[Federal Register Volume 63, Number 117 (Thursday, June 18, 1998)]
[Proposed Rules]
[Pages 33281-33293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16208]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 63, No. 117 / Thursday, June 18, 1998 /
Proposed Rules
[[Page 33281]]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AB76
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Investment Management
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA), by the FCA Board
(Board), proposes to amend the investment regulations to provide Farm
Credit System (Farm Credit, FCS, or System) banks with a broader array
of eligible investments. Under the proposed regulations, Farm Credit
banks are expected to hold only high-quality and liquid investments to
maintain a liquidity reserve, invest surplus funds, and manage interest
rate risk. The proposal provides System banks with guidance on sound
practices for managing risks associated with investment activities and
grants System banks greater flexibility to manage risk on an
institutional, portfolio, or individual instrument level. These
amendments are also designed to better enable FCS banks to adjust to
the rapid and continual changes in the financial markets.
DATES: Written comments should be received on or before August 17,
1998.
ADDRESSES: Comments may be submitted by email to FCA at ``reg-
[email protected].'' Comments may also be mailed or delivered to Patricia W.
DiMuzio, Director, Regulation and Policy Division, Office of Policy and
Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean,
Virginia 22102-5090 or sent by facsimile transmission to (703) 734-
5784. Copies of all communications received will be available for
review by interested parties in the Office of Policy and Analysis, Farm
Credit Administration.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Senior Policy Analyst, Office of Policy Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498;
or
Richard Katz, Senior Attorney, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.
SUPPLEMENTARY INFORMATION:
I. Background
Petitions by System banks, various developments and innovations in
the securities markets, and improvements in risk management
technologies have all led the FCA to reexamine its investment
management regulations in subpart E of part 615. The FCA aims to
develop a regulatory framework that establishes certain fundamental
practices each Farm Credit bank should follow to fully understand and
effectively manage the risks inherent in its investment portfolio.
Although non-agricultural investments are a relatively small percentage
of the assets of Farm Credit banks, proper investment management
enables System banks to control risks stemming from their operations as
monoline providers of agricultural credit. The FCA's proposal is
specifically designed to enhance investment management practices at
Farm Credit banks, and many aspects of this proposal are consistent
with the policies that the Federal Financial Institutions Examination
Council (FFIEC) recently adopted in a document entitled ``Supervisory
Policy Statement on Investment Securities and End-User Derivatives
Activities.'' \1\
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\1\ See 63 FR 20191 (April 23, 1998).
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The proposed amendments enable FCA to relax or repeal many of the
detailed criteria that the existing regulations prescribe for specific
types of investments. As a result, Sec. 615.5140 will provide broader
parameters for various classes of investments while retaining essential
safety and soundness controls, such as credit ratings and
diversification standards.
II. Investment Portfolio Management
Board and senior management should develop and implement
comprehensive risk management processes to effectively identify,
measure, monitor, and control risks associated with investment
activities. Although risk management programs will differ among System
banks, certain elements are fundamental to all sound risk management
programs. Safe and sound banking practices require System banks to have
programs to manage the market, credit, liquidity, operational, legal,
and other risks associated with investment activities. Effective risk
management also addresses risks in individual instruments, the
investment portfolio, and the entire institution.
Proposed Sec. 615.5133 sets forth the fundamental criteria for
developing sound investment management practices at Farm Credit banks.
Senior management, under the oversight of the board of directors,
should adhere to investment practices that are appropriate for the
bank's individual circumstances and consistent with these regulations.
The failure to understand and manage the risks associated with
investment activities will generally be considered an unsafe and
unsound banking practice.
A. Investment Policy Requirements
Many aspects of the current investment management regulations are
retained in this proposal. However, the complexity of many financial
products, both on- and off-balance sheet, compels the FCA and other
Federal financial institution regulators to advocate a more
comprehensive and institution-wide approach to risk management. Thus,
the FCA is proposing to strengthen, redesign, and reorganize this
section.
1. Board and Senior Management Oversight
The introductory paragraph to proposed Sec. 615.5133 outlines the
basic responsibilities of the board of directors regarding the
investment activities of its bank. The proposed rule requires the board
to adopt written policies that specifically identify the purposes and
objectives, risk parameters, delegations of authority, and reporting
requirements for managing the bank's investment portfolio. The
investment policy should also address how investment activities affect
the institution's capital and earnings. For this reason, a Farm Credit
bank board may include its investment policy in a broader asset-
liability management (ALM) or risk management policy.
Oversight by both the board of directors and senior management of
each Farm Credit bank is an integral
[[Page 33282]]
part of an effective risk management program. The board of directors is
responsible for ensuring that management and operational personnel have
the requisite skills and resources to manage the risks associated with
investment activities in accordance with the board's policies.
Annually, the board of directors of each Farm Credit bank must review
its investment policies to determine whether objectives and risk
exposure limits continue to be appropriate for the bank. Senior
management discharges its responsibility by adhering to the board's
policies, providing advice to the board, and safely and soundly
conducting investment activities on both a strategic and operational
basis.
2. Risk Limits
Proposed Sec. 615.5133(a) requires the board's policies to define
the risk parameters for the bank's investment activities. Foremost,
risk parameters are to be based on the strength of each Farm Credit
bank's capital position and its ability to measure and manage risk. The
risk parameters should be consistent with the bank's broader business
strategies and institutional objectives. The bank's investment policies
should identify the risk characteristics of permissible investments and
establish risk limits and diversification requirements for the various
classes of eligible investments and the investment portfolio. The
policies of each Farm Credit bank should control credit, market,
liquidity, and operational risks associated with investment activities.
B. Credit Risk
A System bank should not acquire investments without assessing the
creditworthiness of issuers, obligors, or other counterparties. Credit
risk generally refers to the risk that an issuer, obligor, or other
counterparty will default on its obligation to pay the investor under
the terms of the security or instrument.
Proposed Sec. 615.5133(a)(1) requires each System bank to establish
comprehensive policies to control credit risk in its investment
portfolio. Each Farm Credit institution must maintain a well-
diversified investment portfolio. As a result, every Farm Credit bank
should limit concentrations relating to single or related
counterparties, geographical areas, industries, or obligations with
similar characteristics.
The FCA proposes to delete current Sec. 615.5133(i) relating to
specific credit risk controls on investments in collateralized mortgage
obligations (CMOs), real estate investment conduits (REMICs), and
asset-backed securities (ABS), in favor of the broader language
proposed in Sec. 615.5133(a)(1)(i). Nevertheless, the FCA continues to
expect banks to address concentration risks associated with CMOs,
REMICs, mortgage-backed securities (MBS), and ABS by establishing
appropriate portfolio limits on each of these investments. More
specifically, the policy of each Farm Credit bank should address
minimum pool size, the minimum number of loans in a pool, geographic
diversification of a pool, and maximum allowable premiums.
As part of its efforts to control credit risks, Farm Credit banks
should consider the ability of counterparties to honor their
obligations and commitments. The selection of dealers, brokers, and
investment bankers (collectively, securities firms) is an important
aspect of effective management of counterparty credit risk. Proposed
Sec. 615.5133(a)(1)(ii) requires bank boards of directors to identify
the criteria for selecting securities firms. A satisfactory approval
process includes a review of each firm's financial statements and an
evaluation of its ability to honor its commitments, including an
inquiry into the general reputation of the securities firm. In some
situations, it is also prudent for System banks to review information
from Federal or State securities regulators and industry self-
regulatory organizations such as the National Association of Securities
Dealers concerning any formal enforcement actions against the dealer,
its affiliates, or associated personnel. Proposed
Sec. 615.5133(a)(1)(ii) also requires the board of directors to set
limits on the amounts and types of transactions that the bank can
execute with authorized securities firms. The board of directors must
annually review management's selection of securities firms and
limitations on transactions with such firms.
Proposed Sec. 615.5133(a)(1)(ii) responds to requests by System
banks for modifications in the FCA's policy concerning the board's role
in selecting securities firms, financial institutions, and other
counterparties. The proposed rule would no longer require the board of
directors to approve specific depository institutions where the bank
holds certificates of deposits and Federal funds. The FCA originally
imposed this requirement on System banks at a time when small,
isolated, and financially weak commercial banks were offering brokered
deposits with high rates of return.\2\ Reforms in the commercial
banking industry and a widespread awareness of the risks inherent in
such instruments have lessened FCA's regulatory concern. Furthermore,
proposed Sec. 615.5140(a)(4)(i) sets minimum credit and maturity limits
for investments in certificates of deposits, Federal funds, and bankers
acceptances.
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\2\ See 58 FR 63034, 63040 (November 30, 1993).
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Proposed Sec. 615.5133(a)(1)(iii) requires Farm Credit banks to
establish appropriate collateral margin requirements for repurchase
agreements.\3\ The FCA is proposing this amendment, in part, because
proposed Sec. 615.5140(a)(4)(iv) would expand the types of securities
that Farm Credit banks may accept as collateral in repurchase
transactions. As a means of managing potential counterparty credit
risk, it is prudent for System banks to establish appropriate
collateral margin requirements based on the quality of the collateral
and the terms of the agreement. Farm Credit banks should also manage
their exposure to loss on repurchase agreements by regularly marking
the collateral to market and maintaining control of the collateral.\4\
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\3\ In general, whether a given agreement is termed a
``repurchase agreement'' or a ``reverse repurchase agreement''
depends largely on which party initiated the transaction. Market
participants typically view the transaction from the dealer's
perspective. In this preamble and the proposed regulation, the FCA
uses the term ``repurchase agreement'' regardless of the perspective
from which the transaction is viewed.
