[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Rules and Regulations]
[Pages 36290-36304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14366]



[[Page 36289]]

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Part VII





Federal Housing Finance Board





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12 CFR Parts 900, 905, 965, 966, 969, 985 and 989



Office of Finance; Authority of Federal Home Loan Banks To Issue 
Consolidated Obligations; Final Rule and Changes to the Financial 
Management Policy of the Federal Home Loan Bank System; Notice

  Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules 
and Regulations  

[[Page 36290]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 905, 965, 966, 969, 985 and 989

[No. 2000-24]
RIN 3069-AA88


Office of Finance; Authority of Federal Home Loan Banks To Issue 
Consolidated Obligations

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulations governing the operations of the Office of Finance (OF), 
a joint office of the Federal Home Loan Banks (Bank or Banks), and the 
issuance of debt for the Federal Home Loan Bank System. The final rule 
authorizes the Banks to issue joint debt, i.e., bonds, notes or 
debentures, on which the Banks are jointly and severally liable, to be 
called consolidated obligations (COs), under section 11(a) of the 
Federal Home Loan Act (Act). This action is intended to more closely 
reflect the reality of the Banks' current funding operations by 
allowing the Banks to be responsible for accessing the capital markets 
through the OF to fund their own operations, rather than having the 
Finance Board issue COs on behalf of the Banks as is currently the 
case. The final rule does not have a substantive effect on the debt 
issuance process or on the joint-and-several liability of the Banks on 
outstanding COs or COs to be issued in the future. This action 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 final rule also incorporates changes to the leverage limit that 
were originally proposed as a part of conforming amendments to the 
policy statement entitled ``Financial Management Policy of the Federal 
Home Loan Bank System'' (FMP). Specifically, the final rule deletes the 
Bank System-wide leverage limit, recasts the Bank-by-Bank leverage 
limit from a liability-based limit to an asset-based limit and 
incorporates into regulation expanded leverage originally permitted for 
year 2000 liquidity purposes, all as consistent with the Act provisions 
of the recently enacted Gramm-Leach-Bliley Act.\1\
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    \1\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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    The final rule also authorizes the Finance Board to continue to 
issue COs under the authority of section 11(c) of the Act. At some 
point to be determined by the Finance Board and the OF, the issuance of 
debt under the authority of section 11(c) of the Act will cease and all 
COs will be issued under the authority of section 11(a) of the Act. The 
final rule makes clear that OF ultimately will be responsible for 
performing all CO issuance functions, including preparation of combined 
financial reports, for the Banks. The final rule also effects a number 
of other corporate governance changes to maximize the operating 
efficiency of the OF.
    The Finance Board is also adopting in final form certain conforming 
amendments to the FMP. A Notice describing the FMP amendments in detail 
is published elsewhere in this issue of the Federal Register.

DATES: This final rule is effective July 1, 2000.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Policy, Research and Analysis, 202/408-2845, 
[email protected], Deborah F. Silberman, General Counsel, Office of 
General Counsel, 202/408-2570, [email protected], or Charlotte A. 
Reid, Special Counsel, Office of General Counsel, 202/408-2510, 
[email protected]. Staff also can be reached by regular mail at the 
Federal Housing Finance Board, 1777 F Street, NW, Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

    On January 4, 2000, the Finance Board published for comment a 
proposed rule to 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 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. The proposed 
rule also would have amended Sec. 900.30 of the Finance Board's 
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 Act. By this provision, the 
Finance Board intended to transition itself out of, and the Banks into, 
the debt issuance function under the provisions of section 11(a) of the 
Act as soon as practicable. See 65 FR 324 (Jan. 4, 2000). The proposed 
rule described a new structure for the OF to accommodate additional 
functions proposed to address new challenges faced by the Bank System. 
The 60-day public comment period closed on March 6, 2000. The Finance 
Board received a total of 22 comments, 15 from Banks, 5 from trade 
associations, 1 from a Bank member, and 1 from a group of Bank members. 
A majority of the commenters generally supported the concept of 
devolving the debt issuance from the Finance Board to the Banks, but 
opposed the proposed restructuring of the OF.

