[Federal Register Volume 62, Number 53 (Wednesday, March 19, 1997)]
[Notices]
[Pages 13146-13154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X97-10319]
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FEDERAL HOUSING FINANCE BOARD
[No. 97-21]
Statement of Policy: Financial Management Policy for the Federal
Home Loan Banks
AGENCY: Federal Housing Finance Board.
ACTION: Policy statement.
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SUMMARY: The Board of Directors of the Federal Housing Finance Board
(Finance Board) is proposing to adopt as a statement of policy the
``Financial Management Policy For The Federal Home Loan Bank System''
(FMP). The Finance Board is publishing the policy statement with only
minor changes from the existing version of the FMP, and is soliciting
public comments on the FMP for a period of 30 days.
DATES: The Finance Board will accept comments on the FMP until April
18, 1997.
ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.
20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Senior Attorney,
Office of General Counsel, (202) 408-2990, or Julie Paller, Senior
Financial Analyst, (202) 408-2842, Federal Housing Finance Board, 1777
F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Background
The FMP provides a framework within which the Federal Home Loan
Banks (Banks) may implement their financial management strategies in a
prudent and responsible manner. The FMP includes a series of guidelines
relating to the investment, funding, and hedging practices of the
Banks, as well as to the management of credit, interest rate, and
liquidity risks. Adhering to the guidelines promotes the Banks' ability
to accomplish their housing finance and community development missions
while generating sufficient income to meet their various financial
obligations. The FMP has evolved from a series of policies and
guidelines initially adopted by the Finance Board's predecessor agency,
the Federal Home Loan Bank Board (FHLBB). The FHLBB had adopted
guidelines comparable to the FMP in the 1970s and revised them a number
of times thereafter. The Finance Board adopted the FMP in 1991,
consolidating in one document the previous policies on funds
management, hedging, and interest rate swaps, and adding new guidelines
on management of unsecured credit and interest rate risks.
In recent years, the financial markets and the Banks' participation
in those markets have evolved considerably. Moreover, Congress has
altered the statutory provisions governing the Federal Home Loan Bank
System (System), principally through the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), Public Law 101-73, 103
Stat. 415 (August 9, 1989). As a consequence of such financial and
legislative changes, the FHLBB and Finance Board periodically revised
their financial policies and guidelines so that the Banks could
continue to manage their finances prudently, profitably, and in
furtherance of their mission. In undertaking such revisions to the FMP
and its predecessor policies, the FHLBB and Finance Board in the past
accepted informal comments from the Banks as part of that process. In
some instances, staff of the Banks submitted proposals for
consideration by the agency, and in other instances staff of the Banks
and the agency worked together to analyze the existing policies and to
suggest ways in which they could be revised to reflect the changing
environment in which the Banks operate. Such informal processes and
collaborative efforts reflected the dual regulatory and managerial
responsibilities exercised by the FHLBB and the Finance Board.
More recently, however, the nature of the relationship between the
Finance Board and the System has changed, both as a result of the
changes brought about by FIRREA and of the process of devolution
undertaken by the Finance Board. As a result of the Finance Board's
determination to devolve to the Banks those managerial responsibilities
that are not vested by statute in the Finance Board, the agency has
assumed a more predominantly regulatory role with respect to the Banks.
The Finance Board intends to concentrate its efforts on its regulatory
role, overseeing the safety and soundness of the Banks and ensuring
that they adhere to their housing finance and community development
missions. In light of the changes in its role and its relationship with
the Banks, the Finance Board has determined that it would be
appropriate to issue the FMP as a statement of agency policy and to
solicit comments on the FMP from the public at large.
II. Statement of Policy
The Finance Board last revised and reissued the entire FMP in July
1996, following which Banks and other parties raised several
interpretive questions. In the version of the FMP that is being
published today the Finance Board is proposing to resolve three
interpretive questions, to incorporate into the FMP two other matters
that the Finance Board has addressed previously by separate
resolutions, and to make three additional changes that the Finance
Board deems appropriate. The publication of the FMP as a proposed
policy statement shall not suspend the effectiveness of the version of
the FMP approved by the Finance Board on July 3, 1996 pursuant to
Resolution No. 96-45, nor the separate revisions approved on December
6, 1996 by Resolution No. 96-90 (relating to inflation-indexed
consolidated obligations) or on January 14, 1997 by Resolution No. 97-
05
[[Page 13147]]
(relating to branch and agency offices). The Finance Board intends to
consider the comments received before adopting this proposed revision
to the FMP, including the six new revisions described below, in final
form.
Branch and Agency Offices
As part of the July 1996 revisions to the FMP, the Finance Board
revised the definition of ``eligible financial institution'' to exclude
the U.S. branch and agency offices of foreign commercial banks.
Resolution No. 96-45 (July 3, 1996). In January 1997, the Finance Board
reinstated those branch and agency offices as ``eligible financial
institutions,'' provided that the foreign commercial bank has at least
$250 million in Tier I (or tangible) capital, can be designated as at
least a Level III counterparty under the FMP, and has a country risk
rating of not lower than AA from Thomson Bankwatch. Resolution No. 97-
05 (January 14, 1997). The Finance Board has incorporated the changes
from Resolution No. 97-05 into the proposed version of the FMP,
although as noted above, the changes made by that resolution continue
in effect.
Alternative Funding Sources
On an annual basis, the Finance Board approves the authority of the
Office of Finance Board (OF Board) to approve the issuance of System
consolidated obligations (COs). The Banks' authority to participate in
such debt issuances is addressed by section IV. of the FMP. As part of
the Finance Board's approval of the Office of Finance 1997 Debt
Issuance Authorization, the Finance Board made three changes to the FMP
to allow the Banks to participate in the debt issues the OF Board is
authorized to approve. Resolution No. 96-90 (December 6, 1996). Those
changes made by Resolution 96-90 remain in effect and are included in
the version of the FMP published today.
The Banks may participate in COs for which the coupon or principal
may vary based upon the movement of an eligible financial index. The
first change to the FMP revised the definition of a financial index to
include an index that is sanctioned by a national government and serves
as an aggregate measure of inflation, including those indices derived
from aggregate measures of economic performance and prices. This
amendment permitted the Banks to participate in the issuance of
inflation-indexed COs.