\4\ For a more detailed discussion on managing risks associated
with repurchase agreements, Farm Credit banks should review the
FFIEC's modified policy statement on repurchase agreements with
securities dealers and others. See 63 FR 6935 (February, 11, 1998).
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C. Market Risk
From a safety and soundness perspective, it is crucial for the
management of a Farm Credit bank to fully understand the market risks
associated with investment securities prior to acquisition and on an
ongoing basis. Market risk is the risk to a bank's financial condition
resulting from adverse changes in value of its holdings arising from
movements in interest rates or prices. The most significant market risk
of investment activities is interest rate risk. Proposed
Sec. 615.5133(a)(2) would require bank boards to establish limits on
market risk exposure at the institutional, portfolio, or individual
instrument level. This change corresponds with pending changes in other
parts of the FCA regulations that address interest rate risk
management.\5\
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\5\ The FCA's proposed capital regulations provide more detailed
discussions of FCS institution responsibilities as they relate to
interest rate risk management. See 62 FR 49623 (September, 23,
1997).
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To manage market risk exposure, System banks should evaluate how
[[Page 33283]]
individual instruments and the investment portfolio as a whole affect
the bank's overall interest rate risk profile. Bank's should monitor
the price sensitivity of its investment portfolio and specify
institution-wide interest rate risk limits. In addition, banks may find
it useful to establish interest rate risk limits on the investment
portfolio or on certain types of securities. Risk parameters should be
commensurate with the bank's ability to measure, manage, and absorb
risk. Boards should consider the bank's level of capital and earnings
and its tolerance for market risk exposure when setting risk
parameters. Market risk limits should be established in a manner that
is consistent with all relevant regulations, policies, and guidance
issued by the FCA.
D. Liquidity Risk
The FCA expects Farm Credit banks to manage liquidity risk at both
the investment and the institutional levels. System banks may encounter
liquidity risk stemming from market conditions surrounding individual
investment activities. In this context, liquidity risk is the risk that
a bank would not be able to easily sell or liquidate an investment
quickly at a fair price. This inability may be due to inadequate market
depth or market disruption. At the institutional level, liquidity risk
is the risk that System banks could encounter a liquidity crisis if
they are unable to fund operations at reasonable rates because access
to the capital markets is impeded. This impediment may result from a
market disruption or real or perceived credit problems.
The FCA proposes to repeal a provision in existing Sec. 615.5134(b)
which requires System banks to segregate investments held in the
liquidity reserve from investments that are maintained for the other
purposes permitted by existing Sec. 615.5132. As a result of this
amendment, System banks will have greater flexibility to decide how
best to use their investments to manage exposure to risk.\6\ Since the
liquidity characteristics of an investment influence whether it is
suitable for meeting particular institutional objectives, the FCA also
proposes a conforming change to Sec. 615.5133(a)(3). Pursuant to this
amendment, the bank's policies must specify the desired liquidity
characteristics of investments that it will use for maintaining a
liquidity reserve and accomplishing other institutional objectives.
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\6\ The minimum liquidity reserve that System banks maintain
under Sec. 615.5134 must be sufficient to fund their operations for
approximately 15 days in the event that System access to the capital
markets becomes impeded.
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The bank's investment policies must also require the bank to
maintain sufficient quantities of liquid investments to comply with the
liquidity reserve requirements of Sec. 615.5134. Pursuant to
Sec. 615.5132, each Farm Credit bank's total investments, including its
liquidity reserve, cannot exceed 30 percent of its total outstanding
loans. The FCA expects the policies of each Farm Credit bank to strike
an appropriate balance between the need for a liquidity reserve, the
management of interest rate risk, and the investment of surplus funds
as it strives to accomplish its institutional objectives.
E. Operational Risk
Operational risk occurs when deficiencies in internal controls or
information systems result in unexpected loss to a financial
institution. Operational risk may arise from inadequate procedures,
human error, information system failure, or fraud. Internal controls
that effectively detect and prevent operating risks are an integral
part of prudent investment management. The ability of management to
accurately assess and control operating risks is often one of the
greatest challenges that financial institutions face from investment
activities. Therefore, proposed Sec. 615.5133(a)(4) would require the
board of directors of each Farm Credit bank to address operating risks
by establishing policies that foster effective internal controls.
Organizational structure and reporting lines should clearly
delineate responsibility and accountability for all investment
management functions, including risk measurement, risk management, and
oversight. Organizational structure should periodically be reviewed to
reveal conflicts of interest or inadequate checks and balances.
Proposed Sec. 615.5133(b) specifically requires System banks to
identify who has delegated authority to conduct investment transactions
and the extent of that authority. In addition, the proposed rule
requires a separation of duties and supervision between personnel
executing investment transactions and those responsible for approving,
revaluating, and overseeing the bank's investments. Separation of
duties promotes integrity, accuracy, and reasonable business practices
that reduce the risk of loss. Senior management must ensure that bank
investment practices and risk exposure are regularly reviewed and
evaluated by personnel who are independent from those responsible for
executing investment transactions.
Existing Sec. 615.5133(h), which the FCA proposes to modify and
redesignate as Sec. 615.5133(c), requires Farm Credit banks to
establish appropriate internal controls to monitor their investment
activities and prevent loss, fraud, embezzlement, conflicts of
interest, and unauthorized investment practices. Redesignated
Sec. 615.5133(c)(1) adds conflicts of interest as an issue that every
System bank must specifically address in its investment policies. The
policies of each Farm Credit bank should provide guidelines to prevent
or resolve conflicts of interest that may arise from employees who are
directly involved in purchasing and selling securities. Furthermore,
the bank's policies should ensure that all directors, officers, and
employees act in the best interest of the institution.
Due to the increasingly complex nature of investment instruments,
Farm Credit banks must maintain information systems that are capable of
monitoring, measuring, and evaluating the risks inherent in their
investment activities. Proposed Sec. 615.5133(c)(3) would require banks
to maintain management information systems that are commensurate with
the nature, scope, and complexity of the bank's investment activities.
Internal quantitative models and management expertise must be adequate
to analyze individual investment instruments, the investment portfolio,
and the effect investments have on the bank's cashflows, earnings, and
capital.
Farm Credit banks may also be exposed to other sources of operating
risks, such as legal risk that may result from contracts that are not
legally enforceable. The FCA expects each bank to adequately assess and
control other operational risks relating to investment activities.
Accordingly, Farm Credit banks should clearly define documentation
requirements for securities transactions, retention and safekeeping of
documents, as well as possession and control of purchased instruments.
F. Securities Valuation
Accurate and frequent securities valuation is essential to
measuring risk and monitoring compliance with the bank's objectives and
risk parameters. Proposed Sec. 615.5133(d) establishes the basic
requirements for securities valuations by Farm Credit banks.\7\
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System banks must understand the value and price sensitivity of their
investments prior to purchase and on an ongoing basis. System banks
should rely on valuation methodologies that take into account all the
risk elements in a security to determine its price. Appropriate
securities valuation practices enable managers to fully understand the
risks and cashflow characteristics of the investments.
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\7\ Two provisions of this regulation, Sec. 615.5133(d)(1) and
(d)(2) are new, while existing Sec. 615.5140(d) has been modified
and redesignated as proposed Sec. 615.5133(d)(3).
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A critical step in sound investment management is the independent
verification of securities prices. Accordingly, proposed
Sec. 615.5133(d)(1) requires each Farm Credit bank, at the time of
purchase or sale, to verify the value of the security (except new
issues) with a source that is independent of the broker, dealer,
counterparty, or other intermediary in the specific transaction. Under
the proposed rule, independent verification of price can be as simple
as obtaining a price from an industry-recognized information provider.
Although price quotes from information providers are not actual market
prices, they confirm whether the broker's price is reasonable. In the
event that a bank is unable to obtain a second price quote on a
particular security, a price quote may be obtained on a security with
substantially similar characteristics.
Proposed Sec. 615.5133(d)(2) requires Farm Credit banks to
determine, at least monthly, the fair value of each security in their
portfolio and the fair value of the investment portfolio as a whole.
This provision is added to the regulations to ensure that management
has the necessary information to assess the performance of the bank's
investment portfolio. Additionally, this requirement enables management
to provide accurate and timely reports to the board of directors in
accordance with proposed Sec. 615.5133(e).
Existing Sec. 615.5140(c) has been modified and redesignated as
proposed Sec. 615.5133(d)(3). Currently, Sec. 615.5140(c) requires each
Farm Credit bank to perform ongoing evaluations of all eligible
investments in its portfolio and to support its evaluation with the
most recent credit rating by at least one nationally recognized
statistical rating organization (NRSRO). As amended, proposed
Sec. 615.5133(d)(3) specifically requires Farm Credit banks to perform
evaluations of the credit quality and price sensitivity to changes in
market interest rates of all investments held in its portfolio prior to
purchase and on an ongoing basis. This change emphasizes that effective
credit and interest rate risk management is vital to successful FCS
bank operations.
