[Federal Register Volume 65, Number 2 (Tuesday, January 4, 2000)]
[Proposed Rules]
[Pages 324-338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-35]



[[Page 323]]



Part II





Federal Housing Finance Board





_______________________________________________________________________



12 CFR Parts 900, 910 and 941



Reorganization of the Office of Finance; Authority To Issue 
Consolidated Obligations on Which the Federal Home Loan Banks Are 
Jointly and Severally Liable; Proposed Changes to the Financial 
Management Policy of the Federal Home Loan Bank System; Proposed Rule 
and Notice

  Federal Register / Vol. 65, No. 2 / Tuesday, January 4, 2000 / 
Proposed Rules  

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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 910 and 941

[No. 99-61]
RIN 3069-AA88


Reorganization of the Office of Finance; Authority To Issue 
Consolidated Obligations on Which the Federal Home Loan Banks Are 
Jointly and Severally Liable

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its regulations regarding the Office of Finance (OF), a joint 
office of the Federal Home Loan Banks (Bank or Banks). The proposed 
rule would reorganize the OF and broaden its duties, functions and 
responsibilities in two key respects: the OF would perform consolidated 
obligation (CO) issuance functions, including preparation of combined 
financial reports, for the Banks; and the OF would serve as a vehicle 
for the Banks to carry out joint activities in a way that promotes 
operating efficiency and effectiveness in achieving the mission of the 
Banks.
    With respect to the issuance of COs, i.e., bonds, notes or 
debentures, the proposed rule would make the Banks, rather than the 
Finance Board, the issuers of COs under section 11 of the Federal Home 
Loan Bank Act (Act). As proposed, this action would not have a 
substantive effect on the debt issuance process or on the joint and 
several obligation of the Banks on the COs, but it would make the Banks 
responsible for accessing the capital markets through the OF to fund 
their own operations. This is consistent with devolutionary actions 
taken by Congress to give the Banks greater autonomy over the 
management of their business and to remove the Finance Board from 
involvement in Bank management functions.
    The proposed rule also is intended to provide the powers, 
operational independence, and flexibility the OF needs to be available 
for the Banks' use as a central management facility with respect to all 
joint Bank asset activities, and to facilitate the issuance of COs by 
the Banks or the Finance Board under section 11 of the Bank Act.
    The Finance Board is also proposing to make certain conforming 
amendments to its policy statement entitled ``Financial Management 
Policy of the Federal Home Loan Bank System'' (FMP). A Notice 
describing the proposed FMP changes in detail is published elsewhere in 
this issue of the Federal Register.

DATES: The Finance Board will accept comments on the proposed rule in 
writing on or before March 6, 2000.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by 
electronic mail at [email protected], or by regular mail at the Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006. 
Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Policy, Research and Analysis, 202/408-2845, 
[email protected], Charlotte A. Reid, Special Counsel, Office of 
General Counsel, 202/408-2510, [email protected], or Eric E. Berg, Senior 
Attorney, Office of General Counsel, 202/408-2589, [email protected]. 
Staff also can be reached by regular mail at the Federal Housing 
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Overview of Proposal

    The proposed rule would establish a new structure for the OF to 
accommodate additional functions proposed to address new challenges 
faced by the Bank System. With respect to the issuance of COs, the 
proposed rule would authorize the Banks, rather than the Finance Board, 
to issue COs, as discussed more completely below. This action is 
consistent with the Finance Board's ongoing efforts to remove itself as 
much as it can legally do from involvement in the management of the 
Banks, and with devolutionary actions taken by Congress to give the 
Banks greater autonomy over the management of their business.
    Notwithstanding the fact that the members of the Bank System know 
their communities and customers' needs best, the mortgage market is no 
longer the fragmented, localized market that it was when Congress 
created the Bank System in 1932. Driven by technological improvements, 
the mortgage market's delivery systems have become more national in 
scope, and the mortgage market now plays a central role in the national 
economy. The need for ``an appropriate vehicle for coordination of 
System-wide business issues,'' such as a central facility to assist the 
Banks in managing various aspects of their operations, including 
mortgage-related assets, has grown in the ten years since Congress 
confirmed the OF as a joint office of the Banks in the Financial 
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).\1\
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    \1\ See Pub. L. 101-73, tit. VII, sec. 702, 103 Stat. 183 (Aug. 
9, 1989). A General Accounting Office (GAO) report commissioned by 
Congress in section 1393 of the Housing and Community Development 
Act of 1992, which was issued on December 8, 1993 (GAO/GGD-94-38) 
(GAO Report), noted that FIRREA made ``many changes'' to the Bank 
System that ``introduced significant cultural changes for the Banks 
and their members.'' GAO Report at 19-20. Principally, after FIRREA, 
the Banks were no longer involved in the oversight and supervision 
of their members. The members henceforth only would view the Banks 
as a credit facility, and this change would promote the cooperative 
nature of the Bank System. GAO concluded, however, that to attract 
new, voluntary members and retain members, the Banks ``must provide 
sufficient value--through the products and services offered and the 
dividends paid--to warrant the required stock investment for 
membership.'' Id. at 21. The GAO Report noted the need for 
coordination of System-wide business issues. Id. at 117.
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    The Finance Board believes that the market has created an incentive 
and a business need for a facility controlled by the Banks and their 
members to provide economies and efficiencies of scale, as it has done 
for the issuance of COs by the Finance Board, by giving the Banks the 
flexibility to centralize certain of their common business functions. 
The Finance Board anticipates that this need will become even more 
critical as the Banks develop asset activities such as Member Mortgage 
Assets as part of their core business.\2\ Not only would such a 
facility provide operational benefits, it also would enhance the safety 
and soundness of the operations by providing both expertise and a 
mechanism for achieving risk management, and geographic diversity on a 
joint asset portfolio basis. In light of the recent enactment of Title 
VI of the Gramm-Leach-Bliley Act, the Federal Home Loan Bank System 
Modernization Act of 1999,\3\ the Finance Board is taking this 
opportunity to propose a reorganization of the OF that will allow this 
joint office of the Banks to function in this way at the request of the 
Banks and facilitate growth in the Bank System's business as the Banks 
seek to provide their members with new credit products and respond to 
changes in the marketplace and congressional mandates. The Finance 
Board believes having the OF serve these functions is particularly 
important because the OF is the only statutorily acknowledged and 
sanctioned joint office for the Banks,

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and the legal authority for the Banks to establish other joint entities 
is in question.\4\
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    \2\ Indeed, GAO foresaw this need, stating that ``there may be a 
need for a central coordinating mechanism * * * [that] should reside 
in the [Bank] System itself.'' See GAO Report at 113. The GAO Report 
observed that there were certain positive goals that could be 
attained by relieving the Finance Board of certain Bank System 
governance functions, including enhanced cost control and the 
centralization of ``certain business functions.'' Id. at 114.
    \3\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
    \4\ See, e.g., section 304(a) of the Government Corporation 
Control Act, codified at 31 U.S.C.A. Sec. 9102 (West 1994).
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A. Issuance of Consolidated Obligations

    Since 1946, the operations of the Banks and member demand for 
advances have been financed principally with the proceeds from COs 
issued pursuant to section 11(c) of the Bank Act by the Finance Board, 
or its predecessor agencies. See 12 U.S.C. 1431(c). The Banks, 
individually and collectively, are the sole obligors on COs issued by 
the Finance Board under section 11(c) of the Bank Act.\5\ The issuance 
of COs by the Finance Board under section 11(c) of the Bank Act is 
governed by Finance Board regulations set forth in 12 CFR parts 910 and 
941, the FMP and an annual debt authorization. The Finance Board is 
proposing to achieve the goal of continuing to give the Banks the 
autonomy to manage and run their own businesses by authorizing the 
Banks to issue joint debt pursuant to section 11(a) of the Bank Act 
through the OF as agent for the Banks, which would still be called COs, 
on which the Banks would be jointly and severally liable. See 12 U.S.C. 
1422a(a)(3)(B)(iii), 1431(a) and (d). Section 11(a) of the Bank Act 
provides that the Banks may issue bonds, debentures or other 
obligations ``upon such terms and conditions'' as the Finance Board may 
approve and ``subject to the rules and regulations prescribed by'' the 
Finance Board. See id. 1431(a). Under the proposed rule, the same rules 
governing the apportionment of joint-and-several liability with respect 
to COs issued by the Finance Board through the OF as agent pursuant to 
section 11(c) of the Bank Act would apply to COs issued by the Banks 
through the OF as agent pursuant to section 11(a) of the Bank Act.\6\ 
To eliminate the potential for conflicts to the Finance Board in its 
role as regulator of the OF and the Banks, the Finance Board is 
removing itself from its role as issuer of the COs, and instead 
allowing the Banks to raise funds in the capital markets to fund their 
operations, a management function tied directly to member demand. While 
the Finance Board has long been uncomfortable serving in both of these 
capacities, the process, while awkward, has worked quite successfully. 
However, the Finance Board's discomfort turned to concern over 
potential liability for the United States as a result of litigation 
arising from the bankruptcy of the County of Orange, California.
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    \5\ Id. 1431(b)-(d). The Bank Act makes clear that obligations 
of the Banks issued with the approval of the Finance Board are not 
the obligations of, and are not guaranteed by, the United States. 
See id. 1435. Congress underscored this precept in the Federal 
Housing Enterprises Financial Safety and Soundness Act of 1992, 
which provides in pertinent part that none of the housing 
government-sponsored enterprises' obligations or securities are 
backed by the full faith and credit of the United States. See Pub. 
L. 102-550, tit. XIII, sec. 1304, 106 Stat. 3944 (Oct. 28, 1992) 
(codified at 12 U.S.C. 4503).
    \6\ On October 12, 1999, the Finance Board published a final 
rule clarifying for the Banks how their joint-and-several liability 
on COs would operate, and elucidating for bondholders how they 
benefit from the Banks' joint-and-several liability. See 64 FR 55125 
(Oct. 12, 1999). The Bank System has been and remains financially 
strong. As of September 30, 1999, there were over $477 billion in 
COs outstanding. In the history of the Bank System, no Bank has ever 
been delinquent or defaulted on a principal or interest payment on 
any CO issued by the Finance Board or its predecessor agencies. The 
joint-and-several liability of the Banks on the COs is an integral 
part of investor confidence in Bank System debt.
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    In the course of the Orange County litigation, (which has since 
been settled with respect to the Banks, the OF and the United States), 
the United States District Court for the Central District of California 
held that Orange County had stated a claim for relief based on its 
contention that the United States had violated the federal securities 
laws in the issuance of certain COs. The District Court also found that 
Orange County's claim for ``restitution'' against the United States 
under the provisions of the Administrative Procedure Act was not barred 
by the doctrine of sovereign immunity. The Finance Board does not 
endorse these holdings, but has determined it is prudent to limit any 
further risk to the United States from such suits. By taking the 
proposed action, the Finance Board can accomplish this goal as well as 
that of making the Banks responsible in name for this most central 
aspect of their business.
    As a natural and necessary adjunct to the issuance of COs, the 
Banks also should be responsible for the preparation of the disclosure 
documents that facilitate CO issuance and for the periodic combined 
financial statements for the Bank System. Logic dictates that the OF, 
as the only joint Bank System office and existing agent for CO 
issuance, is the most appropriate entity to perform that function. The 
OF already prepares the offering documents used in the sale of the Bank 
System's COs, services the Bank System's debt, and possesses knowledge 
of the Bank System's financial statements, operations and condition. 
The Finance Board believes that transferring the function of preparing 
combined Bank System annual and quarterly financial reports to the OF 
is entirely appropriate and a provision making the transfer is included 
in the proposed rule.
    The proposed rule will codify the disclosure standards set forth in 
the Finance Board's ``Statement of Policy: Disclosures in the Combined 
Annual and Quarterly Financial Reports of the FHLBank System'' (Policy 
Statement). See 63 FR 39872 (July 24, 1998). These standards generally 
require the combined annual and quarterly financial reports of the Bank 
System to be prepared in a manner that is, in the judgement of the 
Finance Board, consistent with the disclosure requirements promulgated 
by the Securities and Exchange Commission (SEC). While securities 
issued by the Finance Board or the Banks are exempt from the 
registration and reporting requirements of the Securities Exchange Act 
of 1934, 15 U.S.C. 77c(a)42 (1934 Act), the Finance Board believes that 
the disclosure requirements promulgated by the SEC pursuant to the 
federal securities laws represent best practice, and that financial and 
other disclosure concerning the Bank System should conform to this 
standard to the greatest extent practicable. However, having determined 
that certain areas of disclosure are either inapplicable or 
inappropriate for the Bank System, the Finance Board has provided a 
list of exceptions to the general standard in the Appendix to the 
proposed rule. Preparation of combined Bank System annual and quarterly 
financial reports should be greatly simplified by the codification of 
uniform disclosure standards.
    In the area of compensation disclosure, the Finance Board notes 
that Item C of the proposed Appendix requires disclosure of 
compensation information only for the 12 Bank presidents and the CEO of 
the OF, whereas the SEC's regulations require that information for the 
CEO, the 4 other most highly compensated executive officers who held 
such offices during the last completed fiscal year, and up to 2 
additional individuals for whom disclosure would have been provided but 
for the fact that the individual was not serving as an executive 
officer at the end of the last completed fiscal year. This exception 
was adopted when the Finance Board regulated the compensation of Bank 
employees, and was intended to avoid the volume of disclosure that 
would result from applying the SEC standard to twelve Banks and the OF. 
However, now that Bank employee compensation has been deregulated, the 
Finance Board seeks comment on whether it should (1)