Debt issues that are tied to a financial index pertaining to a
foreign country or that are denominated in a foreign currency are
subject to minimum sovereign risk rating requirements. The second
change to the FMP permitted the use of sovereign risk ratings from
Moody's or Standard & Poor's for countries not rated by Thomson
Bankwatch (Thomson). All three rating agencies focus on the assessment
of political and economic risk and their ratings generally tend to be
well correlated.
The third change to the FMP increased the minimum sovereign risk
rating required from Thomson for index and currency eligibility from A-
to AA- in order to conform the FMP to the practice of the OF. If a
country is not rated by Thomson, a Sovereign Risk Rating for long-term
bonds or deposits from Moody's of not lower than Aa3 or a Sovereign
Risk Rating for Foreign Currency from Standard & Poor's of not lower
than AA- may be used.
Obligations Guaranteed by the United States
The investment guidelines of the FMP list the types of assets that
are authorized investments pursuant to Sections 11(g), 11(h), or 16(a)
of the Federal Home Loan Bank Act, 12 U.S.C. 1431(g), (h), 1436(a). One
such type is any marketable obligation issued or guaranteed by the
United States. A question has been raised whether this provision
encompasses obligations for which the principal may be guaranteed by
the United States, but the interest may not be guaranteed or may be
guaranteed only in part.
The version of the FMP approved in 1991 provided that only the
direct obligations of the United States were authorized investments. In
1993, the Finance Board broadened the provision to include obligations
guaranteed by the United States. The inclusion of obligations
guaranteed by the United States recognizes that the full faith and
credit of the United States is not limited to obligations issued by the
United States Treasury, and that there is no difference in an
instrument's credit risk where the full faith and credit of the United
States is pledged through a guaranty, rather than directly. The Finance
Board is proposing to revise Section II.B.6. of the Investment
Guidelines to clarify that it includes only those instruments that
possess the same credit risk as a direct obligation of the United
States, meaning that the guaranty must extend to both the principal and
interest due on the obligation.
Unsecured Credit Guidelines
The July 3, 1996 revisions to the FMP made separate changes to the
Hedge Transactions Guidelines and to the Unsecured Credit Guidelines,
which have prompted a question about the inter-relationship of those
provisions. Footnote 6 of the hedging guidelines was revised to include
among the eligible counterparties certain entities with a Moody's
rating of at least Baa or a Standard & Poor's rating of at least BBB,
but only if transactions with those parties result in no unsecured
credit exposure for the Bank. The Finance Board also revised Section
VI.B. of the Unsecured Credit Guidelines to exclude from the definition
of ``unsecured extensions of credit'' certain off-balance sheet
extensions of credit that are subject to a specified type of net cross-
collateral agreement. A question has been raised as to whether the two
provisions could be read together to allow some level of unsecured
credit exposure to triple-B rated counterparties, if subject to the
required net cross-collateral requirement.
In making those revisions to the FMP the Finance Board intended
that they be applied independently of each other, and that transactions
with triple-B rated counterparties not result in any unsecured credit
exposure to the Banks. The Finance Board is proposing to revise Section
VI.B. of the Unsecured Credit Guidelines to state expressly that the
only off-balance sheet extensions of credit subject to a net collateral
exchange agreement that may be deemed not to be unsecured extensions of
credit are those made to institutions that meet the requirements for at
least a Level III counterparty, as defined within the Unsecured Credit
Guidelines.
Counterparty Downgrade
The Unsecured Credit Guidelines provide that when a rating agency
places a Bank's counterparty on creditwatch for a potential downgrade
the Bank should treat the counterparty as if a downgrade actually has
occurred. The Finance Board is proposing to revise Section VI.C.2.f. of
the Unsecured Credit Guidelines to clarify that for purposes of
determining the remaining available credit line for on-balance sheet
investment purposes, the Bank shall assume that the agency has assigned
to the counterparty a rating at the next lower notch, for example, a
downgrade from A-1+ to A-1, A-1 to A-2, or AA2 to AA3. The Finance
Board expects that a Bank would assume a larger downgrade than the
minimum required by the FMP, if warranted by the circumstances, and
would take the appropriate steps.
[[Page 13148]]
Interest Rate Risk Guidelines: Exclusion of FIRREA Cash Flows and Other
Amendments
Internal models employed by the Banks to calculate their duration
of equity have become increasingly sophisticated, and have effectively
supplanted reliance on the Finance Board's internal model for
calculating duration of equity. The models currently used by the Banks
have the capacity to discount cash flows associated with various assets
and liabilities at rates appropriate to the instrument. For these
reasons, the Finance Board is proposing to modify Sections VII.B.1. and
3. of the Interest Rate Risk Guidelines to: (1) Exclude specific
reference to the CO cost curve as an appropriate uniform discounting
methodology, and (2) provide that duration of equity calculations
should be performed by the Banks employing calculation methods and
assumptions that reasonably capture the interest rate risks inherent in
their on-and off-balance sheet activities.
In addition, the Finance Board is proposing to revise Section
VII.B.4. to exclude the REFCorp and AHP cash flows from Bank duration
of equity calculations. The System pays $300 million annually for
interest on the REFCorp bonds, with each Bank's portion determined by a
two-part formula. Initially, each Bank pays 20 percent of its net
income (first round). If the aggregate of those payments yields less
than $300 million, each Bank pays an additional amount based on its
share of System advances to institutions insured by the Savings
Association Insurance Fund (second round). The annual AHP payment is
the greater of $100 million or 10 percent of System net income.
When the FMP's interest rate risk guidelines were first implemented
in 1991, the REFCorp and AHP payments were not included in the cash
flows used to calculate each Bank's duration of equity. Subsequently,
some of the Banks concluded that it was appropriate to include the
REFCorp and/or AHP cash flows when calculating duration of equity and
measuring interest rate risk. They assumed that their shares of the
System's obligations could be considered fixed liabilities represented
by fixed annual payments or cash outflows, and should be explicitly
included in their asset/liability management. When the FMP was revised
in 1993, the Finance Board required that each Bank report its cash
flows and calculate its duration of equity both with and without the
projected cash flows which represent the Bank's share of the System's
REFCorp and AHP obligations. The Finance Board, in Decision Memorandum
No. 94-DM-48 dated November 10, 1994, indicated that when measuring
individual Bank compliance with the FMP's interest rate risk limits, it
would take into consideration the Bank's determination to include or
exclude the FIRREA cash flows in its interest rate risk management
strategies.