The substance and form of the evaluations are likely to vary
depending on the type of instrument. Relatively simple or standardized
instruments with readily identifiable risks require significantly less
analysis than more volatile or complex instruments. Proposed
Sec. 615.5141 contains specific stress testing guidance for evaluating
the price sensitivity of mortgage securities. Other eligible
investments that have uncertain cashflows as a result of embedded
options (such as call options, caps or floors) may require similar
analytical techniques to appropriately evaluate the instruments. For
example, prior to investing in ABS, the FCA expects a bank to conduct
or obtain an evaluation of the collateral (including type, aging of the
assets, and the credit quality of the underlying loans) and an analysis
of the securities' structure and cashflows.
System banks must continue to support their credit evaluations by
the most recent credit rating with a NRSRO. However, Farm Credit banks
should not rely exclusively on NRSRO ratings prior to purchasing
investments because there may be a lag before an adverse event is
reflected in the credit rating.
G. Reports to the Bank's Board
Adequate reporting enables bank boards to properly discharge their
fiduciary responsibilities. The investment policy should define routine
reporting requirements and the means for reporting exceptions to
policy. Management reports need to communicate effectively to the board
of directors the nature of the risks inherent in the bank's investment
activities. Reporting should occur frequently so that the board has
timely, accurate, and sufficient information to understand how changes
in the investment portfolio affect the balance sheet and the bank's
risk profile. The FCA proposes to modify the second sentence of
existing Sec. 615.5133(h) to emphasize these points and to redesignate
it as Sec. 615.5133(e).
Proposed Sec. 615.5133(e) requires quarterly reports on the
performance (i.e., gains or losses) and risk of individual investments
and the investment portfolio. Key risks should be specifically
identified and discussed in the report. More specifically, reports
should relate potential risk exposure to changes in market interest
rates and any other factors (such as credit deterioration) that may
affect the value of the bank's investment holdings. In addition,
proposed Sec. 615.5133(e) requires management reports to discuss how
investments affect the bank's overall financial condition and to
evaluate whether the performance of the investment portfolio
effectively achieves the objectives established by the board of
directors. Reports should specifically identify any deviations from the
board's policies.
III. Eligible Investments
A. Overview
Section 615.5140 lists the eligible investments that System banks
may purchase and hold to maintain a liquidity reserve, manage interest
rate risk, and invest surplus short-term funds. Associations are also
authorized to hold eligible investments listed in Sec. 615.5140 to
invest surplus funds and reduce interest rate risk pursuant to existing
Sec. 615.5141 (redesignated as Sec. 615.5142). Only investments that
can be promptly converted into cash without significant loss are
suitable for achieving these objectives. For this reason, the eligible
investments listed in both existing and proposed Sec. 615.5140
generally have short maturities and maintain a high investment grade
credit rating by an NRSRO. Furthermore, all eligible investments are
either traded in active secondary markets or are valuable as
collateral.
The proposed rule provides System institutions with a broad array
of high-quality and liquid investments. The FCA proposes to expand the
list of eligible investments and to relax or repeal certain
restrictions in existing Sec. 615.5140. These revisions reflect changes
in the financial markets as well as the FCA's desire to develop a
regulatory framework that can more readily accommodate innovations in
financial products and analytical tools.
The FCA Board proposes to restructure the format of Sec. 615.5140
to accommodate eligible investments that are newly authorized by the
FCA and to provide an organizational structure that is easy to
understand. Similar classes of investments, such as full faith and
credit obligations of Federal and State governments and short-term
money market instruments are now grouped together in proposed
Sec. 615.5140(a). The FCA proposes to reduce the number of portfolio
caps and repeal existing regulatory restrictions on the amount that
each FCS institution can invest in negotiable certificates of deposit,
Federal funds, bankers acceptances, and prime commercial paper.
Requirements that apply to several categories of eligible
investments have been relocated to Sec. 615.5140(b). For example, the
requirement that an investment must be marketable will now be covered
by a single provision in
[[Page 33285]]
proposed Sec. 615.5140(b)(1). Additionally, the sovereign rating for
political and economic stability of foreign countries, which is
currently repeated several times in the existing regulation, is
relocated to proposed Sec. 615.5140(b)(2).
The FCA is proposing to revise its regulatory terminology for
credit ratings. References to the credit ratings of specific NRSROs are
omitted from the proposed rule so it more accurately encompasses the
broad universe of market ratings. Instead, the proposed regulation
requires each eligible investment listed in Sec. 615.5140(a) to
maintain a specified long-term or short-term credit rating by an NRSRO
that is recognized by the Securities and Exchange Commission (SEC).
Whereas the existing regulation refers, for example, to a Standards and
Poor's (S&P) Corporation rating of ``AA'' or its equivalent, the
proposed regulation refers to ``the highest two credit ratings by an
NRSRO.'' The following table provides a comparative illustration of
S&P's investment grades for both long-term and short-term issue credit
ratings.
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S&P ratings
Investment grade ------------------------------------
Long-term Short-term
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First.............................. AAA A-1
Second............................. AA A-2
Third.............................. A A-3
Fourth............................. BBB
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The ratings in the table are often modified by either plus or minus
signs to show relative standing within a major rating category.
Specific investment credit ratings in the proposed rule refer to the
generic rating categories, not modifiers within the generic group.
Thus, for example, a long-term rating of ``AA-'' by S&P would be, for
the purposes of FCA's regulations, within the ``two highest credit
ratings by an NRSRO.''
The following section provides a category-by-category discussion of
the FCA's proposed regulatory framework for eligible investments.
B. U.S. Treasury and Agency Securities
The FCA retains Sec. 615.5140(a)(1) without revision. This
provision authorizes each FCS institution to invest in obligations that
are backed by the full faith and credit of the United States, its
agencies, instrumentalities, and corporations. In response to frequent
questions about the scope of this provision, the FCA confirms that
Sec. 615.5140(a)(1) permits the purchase of debt obligations of other
Government-sponsored enterprises (GSEs). Private obligations that are
fully insured or guaranteed as to both principal and interest by the
United States, its agencies, instrumentalities, or corporations are
also covered by this regulation. Thus, for example, a System
institution may hold federally insured deposits, loans that are
guaranteed by either the Export-Import Bank of the United States or the
Overseas Private Investment Corporation, and certain obligations of the
Small Business Administration.
C. Municipal Securities
The FCA proposes to redesignate Sec. 615.5140(a)(10), which
authorizes the investment in the general obligations of State and
municipal governments, as Sec. 615.5140(a)(2), without significant
change. The FCA proposes to add a definition of ``general obligation of
a State or political subdivision'' to Sec. 615.5131 to codify its
recent guidance on which bonds are deemed to be backed by the full
faith and credit of a State or local government.\8\ Under this
definition, general obligation bonds are those that are: (1) Full faith
and credit obligations of a State or local government that possesses
powers of general taxation; or (2) obligations of a governmental unit
that lacks powers of general taxation if an obligor possessing general
powers of taxation unconditionally guarantees to make all payments on
these obligations.
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\8\ See FCA BL-038, ``Guidance Relating to Investment
Activities,'' (November 26, 1997).
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System banks have requested authority to invest in municipal
revenue bonds. These bonds are not supported by the taxation powers of
the obligor and are repayable from fee income and other sources of
revenue. Although many municipal revenue bonds are highly rated by
NRSROs and are actively traded in secondary markets, others are not.
The universe of municipal revenue bonds is also diverse, and effective
regulation of System investment in these securities could be difficult.
For these reasons, the FCA requests comments on how it could permit
these investments while limiting risks to System institutions.
Specifically, the FCA solicits comments on how the regulation could
establish: (1) Criteria for determining which revenue bonds are
suitable for meeting the investment purposes in Sec. 615.5132; and (2)
an appropriate limit on the amount of these investments.
D. International and Multilateral Development Banks
Obligations of the International Bank for Reconstruction and
Development (World Bank) are eligible investments under existing
Sec. 615.5140(a)(3). The FCA's proposal expands the scope of this
provision to include the obligations of other international and
multilateral development banks (such as the Inter-American Development
Bank and the North American Development Bank) in which the United
States is a voting shareholder. This amendment recognizes other highly
rated banks that work in concert with the World Bank to promote
development in various countries.
E. Money Market Instruments
Several provisions of existing Sec. 615.5140(a) authorize
investments in negotiable certificates of deposit, Federal funds,
bankers acceptances, prime commercial paper, and repurchase agreements.
These money market instruments have high credit quality and short
maturities. Additionally, they can be sold on active secondary markets
prior to maturity. These qualities make them highly liquid and valuable
as collateral. Accordingly, the FCA proposes to group all money market
instruments together into a single regulatory provision,
Sec. 615.5140(a)(4). Since these money market instruments pose limited
risks to investors, the FCA believes that this regulation should no
longer impose specific limitations on the amounts of negotiable
certificates of deposit, Federal funds, bankers acceptances, and prime
commercial paper that each FCS institution could hold in its investment
portfolio. However, Sec. 615.5140(b)(3) continues to restrict the
amount that an FCS institution could invest with a single obligor or
institution to 20 percent of its total capital. The FCA is also
proposing to omit the definitions of negotiable certificates of
deposit, Federal funds, and Term Federal funds from existing
Sec. 615.5131 because the meanings of these instruments are commonly
understood by participants in the money markets. Additionally, the FCA
has relocated the definitions of prime commercial paper and repurchase
agreements from existing Sec. 615.5131 to proposed Sec. 615.5140(a)(4)
so these regulations are easier to read.