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expand the number of individuals for whom the required compensation 
information would be provided and (2) change the triggering criteria 
for compensation disclosure from title/position to income level, or 
from individual Banks to the Bank System overall.
    While the Finance Board is proposing that the OF prepare the Bank 
System's annual and quarterly financial reports, the Finance Board will 
continue to be responsible for oversight of the combined Bank System 
financial reports' compliance with the applicable disclosure standards. 
Accordingly, the proposed rule provides that the Finance Board in its 
sole discretion will determine whether or not a combined annual or 
quarterly report prepared by the OF meets the prescribed regulatory 
standards. The proposed rule requires the OF to promptly comply with 
any directive the Finance Board issues regarding the preparation, 
filing, amendment or distribution of the combined annual or quarterly 
financial reports.

B. Restructuring of the Office of Finance

    The Finance Board long has recognized the importance of an 
organizational structure for the OF that reflects its duties and 
responsibilities. The Finance Board has re-evaluated the appropriate 
organizational structure of the OF in light of the changes proposed 
herein, with two key goals in mind. First, the Finance Board wants to 
build on the governance model in the Bank Act, particularly after 
enactment of the Gramm-Leach-Bliley Act, whereby the Banks should have 
the autonomy to manage and run their own businesses. Second, the 
Finance Board wants to give all of the Banks representation on the OF 
Board of Directors to best achieve their operational goals. 
Additionally, the Finance Board has considered that the members of the 
OF Board of Directors should possess experience and qualifications to 
enable the Board to be most effective in exercising business judgment 
in its policy-making and decision-making roles. The proposed 
reorganization is designed to provide the structure, additional 
functions and operational capacity the OF must possess in order to 
accommodate the evolving business needs of the Banks.
    The Finance Board proposes to significantly alter both the size and 
composition of the OF Board of Directors. Based on the considerations 
described above, particularly the increased role being proposed for the 
OF, the Finance Board believes that the Bank System would best be 
served by an OF Board of Directors that includes representatives from 
each Bank, members of the Bank System, and the general community. 
Accordingly, the proposed rule would expand the OF Board of Directors 
to a total of 24 members, 12 of whom would be appointed by the Banks, 6 
of whom would be elected by Bank System members, and 6 of whom would be 
appointed by the Finance Board. However, recognizing that this number 
of directors may be unwieldy, the Finance Board invites comments 
addressing alternative board structures for the OF that would preserve 
an appropriate balance of representation by the Banks, the members and 
the public, as discussed more completely below.

II. Statutory and Regulatory Background

A. The Office of Finance

    The OF was one of a number of joint Bank offices established by 
regulation of the former Federal Home Loan Bank Board (FHLBB), 
predecessor agency to the Finance Board. Over time, the OF has evolved 
to support the Banks in responding to changes in the financial markets 
and Bank System member funding requirements. As originally enacted in 
1932, the Bank Act permitted the Banks to issue bonds and debentures, 
and established a trust registrar, which was the genesis of the OF. 
From 1934 to 1948, the FHLBB directed the Banks collectively to employ 
a fiscal agent to issue and sell consolidated obligations.\7\ In 1948, 
the FHLBB promulgated a regulation that created the Office of the 
Fiscal Agent of the Banks within the Bank System to facilitate the 
issuance of COs.\8\
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    \7\ In 1934, Section 503 of the National Housing Act of 1934 
amended section 11 of the Bank Act to provide authority to the FHLBB 
to issue COs on which the Banks are jointly and severally liable 
under sections 11(b) and (c) of the Bank Act (12 U.S.C. 1431(b) and 
(c)). See H.R. 9680, 73rd Cong., 2d. Sess. (Pub. No. 479) (enacted). 
The contractual duties of the Fiscal Agent expanded to include 
managing the Banks' investment portfolios.
    \8\ See 13 FR 7447 and 8269 (1948) (codified at 24 CFR 122.80 
(1949)) (repealed). The regulation provided for the appointment of 
the Fiscal Agent, and expanded the duties of the Fiscal Agent to 
include the sale and purchase of Bank System securities. After the 
Federal Home Loan Mortgage Corporation (Freddie Mac) was created in 
1970, the FHLBB created an Office of System Finance (as a separate 
Bank System office) to manage Freddie Mac's investment portfolios 
and reserves with those of the Federal Savings and Loan Insurance 
Corporation (FSLIC) in coordination with the Office of Fiscal Agent. 
The Banks since had ceased having the OF perform investment services 
on their behalf.
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    In 1972, the FHLBB promulgated a regulation that merged the Office 
of System Finance with the Office of Fiscal Agent and created the OF as 
a Joint Bank System office. See 37 FR 16864 (Aug. 22, 1972) (codified 
at 12 CFR 522.80-82) (repealed). The regulation provided for the OF to 
perform any ``function, duty or authority'' previously vested in the 
Fiscal Agent. In addition to issuing COs under the delegated authority 
of the FHLBB and servicing the debt as a fiscal agent of the Banks, the 
OF was required to perform other duties as requested by a Bank or 
Banks, or the FHLBB. During the 1980's, those duties included 
purchasing investment securities on behalf of the Banks, researching 
alternative investment vehicles and strategies and managing assets 
acquired by the FSLIC.
    As a part of the amendments to the Bank Act made by FIRREA, the 
existing joint or collective offices of the Bank System other than the 
OF were abolished, and the FHLBB regulation governing the OF was 
transferred to the Finance Board's regulations. See 12 U.S.C. 
1422b(b)(2); 12 CFR 932.56(a)(3) (repealed). The Finance Board 
reorganized the OF as fiscal agent of the Finance Board in issuing COs 
under section 11(c) of the Bank Act. See 57 FR 2832 (Jan. 24, 1992); 57 
FR 11429 (Apr. 3, 1992) (codified at 12 CFR 941.9(b)(1)). The rule 
instituted a three-member Board of Directors for the oversight of the 
management of the OF, executing daily operations and implementing the 
Board of Directors plans and policies.\9\
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    \9\ From 1972 to 1992, the OF was headed by a Director. See 12 
CFR 932.55 (1992) (repealed). Following the reorganization, the OF 
Board of Directors consists of two Bank presidents and one private 
citizen, all appointed by the Finance Board.
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B. Consolidated Obligations

    The Bank Act always has authorized the Banks to issue debt, and 
empowered the regulator to issue rules, regulations and orders 
governing virtually every aspect of a Bank's debt issuance.\10\ Under 
the original statutory scheme, the Banks were jointly and severally 
liable for the debt of any Bank.\11\ In 1934,

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section 503 of the National Housing Act \12\ amended section 11 of the 
Bank Act (1934 amendments) to give the Bank System more ready access to 
the capital markets, and authorized the FHLBB to issue consolidated 
obligations on which the Banks would be jointly and severally liable. 
12 U.S.C. 1431(b) and (c). Certain constraints on the Banks' power to 
issue debt were eliminated by the 1934 amendments: the requirement that 
security deposits be not less than 190 percent of any consolidated 
issue was replaced by provisions limiting consolidated debentures 
issued by the FHLBB under section 11(b) to 5 times paid in capital. The 
1934 amendments also replaced the requirement in section 11(f) that all 
Banks would be jointly and severally liable for obligations issued by 
any Bank, as well as the proviso, with the more broadly drawn 
requirements in section (a), that the Banks' power to issue debt ``upon 
such terms and conditions as the Board may approve'' is ``subject to 
the rules and regulations prescribed by the Board.'' Thus, the 1934 
revisions to section 11 of the Bank Act gave broad authority to the 
Banks' regulator to determine the terms and conditions for the issuance 
of obligations on which the Banks would be liable.
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    \10\ As originally enacted in 1932, section 11(a) permitted the 
Banks to issue debt. It provided that ``Each Federal Home Loan Bank 
shall have power, subject to the approval of the Board, * * * to 
issue bonds and debentures having such maturities as may be 
determined by the board, secured by the transfer of eligible 
obligations of borrowing institutions on advances made by the bank 
to borrowing institutions and by the deposit of home mortgages.'' 
Sec. 11, c. 522, 47 Stat. 733 (July 22, 1932).
    \11\ Section 11(f) mandated that ``the Federal Home Loan Banks 
shall be jointly and severally liable for the payment when due of 
all bonds and debentures, and of notes and other obligations issued 
by any Federal Home Loan Bank.'' Various provisions in section 11 
required the Board to prescribe rules and regulations governing the 
issuance and security for the bonds, notes or debentures, and set 
requirements for the security for the Banks' debt. Section 11(f) 
also specified that the Banks were permitted to make agreements to 
ensure the payment of such obligations, so long as the agreements 
did not restrict in any way the Banks' joint and several liability. 
Section 11(f), however, contained a limited proviso permitting a 
Bank independently to borrow ``temporarily,'' if the Bank clearly 
disclosed that the liability was limited to it as the sole issuer, 
and obtained the express approval of the FHLBB. See id.
    \12\ Pub. L. 479, c. 847, sec. 503, 48 Stat. 1261 (Jun. 27, 
1934).
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    In 1989, Congress authorized the Finance Board to maintain the OF, 
a joint office of the Banks, and to delegate to the OF the ministerial 
functions associated with issuance of COs. See 12 U.S.C. 1422b(b)(1) 
and (2). Accordingly, the Finance Board delegated to the OF the 
authority to issue COs under section 11 of the Bank Act subject to 
Finance Board regulations, resolutions or policies. See 12 CFR 900.30.
    The issuance of COs is governed by part 910 of the Finance Board's 
regulations (12 CFR part 910), the FMP and an annual debt 
authorization. The operations of the OF are governed by part 941 of the 
Finance Board's regulations (12 CFR part 941). The Finance Board's 
regulations and the FMP provide for a leverage limit on the issuance 
COs. Section 910.1(b) prohibits the issuance of senior bonds where 
immediately following such issuance the aggregate amount of senior 
bonds and unsecured senior liabilities would exceed 20 times the total 
paid-in capital stock, retained earnings and reserves (exclusive of 
loss and deposit reserves required pursuant to section 1431(g)) of all 
of the Banks). See 12 CFR 910.1(b).\13\ Additionally, Finance Board 
regulations require the Banks to maintain certain assets at all times 
free of lien or pledge (the negative pledge requirement) to ensure 
sufficient collateralization of the consolidated obligations.\14\
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    \13\ The following definitions apply to the leverage limit 
provisions: `` (b) 'consolidated bonds'' means bonds or notes issued 
on behalf of all Banks;'' ``(c) 'senior bonds'' means consolidated 
bonds issued pursuant to 12 U.S.C. 1431 and this part and not 
defeased, other than bonds specifically subordinated to any then 
outstanding consolidated bonds;'' ``(d) 'unsecured, senior 
liabilities'' means all obligations of the Banks recognized as a 
liability under Generally Accepted Accounting Principles, except (1) 
liabilities that are covered by a perfected security interest; (2) 
consolidated bonds; (3) bonds issued pursuant to 12 U.S.C. 1431(a); 
and (4) allowances for losses for off-balance sheet obligations.'' 
12 CFR 910.0(b)-(d) (1999).
    \14\ The ``negative pledge requirement'' is the regulatory 
requirement that the Banks maintain certain types of unpledged 
assets in an amount equal to the amount of the Bank's senior bonds 
outstanding. See 12 CFR 910.1(c) (1999). Section 910.1(c) provides 
in pertinent part:
    The Banks shall at all times maintain assets of the following 
types, free from any lien or pledge, in a total amount at least 
equal to the amount of senior bonds outstanding: (1) Cash; (2) 
Obligations of or fully guaranteed by the United States; (3) Secured 
advances; (4) Mortgages as to which one or more Banks have any 
guaranty or insurance, or commitment thereof, by the United States 
or any agency thereof; (5) Investments described in section 16(a) of 
the Bank Act, as amended (12 U.S.C. 1436(a)); and (6) Other 
securities which have been assigned a rating or assessment by a 
major nationally recognized securities rating agency that is 
equivalent to or higher than the rating or assessment assigned by 
such agency or senior bonds outstanding. (Proviso omitted).
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C. FMP