With the growth in System income since 1993, however, an increasing
share of the total REFCorp payment is generated by the first round of
the formula. In 1996, the amount of the obligation generated by the
second round represented only eight percent of the total REFCorp
payment. By comparison, in 1995, 1994 and 1993 the second round share
represented 17, 30, and 40 percent of the total, respectively. In 1996,
each Bank's contribution to the AHP represented 10 percent of its
income.
As System income increases, the percentage of income each Bank pays
to REFCorp and AHP will converge to the System average. To the extent
that the REFCorp and AHP obligations represent a fixed percentage of
each Bank's income, they are, in effect, a tax, which ordinarily is not
considered when estimating a Bank's duration and market value of
equity. Because the percentage paid by each Bank is currently very
close to the System average (no Bank paid more than 1.1 percent more or
less than the System average in 1996), the Finance Board considers it
appropriate to treat the payment as if it were a tax and is proposing
to exclude the REFCorp and AHP cash flows from Bank duration of equity
calculations. Any Bank that exceeds the duration limits as a result of
this change will be expected to develop a plan for returning to
compliance.
Housing and Community Development Investments
The Finance Board has encouraged the Banks to submit proposals to
engage in pilot programs for new mission-related activities. The
Finance Board has determined that the pilot program structure is the
most effective way to encourage the Banks and their members to test the
viability and benefits of any new activities in a controlled manner
that limits the risks to a Bank and to the System. As part of the July
1996 revisions to the FMP, the Finance Board established a detailed set
of criteria under which to evaluate any such proposals. The Finance
Board has employed those criteria most recently in approving pilot
programs proposed by the New York, Atlanta, and Chicago Banks,
respectively.
The FMP criteria provide that any such new investments to support
housing and community development must: (1) Ensure the appropriate
levels of expertise and controls necessary to manage risk and preserve
the triple-A rating; (2) ensure that the Bank's involvement assists in
providing financing that may not otherwise be available or may be
available only on less attractive terms; and (3) ensure that the
investment promotes, or does not detract from, the cooperative nature
of the System. Prior to entering into such an investment, a Bank must
provide a complete description of the contemplated investment activity,
including a comprehensive analysis of how the above criteria are
fulfilled, and must obtain from the Finance Board written confirmation
that the criteria have been satisfied.
These criteria follow closely the criteria recommended by the
General Accounting Office (GAO) for the consideration of new products
and services for the Banks. GAO Report No. 94-38, at pages 97-99. The
GAO developed six criteria for evaluating proposals for new products
and services, which it viewed as necessary to maintain the safety and
soundness and missions of the System. Those criteria are: (1) Avoiding
competition with members; (2) possessing the expertise to conduct the
new activities profitably; (3) conforming to the housing finance,
affordable housing, and community development missions; (4) addressing
a need that others are not adequately meeting; (5) pricing the product
to provide an adequate rate of return; and (6) maintaining the System's
triple-A rating. The Finance Board believes that the FMP criteria are
consistent with those developed by GAO and establish a prudent
analytical framework within which to evaluate proposals from the Banks.
The text of the proposed FMP follows:
Federal Housing Finance Board--Statement of Policy
Financial Management Policy for the Federal Home Loan Bank System
I. Policy Objective
The Federal Housing Finance Board (Finance Board) Financial
Management Policy (FMP) for the Federal Home Loan Bank System has been
established to provide a framework within which the Federal Home Loan
Banks (Banks) are allowed to implement prudent and responsible
financial management strategies that assist them in accomplishing their
mission, and in
[[Page 13149]]
generating income sufficient to meet their financial obligations, in a
safe, sound, and profitable manner. The specific objectives of each
section of the FMP are listed below.
A. Investment Guidelines
1. Establish policy with respect to the use of funds not required
for the Banks' advances programs or operating requirements.
2. Specify permissible investment assets.
3. Establish eligibility requirements for investment
counterparties.
4. Establish requirements with respect to the characteristics of
permissible investments.
5. Establish limits for permissible investment assets.
B. Liquidity Guidelines
1. Implement the provisions of the Federal Home Loan Bank Act
(Act), as amended, with respect to required deposit reserves.
2. Establish additional liquidity requirements.
3. Specify the types and characteristics of investment assets which
may be used to satisfy the reserve and liquidity requirements.
C. Funding Guidelines
1. Identify authorized funding sources.
2. Prescribe the conditions under which the Banks may enter into
non-U.S. dollar denominated and other non-standard financing
arrangements.
3. Establish individual Bank leverage limits.
D. Hedge Transaction Guidelines
1. Define authorized hedging transactions and counterparties.
2. Establish requirements and limitations for authorized hedging
transactions.
3. Establish a framework for the valuation and collateralization of
interest rate swap and option transactions.
4. Establish standards for hedge documentation.
E. Unsecured Credit Guidelines
1. Establish minimum standards for counterparties receiving
extensions of unsecured credit.
2. Establish limits on the amount of unsecured credit a Bank may
extend.
3. Establish a method for measuring unsecured credit risk.
F. Interest Rate Risk Guidelines
1. Establish limits on the aggregate interest rate risk a Bank may
incur.
2. Establish a method for measuring interest rate risk.
G. Implementation Guidelines
1. Define the responsibilities of a Bank's board of directors,
management, and internal audit staff.
2. Define the responsibilities of the Federal Housing Finance
Board.
II. Investment Guidelines
A. Purpose
To establish policy on the use of funds not required for credit
programs or operations, to explicitly permit the purchase of mission-
related and liquid assets, and to provide a safe and sound mechanism
for generating income during periods of reduced credit demand to ensure
that financial commitments can be met and that dividends can be
maintained at levels sufficient to attract and retain members. Each
Bank will be responsible for determining the extent to which its
investment authority will be used to augment income from advances,
consistent with Finance Board regulations and policies.
B. Permissible Investments
To the extent they are specifically authorized under Sections
ll(g), ll(h) or 16(a) of the Act, or to the extent a Bank has
determined that they are securities in which fiduciary or trust funds
may invest under the laws of the state in which the Bank is located,
the following investments are permitted:
1. Overnight and term funds, that on the settlement date have a
remaining term to maturity not exceeding 9 months, placed with eligible
financial institutions.\1\
2. Overnight and term resale agreements, that on the settlement
date have a remaining term to maturity not exceeding 9 months, with
eligible counterparties, using for collateral securities which are
eligible investments under this section, and Federal Housing
Administration (FHA) and Veterans' Administration (VA) mortgages.\2\
3. U.S. dollar deposits, that on the settlement date have a
remaining term to maturity not exceeding 9 months, placed with eligible
financial institutions.