The FCA proposes to omit specific references to Eurodollar and
Yankee certificates of deposits from Sec. 615.5131 and Sec. 615.5140
because proposed Sec. 615.5140 (a)(4)(i) is sufficiently broad to
permit investment in both of these instruments. The provision in
existing Sec. 615.5140(a)(5) regarding deposit insurance for domestic
and Yankee certificates of deposit became redundant in 1996 when the
FCA amended Sec. 615.5140(a)(1) to specifically cover Federal insurance
of private debt
[[Page 33286]]
obligations.\9\ Deposit insurance usually is not a consideration when
an FCS institution purchases negotiable Eurodollar certificates of
deposit because only a small portion of its investment is typically
insured.
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\9\ See 61 FR 67187 (December 20, 1996).
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System banks requested authority to invest in Eurodollar time
deposits. A Eurodollar time deposit is a non-negotiable deposit
denominated in United States dollars that is issued by an overseas
branch of a United States bank or by a foreign bank outside the United
States. The riskiness of Eurodollar time deposits depends on both the
creditworthiness of the issuing bank and the foreign country where the
deposit is located. Financial institutions generally use Eurodollar
time deposits as an alternative to Federal funds. Most Eurodollar time
deposits mature within 180 days.
The FCA agrees that Eurodollar time deposits are suitable for
investing short-term surplus funds and interest rate risk management.
However, the FCA proposes several safety and soundness constraints for
Eurodollar time deposits because these instruments are not negotiable
and they are held at depository institutions outside of the United
States. Specifically, proposed Sec. 615.5140(a)(4)(ii) allows each FCS
institution to invest in Eurodollar time deposits that mature within 90
days and that are issued by depository institutions that maintain the
highest short-term issuer credit rating by an NRSRO. In addition,
proposed Sec. 615.5140(b)(2) further requires Eurodollar time deposits
to be held at depository institutions located in foreign countries that
maintain the highest sovereign rating for political and economic
stability. The FCA also proposes to limit investments in Eurodollar
time deposits to 20 percent of an FCS institution's total investment
portfolio to control concentration risk in these non-negotiable
instruments.
System banks also requested authority to invest in certificates of
deposits that mature within 3 years but contain a put option that
enables the investor to require the depository institution to
repurchase the instrument. The FCA's research reveals that the market
for certificates of deposits with embedded put options is almost
nonexistent, and no commercial banks have issued these instruments in
several years. These instruments are neither liquid nor traded in
active secondary markets. Commercial banks have engineered the few
existing certificates of deposits with put options for specific
customers. Therefore, the FCA has not added these instruments to the
list of eligible investments in the proposed rule.
Prime commercial paper remains an eligible investment under the
proposed regulations. The FCA has redesignated Sec. 615.5140(a)(7) as
Sec. 615.5140(a)(4)(iii).
The FCA proposes to expand the types of collateral that support
eligible repurchase agreements. System banks have asserted that the
FCA's investment eligibility criteria limit their ability to
participate in the repurchase agreement market because market
participants are often unwilling to post collateral that specifically
complies with the investment criteria in existing Sec. 615.5140. The
FCA acknowledges that repurchase transactions can be a valuable tool
for investing short-term surplus funds, and they are relatively safe
due to short maturities, high quality of collateral, and collateral
margin requirements. For this reason, the FCA proposes to amend this
regulation. The proposed regulatory approach will allow more latitude
to participate in this market, while maintaining essential safety and
soundness controls.
Redesignated Sec. 615.5140(a)(4)(iv) permits each FCS institution
to invest in repurchase agreements where the FCS institution agrees to
purchase marketable securities subject to a legal agreement that
requires the counterparty to repurchase the same or identical
securities at a specific price within 100 days or less. Any securities
held as collateral in connection with repurchase agreements must be
either eligible investments authorized by this section or other
marketable securities that are rated in the highest credit rating
category by an NRSRO. In the event that the counterparty defaults on
the agreement and the FCS institution takes possession of the
collateral, the divestiture requirements in existing Sec. 615.5142
(redesignated as proposed Sec. 615.5143) apply to any collateral that
fails to qualify as an eligible investment under Sec. 615.5140(a).
In 1995, the FCA approved a System request to invest in Master
Notes pursuant to existing Sec. 615.5140(a)(11), which permits the FCA
to authorize additional investments on a case-by-case basis. As
requested, the FCA proposes Sec. 615.5140(a)(4)(v) to codify System
institutions' authority to invest in Master Notes.\10\ The proposed
regulation authorizes investments in Master Notes that: (1) Are
executed with a domestic counterparty that maintains the highest issuer
short-term credit rating by an NRSRO; and (2) mature overnight or
within 270 days under a callable contract. The FCA also proposes to
increase the portfolio limit on Master Notes from 15 to 20 percent of
the FCS institution's investment portfolio.
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\10\ Master Notes are interest-bearing unsecured promissory
notes that are issued by institutions to investors under a master
note agreement. The most common type of master note agreement is a
variable-amount note which is a type of open-ended commercial paper
that allows the investment and withdrawal of funds on a daily basis
and pays a daily interest rate tied to the commercial paper rate.
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F. Mortgage Securities
1. Overview
Currently, Sec. 615.5140(a)(2) authorizes investment in mortgage
securities that are issued or guaranteed by the Government National
Mortgage Association (Ginnie Mae or GNMA), the Federal National
Mortgage Association (Fannie Mae or FNMA), and the Federal Home Loan
Mortgage Corporation (Freddie Mac or FHLMC). CMOs that are
collateralized by mortgage securities of GNMA, FNMA and FHLMC are also
expressly authorized under the current regulations, even though they
are packaged, issued, and sold under a private label.\11\ Under the
existing regulation, eligible mortgage securities must either reprice
within 1 year or comply with the stress tests specified in
Sec. 615.5140(a)(2)(iii).\12\ System banks may hold mortgage securities
that are issued or fully guaranteed by Ginnie Mae without restriction
as to amount. However, the existing regulation restricts mortgage
securities that are issued or fully guaranteed by Fannie Mae and
Freddie Mac to 50 percent of each bank's total investments.
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\11\ See 58 FR 63035, (November 30, 1993). Private label
mortgage securities are issued by commercial banks, thrifts, and
private conduits. Unlike agency securities, private label mortgage
securities must be registered with the SEC.
\12\ Section 615.5174 permits Farm Credit banks and associations
to invest in mortgage-related securities that are guaranteed by the
Federal Agricultural Mortgage Corporation (Farmer Mac).
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System banks seek further opportunities to invest in the mortgage
securities market because of the high credit quality and liquidity of
these securities. In particular, Farm Credit banks have requested
authority to invest in mortgage securities that are collateralized by
loans that do not comply with the FNMA and FHLMC underwriting standards
and certain stripped mortgage-backed securities (SMBS). Recently,
System banks petitioned the FCA to repeal the portfolio limit on Fannie
Mae and Freddie Mac mortgage securities. This request also suggested
that the revised regulation authorize FCS institutions to invest in
mortgage securities that are rated within the two highest investment
credit grades by an NRSRO. The
[[Page 33287]]
proposed rule permits investment in a greater variety of mortgage
securities, subject to essential safety and soundness constraints.
2. Limits on FNMA and FHLMC Mortgage Securities
As previously noted, System banks requested that the FCA repeal the
50-percent investment portfolio limit on mortgage securities that are
issued or guaranteed as to principle and interest by FNMA and FHLMC.
System banks commented that no other financial institution regulatory
agency places restrictions on the credit exposure to GSEs and that
exposure limits on these securities should be left to the discretion of
each bank.
At this time, the FCA does not propose to repeal the existing
portfolio limits for FNMA and FHLMC mortgage securities. As explained
in greater detail below, the proposed regulation significantly expands
the authority of System institutions to purchase and hold mortgage
securities. The FCA's proposal will permit System institutions to
invest, for the first time, in non-agency mortgage securities. Under
certain circumstances, System banks would also be able to hold mortgage
derivative products, such as SMBS, for interest rate risk management.
Additionally, the new regulations will enable System institutions to
rely on alternate stress tests for measuring the price sensitivity of
mortgage securities.
The FCA agrees with System commenters that the board and management
of each FCS institution should establish risk exposure limits for all
mortgage securities. A regulatory portfolio limit on FNMA and FHLMC
mortgage securities does not absolve an institution's board or
management of its responsibility to establish risk parameters that are
based on the institution's unique risk-bearing capacity. The FCA also
expects each FCS institution to maintain a well-diversified investment
portfolio, regardless of whether these regulations impose a portfolio
cap on particular classes of investments.
Regulatory portfolio limits enhance safety and soundness by
limiting credit exposure, promoting diversification of System
investment portfolios, and curtailing investments in securities that
may exhibit considerable interest rate or liquidity risks. The FCA
invites further comment about this issue.