    The FMP generally provides a framework within which the Banks may 
implement their financial management strategies in a prudent and 
responsible manner. Specifically, the FMP identifies the types of 
investments the Banks may purchase pursuant to their statutory 
investment authority. The FMP also includes a series of guidelines 
relating to the funding and hedging practices of the Banks, as well as 
to the management of their credit, interest-rate and liquidity risks, 
and establishes liquidity requirements in addition to those required by 
statute, as noted above. See FMP secs. III-IV.
    The FMP evolved from a series of policies and guidelines initially 
adopted by the FHLBB in the 1970s and revised a number of times 
thereafter. The Finance Board adopted the FMP in 1991, consolidating 
into one document the previously separate policies on funds management, 
hedging and interest rate swap, and adding new guidelines on management 
of unsecured credit and interest-rate risks.

III. Analysis of Proposed Rule

A. Overview

    The proposed rule would amend parts 910 and 941 of the Finance 
Board's regulations governing operation of the OF and issuance of COs, 
to enable the OF to issue debt on behalf of the Banks pursuant to 
section 11(a) of the Bank Act, require the OF to prepare the quarterly 
and annual combined financial reports of the Bank System, and provide 
services at the request of two or more Banks related to joint asset 
activities undertaken by the requesting Banks, including the 
administration of Member Mortgage Asset programs and liquidity 
management. With the additional functions and operational capacity 
established for the OF under the proposed rule, the Banks will have the 
ability to make the most efficient use of the OF and its services and 
thereby to maximize mission achievement as they develop new joint asset 
activities.

B. Amendments to 12 CFR 900.30

    The proposed rule would amend Sec. 900.30 of the Finance Board 
regulations to provide for the termination as of December 31, 2000, of 
the OF's authority to act as agent for the Finance Board in the 
issuance of COs under section 11(c) of the Bank Act. By this provision, 
the Finance Board intends to transition itself out of, and the Banks 
into, the debt issuance function under the provisions of section 11(a) 
of the Bank Act as soon as practicable.

C. CO Issuance--Proposed Amendments to Part 910

1. Definitions
    The proposed rule would delete Secs. 910.0(a) and (b), the 
definitions of the terms ``Board'' and ``Bank,'' which have been 
proposed to be defined for all Finance Board regulations in a previous 
rulemaking, see 64 FR 52148 (Sept. 27, 1999), and the definition of the 
term ``unsecured senior liabilities'' in Sec. 910.0(d). The proposed 
rule would amend the definition of the term ``consolidated obligation'' 
to clarify that it includes bonds, notes or debentures issued by the 
Banks through the OF under section 11(a) of the Bank Act. The proposed 
rule also would add a new Sec. 910.1(b) to define the term ``Nationally 
Recognized Statistical Rating Organizations.''
2. Section 910.2
    Proposed Sec. 910.2(a) sets forth the types of liabilities 
authorized for Bank business operations. It is intended to be an 
exclusive list and the Banks' sole liability authority, replacing the

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Funding Guidelines section of the FMP. The Funding Guidelines of the 
FMP, which set forth the parameters for the use by the Banks of 
alternative sources and structures in funding their activities, are 
proposed to be deleted in a separate notice published elsewhere in this 
Federal Register, See FMP sec. IV. The Funding Guidelines differentiate 
between Bank specific liabilities and COs, which are the joint-and-
several liabilities of the Banks. See id. at secs. IV.B. and C.
    Under the FMP, authorized Bank specific liabilities generally 
include: (1) Deposits from members, from any institution for which a 
Bank is providing correspondent services, from another Bank, and from 
other instrumentalities of the United States; (2) federal funds 
purchased from any financial institution that participates in the 
federal funds market; and (3) repurchase agreements, with the provision 
that those requiring the delivery of collateral by a Bank may be only 
with Federal Reserve Banks, U.S. government sponsored agencies and 
instrumentalities, primary dealers recognized by the Federal Reserve 
Bank of New York, eligible financial institutions,\15\ and states and 
municipalities with a Moody's Investment Grade rating of 1 or 2.
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    \15\ Eligible financial institutions include banks and Federal 
Deposit Insurance Corporation (FDIC) insured financial institutions, 
including U.S. subsidiaries of foreign commercial banks, whose most 
recently published financial statements exhibit at least $100 
million of Tier I (or tangible) capital if the institution is a 
member of the investing Bank or at least $250 million of tangible 
capital for all other FDIC-insured institutions, and which have been 
rated at least a level III institution as defined in section VI.C of 
the FMP.
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    The FMP also prohibits a Bank from directly placing COs with 
another Bank. See id. at sec. IV.C.4.
    The proposed rule would incorporate certain provisions of section 
IV of the FMP into regulation. Proposed Sec. 910.2(a)(1) sets forth 
each Bank's authority to act as a joint-and-several obligor with other 
Banks on COs, as authorized under part 910. Proposed Sec. 910.2(a)(2) 
continues each Bank's authority to accept deposits from members, other 
Banks and instrumentalities of the United States, but provides that the 
deposit transaction may not be conducted in such a way as to result in 
the offer or sale of a security in a public offering as those terms are 
used in 15 U.S.C. 77b(3). In addition, recognizing the importance of 
federal funds and repurchase agreements for the Banks' liquidity 
management, proposed Sec. 910.2(a)(3) allows a Bank to purchase federal 
funds and enter into repurchase agreements, but only in order to 
satisfy the Banks' short-term liquidity needs.
    Proposed Sec. 910.2(b) would retain the substance of existing 
Sec. 910.1(a) concerning COs to be issued by the Finance Board through 
the OF, but would expressly provide that the Finance Board may 
terminate the delegation of authority to the OF to issue COs on behalf 
of the Finance Board pursuant to section 11(c) of the Bank Act. 
Proposed Sec. 910.2(b) and (c) continue the existing prohibition on 
directly placing COs with another Bank. It is the opinion of the 
Finance Board that such placements do not further the mission of the 
Bank System. Proposed Sec. 910.2(c) would expressly authorize the OF to 
undertake the issuance of joint Bank debt pursuant to section 11(a) of 
the Bank Act as COs on which all of the Banks are jointly and severally 
liable subject to Sec. 910.8, which governs the joint-and-several 
liability of the Banks on COs issued under section 11(c) of the Bank 
Act.
    The proposed rule does not include the 20-to-1 leverage limit from 
Sec. 910.1(b) of the existing regulations, or the 20-to-1 leverage 
limit on each Bank contained in the FMP. Instead, as discussed in 
detail in the Notice published elsewhere in this issue of the Federal 
Register, the Finance Board is proposing to amend the FMP to require 
each Bank to have and maintain total capital in an amount equal to at 
least 4.76 percent of the Bank's total assets.
    Neither the elimination of the System-wide leverage limit from the 
Finance Board's regulations, nor the proposed revision to the leverage 
limit contained in the FMP, would have any practical effect on the Bank 
System or its bondholders. The Finance Board, as the regulator of the 
Banks, would continue to monitor each Bank for compliance with the 
individual leverage limit included in the FMP. The current FMP 
prohibits a Bank from participating in COs if such transactions would 
cause the Bank's liabilities to exceed 20 times the Bank's total 
capital. The proposed revision to the FMP establishes an equivalent 
leverage standard, stated as a percentage of assets, which would 
require each Bank to maintain capital of at least 4.76 percent of its 
total assets. The imposition of this standard on each Bank will ensure 
that the Bank System itself stays within the leverage limit, rendering 
any retention of a Bank System-wide leverage limit unnecessary. 
Further, the Finance Board notes that with the recent passage of the 
Gramm-Leach-Bliley Act, Banks will be subject to statutory leverage 
limits and risk-based capital requirements. When implemented, the new 
risk-based capital regime will provide an additional safeguard to the 
Bank System and its bondholders by requiring Banks to hold capital in 
proportion to the risks they assume.
    As discussed above, the Finance Board, by incorporating COs issued 
by the Banks under section 11(a) of the Bank Act into the definition of 
the term ``consolidated obligations'' in part 910, intends that the 
provisions of Sec. 910.8 pertaining to the joint-and-several liability 
of the Banks on COs shall apply to such debt because it enhances 
investor confidence in Bank System debt, and promotes the liquidity of 
the bonds.
    Proposed Sec. 910.2(d) amends existing Sec. 910.1(c), the negative 
pledge requirement, by requiring each Bank to at all times maintain the 
assets listed in an amount at least equal to the Bank's pro rata share 
of the outstanding COs issued by the OF on behalf of the Finance Board 
under section 11(c) and the COs issued by the OF on behalf of the Banks 
under section 11(a) in which the Bank participated for purposes of the 
negative pledge requirement. The proposed rule retains the negative 
pledge requirement for debt previously issued by the OF on behalf of 
the Finance Board under section 11(c), and expressly requires each Bank 
to maintain the specified assets free of pledge in an amount equal to 
the Bank's pro rata share in COs issued by the OF on behalf of the 
Banks under section 11(a) in which the Bank participated. In connection 
with these proposed amendments, it is the intention of the Finance 
Board to preserve the existence of the special asset accounts at the 
Banks established when the leverage limit in current part 910 was 
raised in 1992 from 12-to-1 to 20-to-1. See Finance Board Res. No. 92-
751 (Dec. 21, 1992). The Finance Board has maintained these 
requirements in the proposal to cause the least amount of change 
possible to the current structure and thereby avoid disruptions of the 
market. The Finance Board invites comment on this provision.
3. Sections 910.3 Through 910.7
    Sections 910.3 through 910.6 are retained, as amended, by 
substituting ``Finance Board'' for ``Board,'' ``Bank'' for ``Federal 
home Loan Bank,'' and ``consolidated obligation'' for ``consolidated 
bond.'' Current Sec. 910.6(b)(2), which purports to impose limitations 
on the Finance Board's ability to change the leverage limit provision 
in current Sec. 910.6(b), provides that current Sec. 910.1(b) may be 
changed by the Finance Board if the Finance Board receives either: (1) 
Written