4. Commercial paper, bank notes, and thrift notes traded in U.S.
financial markets and rated both P-1 by Moody's and A-1 by Standard &
Poor's, that on the settlement date have a remaining term to maturity
not exceeding 9 months.\3\
5. Bankers' acceptances, drawn on and accepted by eligible
financial institutions, that on the settlement date have a remaining
term to maturity not exceeding 9 months.
6. Marketable obligations issued or guaranteed as to both principal
and interest by the United States.
7. Marketable direct obligations of U.S. Government Sponsored
Agencies and Instrumentalities for which the credit of such
institutions is pledged for repayment of both principal and interest.
8. Securities representing an interest in pools of mortgages (MBS)
issued, guaranteed or fully insured by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC),
or the Federal National Mortgage Association (FNMA), or Collateralized
Mortgage Obligations (CMOs), including Real Estate Mortgage Investment
Conduits (REMICs), backed by such securities.
9. Other MBS, CMOs, and REMICs rated Aaa by Moody's or AAA by
Standard & Poor's.
10. Asset-backed securities collateralized by manufactured housing
loans or home equity loans and rated Aaa by Moody's or AAA by Standard
& Poor's.
11. Marketable direct obligations of state or local government
units or agencies, rated at least Aa by Moody's or AA by Standard &
Poor's, where the purchase of such obligations by a FHLBank provides to
the issuer the customized terms, necessary liquidity, or favorable
pricing required to generate needed funding for housing or community
development.
12. Other investments that support housing and community
development, provided that prior to entering into such investments, the
Bank:
a. ensures the appropriate levels of expertise, establishes
policies, procedures, and controls, and provides for any reserves
required to effectively limit and manage risk exposure and preserve the
Bank's and the System's triple-A rating;
b. ensures that its involvement in such investment activity assists
in providing housing and community development financing that is not
generally available, or that is available at lower levels or under less
attractive terms;
c. ensures that such investment activity promotes (or at the very
least, does not detract from) the cooperative nature of the System;
d. provides a complete description of the contemplated investment
activity (including a comprehensive analysis of how the above three
requirements are fulfilled) to the Finance Board; and
e. receives written confirmation from the Finance Board, prior to
entering into such investments, that the above
[[Page 13150]]
investment eligibility standards and requirements have been satisfied.
C. Limitations on Authorized Investments
1. Investments in other than U.S. Dollar denominated securities are
prohibited.
2. A Bank may enter into agreements to purchase MBS, CMOs, REMICs,
and eligible asset-backed securities so long as such purchases will not
cause the aggregate book value of such securities held by the Bank to
exceed 300 percent of the Bank's capital. A Bank may not increase its
holdings of such securities in any one calendar quarter by more than 50
percent of its total capital at the beginning of that quarter.\4\
3. The purchase of Interest Only or Principal Only stripped MBS,
CMOs, REMICs, and eligible asset-backed securities is prohibited.
4. The purchase of residual interest or interest accrual classes of
CMOs, REMICs, and eligible asset-backed securities is prohibited.
5. The purchase of fixed rate MBS, CMOs, REMICs, and eligible
asset-backed securities, or floating rate MBS, CMOs, REMICs, and
eligible asset-backed securities that on the trade date are at rates
equal to their contractual cap, with average lives that vary more than
six years under an assumed instantaneous interest rate change of 300
basis points, is prohibited.
III. Liquidity Guidelines
A. Purpose
To implement statutory requirements and to ensure each Bank's
ability to meet potential funding needs arising from credit demands,
deposit withdrawals, and debt redemptions without incurring material
losses.
B. Statutory Deposit Reserve Requirements
Each Bank is required to maintain an amount equal to the total
deposits received from its members invested in:
1. Obligations of the United States.
2. Deposits in banks or trust companies (as defined in Finance
Board regulation) which are eligible financial institutions.
3. Advances that mature in 5 years or less to members.
C. Additional Liquidity Requirements
1. Each Bank is required to maintain a daily average liquidity
level each month in an amount not less than:
a. 20 percent of the sum of its daily average demand and overnight
deposits and other overnight borrowings during the month, plus
b. 10 percent of the sum of its daily average term deposits,
Consolidated Obligations (COs) and other borrowings that mature within
one year.
2. Eligible Investments: The following investments, to the extent
permitted under subsection II.B, are eligible for compliance with
subsection III.C.1 liquidity requirements:
a. Overnight funds and overnight deposits, as otherwise described
in subsection II.B.1.
b. Resale agreements, which mature in 31 days or less, as otherwise
described in subsection II.B.2.
c. Negotiable certificates of deposit, bankers' acceptances,
commercial paper, bank notes, and thrift notes as described in
subsections II.B.3, 4, and 5.
d. Marketable obligations of the United States as described in
subsection II.B.6 which mature in 36 months or less.
e. Marketable direct obligations of U.S. Government Sponsored
Agencies and Instrumentalities as described in subsection II.B.7 which
mature in 36 months or less.
f. Cash and collected balances held at Federal Reserve Banks and
eligible financial institutions, net of member pass-throughs.
3. Limitation: A security that has been pledged under a repurchase
agreement cannot be used to satisfy liquidity requirements.
IV. Funding Guidelines
A. Purpose
To establish parameters for the use of alternative funding sources
and structures in order that each Bank may fund its activities in a
prudent, cost effective manner.
B. Bank Specific Liabilities
1. Deposits: A Bank may accept deposits from members, from any
institution for which it is providing correspondent services, from
another Federal Home Loan Bank, and from other instrumentalities of the
United States, subject to provisions of the Act and the Finance Board's
regulatory and policy requirements.
2. Federal Funds: A Bank may purchase federal funds from any
financial institution that participates in the federal funds market.
3. Repurchase Agreements: Repurchase agreements requiring the
delivery of collateral by a Bank are permitted with any Federal Reserve
Bank, U.S. Government Sponsored Agencies and Instrumentalities, primary
dealers recognized by the Federal Reserve Bank of New York, eligible
financial institutions, and states and municipalities with a Moody's
Investment Grade rating of 1 or 2. Repurchase agreements not requiring
the delivery of collateral by the Bank may be entered into with any
supplier of funds.