3. Non-agency Mortgage Securities
The size and liquidity of the non-agency mortgage securities market
has increased markedly since the implementation of the current
regulations in 1993. The largest sector of the non-agency market is
comprised of securities that are collateralized by ``jumbo'' mortgages
with principal amounts that exceed the maximum limits for FNMA and
FHLMC programs.\13\
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\13\ Several other asset classes in the non-agency MBS market
exist, including: (1) Housing and Urban Development paper; (2) high
loan-to-value loans; (3) Community Reinvestment Act loans; and (4)
loans to borrowers with conforming loan balances with other features
that prevent agency securitization, such as low documentation, self-
employment, and unique property features.
---------------------------------------------------------------------------
The credit quality and liquidity of any particular non-agency
mortgage security are dependent upon a myriad of factors, including the
type of collateral and the structure, term, and originator of the
issue. Non-agency mortgage securities are not explicitly or implicitly
guaranteed by the United States, so these instruments typically require
credit enhancements to receive a high rating. Credit enhancement is
usually provided by some combination of issuer or third-party
guarantee, letter of credit, over-collateralization, pool insurance, or
subordination. As a result of these credit enhancements, highly rated
non-agency mortgage securities enjoy low default rates.
The FCA determines that non-agency mortgage securities that
maintain the highest credit rating by an NRSRO have sufficient
protections against default risk. Proposed Sec. 615.5140(a)(5)(ii)
permits each System institution to invest in mortgage securities that
are offered by private sector entities. Under this proposal, privately
issued mortgage securities are eligible investments for System
institutions if they are rated in the highest rating category by an
NRSRO and they are collateralized by qualifying residential mortgages,
meeting the requirements of the Secondary Mortgage Market Enhancement
Act of 1984 (SMMEA).\14\ Prior to investing in such securities, every
System bank must subject each non-agency mortgage security to stress
testing in accordance with Sec. 615.5141. Non-agency mortgage
securities cannot exceed 15 percent of each institution's total
investments. Furthermore, mortgage securities that are issued by any
party other than Ginnie Mae cannot exceed 50 percent of each
institutions' total investments. This amendment balances the System's
request for a broader selection of mortgage securities with appropriate
safety and soundness restraints.
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\14\ The proposed rule allows investments in mortgage securities
that are offered and sold pursuant to section 4 (5) of the
Securities Act of 1933, 15 U.S.C. 77d(5), or are residential
mortgage related securities within the meaning of section 3 (a) (41)
of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a) (41). SMMEA
amended several statutes to encourage private sector investment in
certain mortgage-related securities. See Pub. L. 98-440, 98 Stat.
1689, October 3, 1984.
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4. Fixed-rate Mortgage Pass-through Securities
Currently, fixed-rate mortgage securities are eligible investments
for System institutions if they satisfy the three-pronged stress test
in existing Sec. 615.5140(a)(2)(ii).\15\ This stress test provides a
basic method for measuring the price sensitivity of a mortgage security
to changes in interest rates.\16\ System banks requested that the FCA
repeal the requirement in existing Sec. 615.5140(a)(2) that subjects
mortgage pass-through securities to the stress test. The Farm Credit
banks asserted that interest rate risk in mortgage pass-through
securities is easier to model and analyze and other federally regulated
financial institutions are not subject to similar requirements.
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\15\ A recent FCA bookletter explains the authority of System
banks to invest in fixed-rate mortgage securities that convert to
adjustable rate securities. See BL-038, ``Guidance Relating to
Investment Activities,'' (November 26, 1997).
\16\ Under existing Sec. 615.5140(a)(2)(ii), each fixed-rate
mortgage security must have a weighted average life (WAL) of 5 years
or less, and changes in its WAL and price cannot exceed specified
percentages, assuming parallel and sustained shift in interest rates
of 300 basis points.
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The FCA believes that stress testing of all mortgage securities is
a necessary discipline that enables each System institution to better
understand and manage the risks inherent in these instruments.
Therefore, the FCA does not incorporate the System's suggestion in this
proposal. However, as discussed below, the FCA proposes significant
changes to the stress-testing requirements for mortgage securities.
5. Other Mortgage-derivative Products
The FCA also plans to repeal existing Secs. 615.5131(r) and (s),
615.5140(a)(2)(v), and certain provisions in Sec. 615.5174(c) that
explicitly ban investments in SMBS and inverse floating-rate debt
classes.\17\ System banks claim that the explicit ban on SMBS is overly
broad and, as a
[[Page 33288]]
result, it excludes securities with limited interest rate risk. The FCA
concludes that the explicit regulatory ban on certain mortgage-
derivative products is unnecessary because all mortgage securities are
subject to stress-testing requirements under both the current and
proposed rules. The degree of price sensitivity that a mortgage
security exhibits to changes in market interest rates is influenced by
its unique characteristics. A System institution should determine
whether a particular mortgage security meets its risk management
objectives by using analytical techniques and methodologies that
effectively evaluate how interest rate changes will affect prepayments
and cashflows of the instrument.
---------------------------------------------------------------------------
\17\ Existing Sec. 615.5131(r) defines SMBS as ``securities
created by segregating the cashflows from the underlying mortgages
or mortgage securities to create two or more new securities, each
with a specified percentage of the underlying security's principal
payments, interest payments, or combination of the two.''
Furthermore, existing Sec. 615.5140(a)(2)(v)(A) and 615.5174(c)
specifically prohibit System banks from acquiring SMBS that are
issued by GNMA, FNMA, FHLMC, and the Farmer Mac. When the existing
regulations were adopted, the FCA reasoned that SMBS exhibit extreme
price volatility to shifting interest rates, and therefore, these
instruments were not suitable for maintaining a liquidity reserve or
managing interest rate risk. See 56 FR 65091, 65096 (December 18,
1991); 58 FR 63034, 63046 (November 30, 1993).
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Repeal of these regulatory restrictions will afford each System
institution greater latitude to manage interest rate risks in the
investment portfolio and its balance sheet. Although certain mortgage
derivative products are risky because their prices may be subject to
substantial fluctuations, the FCA recognizes that they can also be
useful tools for reducing interest rate risk. Successful risk
management of these instruments requires a thorough understanding of
the principles that govern the pricing of these instruments. In
general, FCA would view it as an unsafe and unsound practice to hold
SMBS and inverse floaters for any purpose other than to reduce specific
interest rate risks. Management must document, prior to purchase and
each quarter thereafter, that the mortgage derivative product is
reducing the interest rate risk of a designated group of assets or
liabilities and the interest rate risk of the institution. However, if
such an instrument exhibits only minimal price sensitivity under the
stress test in proposed Sec. 615.5141, a System institution would be
allowed to purchase and hold the instrument for other purposes
permitted by existing Sec. 615.5132.
6. Stress-testing Requirements
Although credit risk on highly rated mortgage securities is
minimal, these securities may expose investors to significant interest
rate risk. Since borrowers may prepay their mortgages, investors may
not receive the expected cashflows and returns on these securities.
Numerous factors influence the cashflow pattern and price sensitivity
of mortgage securities. Prepayments on these securities are affected by
the spread between market rates and the actual interest rates of
mortgages in the pool, the path of interest rates, and the unpaid
balances and remaining terms to maturity on the mortgage collateral.
The price behavior of a mortgage security also depends on whether the
security was purchased at a premium or at a discount. Therefore, each
System institution needs to employ appropriate analytical techniques
and methodologies to measure and evaluate interest rate risk inherent
in mortgage securities. More specifically, prudent risk management
practices require every System institution to examine the performance
of each mortgage security under a wide array of possible interest rate
scenarios. For these reasons, the FCA continues to believe that
appropriate stress testing of all mortgage securities is necessary to
gain a full understanding of the risks inherent in the instruments.
Originally, FCS banks requested technical modifications to FCA's
existing regulatory stress test. System banks subsequently requested
that the FCA repeal the regulatory stress test after the FFIEC
rescinded a policy statement that required depository institutions to
stress test mortgage derivative products.\18\ The System banks
commented that the FCA should make its regulatory approach consistent
with the FFIEC's new policy.
---------------------------------------------------------------------------
\18\ See 63 FR 20191 (April 23, 1998).
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In response, the FCA proposes significant changes to existing
requirements for evaluating the price sensitivity of mortgage
securities and determining their suitability. The FCA's revised
regulatory approach reflects improvements in prepayment models and
methodologies for evaluating and measuring the price sensitivity of a
security. Specifically, this proposal would enable each FCS institution
to choose between two alternative approaches for measuring and
evaluating the price sensitivity of mortgage securities to interest
rate fluctuations.
Under the first option, an FCS institution may continue to use a
modified version of the existing three-pronged stress test. The FCA
proposes to modify the third prong of the stress test, which
establishes a price sensitivity limit for mortgage securities. Under
proposed Sec. 615.5141(a)(3), the estimated change in the price of the
security cannot exceed 13 percent due to an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
This revision, which was originally requested by System banks, corrects
an inconsistency in the test that may arise under certain interest rate
scenarios. This change affords more latitude for investment in mortgage
securities.