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evidence from at least one major nationally recognized securities 
rating agency that the proposed change will not result in the lowering 
of that rating agency's then-current rating or assessment on senior 
bonds outstanding or next to be issued; or (2) a written opinion from 
an investment banking firm that the proposed change would not have a 
materially adverse effect on the creditworthiness of senior bonds 
outstanding or next to be issued. While the Finance Board will continue 
to consult with the ratings agencies to preserve the triple-A rating of 
Bank System COs, this provision is proposed to be deleted along with 
the rest of the existing Sec. 910.6.
    Proposed Sec. 910.7 provides the conditions under which the OF 
Board of Directors may authorize the issuance of COs: the OF Board of 
Directors shall authorize the offering for current and forward 
settlement (not to exceed 12 months) or the reopening of COs as 
necessary and authorize the maturities, rates of interest, terms and 
conditions (subject to the provisions of 31 U.S.C. 9108) under certain 
conditions, including the restriction that COs may be offered for sale 
only to the extent that the Banks are committed to take the proceeds, 
the OF Board of Directors shall implement investor suitability 
standards and adopt a policy addressing the relationship between the 
Banks and their members as debt issuers.
D. Powers, Duties, Responsibilities and Functions of the OF--Amendments 
to Part 941
1. Section 941.1--Definitions
    The definitions in Sec. 941.1 are proposed to be revised as 
follows: the term ``Office of Finance'' becomes ``OF'' in the heading 
and is added as a defined term; the term ``OF Board of Directors'' is 
revised to mean the 24 member administrative body responsible for the 
oversight of management of the OF; the terms ``Chief Executive 
Officer'' and ``OF Operations Imprest Fund'' are added as new defined 
terms. The definition of the term ``consolidated obligation'' is made 
consistent with the proposed definition in Sec. 910.1(a). The 
definitions of the terms ``Finance Board,'' ``Bank,'' and ``Bank Act'' 
which have been proposed to be defined for all Finance Board 
regulations in a previous rulemaking, see 64 FR 52148 (Sept. 27, 1999), 
and the definition of the term ``Director'' are deleted.
2. Section 941.2--Powers and Responsibilities of the OF
    Proposed Sec. 941.2(a) states that the OF is a joint office of the 
Banks under section 2B of the Bank Act. See 12 U.S.C. 1422b(b)(2). 
Proposed Sec. 941.2(b) sets out the broadened purpose of the OF: to 
facilitate the accomplishment of the mission of the Banks as set forth 
in section 2A of the Bank Act. Id. 1422a(3)(A)(ii) and (iii). As a part 
of its purpose to further the mission of the Banks, proposed 
Sec. 941.2(b)(1) expressly provides that the OF shall issue COs on 
which the Banks shall be jointly and severally liable, on behalf of the 
Banks and the Finance Board under sections 11(a) and 11(c) of the Bank 
Act, respectively. Id. 1431(a) and (c). The second prong of the OF's 
purpose is to support the Banks upon the request of two or more Banks 
undertaking joint asset activities that the Banks are otherwise 
authorized by law to undertake individually.
    Proposed Sec. 941.2(c) sets out the functions the OF is authorized 
to undertake in support of the issuance of debt and the support to be 
provided to Banks engaged in joint asset activities. Proposed 
Sec. 941.2(c)(1) contains the specific parameters related to issuance 
and servicing of COs: conducting negotiations relating to the offering 
and sale of COs and other obligations of the Banks, and promoting 
market discipline and making timely payments on the COs. Proposed 
Sec. 941.2(c)(1)(iii) requires the OF to offer, issue and service COs 
effectively and at the lowest all-in funding costs over time, with due 
regard for prudent risk-management practices, prudential debt 
parameters, short-and long-term market conditions, the cooperative 
nature of the Bank System, and the Banks' role as government-sponsored 
enterprises. The proposed rule further provides that such debt shall be 
issued consistent with maintaining reliable access to the short-term 
and long-term capital markets, by positioning the issuance of debt to 
take advantage of current and future capital market opportunities, and 
requires the OF to define and maintain appropriate investor suitability 
standards. In considering the cooperative nature of the Bank System, 
the OF specifically must take into account the relationship between the 
Banks as debt issuers, and the members of the Bank System as retail 
issuers of debt, such as certificates of deposit, and the potential for 
competition between the Banks and their members.
    As discussed, the OF currently issues debt on behalf of the Finance 
Board. The Finance Board annually adopts a debt-issuance authorization 
to the OF that includes parameters to which the debt must conform. If 
the Banks are authorized to issue joint debt under section 11(a) of the 
Bank Act, as proposed, the annual Finance Board authorization, 
including the parameters to which debt must conform, would no longer be 
required. However, the Finance Board continues to be responsible for 
ensuring that the Banks are able to raise funds in the capital markets. 
See 12 U.S.C. 1422a(a)(3)(B)(iii). Accordingly, the proposed rule 
requires the OF Board of Directors to implement policies to access debt 
markets according to an efficient and managed process that establishes 
prudent debt parameters and risk-management practices. In particular, 
this will involve establishing policies that may temporarily prevent a 
Bank from accessing the capital markets or prevent a Bank from issuing 
a specific type of security. In addition, the proposed rule requires 
the OF to adopt, implement and maintain investor suitability standards.
    As a part of its CO issuance function, proposed Sec. 941.2(c) would 
assign to the OF the function of preparing the combined Bank System 
annual and quarterly financial reports (financial reports). Proposed 
Sec. 941.2(c)(1)(iv) would codify current Finance Board policy (Finance 
Board Res. No. 98-27 (June 24, 1998)) and set forth the standards under 
which the OF must prepare the financial reports, including requiring 
that the scope, form and content of the disclosure contained in such 
financial reports generally be consistent with the requirements of the 
SEC's Regulations S-K (specific narrative disclosure requirements) and 
S-X (accounting and financial statement disclosure requirements) (17 
CFR parts 229 and 210) and be presented in accordance with the 
Statement Of Financial Accounting Standards No. 131, ``Disclosures 
about Segments of an Enterprise and Related Information'' (FAS 131). 
While the FAS 131 standard only applies to public business enterprises, 
and not, therefore, to a government-sponsored enterprise such as the 
Bank System, the Finance Board continues to believe that presentations 
resulting from compliance with FAS 131, with each Bank presented as a 
separate segment, provide useful information to bondholders and Bank 
members.
    Proposed Sec. 941.2(c)(1)(iv)(C) references an Appendix to the 
proposed rule that lists exceptions to the standards set forth in 
Sec. 941.2(c)(1)(iv)(A) and (B). These exceptions stem from the Finance 
Board's belief that the general standards may include disclosure 
requirements that are inapplicable to, or inappropriate for, the Bank 
System. The list of exceptions is similar to that contained in the 
Finance Board's Policy

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Statement, and includes certain disclosures concerning related-party 
transactions, biographical information, compensation, submission of 
matters to a vote of shareholders, exhibits, per-share information and 
beneficial ownership. Exceptions relating to derivatives and the filing 
schedule for financial reports that are included in the Finance Board's 
Policy Statement have been omitted from the Appendix since the Finance 
Board intends the SEC standard to be met in each case. The Appendix 
also expands the list of persons required to provide biographical 
information to include members of the OF Board of Directors, in 
recognition of the increased role assigned to that body by the proposed 
reorganization of the OF.
    References to the ``managing director of the OF'' in the Policy 
Statement have been changed to the ``Chief Financial Officer of the 
OF'' in the Appendix.
    Proposed Sec. 941.2(c)(1)(iv)(D) provides that the OF will file and 
distribute combined Bank System financial reports according to a 
schedule that mirrors the filing requirements applicable to corporate 
registrants under the 1934 Act (i.e., annual reports within 90 days 
after the end of the fiscal year and quarterly reports within 45 days 
after the end of each of the first three fiscal quarters). The Finance 
Board believes that, just as disclosure concerning the Bank System 
should conform to industry standards, so too should the Bank System 
provide that information to interested parties within the timeframes 
applicable in the industry. Proposed Sec. 941.2(c)(1)(iv)(D) would 
require the OF to distribute financial reports to each Bank member 
according to the same schedule to ensure prompt dissemination of 
relevant information. Proposed Sec. 941.2(c)(1)(iv)(E) expressly 
confirms the Finance Board's sole authority to determine compliance 
with the standards of part 941, while proposed Sec. 941.2(c)(1)(iv)(F) 
provides an explicit compliance mechanism by requiring the OF to 
promptly comply with any Finance Board directive pertaining to the 
preparation, filing, amendment or distribution of financial reports.
    Proposed Secs. 941.2(c)(1)(v), (vi) and (vii) obligate the OF to 
stay informed on issues and developments relating to capital markets 
and COs, and to pass relevant information along to the Banks. Proposed 
Sec. 941.2(c)(1)(v) expressly requires the OF to provide capital 
markets information concerning debt to the Banks. Proposed 
Sec. 941.2(c)(1)(vi) provides that the OF shall manage relationships 
with Nationally Recognized Statistical Rating Organizations (NRSROs) in 
connection with the NRSRO's ratings of COs, while Sec. 941.2(c)(1)(vii) 
allows the OF to conduct research reasonably related to the issuance or 
servicing of COs. These functions are intended to allow the OF to serve 
as a centralized repository for information supporting the issuance of 
COs for the benefit of the Bank System.
3. Joint Asset Activity Management
    The Finance Board has determined that the Banks have incidental and 
investment authority to undertake certain lending programs with their 
members whereby a Bank may purchase or fund mortgages originated by 
members, subject to certain conditions. On October 4, 1999, the Finance 
Board adopted Resolution Number 99-50, which authorized the Banks to 
``establish and operate Member Mortgage Assets programs, a generic 
designation for programs that efficiently allocate mortgage risks so as 
to best use the core competencies of the entities involved, provide 
appropriate capital treatment to the participating financial 
institution members, and provide capital market funding and risk 
management alternatives, all for the ultimate benefit of consumers.'' 
See Finance Board Res. No. 99-50 (Oct. 4, 1999); see also 64 FR 60448 
(Nov. 5, 1999). Finance Board Resolution Number 99-50 also includes the 
terms and conditions applicable to the operation of member mortgage 
assets programs. See Finance Board Res. No. 99-50 at 2.
    These are not the only potential joint asset activities that the 
Banks may choose to conduct. Certain advance participation programs or 
investments, liquidity management and investments in housing finance 
agency bonds present potential for joint activity among the Banks.
    Any joint asset activities in which the Banks may engage may be 
most efficiently administered on a joint basis through a central 
facility. Administering joint assets through a centralized facility 
offers the added safety and soundness benefits of better risk-
management capabilities and geographic diversity in the portfolio. The 
latter is particularly important given the national nature of the 
mortgage markets. This is an issue the Finance Board will continue to 
study as this product develops and business therein increases.
    Proposed Sec. 941.2(c)(2) is intended to authorize the OF, as the 
only statutorily recognized joint office of the Banks, to operate in 
the above capacity. It provides that, to the extent requested by two or 
more Banks pursuant to any agreement or contract, the OF shall 
facilitate or provide services to the Banks in connection with any Bank 
joint asset activities authorized by law. With regard to the joint 
asset activities of the Banks, the OF would be required to provide 
administrative and technical support for the origination, purchase, 
management, servicing or sale of any asset owned by one or more Banks 
pursuant to any contract, including member mortgage assets; provide 
market information to the Banks concerning member mortgage assets and 
other assets or investments of the Banks; conduct and provide research 
on such assets and investments; develop effective systems to monitor 
credit exposure and manage counter-party risk; adopt procedures to 
assist the Banks in managing their liquidity; and adopt procedures to 
facilitate the inter-Bank sale of participation interests in advances 
and investments. This section does not require the Banks to make use of 
the OF in this capacity, but it does require the OF to provide the 
services outlined if two or more Banks wish the OF to do so. The OF 
may, of course, establish a reasonable fee structure or charge for its 
services by contract or otherwise. It also may mediate among competing 
Bank demands, in accordance with its specified duties and 
responsibilities.
    Proposed Sec. 941.2(c)(3) provides that, in accordance with 
policies and procedures established by the OF Board of Directors, the 
OF shall perform such duties and responsibilities for the Financing 
Corporation (FICO) or the Resolution Funding Corporation (REFCorp) on 
behalf of the Banks, as may be required. This section preserves a 
current function of the OF as set forth in Sec. 941.5(b).
    Proposed Sec. 941.2(d) provides that the OF may contract with a 
Bank or Banks for the use of Bank facilities or personnel in order to 
perform its functions, which is currently set forth in Sec. 941.7(b).
4. Finance Board Oversight
    Proposed Sec. 941.3 provides that the Finance Board shall retain 
the same regulatory oversight authority and enforcement powers over the 
OF, the OF Board of Directors, the directors, officers, employees, 
agents, attorneys, accountants or other OF staff, as it has over a Bank 
and its respective board members, officers, employees, attorneys, 
accountants, agents or other staff, which is broader than the existing 
provision. The proposed rule deletes Sec. 941.3(a), which states that 
the activities of the OF are subject to the approval of the Finance 
Board. The Finance Board believes that Sec. 941.3 should be amended to 
expressly state the Finance Board's

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supervisory role in the proposed expanded functions of the OF. 
Additionally, the proposed rule states that, pursuant to Section 20 of 
the Bank Act, 12 U.S.C. 1440, the Finance Board shall examine the OF, 
all funds and accounts that may be established pursuant to this part, 
and the operations and activities of the OF, as provided for in the 
Bank Act or any regulations promulgated pursuant thereto. This is 
somewhat broader in scope than the provisions of existing Sec. 941.3.