II. Comments on the Proposed Rule and Analysis of Changes Made in 
the Final Rule

A. Joint Asset Activity Management and Restructuring of the Office of 
Finance

    The proposed rule would have amended part 941 of the regulations to 
authorize the OF, as the only statutorily recognized joint office of 
the Banks, to operate as a centralized facility through which Bank 
assets could be efficiently administered on a joint basis. The proposed 
rule provided 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 have been 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 acquired member assets; provide market 
information to the Banks concerning acquired member 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 would not have required the Banks to make 
use of the OF in this capacity, but it would have required the OF to 
provide the services outlined if two or more Banks wished the OF to do 
so. The OF would have been authorized to establish a reasonable fee 
structure or charge for its services by contract or otherwise. It also 
would have been authorized to mediate among competing Bank demands, in 
accordance with its specified duties and responsibilities.

[[Page 36291]]

    These proposed provisions were intended primarily to address the 
Finance Board's belief 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. 
As discussed in the Supplementary Information of the proposed 
rulemaking, see 65 FR 324 (Jan. 4, 2000), the Finance Board anticipates 
that this need will become even more critical as the Banks develop 
asset activities such as acquired member 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, the Finance Board proposed a reorganization of the OF that would 
allow OF, the only 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.
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    \2\ Indeed, the General Accounting Office (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 report commissioned by Congress in section 1393 of the Housing 
and Community Development Act of 1992, issued on December 8, 1993 
(GAO/GGD-94-38) (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.
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    The Finance Board believes that administering joint assets through 
a centralized facility could offer safety-and-soundness benefits of 
better risk-management capabilities and geographic diversity in the 
asset portfolio, which is particularly important given the national 
nature of the mortgage markets. 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).\3\
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    \3\ See Pub.L. 101-73, tit. VII, sec. 702, 103 Stat. 183 (Aug. 
9, 1989). The 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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    A majority of the commenters opposed this portion of the proposal, 
as well as the provisions of proposed Sec. 941.4 \4\ concerning the 
restructuring of the OF board of directors to significantly alter both 
the size and composition of the OF board of directors by including 
representatives from each Bank, elected members of the Bank System, and 
appointed representatives of the general public with relevant 
experience, and other proposed changes designed to provide the 
structure, additional functions and operational capacity the OF would 
have to possess in order to accommodate the joint assets activities 
function. Because the Finance Board does not wish to delay adoption of 
the debt issuance provisions in final form, the Finance Board has 
decided to remove the joint asset activity management and restructuring 
provisions from the text of this final rule. The proposals regarding 
joint asset activity management functions for the OF and the necessity 
to adapt the structure of the OF for the addition of such functions, 
however, remain under active consideration and analysis by the Finance 
Board. It is anticipated that the Finance Board will respond to the 
comments and adopt those provisions in a future separate notice of 
final rulemaking.
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    \4\ The Finance Board recently reorganized and redesignated all 
of its regulations. See 65 FR 8253 (Feb. 18, 2000). Part 900 of the 
Finance Board's regulations, 12 CFR part 900 (1999), was 
redesignated as part 905, see 65 FR 8253, 82 (to be codified at 12 
CFR part 905); part 910, ``Consolidated Bonds and Debentures,'' was 
redesignated as part 966 ``Consolidated Obligations,'' see 65 FR 
8253, 82 (to be codified at 12 CFR part 966); and part 941, 
``Operations of the Office of Finance, `` was redesignated as part 
985, see 65 FR 8253, 82 (to be codified at 12 CFR part 985).
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B. Authorization of Banks To Issue Joint Debt Under Section 11(a) of 
the Act

    As discussed in the Supplementary Information of the proposed 
rulemaking, section 11(a) of the 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. 12 U.SC. 
1431(a). Proposed Sec. 910.2(b) (redesignated as Sec. 966.2(b) in the 
final rule) expressly authorizes the OF to undertake the issuance of 
joint Bank debt pursuant to section 11(a) of the Act as COs on which 
all of the Banks would be jointly and severally liable subject to 
Sec. 966.9 of the Finance Board regulations (which governs the joint-
and-several liability of the Banks on COs issued under section 11(c) of 
the Act). As adopted, Sec. 966.2(b) also provides that the 
authorization contained therein shall be deemed to constitute 
satisfaction of the requirement for Finance Board approval of the 
``terms and conditions'' pursuant to section 11(a) of the Act (12 
U.S.C. 1431(a)).
    As discussed in the Supplementary Information of the proposed 
rulemaking, the Finance Board wishes to achieve the goals of continuing 
to give the Banks the autonomy to manage and run their own businesses 
by authorizing the Banks to issue the COs, while eliminating the 
continued potential for conflict with the Finance Board in its roles as 
regulator of the OF and the Banks and issuer of the COs. See 65 FR 324 
at 325 (Jan. 4, 2000).
    A majority of the commenters generally supported the concept of 
devolution of the CO issuance function to the Banks. However, almost 
all of the commenters expressed varying degrees of apprehension about 
recent market volatility and about how implementation of the final rule 
would be perceived in the capital markets, and many recommended 
delaying adoption of the final rule because of those concerns. Several 
commenters questioned whether the Finance Board had a legal basis to 
require, as a condition of authorizing the Banks to issue debt under 
section 11(a) of the Act, that the Banks be jointly and severally 
liable on the debt. One Bank commenter questioned whether COs issued by 
the OF as agent for the Banks would be afforded the same treatment 
under the Federal securities laws as COs issued by the Finance Board 
under section 11(c).