Proposed Sec. 615.5141(b) allows the use of alternative stress
tests to evaluate the price sensitivity of investments in mortgage
securities. The FCA is permitting alternative stress tests because new
risk management technologies better enable investors to measure
interest rate risks in complex mortgage securities. Alternative stress
tests must be able to measure the price sensitivity of mortgage
instruments over different interest rate/yield curve scenarios prior to
purchase and each quarter thereafter. The methodology that an FCS
institution uses to analyze mortgage securities must be commensurate
with the complexity of the instrument's structure and cashflows. For
example, a pre-purchase analysis may show the effect of an immediate
and parallel shift in the yield curve of plus and minus 100, 200, and
300 basis points. Depending on the instrument's complexity, such
analysis may encompass a wider range of scenarios, including non-
parallel changes in the yield curve. A comprehensive analysis may also
take into consideration other relevant factors, such as interest rate
volatility and changes in credit spreads. The methodology used to
evaluate an instrument's price sensitivity should enable management to
determine that the particular mortgage security: (1) Is compatible with
the objectives and risk limits in the institution's investment
policies; and (2) does not expose capital and earnings to excessive
risk.
An FCS institution employing internal models for valuation and risk
measurement of mortgage securities should have adequate procedures to
validate the models and periodically review all elements of the
modeling process, including assumptions and risk measurement
methodologies and techniques. Any FCS institution that relies on third
parties for valuation and risk measurement must understand the
assumptions and techniques used. All analysis must be available for
review by the Office of Examination of the FCA.
7. Other Technical Changes
The FCA proposes to replace the definitions of ``CMOs,''
``mortgage-backed securities,'' and ``REMICs'' in existing
Sec. 615.5131(e), (l), and (p) with a single definition of ``mortgage
securities'' in proposed Sec. 615.5131(i), which encompasses mortgage
pass-through securities and all mortgage derivative products. Although
proposed Sec. 615.5131(i) continues to refer to CMOs and REMICS, the
FCA has omitted specific regulatory definitions for these securities
from the regulation because
[[Page 33289]]
their meanings are commonly understood in the financial markets.
The FCA proposes to relocate the applicable regulatory provision
governing ARM securities from Sec. 615.5140(a)(2)(ii) to Sec. 615.5141
and to delete the definition of ``adjustable-rate mortgage'' in
existing Sec. 615.5131(b) because it is redundant.
G. Corporate Debt Obligations and ABS
Currently, corporate debt obligations and ABS are subject to a
single regulatory provision, existing Sec. 615.5140(a)(8). Under the
existing regulation, corporate bonds and ABS, combined, cannot exceed
15 percent of the total investments of each FCS institution. Under this
proposal, corporate bonds and ABS would be governed by separate
regulatory provisions, and the portfolio cap for each category would be
20 percent of total outstanding investments. The FCA's proposal to
expand the portfolio limits for these two investments provides every
FCS institution with greater flexibility to invest in these securities
within reasonable risk diversification parameters.
Existing Sec. 615.5140(a)(8)(ii) authorizes each FCS institution to
invest in ABS that mature in 5 years, are collateralized by loans on
new automobiles (CARs) or credit card receivables (CARDs), and maintain
the highest investment grade credit rating by an NRSRO. The FCA adopted
Sec. 615.5140(a)(8)(ii) in 1993 when CARs and CARDs comprised
approximately 80 percent of the ABS market and other types of ABS were
not actively traded in the secondary markets.\19\
---------------------------------------------------------------------------
\19\ See 58 FR 63034, 63050 (November 30, 1993).
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The scope and depth of the ABS market has expanded rapidly since
1993. As a result, System banks have requested authority to invest in
ABS that are collateralized by other types of assets. Originally,
System banks petitioned the FCA for authority to purchase and hold ABS
that are secured by home equity loans, manufactured housing loans,
agricultural equipment loans, student loans, and wholesale dealer
automobile loans. Subsequently, System banks requested that the FCA
amend the regulation so it places no restrictions on the types of
collateral that securitize ABS. System banks assert that a high credit
rating is more indicative of an ABS's liquidity than its underlying
collateral. Farm Credit banks also suggested that the FCA revise the
maturity limits on ABS to permit fixed-rate ABS that have both a final
maturity of 7 years or less and a WAL of 5 years or less, and floating-
rate ABS that have both a final maturity of 10 years or less and a WAL
of 7 years or less.
This proposal adopts a modified version of the System's original
recommendation.\20\ Proposed Sec. 615.5140(a)(6) would authorize
investment in ABS that are collateralized by CARs, CARDs, home equity
loans, manufactured housing loans, equipment loans, student loans, and
wholesale dealer automobile loans. The FCA emphasizes that securities
collateralized by home equity loans are ABS, not mortgage securities,
under this proposal. The FCA finds that the market for these types of
ABS is sufficiently developed and that these securities are suitable
for meeting the objectives of Sec. 615.5132. This broad array of ABS
should provide FCS institutions with an ample selection of highly
rated, fixed-income investments that have relatively stable cashflows.
---------------------------------------------------------------------------
\20\ Although the System's recommendation did not address the
credit rating for ABS, the FCA proposes to retain the requirement in
the existing regulation that all eligible ABS maintain the highest
credit rating by an NRSRO.
---------------------------------------------------------------------------
Under proposed Sec. 615.5140(a)(6), FCA specifies that the WAL for
all eligible ABS cannot exceed 5 years and the final maturity cannot
exceed 7 years. The FCA proposes to extend the final maturity from 5 to
7 years in recognition that ABS with final maturities of 7 years
typically have much shorter WALs. This approach has the added advantage
of facilitating comparisons between amortizing ABS and other fixed-
income securities. The FCA does not adopt the System's suggestion
regarding the maturity of adjustable-rate ABS for two reasons. Most ABS
have final maturities that are shorter than the timeframe recommended
by Farm Credit banks. Other factors, such as the frequency of
repricing, periodic and life-time interest rate caps and the index to
which the instrument is tied are important determinants of how the
instrument will perform. Therefore, the FCA requests comments on how
the regulations could address maturity limits for adjustable ABS.
The FCA anticipates that there will be further growth in the ABS
market and active secondary markets will ultimately develop for ABS
that are backed by other types of collateral. Thus, the FCA also
requests comments on how it could develop a more flexible final
regulation that would enable the regulator to establish criteria for
determining the suitability of new types of ABS that financial markets
may create.
The FCA proposes no substantive changes to the regulatory
provisions that govern investments in corporate debt obligations. Under
this proposal, existing Sec. 615.5140(a)(8)(i) will be redesignated as
Sec. 615.5140(a)(7).
H. Shares in Investment Companies
The FCA believes that investment companies provide System
institutions with another convenient method to diversify and manage
risks. Therefore, the FCA proposes to authorize investment in shares of
any investment company that is registered under section 8 of the
Investment Company Act of 1940, 15 U.S.C. 80a-8, as long as the
investment company's portfolio consists exclusively of securities that
are authorized by Sec. 615.5140. Prior to investing in a particular
investment company, an FCS institution would be required by proposed
Sec. 615.5140(a)(8) to evaluate the investment company's risk and
return objectives. As part of this evaluation, the FCS institution
should determine whether the investment company's use of financial
derivatives is consistent with its investment policies. For instance,
the FCA would generally view it an unsafe and unsound practice for an
FCS institution to invest in an investment company that uses financial
derivatives for speculative purposes rather than as a risk management
tool. Every System institution should maintain appropriate
documentation on each investment, including a prospectus and analysis,
so its investment and selection process can be audited and examined.
Proposed Sec. 615.5140(b)(5) addresses how the obligor and
portfolio limitations in Sec. 615.5140(b)(3) and (b)(4) apply to an FCS
institution's interest in an investment company. Generally, proposed
Sec. 615.5140(b)(5)(i) requires combining the institution's direct
holdings of an eligible investment with its pro rata interest in the
same type of instrument in the portfolio of an investment company for
the purpose of complying with Sec. 615.5140(b)(3), (b)(4)(i), and
(b)(4)(ii). The FCA notes that aggregation is required only if this
regulation subjects a particular investment to an obligor or portfolio
limit. For example, prime commercial paper is subject to an obligor
limit, but not a portfolio limit. As a result, the regulation requires
aggregation to ensure that no more than 20 percent of an FCS
institution's total capital is invested in the prime commercial paper
of any single obligor. However, no regulatory restriction applies to
the amount of prime commercial paper that an FCS institution may hold
in its investment portfolio, either directly or through an investment
company.
Proposed Sec. 615.5140(b)(5)(ii) carves out two exceptions to this
aggregation rule. The first exception applies to the
[[Page 33290]]
obligor limit, while the second exemption covers portfolio
restrictions. Under Sec. 615.5140(b)(5)(ii)(A), an FCS institution may
elect not to combine its pro rata interest in a particular security in
an investment company with its direct holdings of securities that are
issued by the same obligor if the investment company's holdings of the
securities of any one issuer do not exceed 5 percent of its total
portfolio. Pursuant to Sec. 615.5140(b)(5)(ii)(B), an FCS institution
may elect not to combine its pro rata interest in a type of security in
an investment company with its direct holding of a class of securities
that are subject to the portfolio limits if its shares in a particular
investment company do not exceed 10 percent of its total investments.
I. Other Eligible Investments
The FCA proposes to redesignate existing Sec. 615.5140(a)(11) as
Sec. 615.5140(a)(9). This proposal contains no substantive amendments
to this provision, which allows the purchase of other short-term
investments, as authorized by the FCA that are marketable and highly
rated by an NRSRO. Whenever possible, the FCA seeks to repeal
regulatory prior-approval requirements that are not mandated by the
Act. The FCA requests comments on how the final regulation could permit
FCS institutions, under certain circumstances, to invest in short-term,
highly rated, marketable securities that are not expressly authorized
by Sec. 615.5140 without requiring Agency approval.