E. Organizational Structure--Amendments to Part 941

1. Section 941.4--the OF Board of Directors
    Current Sec. 941.7(c) establishes an OF board of directors composed 
of three members, two Bank presidents and one private citizen with 
demonstrated expertise in financial markets, all appointed by the 
Finance Board. This structure has served the OF and the Bank System 
while the OF's only functions have been to issue COs on behalf of the 
Finance Board and make CO principal and interest payments when due on 
behalf of the Banks. The proposed rule contemplates that the OF will 
undertake additional, varied responsibilities that would require 
broader oversight by a board of directors possessing a wide range of 
financial sector credentials. Accordingly, proposed Sec. 941.4(a) would 
change the size and composition of the OF Board of Directors to reflect 
the proposed expanded duties and functions of the OF. As revised, the 
OF Board of Directors would consist of 24 individuals, 6 of whom would 
be appointed by the Finance Board, 6 of whom would be elected by Bank 
System members, and 12 of whom would be appointed by the Banks. The 
Finance Board acknowledges that the size of the proposed OF Board of 
Directors may seem unwieldy to some. The ratio and balance among Bank 
representatives, System representatives and representatives of the 
public is the principle most important to the Finance Board in this 
provision. The quest to achieve the proper balance while providing 
every Bank a seat and a role for members and the public on the OF Board 
of Directors, leads to the number proposed. The Finance Board seeks 
comment on and suggestions for alternative structures that might be 
more workable in terms of number that that would still maintain the 
appropriate mix and balance of representation on the OF Board of 
Directors. For instance, if less than 12 Banks were to be represented 
on the OF Board of Directors at any one time, the regulation could 
provide for rotating Bank representation, or the elimination of the 
requirement for an Executive Committee.
    Under proposed Sec. 941.4(a)(1), directors appointed by the Finance 
Board would have to be U.S. citizens with demonstrated experience in 
financial markets or asset management, and could not be affiliated with 
any Bank or broker-dealer under contract with the OF. The proposed rule 
establishes no other eligibility criteria for Finance Board appointees 
to the OF Board. This differs from the appointment standards for public 
interest directors of the Banks, which require that two out of six 
Finance Board appointees represent consumer or community interest 
organizations, and prohibit any Finance Board appointee from serving as 
an officer of a Bank, or as an officer or director of any member of a 
Bank, or from holding shares or any other financial interest in any 
member, during his or her tenure as a Bank director. See 12 U.S.C. 
1427(a). The absence of such restrictions for OF Board appointees in 
the proposed rule is intended to provide the Finance Board with maximum 
flexibility in selecting persons it believes would best assist the OF 
in fulfilling its mission. However, the Finance Board seeks comment on 
whether the qualifications and restrictions applicable to appointed 
Bank directors, or any others, should be included in the proposed rule 
for Finance Board appointees to the OF Board.
    Under proposed Sec. 941.4(a)(2), a director appointed by a Bank 
must be an officer, employee, or director of the Bank. Pursuant to 
proposed Sec. 941.4(a)(3), Bank System members would elect six 
directors (two each year) through annual elections conducted by the OF. 
Under proposed Sec. 941.4(a)(3)(i), to be eligible for a directorship, 
nominees of members would have to be U.S. citizens with demonstrated 
experience in financial markets or asset management, and could not be 
associated with a broker-dealer under contract with the OF. A Bank 
System member and its affiliates could not have more than one 
representative on the OF Board of Directors at any time.
    Proposed Sec. 941.4(a)(3)(ii) provides that each member of the Bank 
System is entitled to nominate an eligible person for service on the OF 
Board in each annual election. From such nominees, two member-elected 
directorships would be filled each year by a plurality vote of Bank 
System members. Each member would be permitted to cast a number of 
votes equal to the number of shares of stock in such Bank the member 
held at the end of the calendar year preceding the election, without 
any limitation, including limits that would apply to voting in director 
elections under section 7(b) of the Bank Act. See 12 U.S.C. 1427(b). 
Under proposed Sec. 941.4(a)(3)(iii), the OF would prepare nomination 
forms and transmit them to Bank System members no later than March 1st 
of the election year. The nomination forms would state the director 
eligibility requirements and restrictions. Members would have not less 
than 30 calendar days to submit the nomination forms to the OF, which 
would create acceptance and certification of eligibility forms and 
provide them to the nominees no later than May 1st of the election 
year. The nominees would have 30 days to accept or decline the 
nomination and provide the written eligibility certification to the OF.
    Under proposed Sec. 941.4(a)(3)(iv), the OF would prepare a ballot 
for the OF Board of Directors election to be used in each Bank district 
based on the acceptance and certification forms, and provide the ballot 
to the Banks not later than July 1st of the election year. The Banks 
would be required to transmit the ballot to their members with the 
election ballots for the election of the Banks' respective boards of 
directors. Bank System members would have a minimum of 30 days to vote 
and return the OF Board of Directors election ballot to the OF. The OF 
would tabulate the ballots and announce the slate of the OF Board of 
Directors no later than November 1st of the election year.
    Proposed Sec. 941.4(b) provides that the directors' terms would be 
three years, and that initial terms would be staggered so that \1/3\ of 
the terms expire each year. Under proposed Sec. 941.4(c), appointed 
directorship vacancies would be filled in the manner in which the 
appointment was originally made, while elected directorship vacancies 
would be filled by majority vote of the remaining OF Board of 
Directors. A director appointed or elected to fill a vacancy would 
serve the remainder of the original term. Proposed Sec. 941.4(d), which 
sets forth the means of selection and duties of the Chair and Vice 
Chair of the OF Board of Directors, contains all of the substantive 
provisions of current Sec. 941.7(e).
    Proposed Sec. 941.4(e), ``Compensation,'' replaces the multiple 
provisions of current Sec. 941.7(f) with a single standard that permits 
members of the OF Board of Directors to receive compensation and 
reimbursement for expenses incurred as a result of their service on the 
OF Board of Directors.

[[Page 332]]

    Proposed Sec. 941.4(f) is a new section that requires the OF Board 
of Directors to establish an audit committee consistent with the 
requirements set forth in part 917 (which is being proposed in a 
separate notice of proposed rulemaking); an executive committee 
comprised of member-elected directors, Bank-appointed directors, and 
Finance Board-appointed directors, each represented in the same 
proportions as they are on the full OF Board of Directors; and a 
committee to coordinate the issuance and servicing of COs under part 
910. The proposed rule provides authority for the OF Board of Directors 
to establish additional committees as necessary and appropriate to 
carry out the Board's duties and responsibilities. Additionally, the OF 
Board of Directors is required to promulgate policies and define 
respective roles and duties of any committees so established, which 
shall be binding upon such committees.
    Proposed Sec. 941.4(g) is a new section that sets the quorum 
requirement for meetings of the OF Board of Directors and meetings of 
committees of the OF Board of Directors at a simple majority of the 
total directorships on the OF Board of Directors or the committee.
2. Section 941.5--Powers of the OF Board of Directors
    Proposed Sec. 941.5, ``Powers of the OF board of directors,'' 
incorporates and revises the provisions of current Sec. 941.8. As is 
true in Sec. 941.8(a) of the current rule, proposed Sec. 941.5(a) 
provides that the OF Board of Directors shall have the incidental 
powers under section 12(a) of the Bank Act as are necessary, convenient 
and proper to accomplish the efficient operation and management of the 
OF. Also, as is true under Sec. 941.8(b) of the current rule, proposed 
Sec. 941.5(b) expressly empowers the OF Board of Directors to act as 
the agent of the Finance Board in issuing COs pursuant to section 11(c) 
of the Bank Act. It also empowers the OF Board of Directors to act as 
agent for the Banks in issuing COs pursuant to section 11(a) of the 
Bank Act and in making principal and interest payments on COs issued by 
either entity.
    Proposed Sec. 941.5(c) preserves the authority of the OF Board of 
Directors to delegate powers to OF staff to carry out OF functions, and 
proposed Sec. 941.5(d) retains the indemnification powers currently 
provided in Sec. 941.8(d).
3. Section 941.6--Duties of the OF Board of Directors
    Proposed Sec. 941.6, ``Duties of the OF board of directors'' would 
substantially revise the provisions of current Sec. 941.9. Proposed 
Sec. 941.6(a) retains intact the provisions of current Sec. 941.9(a), 
which provides that the OF Board of Directors shall adopt bylaws, 
consistent with applicable laws and regulations as administered by the 
Finance Board, governing its operation and issue such guidance or 
instruction as will promote the efficient operation of the OF and that 
the OF Board of Directors shall conduct its business by majority vote 
of its members convened at a meeting in accordance with its bylaws.
    Proposed Sec. 941.6(b) enumerates the oversight responsibilities of 
the OF Board of Directors. Importantly, proposed Sec. 941.6(b)(2) 
requires the OF Board of Directors to set policies for management of 
the OF, in particular a policy in connection with the issuance of debt 
that would take into account the cooperative nature of the Bank System, 
and the relationship of the Banks as issuers of debt to their members 
as issuers of debt. Proposed Sec. 941.6(b) also requires the OF Board 
of Directors to be responsible for the conduct and performance of all 
duties, functions, operations and activities of the OF and for its 
efficient and effective operation; approve a strategic business plan 
for the OF and monitor the progress of its operations under such plan; 
review, adopt, and monitor the annual operating budget of the OF 
including any supplemental expenditure thereto; provide oversight for 
the OF Board of Directors committee charged with directing the issuance 
of COs; develop and implement the pricing mechanism by which the OF 
will make private or public offerings of COs, subject to the 
requirements of part 910; select, employ and define the duties of a 
Chief Executive Officer of the OF (CEO), provided that the CEO, or his 
designee, shall be the Fiscal Agent of the Banks, a member of the 
Directorate of the Financing Corporation, pursuant to section 
21(b)(1)(A) of the Bank Act, 12 U.S.C. 1441(b)(1)(A), and a member of 
the Directorate of the Resolution Funding Corporation, pursuant to 
section 21B(c)(1)(A) of the Bank Act, 12 U.S.C. 1441b(c)(1)(A). 
Additionally, the OF Board of Directors would be required to approve 
all contracts of the OF, and assume any other responsibilities that may 
from time to time be delegated to it by the Finance Board. The proposed 
rule also expressly provides that the OF Board of Directors would be 
subject to and required to operate in accordance with Finance Board 
policies and regulations applicable to the boards of directors of the 
Banks, including proposed part 917.
    Proposed Sec. 941.7 incorporates and revises the provisions of 
current Sec. 941.11. It retains the requirement of current 
Sec. 941.11(f) that the Banks are responsible for jointly funding the 
OF. Under the proposed rule, at the direction of and pursuant to 
policies and procedures adopted by the OF Board of Directors, the Banks 
are required periodically to reimburse the OF Operations Imprest Fund 
to maintain in such fund an amount approved by the OF Board of 
Directors sufficient to fund the operations of the OF under a budget 
approved by the OF Board of Directors. Each Bank's respective pro rata 
share of the reimbursement must be based on the ratio of the total 
paid-in value of its capital stock relative to the total paid-in value 
of all capital stock in the Bank System. The proposed rule provides new 
authority for the OF Board of Directors, with the prior approval of the 
Finance Board, to devise an alternative formula for determining each 
Bank's respective share of the OF expenses or, by contract with a Bank 
or Banks, may choose to be reimbursed through a fee structure in lieu 
of or in addition to assessment, for services provided to the Bank or 
Banks for the issuance or servicing of COs or the management and 
administration of joint asset activities.
    Proposed Sec. 941.8 retains the savings clause contained in current 
Sec. 941.12, which provides that all actions taken by the OF as it 
existed prior to these amendments will continue to be valid as regards 
the Finance Board and the Bank System. The rest of the provisions of 
current Sec. 941.12 are not included in the proposed rule as they are 
obsolete and no longer necessary.