C. Consolidated Obligations
A Bank may participate in COs, so long as entering into such
transactions will not cause the Bank's total COs and unsecured
liabilities, as defined in Section 910.0 of the Finance Board's
regulations (but excluding interBank loans), to exceed 20 times the
Bank's total capital. Each Bank shall make every effort to manage its
liabilities and capital to ensure compliance with the 20:1 leverage
limit.
1. A Bank may participate in the following types of standard debt
issues:
a. Debt with a fixed rate and fixed maturity, in either coupon or
discount form.
b. Debt with a fixed maturity whose coupon rate may vary in
predetermined increments or based upon the movement of U.S. Treasury
securities, U.S. Dollar LIBOR, the 11th District Cost of Funds Index,
or FHLBank COs.
c. Debt whose principal may be called or redeemed in whole or in
part at the discretion of the Bank, at the discretion of the investor,
or based upon the movement of U.S. Treasury securities, U.S. Dollar
LIBOR, the 11th District Cost of Funds Index, or FHLBank COs.
d. Debt whose principal amortizes according to a predetermined
schedule.
e. Debt with a coupon rate that may change from fixed to floating,
or vice versa, at the discretion of the Bank, according to a
predetermined schedule, or based upon the movement of one or more
financial indices.
2. A Bank may also participate in non-standard debt issues, some
examples of which are:
a. Debt whose coupon may vary based upon the movement of an
eligible financial index (other than those identified in subsection
C.1.b. above).\5\
b. Debt whose principal is subject to redemption in whole or in
part, based upon the movement of one or more eligible financial indices
(other than those identified in subsection C.1.c. above).
c. Debt whose principal balance may increase based upon the
movement of one or more eligible financial indices.
d. Debt whose coupon may vary based upon the movement of two or
more eligible financial indices, including transactions which multiply
the effect of rate changes.
e. Debt denominated in a currency other than U.S. Dollars,
including the European Currency Unit (ECU), whose
[[Page 13151]]
exchange rate risk relative to the U.S. Dollar can be effectively
hedged.
3. If a Bank participates in a debt issue other than the standard
transactions described in subsection C.1 above, the Bank will be
required to enter into a contemporaneous hedging arrangement that
allows the interest rate and/or basis risk to be passed through to the
hedge counterparty, unless the Bank is able to document that the debt
will: (a) Be used to fund mirror-image assets in an amount equal to the
debt; or (b) offset or reduce interest rate or basis risk in the Bank's
portfolio, or otherwise assist the Bank in achieving its interest rate
and/or basis risk management objectives. If a Bank participates in debt
denominated in a currency other than U.S. Dollars, the currency
exchange risk must be hedged.
4. An FHLBank shall not directly place consolidated obligations
with another FHLBank.
V. Hedge Transaction Guidelines
A. Purpose
To allow the implementation of hedging programs that control the
interest rate and basis risk which arises in the ordinary course of
business.
B. Permitted Instruments and Strategies
Long and short positions in the cash, forward, futures, and option
markets (including caps and floors), and the purchase and sale of
interest rate exchange agreements (swaps) are permitted if they assist
a Bank in achieving its interest rate and/or basis risk management
objectives. Hedging strategies must be explicitly stated at the time of
execution and adequate documentation must be maintained during the life
of the hedge. A Bank may also enter into interest rate swaps and
options with a member to facilitate the member's asset/liability
management strategies. Speculative use of hedging instruments is
prohibited.\6\
C. Hedging With Interest Rate Swaps and Options (Including Caps and
Floors)
1. All swaps entered into by a Bank shall be governed by the FMP.
2. Unsecured credit exposure resulting from interest rate swaps and
options (as defined in subsection VI.B.) is governed by the FMP's
Unsecured Credit Guidelines.
3. Collateral Requirements: A Bank shall require collateral for
interest rate swaps and options from those counterparties (or
guarantors) that, on the trade date of the transaction, do not qualify
for unsecured extensions of credit, and for risk exposure that, on the
trade date of the transaction, exceeds the limits for unsecured
extensions of credit established in the FMP. (Each Bank's board of
directors may identify a level of exposure it deems material before a
collateral call will be required, either at the initiation, or
throughout the life, of a hedge agreement. If a Bank chooses to
identify a minimum collateral call level, that level or the method for
calculating it must be included in the Bank's policy, as required in
subsection VIII.A.1.f. of the FMP.)
a. The dollar amount of collateral shall be determined by the Bank
commensurate with the risk undertaken and shall be maintained in
accordance with the requirements of the Bank's agreement with the
counterparty.
b. Collateral required during the life of the transaction shall be
no less than the market value of the swap, as determined by the Bank,
plus net accrued interest due to the Bank, unless the transaction is
subject to a net collateral exchange agreement as described in
subsection VI. B.
c. For option transactions in which the Bank is a potential
receiver of payments, a minimum initial collateral maintenance level
must be established that is no less than the market value of the
contract, plus amounts due to the Bank under the contract.
d. Collateral agreements entered into by a Bank that are not
required by the FMP will not be subject to FMP collateral requirements.
4. A Bank may enter into an unsecured interest rate swap or option
agreement with a counterparty that does not meet the minimum credit
standards as long as the transaction results in a net reduction of
credit risk arising from previously existing swap or option agreements
with that counterparty, and a master agreement executed by the Bank and
the counterparty provides for such netting.
5. A Bank may, for hedging purposes, enter into interest rate swap
agreements in which the notional principal balance amortizes based upon
the prepayment experience of a specified group of MBS or the behavior
of an interest rate index (Indexed Principal Swaps), or swap agreements
which may be terminated or extended at the option of the Bank or its
counterparty (swaptions).
a. Interest rate swaps that amortize according to the behavior of
Interest Only or Principal Only stripped MBS/CMOs/REMICs are
prohibited.
b. Interest rate swaps that amortize according to the behavior of
residual interest or interest accrual classes of CMOs or REMICs are
prohibited.
c. Indexed principal swaps that have average lives that vary by
more than six years under an assumed instantaneous change in interest
rates of 300 basis points are prohibited, unless they are entered into
in conjunction with the issuance of COs or the purchase of permissible
investments in which the interest rate risk is passed through to the
investor or counterparty.