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    There are no conditions or restrictions attached to the Finance 
Board's authority to prescribe the rules and regulations or to approve 
the terms and conditions of issuance of Bank debt under section 11(a). 
So long as the Finance Board exercises its power to promulgate its 
rules in a form authorized by Congress,\5\ and the rules are reasonable 
and consistent with the statute, the rules will be valid and 
enforceable, and will have the force and effect of law.\6\
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    \5\ Generally, Congress has authorized Federal agencies to issue 
binding rules through the use of the notice and comment procedure 
set forth in section 553 of the Administrative Procedure Act, 5 
U.S.C. 551 et seq. See generally, 1 Kenneth Culp Davis & Richard J. 
Pierce, Jr., Administrative Law Treatise Sec. 6.3 at 236 (3rd ed. 
1994 and Supp. 1999).
    \6\ Id. (citing Fawcus Machine Co. v. United States, 282 U.S. 
375, 378 (1931); Maryland Casualty Co. v. United States, 251 U.S. 
342, 349 (1920)).
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    As proposed, the final rule applies the same rules governing the 
apportionment of joint-and-several liability to COs issued by the 
Finance Board pursuant to section 11(c) of the Act as to COs issued by 
the Banks pursuant to section 11(a). By requiring joint-and-several 
liability as a condition of authorizing the Banks to issue debt under 
section 11(a), the Finance Board is implementing by regulation an 
issuance scheme that is identical to the issuance scheme established by 
Congress elsewhere in section 11 of the Act, and the Banks will be 
subject to the same payment provisions (i.e., the joint-and-several 
liability provisions) currently established in the Finance Board's 
regulations. Nothing in the Finance Board's regulatory action requiring 
the Banks to be jointly and severally liable on debt issued under 
section 11(a) is inconsistent with any existing statutory or regulatory 
requirement.
    The Finance Board has concluded that it has the authority both to 
promulgate this rule and to require, as a condition of authorizing the 
Banks to issue debt under section 11(a) of the Act, that the Banks be 
jointly and severally liable on that debt. Further, the Finance Board 
has concluded that the technical change in the issuer of the COs from 
the Finance Board to the Banks will have no effect on the treatment of 
COs under the Federal securities laws.\7\
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    \7\ See Op. Gen. Counsel (May 22, 2000).
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C. Authorized Liabilities

    Proposed Sec. 910.2(a) (redesignated as Sec. 965.2 in the final 
rule) set forth an exclusive list of liabilities authorized for Bank 
business operations, which was designed to replace the Funding 
Guidelines section of the FMP. See 65 FR 324 at 328; 65 FR 339 (Jan. 4, 
2000). Five commenters expressed opposition to various aspects of this 
provision.
    Two Bank commenters and one trade association commenter objected to 
limiting the purchase of Federal funds and the use of repurchase 
agreements to meet the short-term liquidity needs of the Banks, stating 
that the standard was ambiguous or that the limits would make liquidity 
management more difficult. The Finance Board has reconsidered the need 
for the limit in light of the comments and in light of its change to 
the leverage limit from a liability-based limit to an asset-based 
limit, and has determined not to limit the purchase of Federal funds or 
the use of repurchase agreements in the final rule.
    Proposed Sec. 910.2(a)(2) (redesignated as Sec. 965.2(b) in the 
final rule) was designed to continue each Bank's authority to accept 
deposits from members, other Banks and instrumentalities of the United 
States, but provided that deposit transactions 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 defined under the Federal securities laws. 
See 65 FR at 328. Three commenters criticized this provision, noting 
that it was unclear as proposed whether deposits from categories of 
financial institutions from which the Banks now accept deposits still 
would be permitted, and that there was no justification for limiting or 
eliminating a significant, low-cost source of funds for the Banks. The 
Finance Board did not intend to preclude the Banks from accepting 
deposits or cash accounts from any category of financial institution 
from which the Banks are currently authorized by statute or regulation 
to do so. The final rule has been revised in light of the comments to 
remedy this. Two commenters objected to the ``no public offering'' 
provision relating to deposits and recommended that it be eliminated as 
difficult to apply in light of the rate posting practices of the Banks 
and unnecessary given the nature of the Banks' depositors. The Finance 
Board agrees with the comments and has eliminated that restriction from 
the final rule.