IV. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of small entities as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board 
hereby certifies that this proposed rule, if promulgated as a final 
rule, will not have significant economic impact on a substantial number 
of small entities.

V. Paperwork Reduction Act

    This proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

[[Page 333]]

List of Subjects

12 CFR Part 900

    Organization and functions (Government agencies).

12 CFR Part 910

    Banks, Consolidated bonds and debentures, Federal home loan banks, 
Securities.

12 CFR Part 941

    Consolidated bonds and debentures, Federal home loan banks, 
Organization and functions (Government agencies), Securities.
    For the reasons stated in the preamble, the Finance Board proposes 
to amend 12 CFR parts 900, 910 and 941 as follows:

PART 900--DESCRIPTION OF ORGANIZATION AND FUNCTIONS

    1. The authority citation for part 900 continues to read as 
follows:

    Authority: 5 U.S.C. 552; 12 U.S.C. 1422b(a) and 1423.

    2. Amend Sec. 900.30 to add a new paragraph (a)(3) to read as 
follows:


Sec. 900.30  Office of Finance Board of Directors.

    (a) * * *
    (3) The authority delegated under paragraphs (a)(1) and (2) of this 
section expires on December 31, 2000, unless otherwise extended or 
modified by the Finance Board.
* * * * *
    3. Revise part 910 to read as follows:

PART 910--CONSOLIDATED OBLIGATIONS

Sec.
910.1  Definitions.
910.2  Authorized liabilities; Issuance of consolidated obligations.
910.3  Form of consolidated obligations.
910.4  Transactions in consolidated obligations.
910.5  Lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.
910.6  Administrative provision.
910.7  Conditions for issuance of consolidated obligations.
910.8  Joint and several liability.

    Authority: 12 U.S.C. 1422a, 1422b and 1431.

Sec. 910.1  Definitions.

    For purposes of this part:
    (a) Consolidated obligations or CO means any bond, debenture, or 
note issued jointly by the Banks pursuant to section 11(a) of the 
Federal Home Loan Bank Act (Act), as amended (12 U.S.C. 1431(a)), or 
any bond or note issued by the Finance Board on behalf of all Banks 
pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)), on which the 
Banks are by statute or regulation jointly and severally liable.
    (b) NRSRO means a credit rating organization regarded as a 
Nationally Recognized Statistical Rating Organization by the Securities 
and Exchange Commission.
    (c) Senior bonds means COs issued pursuant to section 11 of the Act 
and this part and not defeased, other than bonds specifically 
subordinated to any then outstanding COs.


Sec. 910.2  Authorized liabilities; Issuance of consolidated 
obligations.

    (a) Authorized liabilities. As a source of funds for business 
operations, each Bank is authorized to incur liabilities only by:
    (1) Acting as joint and several obligor with other Banks on 
consolidated obligations, as authorized under this part;
    (2) Accepting time or demand deposits from members or any 
institution for which the Bank is providing correspondent services, 
other Banks, and instrumentalities of the United States, so long as the 
deposit transaction is not conducted in such a way as to result in the 
offer or sale of a security in a public offering as those terms are 
used in 15 U.S.C. 77b(3); or
    (3) Solely in order to satisfy the Bank's short-term liquidity 
needs, by:
    (i) Purchasing federal funds; and
    (ii) Entering into repurchase agreements.
    (b) Consolidated obligations issued by the Finance Board. The 
Finance Board may issue consolidated obligations under section 11(c) of 
the Act (12 U.S.C. 1431(c)), including the determination of the dates 
of issue, maturities, rates of interest, terms and conditions thereof, 
and the manner in which such consolidated obligations shall be issued, 
subject to the provisions of 31 U.S.C. 9108. The Finance Board in its 
discretion may delegate this responsibility, or terminate such 
delegation. Consolidated obligations issued under this paragraph shall 
not be directly placed with any Bank.
    (c) Consolidated obligations issued by the Banks. (1) Pursuant to 
the Banks' housing finance mission set forth in section 2A(a)(3)(B)(ii) 
of the Act (12 U.S.C. 1422a(a)(3)(B)(ii)), pursuant to the Finance 
Board's duty to ensure that the Banks carry out that mission and remain 
adequately capitalized and able to raise funds in the capital markets 
under section 2A(a)(3)(B)(ii) and (iii) of the Act (12 U.S.C. 
1422a(a)(3)(B)(ii) and (iii)), and subject to such rules, regulations, 
terms and conditions as the Finance Board may prescribe, the Banks are 
authorized to issue joint debt under section 11(a) of the Act (12 
U.S.C. 1431(a)), which shall be called consolidated obligations and on 
which the Banks shall be jointly and severally liable under Sec. 910.7.
    (2) Consolidated obligations shall be issued through the Office of 
Finance, as agent of the Banks pursuant to this part 910.
    (3) Consolidated obligations issued under this paragraph (c) shall 
not be directly placed with any Bank.
    (d) Negative pledge requirement. Each Bank shall at all times 
maintain assets described in paragraphs (d)(1) through (d)(6) of this 
section free from any lien or pledge, in an amount at least equal to a 
pro rata share of the total amount of currently outstanding 
consolidated obligations jointly issued by the Banks pursuant to 
section 11(a) of the Act (12 U.S.C. 1431(a)) and by the Finance Board 
pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)) equal to such 
Bank's participation in all such COs outstanding provided that any 
assets that are subject to a lien or pledge for the benefit of the 
holders of any issue of consolidated obligations shall be treated as if 
they were assets free from any lien or pledge for purposes of 
compliance with this paragraph (d). Eligible assets are:
    (1) Cash;
    (2) Obligations of or fully guaranteed by the United States;
    (3) Secured advances;
    (4) Mortgages as to which one or more Banks have any guaranty or 
insurance, or commitment therefore, by the United States or any agency 
thereof;
    (5) Investments described in section 16(a) of the Act (12 U.S.C. 
1436(a)); and
    (6) Other securities that have been assigned a rating or assessment 
by an NRSRO that is equivalent to or higher than the rating or 
assessment assigned by an NRSRO to consolidated obligations 
outstanding.


Sec. 910.3  Form of consolidated obligations.

    Consolidated obligations shall be issued in series and all 
consolidated obligations of the same series shall be of like date, 
tenor, and effect except as to denominations, which shall be in such 
amounts as may be authorized by the Finance Board. The Finance Board 
shall prescribe the form of each consolidated obligation. Consolidated 
obligations issued with maturities of one year or less may be 
designated consolidated notes.


Sec. 910.4  Transactions in consolidated obligations.

    The general regulations of the Department of Treasury now or

[[Page 334]]

hereafter in force governing transactions in United States securities, 
except 31 CFR part 357 regarding book-entry procedure, are hereby 
incorporated into this part 910, so far as applicable and as 
necessarily modified to relate to consolidated obligations, as the 
regulations of the Finance Board for similar transactions on 
consolidated obligations. The book-entry procedure for consolidated 
obligations is contained in part 912 of this subchapter.


Sec. 910.5  Lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.

    United States statutes and regulations of the Department of 
Treasury now or hereafter in force governing relief on account of the 
loss, theft, destruction, mutilation, or defacement of United States 
securities, so far as applicable and as necessarily modified to relate 
to consolidated obligations, are hereby adopted as the regulations of 
the Finance Board for the issuance of substitute consolidated 
obligations or the payment of lost, stolen, destroyed, mutilated or 
defaced consolidated obligations.


Sec. 910.6  Administrative provision.

    The Secretary of the Treasury or the Acting Secretary of the 
Treasury is hereby authorized and empowered, as the agent of the 
Finance Board and the Banks to administer Secs. 910.4 and 910.5, and to 
delegate such authority at their discretion to other officers, 
employees, and agents of the Department of Treasury. Any such 
regulations may be waived on behalf of the Finance Board and the Banks 
by the Secretary of the Treasury or the Acting Secretary of the 
Treasury or by an officer of the Department of Treasury authorized to 
waive similar regulations with respect to United States securities, but 
only in any particular case in which a similar regulation with respect 
to United States securities would be waived. The terms ``securities'' 
and ``bonds'' as used in this section shall, unless the context 
otherwise requires, include and apply to coupons and interim 
certificates.


Sec. 910.7  Conditions for issuance of consolidated obligations.

    The OF Board of Directors shall authorize the offering for current 
and forward settlement (up to 12 months) or the reopening of COs, as 
necessary, and authorize the maturities, rates of interest, terms and 
conditions thereof, subject to the provisions of 31 U.S.C. 9801 and the 
following conditions:
    (a) COs may be offered for sale only to the extent that Banks are 
committed to take the proceeds;
    (b) The OF Board of Directors shall implement investor suitability 
standards; and
    (c) COs may be offered for sale only pursuant to a policy adopted 
by the OF Board of Directors that addresses the relationship between 
the Banks as issuers of debt and their members as issuers of debt.


Sec. 910.8  Joint and several liability.