IV. Technical Amendments
The FCA proposes several conforming amendments to Sec. 615.5174
relating to investments in securities issued by Farmer Mac. The
terminology for mortgage securities has been revised so that it is
consistent with proposed amendments to Sec. 615.5131.
The FCA proposes to repeal the definitions of ``asset-liability
management,'' ``Federal funds,'' ``interest rate risk,'' ``market value
of equity,'' ``net interest income,'' ``total capital,'' and ``weighted
average maturity'' in Sec. 615.5131 because the meanings of these terms
are commonly understood in financial markets. Separately, the FCA has
redefined ``absolute final maturity'' in Sec. 615.5131(a) as ``final
maturity'' in proposed Sec. 615.5131(c).
The FCA also proposes to repeal Sec. 615.5142(a) and remove the
designation from paragraph (b) because this provision is obsolete.
Existing Sec. 615.5142(a) pertains to the divestiture of investments
that were rendered ineligible when the FCA originally adopted these
regulations in 1993.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, part 615 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
to read as follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
2. Subpart E is amended by revising the heading to read as follows:
Subpart E--Investment Portfolio Management
3. Section 615.5131 is revised to read as follows:
Sec. 615.5131 Definitions.
For purposes of this subpart, the following definitions shall
apply:
(a) Asset-backed securities (ABS) mean investment securities that
provide for ownership of a fractional undivided interest or collateral
interests in specific assets of a trust that are sold and traded in the
capital markets. For the purposes of this subpart, ABS exclude mortgage
securities that are defined in Sec. 615.5131(i).
(b) Eurodollar time deposit means a non-negotiable deposit
denominated in United States dollars and issued by an overseas branch
of a United States bank or by a foreign bank outside the United States.
(c) Final maturity means the last date on which the remaining
principal amount of a security is due and payable (matures) to the
registered owner. It shall not mean the call date, the expected average
life, the duration, or the weighted average maturity.
(d) General obligations of a State or political subdivision means:
(1) The full faith and credit obligations of a State, the District
of Columbia, the Commonwealth of Puerto Rico, a territory or possession
of the United States, or a political subdivision thereof that possesses
general powers of taxation, including property taxation; or
(2) An obligation payable from a special fund or by an obligor not
possessing general powers of taxation when an obligor possessing
general powers of taxation, including property taxation, has
unconditionally promised to make payments into the fund or otherwise
provide funds to cover all required payments on the obligation.
(e) Liquid investments are assets that can be promptly converted
into cash without significant loss to the investor. In the money
market, a security is liquid if the spread between bid and ask prices
is narrow and a reasonable amount can be sold at those prices.
(f) Loans are defined by Sec. 621.2(f) of this chapter and are
calculated quarterly (as of the last day of March, June, September, and
December) by using the average daily balance of loans for the quarter
then ended.
(g) Market risk means the risk to the bank's financial condition
resulting from a decline in value of its holdings arising from changes
in interest rates or market prices. A bank's exposure to market risk
can be measured by assessing the effect of changing rates and prices on
either earnings or economic value of an individual instrument, a
portfolio, or the entire institution.
(h) Marketable investment means an asset that can be sold with
reasonable promptness at a price that reasonably reflects its fair
value in an active and universally recognized secondary market.
(i) Mortgage securities means securities that are either:
(1) Collateralized with residential mortgage loans (excluding home
equity loans) that represent ownership of a fractional undivided
interest in a specific pool of mortgages (commonly known as pass-
through securities or participation certificates), or
(2) A multi-class, pay-through bond backed by a pool of residential
mortgage pass-through securities or residential mortgage loans
(including securities commonly known as collateralized mortgage
obligations and real estate mortgage investment conduits).
(j) Nationally Recognized Statistical Rating Organization (NRSRO)
means a rating organization that the Securities and Exchange Commission
has recognized as an NRSRO.
(k) Weighted average life (WAL) means the average time to receipt
of principal, weighted by the size of each principal payment. Weighted
average
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life for mortgage and asset-backed securities is calculated under
specific prepayment assumptions.
4. Section 615.5133 is revised to read as follows:
Sec. 615.5133 Investment portfolio management.
The board of directors of each Farm Credit bank is responsible for
adopting written policies for managing the bank's investment
activities. The board of directors shall also ensure that the bank's
investments are safely and soundly managed in accordance with the
written policies and that appropriate internal controls are in place to
preclude investment actions that undermine the solvency and liquidity
of the bank. Written investment policies must address the purposes and
objectives of investments, risk parameters, delegations of authority,
and reporting requirements. Annually, the board of directors of each
Farm Credit bank shall review its investment policies to determine
whether objectives and risk exposure limits continue to be appropriate
for the bank.
(a) Risk parameters. The investment policies shall establish risk
limits and diversification requirements for the various classes of
eligible investments and the entire investment portfolio. Risk
parameters shall be based on the Farm Credit bank's institutional
objectives, capital position, and its tolerance for risk. The policies
must identify the types and quantity of investments that the bank will
hold to achieve its objectives and control credit, market liquidity,
and operational risks.
(1) Credit risk. The bank's investment policies shall establish:
(i) Credit quality standards, limits on counterparty risk, and risk
diversification requirements that limit concentrations based on a
single or related counterparties, a geographical area, industries or
obligations with similar characteristics.
(ii) Criteria for selecting brokers, dealers, and investment
bankers (collectively, securities firms). The policy shall also set
limits on the amounts and types of transactions that the bank shall
execute with authorized securities firms. The board of directors shall
annually review management's selection of securities firms and
limitations on transactions with such securities firms.
(iii) Collateral margin requirements on repurchase agreements.
(2) Market risk. The bank's investment policies shall set market
risk limits for the institution, the investment portfolio or specific
types of investments pursuant to the regulations in this chapter and
guidance by the Farm Credit Administration.
(3) Liquidity risk. The bank's policies shall describe the
liquidity characteristics of investments used to accomplish
institutional objectives and its liquidity needs sufficient to comply
with the requirements of Sec. 615.5134.
(4) Operational risk. The bank's policy shall address operational
risks, including delegations of authority and internal controls in
accordance with paragraphs (b) and (c) of this section.
(b) Delegations of authorities. All delegations of the management
of the bank's investments to specific personnel or committees shall
state the extent of management's authority and responsibilities.
(c) Internal controls. Each Farm Credit bank shall:
(1) Establish appropriate internal controls to detect and prevent
loss, fraud, embezzlement, conflicts of interest, and unauthorized
investments and ensure compliance with policies established by the
board.
(2) Ensure that a separation of duties and supervision exists
between personnel executing investment transactions and those
responsible for approving, revaluating, and overseeing the bank's
investments.
(3) Maintain management information systems that are commensurate
with the level and complexity of the bank's investment activities.
(d) Securities valuation. Each Farm Credit bank shall:
(1) Verify the value of any security (except new issues) that it
purchases or sells from a source that is independent of the broker,
dealer, counterparty, or other intermediary in the specific
transaction.
(2) Determine, at least monthly, the fair value of each security in
its portfolio and the fair value of the portfolio as a whole.
(3) Perform evaluations of the credit quality and price sensitivity
to changes in market interest rates of all investments held in its
portfolio prior to purchase and on an ongoing basis.
(e) Reports to the board. Reports on the performance and risk of
each investment and the investment portfolio shall be made to the board
of directors or a committee thereof each quarter. Reports shall
identify potential risk exposure to changes in market interest rates
and other factors that may affect the value of the bank's investment
holdings. Each report shall discuss how investments affect the bank's
overall financial condition and evaluate whether the performance of the
investment portfolio effectively achieves the objectives established by
the board of directors. Any deviations from the board's policies shall
be specifically identified in the report.
5. Section 615.5134 is amended by revising paragraph (b) to read as
follows:
Sec. 615.5134 Liquidity reserve requirement.
* * * * *
(b) All investments held for the purpose of meeting the liquidity
reserve requirement under this section shall be free of lien.
* * * * *
6. Section 615.5140 is revised to read as follows:
Sec. 615.5140 Eligible investments.
(a) Farm Credit banks are authorized to hold the following types of
eligible investments, denominated in United States dollars, to comply
with the requirements of Secs. 615.5132, 615.5134, and 615.5135 of this
subpart:
(1) Treasury and agency securities. Obligations of the United
States; full-recourse obligations, other than mortgage securities, of
agencies, instrumentalities or corporations of the United States, or
debt obligations of other obligors that are fully insured or guaranteed
as to both principal and interest by the United States, its agencies,
instrumentalities, or corporations.
(2) General obligations of a State or political subdivision that
mature within 10 years and are rated in one of the three highest credit
rating categories by an NRSRO.
(3) Obligations of international and multilateral development banks
in which the United States is a voting shareholder.
(4) Money market instruments: (i) Negotiable certificates of
deposit that mature within 1 year or less, Federal funds, term Federal
funds that have a callable contract with a term to maturity of 100 days
or less, and bankers acceptances that are issued by depository
institutions. All issuers of money market instruments listed in
paragraph (a)(4)(i) of this section shall maintain a rating in one of
the two highest short-term credit rating categories by an NRSRO.