6. In addition to interest rate caps and floors, a Bank may take
long and short hedge positions in any options contract provided that:
a. The underlying instrument is an investment or a futures contract
permissible under this policy.
b. The hedge is constructed such that the price volatility of the
option position is consistent with the price volatility of the cash
instrument being hedged or with the option component of that
instrument.
c. The option contract is traded on an organized exchange regulated
by the Commodity Futures Trading Commission or the Securities and
Exchange Commission; or through a recognized securities dealer which
reports its position regularly to the Federal Reserve Bank of New York.
7. Documentation:
a. Market value determinations and subsequent collateral
adjustments should be made, at a minimum, on a monthly basis.
b. Failure of a counterparty to meet a collateral call will result
in an early termination event.
c. Early termination pricing and methodology shall be detailed in
all interest rate swap and option contracts in which a Bank is involved
as principal. This methodology must reflect a reasonable estimate of
the market value of the swap or option at termination. Standard
International Swap and Derivatives Association, Inc. language relative
to early termination pricing/methodology may be used to satisfy this
requirement.
d. The transfer of an agreement or contract by a counterparty shall
be made only with the consent of the Bank.
e. Transactions with a single counterparty shall be governed by a
single master agreement when practicable.
8. Non-U.S. Dollar denominated swaps are authorized only to convert
matching non-U.S. Dollar denominated debt to U.S. Dollar denominated
debt, or to offset another non-U.S. Dollar denominated swap.
[[Page 13152]]
D. Hedging in the Financial Futures Markets:
1. Long and short positions in financial futures may be used for
hedging purposes provided that:
a. The underlying instrument is an investment or other transaction
permissible under this policy.
b. The price of the futures contract has a high correlation with
the price of the cash instrument being hedged.
c. The futures contract is traded on an organized exchange
regulated by the Commodity Futures Trading Commission.
2. If delivery of the underlying security will cause a Bank to
exceed any investment limitation of the FMP, the Bank must close out
its position prior to taking delivery.
3. Any Bank with a position which exceeds 5 percent of the open
interest in any specific futures contract month shall report that
position to the investment desks of the other Banks and to the Managing
Director of the Finance Board within one business day of the initiation
of the position. Notification shall also be provided when such a
position declines below 5 percent.
E. Hedging in the Cash or Forward Markets
1. The purchase or sale of cash market securities for either
regular (cash) or forward delivery is permitted, provided that:
a. Only securities that are permissible investments under this
policy are used.
b. The price of the cash or forward instrument has a high
correlation with the price of the instrument being hedged.
c. Any security purchased in the cash market for hedging purposes
is subject to the investment limits of the FMP.
2. Short positions in instruments authorized in the FMP, the
purchase of securities under resale agreements, and the borrowing of
securities in connection with short sales is authorized for hedging
purposes.
VI. Unsecured Credit Guidelines
A. Purpose
To set prudent limits on unsecured credit risk arising from
authorized investment and hedging strategies.
B. Scope
All on- and off-balance sheet extensions of credit, in which the
value of collateral pledged to the Bank by a counterparty is less than
the credit the Bank has extended to that counterparty. Off-balance
sheet extensions of credit to institutions that are at least Level III
counterparties (as defined in section VI.C.2), which are subject to a
net collateral exchange agreement having prudent limits on the maximum
allowable levels of unsecured credit exposure as approved by the Bank's
board of directors, shall not be considered unsecured extensions of
credit. (Inter-Bank loans, obligations of an FHLBank, and obligations
of, or guaranteed by, the United States are not subject to the
requirements of this section.) \7\
C. Eligibility for Unsecured Extensions of Credit
1. The amount of unsecured credit that may be extended to
individual counterparties shall be commensurate with the counterparty's
credit quality. A counterparty's credit quality shall be determined by
credit ratings of the counterparty's debt, debt securities, or
deposits.
2. Acceptable Credit Ratings: A Bank may extend unsecured credit to
counterparties assigned the following credit ratings at the transaction
trade date:
----------------------------------------------------------------------------------------------------------------
Standard &
Thomson Bankwatch IBCA Moody's Poor's IDC
----------------------------------------------------------------------------------------------------------------
Level I...................... A A P-1 Aaa A-1 AAA Above 190.
A/B A/B
Level II..................... B B Aa AA 165-190.
B/C B/C
Level III.................... C C A A 140-164.
----------------------------------------------------------------------------------------------------------------
a. With respect to investments in instruments other than commercial
paper, bank notes and thrift notes, Thomson Bankwatch shall be the
primary short-term rater; i.e., a short-term rating from Moody's,
Standard & Poor's, IBCA or IDC may only be used if the counterparty is
not rated by Thomson. For investments other than commercial paper, bank
notes, or thrift notes, an A-1 or P-1 rating from Standard & Poor's or
Moody's may only be used to determine allowable levels of unsecured
credit exposure when it is a stand-alone rating and not the result of
credit enhancement of a counterparty's commercial paper issue. For
long-term investments, only ratings from Moody's and Standard & Poor's
may be used. The use of short- or long-term credit ratings shall be
appropriate to the term of the transaction: i.e., short-term ratings
for transactions with a maturity equal to 1 year or less; long-term
ratings for transactions with a maturity greater than 1 year.
b. Single-A and double-A ratings from Moody's and Standard & Poor's
shall be interpreted to include the full range of the generic rating
category (e.g., single-A will include A- and A3).
c. Rating downgrades of counterparties shall not require the
liquidation of existing positions.
d. A Bank will have discretion to choose the rating it will use if
the rating agencies disagree on either a counterparty's long or its
short-term credit rating.
e. In the event of a split rating (i.e., a counterparty falling
into different FMP unsecured credit levels based on its short- and
long-term ratings), the higher of the two ratings will dictate the
total amount of unsecured credit the Bank may extend to the
counterparty; however, the lower of the two ratings will limit the
allowable credit exposure to the counterparty for transactions with
maturities governed by that rating.
f. When a counterparty is placed on creditwatch for potential
downgrade by a rating agency, the Bank shall: (1) For purposes of
determining the remaining available credit line for on-balance sheet
investment purchases assume a rating from that agency at the next lower
notch, e.g., a downgrade from A-1+ to A-1 or from AA2 to AA3; or (2)
for off-balance sheet transactions, take action deemed appropriate by
the Bank, taking into account contractual agreements in force with the
counterparty.
3. Limitations on Unsecured Credit Extensions
a. Unsecured extensions of credit to a single U.S. Government
Sponsored Agency or Instrumentality shall not exceed 100 percent of a
Bank's capital.
b. Unsecured extensions of credit to a single Level I counterparty
shall not exceed 30 percent of a Bank's capital.