    (a) In general. (1) Each and every Bank, individually and 
collectively, has an obligation to make full and timely payment of all 
principal and interest on consolidated obligations when due.
    (2) Each and every Bank, individually and collectively, shall 
ensure that the timely payment of principal and interest on all 
consolidated obligations is given priority over, and is paid in full in 
advance of, any payment to or redemption of shares from any 
shareholder.
    (3) The provisions of this part shall not limit, restrict or 
otherwise diminish, in any manner, the joint and several liability of 
all of the Banks on all of the consolidated obligations issued by the 
Finance Board pursuant to section 11(c) of the Bank Act (12 U.S.C. 
1431(c) and by one or more Banks pursuant to section 11(a) of the Bank 
Act (12 U.S.C. 1431(a).
    (b) Certification and reporting. (1) Before the end of each 
calendar quarter, and before declaring or paying any dividend for that 
quarter, the President of each Bank shall certify in writing to the 
Finance Board that, based on known current facts and financial 
information, the Bank will remain in compliance with the liquidity 
requirements set forth in section 11(g) of the Act (12 U.S.C. 1431(g)), 
and the Finance Board's Financial Management Policy or any regulations, 
(as the same may be amended, modified or replaced), and will remain 
capable of making full and timely payment of all of its current 
obligations, including direct obligations, coming due during the next 
quarter.
    (2) A Bank shall immediately provide written notice to the Finance 
Board if at any time the Bank:
    (i) Is unable to provide the certification required by paragraph 
(b)(1) of this section;
    (ii) Projects at any time that it will fail to comply with 
statutory or regulatory liquidity requirements, or will be unable to 
timely and fully meet all of its current obligations, including direct 
obligations, due during the quarter;
    (iii) Actually fails to comply with statutory or regulatory 
liquidity requirements or to timely and fully meet all of its current 
obligations, including direct obligations, due during the quarter; or
    (iv) Negotiates to enter or enters into an agreement with one or 
more other Banks to obtain financial assistance to meet its current 
obligations, including direct obligations, due during the quarter; the 
notice of which shall be accompanied by a copy of the agreement, which 
shall be subject to the approval of the Finance Board.
    (c) Consolidated obligation payment plans. (1) A Bank promptly 
shall file a consolidated obligation payment plan for Finance Board 
approval:
    (i) If the Bank becomes a non-complying Bank as a result of failing 
to provide the certification required in paragraph (b)(1) of this 
section;
    (ii) If the Bank becomes a non-complying Bank as a result of being 
required to provide the notice required pursuant to paragraph (b)(2) of 
this section, except in the event that a failure to make a principal or 
interest payment on a consolidated obligation when due was caused 
solely by a temporary interruption in the Bank's debt servicing 
operations resulting from an external event such as a natural disaster 
or a power failure; or
    (iii) If the Finance Board determines that the Bank will cease to 
be in compliance with the statutory or regulatory liquidity 
requirements, or will lack the capacity to timely and fully meet all of 
its current obligations, including direct obligations, due during the 
quarter.
    (2) A consolidated obligation payment plan shall specify the 
measures the non-complying Bank will undertake to make full and timely 
payments of all of its current obligations, including direct 
obligations, due during the applicable quarter.
    (3) A non-complying Bank may continue to incur and pay normal 
operating expenses incurred in the regular course of business 
(including salaries, benefits, or costs of office space, equipment and 
related expenses), but shall not incur or pay any extraordinary 
expenses, or declare, or pay dividends, or redeem any capital stock, 
until such time as the Finance Board has approved the Bank's 
consolidated obligation payment plan or inter-Bank assistance 
agreement, or ordered another remedy, and all of the non-complying 
Bank's direct obligations have been paid.
    (d) Finance Board payment orders; Obligation to reimburse. (1) The 
Finance Board, in its discretion and notwithstanding any other 
provision in this section, may at any time order any Bank to make any 
principal or interest

[[Page 335]]

payment due on any consolidated obligation.
    (2) To the extent that a Bank makes any payment on any consolidated 
obligation on behalf of another Bank, the paying Bank shall be entitled 
to reimbursement from the non-complying Bank, which shall have a 
corresponding obligation to reimburse the Bank providing assistance, to 
the extent of such payment and other associated costs (including 
interest to be determined by the Finance Board).
    (e) Adjustment of equities. (1) Any non-complying Bank shall apply 
its assets to fulfill its direct obligations.
    (2) If a Bank is required to meet, or otherwise meets, the direct 
obligations of another Bank due to a temporary interruption in the 
latter Bank's debt servicing operations (e.g., in the event of a 
natural disaster or power failure), the assisting Bank shall have the 
same right to reimbursement set forth in paragraph (d)(2) of this 
section.
    (3) If the Finance Board determines that the assets of a non-
complying Bank are insufficient to satisfy all of its direct 
obligations as set forth in paragraph (e)(1) of this section, then the 
Finance Board may allocate the outstanding liability among the 
remaining Banks on a pro rata basis in proportion to each Bank's 
participation in all consolidated obligations outstanding as of the end 
of the most recent month for which the Finance Board has data, or 
otherwise as the Finance Board may prescribe.
    (f) Reservation of authority. Nothing in this section shall affect 
the Finance Board's authority to adjust equities between the Banks in a 
manner different than the manner described in paragraph (e) of this 
section, or to take enforcement or other action against any Bank 
pursuant to the Finance Board's authority under the Act or otherwise to 
supervise the Banks and ensure that they are operated in a safe and 
sound manner.
    (g) No rights created. (1) Nothing in this section shall create or 
be deemed to create any rights in any third party.
    (2) Payments made by a Bank toward the direct obligations of 
another Bank are made for the sole purpose of discharging the joint and 
several liability of the Banks on consolidated obligations.
    (3) Compliance, or the failure to comply, with any provision in 
this section shall not be deemed a default under the terms and 
conditions of the consolidated obligations.
    4. Revise part 941 to read as follows:

PART 941--OPERATIONS OF THE OFFICE OF FINANCE

Sec.
941.1  Definitions.
941.2  Powers and responsibilities of the OF.
941.3  Finance Board oversight.
941.4  The OF board of directors.
941.5  Powers of the OF board of directors.
941.6  Duties of the OF board of directors.
941.7  Funding of the OF.
941.8  Savings clause.

Appendix A to Part 941--Exceptions to the General Disclosure Standards

    Authority: 12 U.S.C. 1422b(a) and 1431.


Sec. 941.1  Definitions.

    For purposes of this part:
    (a) Bank System means the 12 Banks and the OF.
    (b) Chair means the Chairperson of the OF Board of Directors.
    (c) Chief Executive Officer or CEO means the Chief Executive 
Officer of the OF.
    (d) OF means the Office of Finance.
    (e) OF Board of Directors means the 24 member administrative body 
responsible for management of the OF.
    (f) OF Operations Imprest Fund means the checking account 
established in a financial depository institution approved by the OF 
Board of Directors to fund OF operations.


Sec. 941.2  Powers and responsibilities of the OF.

    (a) Joint office. The OF is a joint office of the Banks pursuant to 
section 2B of the Act (12 U.S.C. 1422b(b)(2)).
    (b) Purpose. The role of the OF is to facilitate the accomplishment 
of the mission of the Banks set forth in section 2A of the Act (12 
U.S.C. 1422a(3)(A)(ii) and (iii)) by:
    (1) Exclusively offering, issuing, and servicing consolidated 
obligations on behalf of the Finance Board pursuant to section 11(c) of 
the Act (12 U.S.C. 1431(c)) and the Banks pursuant to section 11(a) of 
the Act (12 U.S.C. 1431(a)), on which the Banks are jointly and 
severally liable; and
    (2) At the request of two or more Banks, by undertaking on a joint 
basis activities the requesting Banks are authorized by law to 
undertake individually.
    (c) Functions. The OF shall have the following functions:
    (1) Subject to part 910 of this chapter, with respect to 
consolidated obligations, the OF shall:
    (i) Conduct or facilitate negotiations relating to the public or 
private offering and sale of consolidated obligations in such a manner 
as to promote the cooperative nature of the Bank System and assure that 
suitability standards are met;
    (ii) Issue and service (including making timely payments on 
principal and interest due, subject to Sec. 910.7 of this chapter) 
consolidated obligations pursuant to and in accordance with the 
policies and procedures established by the OF Board of Directors under 
this part, which shall govern the frequency and timing of issuance, 
issue size, minimum denomination, bond concessions, underwriter 
qualifications, currency of issuance, interest-rate change or 
conversion features, call features, principal indexing features, 
selection and retention of outside counsel, selection of clearing 
organizations, and the selection and compensation of underwriters for 
consolidated obligations, and shall be in accordance with the mission 
of the OF as set forth in Sec. 941.2 and the requirements and 
limitations set forth in paragraph (c)(1)(iii) of this section;
    (iii) Discharge the function described in paragraphs (c)(1)(i) and 
(ii) of this section effectively and at the lowest all-in funding costs 
over time, with due regard for prudent risk-management practices, 
prudential debt parameters, short and long-term market conditions, the 
cooperative nature of the Bank System, and the Banks' role as 
government-sponsored enterprises, and, consistent with:
    (A) Maintaining reliable access to the short-term and long-term 
capital markets;
    (B) Positioning the issuance of debt to take advantage of current 
and future capital market opportunities; and
    (C) Defining and maintaining appropriate investor suitability 
standards.
    (iv) Prepare and issue the combined annual and quarterly financial 
reports for the Bank System in accordance with the following 
requirements:
    (A) The scope, form and content of the disclosure generally shall 
be consistent with the requirements of the Securities and Exchange 
Commission's Regulations S-K and S-X (17 CFR parts 229 and 210);
    (B) Information about each Bank shall be presented as a segment of 
the Bank System as if Statement of Financial Accounting Standards No. 
131, titled ``Disclosures about Segments of an Enterprise and Related 
Information'' (FASB 131) applied to the combined annual and quarterly 
financial reports of the Bank System.
    (C) The standards set forth in paragraphs (c)(1)(iv)(A) and (B) of 
this section are subject to the exceptions set forth in the Appendix to 
this part 941.
    (D) The OF shall file with the Finance Board and distribute to each 
Bank and Bank member the combined Bank

[[Page 336]]

System annual report within 90 days after the end of the fiscal year, 
and the combined Bank System quarterly report within 45 days after the 
end of the first three fiscal quarters of each fiscal year.
    (E) The Finance Board in its sole discretion shall determine 
whether or not a combined Bank System annual or quarterly financial 
report prepared by the OF pursuant to Sec. 941.8 complies with the 
standards of this part 941.
    (F) The OF shall promptly comply with any directive of the Finance 
Board regarding the preparation, filing, amendment or distribution of 
the combined Bank System annual or quarterly financial reports.
    (v) Provide capital markets information concerning debt to the 
Banks;
    (vi) Manage relationships with the Nationally Recognized 
Statistical Rating Organizations in connection with their rating of 
consolidated obligations;
    (vii) Conduct research reasonably related to the issuance or 
servicing of consolidated obligations.
    (2) The OF shall, to the extent requested by two or more Banks 
pursuant to any agreement or contract, facilitate or provide services 
for the management and administration of joint asset activities of the 
Banks otherwise authorized by law and in accordance with this part, 
including without limitation:
    (i) Providing administrative and technical support for the 
origination, purchase, management, servicing, or sale of any assets 
acquired or to be acquired by two or more Banks pursuant to any 
agreement or contract, including Member Mortgage Assets;
    (ii) Providing market information to the Banks concerning joint 
asset activities, or other assets or investments, as necessary from 
time to time;
    (iii) Conducting and providing to the Banks research reasonably 
related to joint asset activities or other assets or investments of the 
Banks, as necessary from time to time;
    (iv) Developing, administering, and maintaining appropriate systems 
for timely monitoring of each Bank's unsecured credit exposure to 
individual counter-parties, and appropriate systems to manage Bank 
System exposure to counter-party risk within Bank System limits;
    (v) Adopting and administering procedures to enable the Banks to 
jointly manage their liquidity; and
    (vi) Adopting procedures to facilitate the sale or participation of 
advances and other assets among the Banks.
    (3) In accordance with policies and procedures established by the 
OF Board of Directors, the OF shall perform such duties and 
responsibilities for the Financing Corporation (FICO) or the Resolution 
Funding Corporation (REFCorp) on behalf of the Banks, as may be 
required.
    (d) Use of facilities or personnel. The OF may contract with a Bank 
or Banks for the use of Bank facilities or personnel in order to 
perform its functions.


Sec. 941.3  Finance Board oversight.

    (a) Oversight and enforcement actions. The Finance Board has the 
same regulatory oversight authority and enforcement powers over the OF, 
the OF Board of Directors, the directors, officers, employees, agents, 
attorneys, accountants or other OF staff, as it has over a Bank and its 
respective directors, officers, employees, attorneys, accountants, 
agents or other staff.
    (b) Examinations. Pursuant to section 20 of the Act (12 U.S.C. 
1440), the Finance Board shall examine the OF, all funds and accounts 
that may be established pursuant to this part 941, and the operations 
and activities of the OF, as provided for in the Act or any regulations 
promulgated pursuant thereto.