(ii) Eurodollar time deposits that mature within 90 days and are
held at depository institutions that maintain a rating in the highest
short-term credit rating category by an NRSRO.
(iii) Prime commercial paper that has a maturity of 270 days or
less and is rated in the highest short-term credit rating category by
an NRSRO.
(iv) Repurchase agreements where a Farm Credit bank agrees to
purchase marketable securities subject to an agreement that requires a
counterparty
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to repurchase the same or identical securities at a specific time
within 100 days or less. The collateral for repurchase agreements shall
be either eligible investments authorized by this section or other
marketable securities that are rated in the highest credit rating
category by an NRSRO.
(v) Master notes that mature overnight, or have a callable feature
and mature within 270 days, and are executed with domestic
counterparties that maintain a rating in the highest short-term credit
rating category by an NRSRO.
(5) Mortgage securities that are rated in the highest credit rating
category by an NRSRO and are either:
(i) Agency mortgage securities that are issued or guaranteed as to
principal and interest by the Government National Mortgage Association,
the Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation, or
(ii) Non-agency mortgage securities that are offered and sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5) or are residential mortgage-related securities within the
meaning of section 3(a)(41) of the Securities Exchange Act of 1934, 15
U.S.C. 78c(a)(41).
(iii) Mortgage securities shall not be consider eligible
investments, unless they comply with the requirements of Sec. 615.5141
of this subpart.
(6) Asset-backed securities that are collateralized by credit card
receivables, automobile loans, home equity loans, manufactured housing
loans, equipment loans, student loans, or wholesale dealer automobile
loans that are rated in the highest credit rating category by an NRSRO.
The expected WAL on eligible ABS shall not exceed 5 years and the final
maturity shall not exceed 7 years.
(7) Corporate debt securities that are rated within the two highest
credit rating categories by an NRSRO, mature within 5 years and are not
convertible into equity securities.
(8) Investment companies. Shares of an investment company
registered under section 8 of the Investment Company Act of 1940, 15
U.S.C. 80a-8 (including mutual funds, unit investment trusts, and
collective investment funds maintained by a national bank under 12 CFR
part 9), provided that the portfolio of the investment company consists
exclusively of eligible investments that are authorized by this section
or Sec. 615.5174 of this part. In addition, Farm Credit banks must
evaluate the investment company's risk and return objectives and use of
derivatives to ensure that the investment company's objectives and
strategies for achieving its objectives are consistent with the bank's
investment policies and the requirements of this subpart.
(9) Other investments, as authorized by the Farm Credit
Administration, that have a short maturity and are rated investment
grade by an NRSRO. A Farm Credit bank seeking approval of an investment
under this paragraph should provide the Farm Credit Administration with
documentation that describes the risk characteristics of the investment
and explains the bank's purpose and objectives for making the
investment.
(b) The authority of Farm Credit banks to hold the investments
listed in paragraph (a) of this section is subject to the following
requirements:
(1) Marketable securities. Except for the money market instruments
listed in paragraph (a)(4) of this section, all other eligible
investments shall be marketable within the meaning of Sec. 615.5131(h).
(2) Rating of foreign countries. Whenever the obligor or issuer of
an eligible investment is located outside of the United States, the
host country shall maintain the highest sovereign rating for political
and economic stability by an NRSRO.
(3) Obligor limits. Except for eligible investments covered by
paragraph (a)(1) of this section and mortgage securities that are
issued by or guaranteed as to principal and interest by the Government
National Mortgage Association, Federal National Mortgage Association,
or the Federal Home Loan Mortgage Corporation under paragraph (a)(5)(i)
of this section, each Farm Credit bank shall not invest more than
twenty (20) percent of its total capital in eligible investments issued
by any single institution, issuer, or obligor.
(4) Portfolio limits. Subject to Sec. 615.5132, each Farm Credit
System bank is authorized to hold eligible investments listed in
paragraph (a) of this section without limitation as to amount except:
(i) Mortgage securities shall not exceed fifty (50) percent of the
bank's total investments authorized under this section provided that
mortgage securities that are issued under paragraph (a)(5)(ii) of this
section shall not exceed fifteen (15) percent of the bank's total
investments. Mortgage securities that are issued by the Government
National Mortgage Association shall not be subject to any restriction
on amount.
(ii) Each of the following types of investments shall not exceed
twenty (20) percent of the bank's total investments authorized under
this section:
(A) Eurodollar time deposits;
(B) Master notes;
(C) Asset-backed securities; and
(D) Corporate bonds.
(5) Limit on investment company holdings. (i) General. A Farm
Credit bank shall combine its direct holdings of eligible investments
with its pro rata interest in the same type of instrument or obligor in
the portfolio of an investment company for the purpose of complying
with the obligor and portfolio limitations of paragraphs (b)(3),
(b)(4)(i), and (b)(4)(ii) of this section.
(ii) Alternate diversification requirements for investment
companies. (A) Exemption from the obligor limit. A Farm Credit bank may
elect not to combine its pro rata interest in a particular security in
an investment company with the bank's direct holdings of securities
that are subject to the obligor limit in paragraph (b)(3) of this
section if the investment company's holdings of the securities of any
one issuer do not exceed five (5) percent of its total portfolio.
(B) Exemption from the portfolio limits. A Farm Credit bank may
elect not to combine its pro rata interest in a type of security in an
investment company with the bank's direct holding of a class of
securities that are subject to the portfolio limits in paragraphs
(b)(4)(i) and (b)(4)(ii) of this section if the bank's shares in an
investment company do not exceed ten (10) percent of its total
investments.
Sec. 615.5141 through 615.5143 [Redesignated]
7. Sections 615.5141, 615.5142, and 615.5143 are redesignated as
Secs. 615.5142, 615.5143, and 615.5144, respectively, and a new
Sec. 615.5141 is added to read as follows:
Sec. 615.5141 Stress tests for mortgage securities.
Each Farm Credit bank shall perform stress tests to determine how
interest rate fluctuations will affect the cashflows and price of all
mortgage securities that it purchases and holds under
Sec. 615.5140(a)(5), as well as their overall affect on the earnings
and capital of the bank. Adjustable mortgage securities that have a
repricing mechanism of 12 months or less and tied to an index are not
subject to stress testing. Farm Credit banks may conduct the stress
tests in accordance with either paragraph (a) or (b) of this section.
(a) Mortgage securities shall comply with the following three tests
at the time of purchase and each quarter thereafter:
(1) Average Life Test. The expected WAL of the instrument does not
exceed 5 years.
(2) Average Life Sensitivity Test. The expected WAL does not extend
for more
[[Page 33293]]
than 2 years, assuming an immediate and sustained parallel shift in the
yield curve of plus 300 basis points, nor shorten for more than 3
years, assuming an immediate and sustained parallel shift in the yield
curve of minus 300 basis points.
(3) Price Sensitivity Test. The estimated change in price is not
more than thirteen (13) percent due to an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
(4) Exemption. A floating-rate mortgage security shall not be
subject to paragraphs (a)(1) and (2) of this section if at the time of
purchase, and each subsequent quarter, it bears a rate of interest that
is below the contractual cap on the instrument.
(b) A Farm Credit bank may use alternative stress tests to evaluate
the price sensitivity of its investments in mortgage securities.
Alternative stress tests must be able to measure the price sensitivity
of mortgage instruments over different interest rate/yield curve
scenarios prior to purchase and each quarter thereafter. The
methodology used to analyze mortgage securities shall be commensurate
with the complexity of the instrument's structure and cashflows. Prior
to purchase and quarterly thereafter, the stress test should determine
that the mortgage security's risk is compatible with the bank's
investment policies and the investment does not expose the bank's
capital and earnings to excessive risks.
(c) In applying the stress tests in either paragraphs (a) or (b) of
this section, each Farm Credit bank shall rely on verifiable
information to support all of its assumptions, including prepayment and
interest-rate volatility assumptions. All assumptions that form the
basis of the bank's evaluation of the security and its underlying
collateral shall be available for review by the Office of Examination
of the Farm Credit Administration. Subsequent changes in the bank's
assumptions shall be documented. If at any time after purchase, a
mortgage security no longer complies with requirements in this section,
the bank shall divest the security in accordance with Sec. 615.5143 of
this part.
Sec. 615.5143 [Amended]
8. Newly designated Sec. 615.5143 is amended by removing paragraph
(a) and the paragraph designation from paragraph (b).
Subpart F--Property and Other Investments
Sec. 615.5174 [Amended]
9. Section 615.5174 is amended by removing the words ``mortgage-
backed securities (MBSs), as defined by Sec. 615.5131(l),
collateralized mortgage obligations (CMOs), as defined by
Sec. 615.5131(e), and Real Estate Mortgage Investment Conduits
(REMICs), as defined by Sec. 615.5131(p)'' in paragraph (a), and adding
in their place, the words ``mortgage securities as defined by
Sec. 615.5131(l);'' by removing the words, ``as defined by
Sec. 615.5131(b),'' from paragraph (b)(1); by removing paragraph (c);
and redesignating paragraphs (d) and (e) as paragraphs (c) and (d),
respectively.
Dated: June 15, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-16208 Filed 6-17-98; 8:45 am]
BILLING CODE 6705-01-P