[[Page 13153]]
c. Unsecured extensions of credit to a single Level II counterparty
shall not exceed 20 percent of a Bank's capital.
d. Unsecured extensions of credit to a single Level III
counterparty shall not exceed 10 percent of a Bank's capital.
e. The maximum amount of unsecured credit that may be extended to
any counterparty shall not exceed 25 percent of that counterparty's
Tier I capital (or tangible capital if Tier I is not available).
f. Limitations on extensions of unsecured credit apply to the
specific counterparty receiving the credit or the party guaranteeing
repayment on behalf of the counterparty. However, each Bank is expected
to evaluate its aggregate unsecured credit exposure to affiliated
counterparties and impose limits on such extensions of credit if
necessary.
g. Unsecured extensions of credit to (except those that result from
a Bank entering into swaps and other hedging arrangements with) Level
III counterparties may not be made for terms in excess of one (1)
business day.
h. Maximum Effective Maturities for Unsecured Extensions of Credit
(as defined in subsection VI.B.) Arising from Interest Rate Swap
Agreements and Similar Transactions: \8\
------------------------------------------------------------------------
Maximum effective
Counterparty credit maturity of
rating agreements
------------------------------------------------------------------------
Long Term..................... Aaa, AAA No maturity
limit.
Aa, AA 7 years.
A, A 5 years.
Short Term *.................. A1, P1, A, B 1 year.
------------------------------------------------------------------------
A-1 or P-1 ratings must be based on Standard & Poor's or Moody's rating
of the counterparty, and may not not be the result of credit
enhancement of a counterparty's commercial paper issue.
Note: At its discretion, a Bank may use long term credit ratings for
all interest rate swap agreements and similar transactions, regardless
of the term of those agreements.
i. Contingent Collateralization of Agreements: Contracts for
interest rate exchange agreements or similar transactions with
effective maturities longer than 10 years shall require full
collateralization of the agreement value plus accrued interest
(maintenance margin) in the event of a counterparty downgrade below
Level III.
VII. Interest Rate Risk Guidelines
A. Purpose
To set prudent limits on the extent to which each Bank may be
exposed to interest rate risk.
B. Interest Rate Risk Limitation
1. Each Bank is required to maintain the duration of its equity (at
current interest rate levels using an appropriate discounting
methodology) within a range of +5 years to -5 years.
2. Each Bank is required to maintain its duration of equity, under
an assumed 200 basis point change in interest rates, within a range of
+7 years to -7 years.
3. Duration of equity calculations shall be performed by each Bank
at intervals prescribed by the Finance Board. Each Bank shall employ
calculation methods and assumptions that reasonably capture the
interest rate risks inherent in its on- and off-balance sheet
activities.
4. Each Bank is required to report its cash flows and calculate its
duration and market value of equity without projected cash flows which
represent the Bank's share of the System's REFCorp and AHP obligations.
VIII. Implementation Guidelines
A. The Board of Directors of Each Bank Shall
1. Adopt and forward to the Finance Board a Bank financial
management policy consistent with the FMP within 90 calendar days of
the effective date of the FMP. The Bank's policy will address:
a. the role of the investment portfolio in fulfilling the Bank's
public purpose, maintaining liquidity, and generating earnings;
b. explicit limits (in percent) on changes in net market value (in
addition to limits on changes in net market value implicit in the
duration limits set forth in subsection VII.B.) resulting from interest
rate risk and convexity;
c. how the investment strategy addresses the mark to market
accounting requirements of SFAS 115;
d. the cash flow implications of the FIRREA obligations and their
impact on the Bank's measurement and control of interest rate risk;
e. a commitment to attain and maintain a stand-alone triple-A
rating on long-term deposits or other unsecured long-term liabilities;
f. any maximum threshold and minimum collateral call levels
approved by the Bank's board for off-balance sheet transactions and the
methods by which such levels are determined; and
g. the maximum allowable level of term (i.e., one year or greater),
unsecured credit exposure arising from on-balance sheet transactions.
2. Review and approve, prior to implementation, any significant
changes in financial strategies undertaken by Bank management.
3. To the extent that the Bank enters into investment transactions
not explicitly permitted under Sections ll(g), ll(h), or 16(a) of the
Act, ensure that such investments are securities in which fiduciary and
trust funds may invest under the laws of the state in which the Bank is
located.
4. Identify the tolerable risk limits for mortgage-backed and
asset-backed security investments, including the amount of capital
(market value) the Bank is willing to expose under a 200 basis point
movement in interest rates.
5. Evaluate modeling and management expertise available to measure
and control the credit, interest rate, basis, and other risks involved
in financing and investment arrangements entered into by the Bank.
6. Establish policies that promote diversity in the Bank's funding
sources and investments.
7. Authorize specific individuals to develop financial strategies
and to execute financial transactions governed by the FMP. (Duties and
responsibilities shall be appropriately divided so that no one
individual has sole responsibility for any two of the following
functions: trading; funds and security transfer; and portfolio
accounting.)
8. Approve the opening of any unsecured checking or settlement
accounts with counterparties that do not meet the credit standards
established in the FMP. Decide whether to maintain any existing
unsecured checking or settlement accounts with counterparties that have
been downgraded below credit standards established in the FMP.
Justification for such approvals shall be available to Finance Board
examiners for review. (Unsecured checking or settlement accounts with
counterparties that do not meet the credit standards of the FMP but
that are covered by deposit insurance or are otherwise guaranteed are
exempt from this requirement).
9. Approve a list of brokers, reporting dealers, and futures
commission merchants with whom the Bank may purchase and sell
securities and contracts.
B. Management of Each Bank Shall
1. Establish internal control systems to ensure compliance with the
FMP.
2. Submit a monthly report to its board of directors and to the
Finance Board regarding the activities governed by the FMP. At a
minimum, the report shall cover the areas of investments, liquidity,
funding, hedging, unsecured credit risk, and interest rate risk. It
will also discuss compliance with the limitations in the FMP and the
Bank's internal policies. Any exceptions to the FMP shall be
highlighted and explained
[[Page 13154]]
in the compliance report submitted to the Finance Board; such report
shall be in a format defined by the Finance Board.
3. Provide periodic data, as requested by the Finance Board, to
facilitate its oversight of FMP compliance.
