[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Proposed Rules]
[Pages 57963-57965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28585]



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FARM CREDIT ADMINISTRATION
12 CFR Part 615

RIN 3052-AB68


Funding and Fiscal Affairs, Loan Policies and Operations, Funding 
Operations; Foreign Denominated Debt

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Farm Credit Administration (FCA) requests public comment 
through an Advance Notice of Proposed Rulemaking (ANPRM) regarding the 
issuance of debt securities of the Farm Credit System (System) 
denominated in foreign currencies. The Federal Farm Credit Banks 
Funding Corporation (Funding Corporation), on behalf of the Farm Credit 
banks (banks), is considering offering Federal Farm Credit Banks 
Consolidated Systemwide debt securities (Systemwide debt securities) 
outside of the United States under a proposed Global Debt Program 
(Program). Under the Program, Systemwide debt issuances could be 
denominated in foreign currencies. The FCA specifically requests public 
comment regarding any safety and soundness risks that may be posed by 
the issuance of foreign denominated Systemwide debt securities.

DATES: Written comments must be received on or before January 31, 1996.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio, 
Associate Director, Regulation Development, Office of Examination, Farm 
Credit Administration, McLean, VA 22102-5090. Copies of all 
communications received will be available for examination by interested 
parties in the Office of Examination, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Michael J. LaVerghetta, Senior Financial Analyst, Office of 
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 
883-4498,
      or
William L. Larsen, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444. 

[[Page 57964]]


SUPPLEMENTARY INFORMATION:

I. Background

    In a separate action published elsewhere in today's issue of the 
Federal Register, the FCA issued an interim regulation to clarify the 
Funding Corporation's statutory authority to use more than one fiscal 
agent to facilitate the sale of Systemwide debt securities. The interim 
regulation permits the Funding Corporation to employ fiscal agents that 
are not Federal Reserve Banks for issuance of dollar denominated 
Systemwide debt securities in foreign capital markets. The interim 
regulation provides guidance on two components of the Funding 
Corporation's proposed three-part Global Debt Program.1 This ANPRM 
requests comments regarding the final part of the Program, pursuant to 
which the banks could issue foreign denominated Systemwide debt 
securities. Under the Program, non-dollar denominated Systemwide debt 
would be issued exclusively outside the United States using fiscal 
agents other than the Federal Reserve Banks.2 Secondary market 
trading and safekeeping would be handled through international clearing 
systems. Other GSEs have developed similar global debt programs, and 
have issued non-dollar denominated global debt, including the Federal 
National Mortgage Association (FNMA), the Federal Home Loan Banks 
(FHLBs), and the Student Loan Marketing Association (Sallie Mae).3

    \1\ The proposed Global Debt Program is described in greater 
detail in connection with the interim regulation published 
separately in today's issue of the Federal Register.
    \2\ The Federal Reserve Banks may not act as fiscal agent for 
Government Sponsored Enterprise (GSE) debt obligations that are 
issued exclusively outside the United States.
    \3\ During the past year, FNMA and the FHLBs sold foreign debt 
securities in Deutche marks. Sallie Mae sold Japanese yen-
denominated bonds.
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II. Authority for Issuance of Foreign Currency Debt

    As noted in the preamble discussion of the FCA's companion interim 
rule on Global Debt issuance, the Farm Credit Act of 1971, as amended, 
(Act) 4 provides no specific guidance on the issuance of 
Systemwide debt securities outside the United States, but grants the 
banks broad authority to issue Systemwide debt securities to fund their 
operations.5 While no provision of the Act requires Systemwide 
debt securities to be denominated in U.S. dollars, an FCA rule 
specifies that Systemwide debt securities shall be issued in 
denominations of $1000 and $5000 or multiples thereof. See 12 CFR 
615.5450. The specification of dollar denominations in this regulation 
can be interpreted to preclude the Funding Corporation from issuing 
foreign denominated Systemwide debt securities.

    \4\ 12 U.S.C. 2001-2279bb-6.
    \5\ See sections 1.5(10), 3.1(10), and 4.2 of the Act.
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III. Assessment of Regulatory Needs

    As demonstrated by its separate approval of global offerings of 
dollar denominated Systemwide debt securities, the FCA believes that 
the Act permits the agency latitude to recognize the increasing 
globalization of the capital markets and the needs of the System to 
adapt its funding techniques to changing markets. Moreover, absent 
overriding safety and soundness considerations, the FCA is disinclined 
to adopt a technical interpretation of its regulations that would 
prevent the banks from pursuing cost-effective and efficient methods of 
raising funds in the capital markets. This ANPRM is intended to assist 
the FCA in identifying potential safety and soundness risks in the 
issuance of foreign denominated Systemwide debt and in determining the 
need for regulatory guidance regarding this aspect of the Program.