Sec. 941.4  The OF board of directors.

    (a) Composition of the OF board of directors. The OF Board of 
Directors shall consist of 24 members, 6 of whom shall be appointed by 
the Finance Board, 6 of whom shall be elected by members of the Banks, 
and 12 of whom shall be appointed by the Banks.
    (1) Finance Board appointments. The Finance Board shall appoint a 
total of six directors. Each director appointed by the Finance Board 
shall be a citizen of the United States having demonstrated experience 
in financial markets or asset management. An individual who is 
affiliated with any consolidated obligation selling or dealer group 
member under contract with the OF is not eligible to be appointed or 
serve as a member of the OF Board of Directors.
    (2) Bank appointments. Each Bank shall, by resolution of its board 
of directors, appoint one director, who shall be an officer, director 
or employee of the Bank.
    (3) Member elections. Bank System Members shall elect six directors 
through annual elections conducted by the OF.
    (i) Eligibility requirements. To be eligible for nomination, 
election, and service as a member of the OF Board of Directors, an 
individual shall be a citizen of the United States with demonstrated 
experience in financial markets or asset management. An individual who 
is affiliated with any consolidated obligation selling or dealer group 
member under contract with the OF is not eligible to serve as a member 
of the OF Board of Directors. A Bank System member and its affiliates 
may not have more than one representative on the OF Board of Directors 
at any time.
    (ii) Member-elected directorships and certain restrictions. Each 
member of the Bank System is entitled to nominate an eligible person 
for service on the OF Board of Directors in each annual election. Two 
member-elected directorships shall be filled each year from such 
nominees by a plurality of the votes which such members may cast in an 
election held by the OF under this part 941. Each member may cast a 
number of votes equal to the number of shares of stock in such Bank 
held by the member at the end of the calendar year preceding the 
election.
    (iii) Nominations. The OF shall prepare the nomination forms and 
transmit them to the Bank System members no later than March 1st of the 
election year. The nomination forms shall state the director 
eligibility requirements and the restrictions. Members shall have not 
less than 30 calendar days to submit nomination forms to the OF. The OF 
shall create acceptance and certification of eligibility forms, and 
provide such forms to the nominees no later than May 1st of the 
election year and the nominees shall have 30 days to accept or decline 
the nomination and provide the written eligibility certification to the 
OF.
    (iv) Ballots. The OF shall prepare a ballot for the OF Board of 
Directors election to be used in each Bank district based on the 
acceptance and certification forms, and provide the ballot to the Banks 
no later than July 1st of the election year. The Banks shall transmit 
the ballot to their members with the election ballots for the election 
of the Banks' respective boards of directors. Bank System members shall 
have a minimum of 30 days to vote and return the OF Board of Directors 
election ballot to the OF. The OF will tabulate the ballots and 
announce the slate of the OF Board of Directors no later than November 
1st of the election year.
    (b) Terms. The term of each director shall be three years and 
initial terms shall be staggered such that \1/3\ of the terms expire 
each year.
    (c) Vacancies. (1) In general. An OF director appointed or elected 
to fill a vacancy shall be appointed or elected only for the remainder 
of the term during which the vacancy occurred.

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    (2) Appointed directors. Vacancies in directorships appointed by 
the Finance Board or the Banks shall be filled in the manner in which 
the original appointment was made.
    (3) Elected directors. Vacancies in directorships elected by Bank 
System members shall be filled by a majority vote of the remaining 
directors.
    (d) Chair and vice chair. (1) The Finance Board shall designate one 
member of the OF Board of Directors as the chair, and another member as 
the vice chair.
    (2) The chair shall preside over meetings of the OF Board of 
Directors. In the absence of the chair, the vice chair shall preside. 
The chair is responsible for ensuring that the directives and 
resolutions of the OF Board of Directors are drafted and maintained and 
for keeping the minutes of all meetings.
    (e) Compensation. Members of the OF Board of Directors may receive 
compensation and reimbursement for expenses incurred as a result of 
their service on the OF Board of Directors.
    (f) Committees. (1) The OF Board of Directors shall establish an 
audit committee consistent with the requirements set forth in part 917 
of this chapter.
    (2) The OF Board of Directors shall establish an executive 
committee comprising member-elected directors, Bank-appointed 
directors, and Finance Board-appointed directors, each represented in 
the same proportions as they are on the full OF Board of Directors.
    (3) The OF Board of Directors shall establish a committee to 
coordinate the issuance and servicing of consolidated obligations under 
part 910 of this chapter.
    (4) The OF Board of Directors may establish additional committees 
that are necessary and appropriate to carry out the duties and 
responsibilities of the OF Board of Directors.
    (5) The OF Board of Directors shall promulgate policies and define 
the roles and duties of any committees so established, which shall be 
binding upon such committees.
    (g) Quorum. A quorum, for purposes of meetings of the OF Board of 
Directors and of meetings of committees of the OF Board of Directors, 
shall be a simple majority of the total directorships on the OF Board 
of Directors or the committee.


Sec. 941.5  Powers of the OF board of directors.

    (a) General. The OF Board of Directors shall enjoy such incidental 
powers under section 12(a) of the Act (12 U.S.C. 1432(a)), as are 
necessary, convenient and proper to accomplish the efficient operation 
and management of the OF pursuant to this part, consistent with part 
917 of this chapter.
    (b) Agent. Subject to any limitations set by the Finance Board, the 
OF Board of Directors, in the performance of its duties, shall have the 
power to act on behalf of:
    (1) The Banks in issuing consolidated obligations pursuant to 
section 11(a) of the Act (12 U.S.C. 1431(a));
    (2) The Finance Board in issuing consolidated obligations pursuant 
to section 11(c) of the Act (12 U.S.C. 1431(c)); and
    (3) The Banks in paying principal and interest due on the 
consolidated obligations, or other obligations of the Banks.
    (c) Delegation. The OF Board of Directors may delegate any of its 
powers to any employee of the OF in order to enable the OF to carry out 
its functions.
    (d) Indemnification. (1) The OF Board of Directors may determine 
the terms and conditions under which its members, the Chief Executive 
Officer, and other officers and employees of the OF will be indemnified 
by the OF, provided that such terms and conditions are consistent with 
the terms and conditions of indemnification of directors, officers and 
employees of the Bank System, generally.
    (2) Such indemnification procedures, when duly adopted, may be 
supplemented by a contract of insurance, and all expenses incident to 
indemnification will be treated as an expense of the OF.


Sec. 941.6  Duties of the OF board of directors.

    (a) General. (1) Bylaws. The OF Board of Directors shall adopt 
bylaws, consistent with applicable laws and regulations as administered 
by the Finance Board, governing its operation and issue such guidance 
or instruction as will promote the efficient operation of the OF.
    (2) Conduct of business. The OF Board of Directors shall conduct 
its business by majority vote of its members convened at a meeting in 
accordance with its bylaws.
    (b) Oversight. The OF Board of Directors shall:
    (1) Be responsible for the conduct and performance of all duties, 
functions, operations and activities of the OF and for its efficient 
and effective operation;
    (2) Set policies for management of the OF, including a policy 
addressing the relationship between the Banks as issuers of debt and 
Bank System members as issuers of debt;
    (3) Approve a strategic business plan for the OF and monitor the 
progress of its operations under such plan;
    (4) Review, adopt and monitor the annual operating and capital 
budgets of the OF including any supplemental expenditure thereto;
    (5) Select, employ and define the duties of a Chief Executive 
Officer of the OF. The Chief Executive Officer, or the Chief Executive 
Officer's designee, shall be:
    (i) The Fiscal Agent of the Banks;
    (ii) A member of the Directorate of the Financing Corporation, 
pursuant to section 21(b)(1)(A) of the Act (12 U.S.C. 1441(b)(1)(A); 
and
    (iii) A member of the Directorate of the Resolution Funding 
Corporation, pursuant to section 21B(c)(1)(A) of the Act (12 U.S.C. 
1441b(c)(1)(A)).
    (6) Review and approve all contracts of the OF; and
    (7) Assume any other responsibilities that may from time to time be 
delegated to it by the Finance Board.
    (c) The OF Board of Directors shall be subject to and shall operate 
in accordance with Finance Board policies and regulations as applicable 
to the boards of directors of the Banks, including part 917 of this 
chapter.


Sec. 941.7  Funding of the OF.

    (a) General. The Banks are responsible for jointly funding the OF.
    (b) Method. (1) At the direction of and pursuant to policies and 
procedures adopted by the OF Board of Directors, the Banks shall 
periodically reimburse the OF Operations Imprest Fund in order to 
maintain in such fund an amount approved by the OF Board of Directors 
sufficient to fund operations of the OF under a budget approved by the 
OF Board of Directors.
    (2) Each Bank's respective pro rata share of the reimbursement 
described in paragraph (b)(1) of this section shall be based on the 
ratio of the total paid-in value of its capital stock relative to the 
total paid-in value of all capital stock in the Bank System. With the 
prior approval of the Finance Board, the OF Board of Directors may 
implement an alternative formula for determining each Bank's respective 
share of the OF expenses or, by contract with a Bank or Banks, may 
choose to be reimbursed through a fee structure in lieu of or in 
addition to assessment, for services provided to the Bank or Banks for 
the issuance or servicing of consolidated obligations or the management 
and administration of joint asset activities.


Sec. 941.8  Savings clause.

    All actions taken by the OF as it existed prior to the amendments 
made

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to this part shall continue to be valid as regards the Finance Board 
and the Bank System.

Appendix A to Part 941--Exceptions to the General Disclosure 
Standards

    A. Related-Party Transactions. Item 404 of Regulation S-K, 17 
CFR 229.404, requires the disclosure of certain relationships and 
related party transactions. In light of the cooperative nature of 
the Bank System, related-party transactions are to be expected, and 
a disclosure of all related-party transactions that meet the 
threshold would not be meaningful. Instead, the combined annual 
report will disclose the percent of advances to members an officer 
of which serves as a Bank director, and list the top 10 holders of 
advances in the Bank System and the top 5 holders of advances by 
Bank, with a further disclosure indicating which of these members 
had an officer that served as a Bank director.
    B. Biographical Information. The biographical information 
required by Items 401 and 405 of Regulation S-K, 17 CFR 229.401 and 
405, will be provided only for the members of the Board of Directors 
of the Finance Board, Bank presidents, chairs and vice chairs, and 
the directors and Chief Executive Officer of the OF.
    C. Compensation. The information on compensation required by 
Item 402 of Regulation S-K, 17 CFR 229.402, will be provided only 
for Bank presidents and the Chief Executive Officer of the OF. Since 
stock in each Bank trades at par, the Finance Board will not include 
the performance graph specified in Item 402(1) of Regulation S-K, 17 
CFR 229.402(1).
    D. Submission of Matters to a Vote of Stockholders. No 
information will be presented on matters submitted to shareholders 
for a vote, as otherwise required by Item 4 of the SEC's form 10-K, 
17 CFR 249.310. The only item shareholders vote upon is the annual 
election of directors.
    E. Exhibits. The exhibits required by Item 601 of Regulation S-
K, 17 CFR 229.601, are not applicable and will not be provided.
    F. Per Share Information. The statement of financial information 
required by Items 301 and 302 of Rule S-K, 17 CFR 229.301 and 302, 
is inapplicable because the shares of the Banks are subscription 
capital that trades at par, and the shares expand or contract with 
changes in member assets or advance levels.
G. Beneficial Ownership. Item 403 of Rule S-K, 17 CFR 229.403, requires 
the disclosure of security ownership of certain beneficial owners and 
management. The combined financial report will provide a listing of the 
10 largest holders of capital stock in the Bank System and a listing of 
the 5 largest holders of capital stock by Bank. This listing will also 
indicate which members had an officer that served as a director of a 
Bank.

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: December 14, 1999.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-35 Filed 1-3-00; 8:45 am]
BILLING CODE 6725-01-P