4. Establish one or more securities safekeeping agents and notify
the Finance Board accordingly. (Authorized agents include Federal
Reserve Banks, Federal Home Loan Banks, and other eligible financial
institutions domiciled in the U.S.)
5. Account for financial transactions executed under the FMP in
accordance with Generally Accepted Accounting Principles.
C. The Internal Auditor of Each Bank Shall Establish Internal Auditing
Programs That Test for Compliance With the FMP
D. The Federal Housing Finance Board Shall
1. Monitor each Bank's compliance with the FMP.
2. Interpret any questions related to the FMP.
3. Consider requests for exceptions to the FMP.
E. This Most Recently Amended Version of the FMP Shall
1. Become effective on ____________________, 1997.
2. Amend and replace the Financial Management Policy dated July 3,
1996. Financial transactions and contracts that were authorized for,
and entered into by, the Banks under these and any relevant preceding
policies, and that remain outstanding on the effective date of the FMP,
are grandfathered for purposes of compliance with the amended policy
guidelines.
Footnotes
1. The term ``eligible financial institutions'' includes:
a. Federal Home Loan Banks;
b. FDIC-insured financial institutions, including U.S.
subsidiaries of foreign commercial banks, whose most recently
published financial statements exhibit at least $100 million of Tier
I (or tangible) capital if the institution is a member of the
investing FHLBank or least $250 million of tangible capital for all
other FDIC-insured institutions, and which have been rated at least
a level III institution as defined in subsection VI.C. of the FMP.
c. U.S. branch or agency offices of foreign commercial banks,
provided that the most recently published financial statements of
the foreign commercial bank exhibit at least $250 million of Tier I
(or tangible) capital and the foreign bank can be designated at
least a Level III counterparty as defined under Section VI.C.2. and
has a country risk rating of not lower than AA from Thomson
Bankwatch.
2. Eligible counterparties for resale agreements include the
Federal Reserve Bank of New York, primary dealers in government
securities recognized by the Federal Reserve whose capital exceeds
$250 million or whose obligations under such agreements are
guaranteed by parent firms whose capital exceeds $250 million, and
U.S. Government Sponsored Enterprises for which the credit of such
institution is pledged for repayment. The Bank for International
Settlements (BIS) and the central banks of foreign countries with a
Thomson Bankwatch country risk rating of at least double-A are
considered eligible counterparties, provided the resales are
collateralized solely by FHLBank System consolidated obligations.
Resale agreements may be consummated using a designated custodian,
provided the custodian is a domestic eligible financial institution
and documentation is provided which evidences the Bank's security
interest in the collateral held by the custodian.
3. Commercial paper, bank note, and thrift note issuers shall be
in the banking, housing, finance, or securities industries as
determined by an FHLBank. Commercial paper, bank note, and thrift
note issuers (or guarantors if applicable) must exhibit on their
most recently published audited financial statements at least $100
million of tangible capital if the institution is a member of the
investing FHLBank or at least $250 million of tangible capital for
all other institutions. If the commercial paper, bank note, or
thrift note issue receives its A-1/P-1 rating by virtue of a
guarantee or other credit enhancement, both the minimum tangible
capital requirement and the maximum allowable unsecured credit
exposure (as determined in subsection VI.C.) shall apply to the
guarantor rather than to the issuer.
4. For purposes of determining compliance with the 300 percent
of capital limit, investment levels will be measured as of the
transaction trade date and capital levels will be based on the
Bank's most recently available monthly financial statement. A Bank
will not be required to divest securities solely to bring the level
of its holdings into compliance with the limit. A Bank's dollar roll
financing activity will not be included in calculating the Bank's
position relative to the limit.
5. A ``financial index'' is defined as an index that pertains
to: (1) Interest rates, (2) baskets of equities, (3) currencies, or
(4) aggregate measures of inflation, sanctioned by a national
government, including those derived from aggregate measures of
economic performance and prices. In the event of debt tied to a
basket of equities, the basket should include a sufficient number of
equities to ensure that the movement of the index is not dictated by
the performance of just one equity in the basket. To be considered
``eligible,'' an index must be publicly available and verifiable
independent of underwriters or selling group members. For an index
that pertains to a foreign country, that country must be assigned a
Country Risk Rating no lower than AA- by Thomson Bankwatch. In the
event a country is not rated by Thomson Bankwatch, Sovereign Risk
Ratings from Moody's or Standard & Poor's may be used subject to the
following requirements: a country must be assigned a Sovereign Risk
Rating for long-term bonds or deposits from Moody's of not lower
than Aa3 or a Sovereign Risk Rating for Foreign Currency from
Standard & Poor's of not lower than AA-. The European Currency Unit
(ECU) shall be deemed an eligible index.
6. Eligible non-member counterparties for hedging transactions
include:
a. Eligible financial institutions;
b. Foreign financial institutions rated at least a Level III
institution, as defined in subsection VI.C. of the FMP, and
domiciled in countries receiving a country risk rating of at least
AA from Thomson Bankwatch;
c. Domestic corporations or partnerships, foreign corporations,
domestic subsidiaries of foreign corporations, international
organizations, and foreign governments or their agencies, rated at
least single-A by Moody's or Standard & Poor's, or rated Baa by
Moody's or BBB by Standard & Poor's provided transactions with such
counterparties result in no unsecured credit exposure for the Bank;
and
d. U.S. Government Sponsored Agencies.
7. For purposes of the FMP, unsecured extensions of credit will
be measured as follows:
a. For on-balance sheet transactions, an amount equal to the sum
of the book value of the item plus net payments due the Bank.
b. For off-balance sheet transactions, an amount equal to the
sum of the net market value of the agreement, as determined by the
Bank, plus net payments due the Bank.
c. Extensions of credit arising from off-balance sheet
transactions with one counterparty may be netted provided the Bank
and the counterparty have executed a master agreement that provides
for such netting.
8. The effective maturity of interest rate exchange agreements
may be considered the term from settlement to the date on which an
FHLBank has the unilateral and unconditional option to terminate the
agreement at its then current market value. For Indexed Principal
Swaps, the effective maturity shall be the weighted average maturity
using consensus prepayment speed estimates for current interest rate
levels, unless an appropriate alternative methodology is applied.
Dated: March 5, 1997.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR No. 97-6878 Filed 3-18-97; 8:45 am]
BILLING CODE 6725-01-U