IV. Potential Safety and Soundness Issues

    The principal form of risk to an issuer of foreign denominated debt 
is foreign exchange risk. Before System banks and associations can loan 
the proceeds of sale of foreign denominated Systemwide debt securities 
to American farmers, ranchers, aquatic producers, rural homeowners, 
cooperatives, and rural utilities, the proceeds must be converted into 
U.S. dollars. Moreover, while the foreign denominated Systemwide debt 
securities are outstanding, the banks periodically must make payments 
in foreign currency of principal and interest to securityholders. In 
these instances when currency exchange transactions are necessary, 
fluctuations in currency exchange rates pose foreign exchange risks for 
the banks.
    The banks may use various techniques to hedge against this foreign 
exchange risk. One commonly used technique is to execute a currency 
swap agreement under which another party agrees to supply the amount of 
foreign currency necessary to make future payments of principal and 
interest on debt obligations. While a currency swap agreement may 
provide an effective hedge against foreign exchange risk, the success 
of the currency swap depends on whether the counterparty will fulfill 
its obligations under the agreement. Thus, where foreign currency swap 
agreements are used to hedge against foreign exchange risk, 
``counterparty risk'' becomes the most significant type of risk. Other 
techniques for hedging against foreign exchange risk, such as options 
and futures contracts, may present other risks that need to be 
identified.
    In light of the potential exchange, counterparty, and other risks 
that may be involved in the issuance of foreign denominated Systemwide 
debt securities, the FCA is requesting additional information from the 
Funding Corporation, Farm Credit institutions, and other interested 
parties regarding the existence and containment of such risks. In 
particular, the FCA requests that comments address the following 
questions:

A. General

    1. Under what economic and market scenarios will the banks consider 
it advantageous to assume the additional risks of issuing foreign 
denominated Systemwide debt securities instead of raising loan funds 
through the sale of dollar denominated debt?
    2. How should the FCA adapt its current debt approval procedures to 
encompass foreign currency debt offerings? 6

    \6\ See 12 CFR 615.5101(d).
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B. Currency Selection and Risk

    1. What criteria should be used to determine suitability of 
particular foreign currencies for Systemwide debt issuances?
    2. What internal procedures and approvals should the System use to 
apply such criteria?
    3. Should there be limits on total System and individual bank 
exposure to each foreign currency?
    4. How could total System and individual bank exposure to foreign 
currencies be monitored and who should have the responsibility within 
the System to do so? 7

    \7\ The banks currently maintain, on a voluntary basis, a 
listing of investment credit exposures to financial and corporate 
institutions. This listing is prepared and published by the Funding 
Corporation.
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    5. Describe any other controls that can be employed to minimize or 
manage foreign currency exposure?

C. Counterparty Risk

    1. What standards should be used to establish, evaluate, and manage 
counterparty risk in currency swaps undertaken to offset foreign 
currency exposure?
    2. What role should the Funding Corporation play in monitoring 
total System risk exposure to counterparties 

[[Page 57965]]
in currency swap transactions and otherwise?
    3. What procedures should be established to demonstrate that the 
banks have adequate management expertise and internal controls to 
effectively evaluate counterparty risk prior to engaging in foreign 
currency deals?

D. Lead Managers and Performance Risk

    After a foreign currency debt offering has been initiated and the 
securities have been allocated to the global dealers, performance risk 
becomes largely the responsibility of the ``lead manager(s)'' or lead 
global dealer(s). Lead managers can take back securities for their own 
account or reallocate them to other global dealers for sale.
    Are there any risks unique to the selection of lead managers for 
non-dollar denominated debt offerings? If so, how should lead managers 
be selected for such offerings?

E. Other Risks of Non-dollar Denominated Offerings

    There may be other risks of non-dollar denominated offerings, such 
as daylight overdrafts, market exposure, and performance of other 
agents (e.g., paying, settlement, transfer, exchange, calculation 
agents).
    1. How should such risks be managed and quantified?
    2. What factors should be considered in developing criteria for 
selection and performance of other agents and who should approve their 
activities?

F. Other Comments and Information

    The FCA invites any other pertinent comments and information that 
may assist it in developing appropriate guidance in the area of foreign 
denominated Systemwide debt security offerings.

    Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration.
[FR Doc. 95-28585 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P