D. Powers and Responsibilities of the OF

    Proposed Sec. 941.2 stated that the OF is a joint office of the 
Banks under section 2B of the Act; set out a two-pronged purpose for 
the OF; provided that, as a part of its purpose, OF shall issue COs on 
behalf of the Banks or the Finance Board and shall 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; and set out the functions the OF was authorized to 
undertake in support of the issuance of debt and the support to be 
provided to the Banks engaged in joint asset activities. See 65 FR 324 
at 329. As previously discussed, because only the CO issuance 
provisions of the proposal are being adopted in final form at this 
time, only those comments are being addressed here. Three Banks, two 
trade associations, and one individual commented on some aspect of this 
provision of the proposed rule.
    Proposed Sec. 941.2(c) (redesignated as Sec. 985.6(b) of the final 
rule) assigned to the OF the function of preparing the combined Bank 
System annual and quarterly financial reports as a part of the CO 
issuance or debt management function. The proposal codified current 
Finance Board policy (See Res. No. 98-27 (June 24, 1998)) (Policy 
Statement) and set forth the standards under which the OF would be 
required to prepare Bank System 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 
Securities and Exchange Commission's (SEC) 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).
    The proposed rule included an Appendix listing exceptions to the 
standards set forth in proposed Sec. 941.2(c)(1)(iv)(A) and (B), 
derived from the Finance Board's Policy Statement, which included 
certain disclosures concerning related-party transactions, biographical 
information, compensation, submission of matters to a vote of 
shareholders, exhibits, per-share information and beneficial ownership. 
The proposed rule also required the OF to file and distribute combined 
Bank System financial reports according to a schedule that mirrors the 
filing requirements applicable to corporate registrants under the 
Securities Exchange Act of 1934 (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 3 fiscal quarters). The 
proposal expressly confirmed the Finance Board's sole authority to 
determine compliance with the standards of proposed part 941 
(redesignated as part 985) and provided an explicit compliance 
mechanism by

[[Page 36293]]

requiring the OF to promptly comply with any Finance Board directive 
pertaining to the preparation, filing, amendment or distribution of 
financial reports.
    Two commenters objected to the timeframes within which the 
financial statements are required to be prepared and recommended that 
those deadlines be relaxed. One commenter also suggested that the 
provision governing the preparation of the system financial statements 
make clear that the Finance Board would make its determination as to 
whether the reports conform to the appropriate disclosure and 
accounting requirements prior to the release of the financial statement 
by the OF. Two commenters suggested the addition of a provision stating 
that the failure to comply with the rule would not create any private 
right of action that would not have existed in the absence of the 
regulation's reporting requirement.
    Section 985.6(b) is adopted as proposed, with only minor changes, 
in the final rule. With respect to the comments concerning relaxing the 
timeframes for preparation of financial reports, the Finance Board 
continues to believe 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. In this regard, the Finance 
Board prepared and completed both the 1999 combined annual financial 
report and the first quarter 2000 combined financial report within the 
applicable timeframes. There does not appear to be any reason why the 
OF could not and should not continue to meet this standard. Therefore, 
no changes have been made in the final rule to the proposed timeframes.
    With respect to the comment concerning Finance Board review of 
disclosure prior to release of financial reports, the Finance Board 
does not wish to impose any delay in the issuance or distribution 
process, nor to have the process of review of these reports differ from 
the process of review practiced by the SEC. When the SEC reviews 1934 
Act reports, it does not generally do so prior to issuance. Therefore, 
the Finance Board has adopted the review provision as proposed.
    A provision stating that the failure to comply with the rule would 
not create any private right of action that would not have existed in 
the absence of the regulation's reporting requirement has been added to 
the rule in Sec. 985.6(b)(7), in response to a concern expressed by the 
commenters. The Finance Board has no intention by engaging in this 
rulemaking of creating any private right of action that would not have 
existed in the absence of this rule. It should be noted that the 
Finance Board does not believe that the Banks, the OF or the OF board 
of directors will incur any different or greater liability under any 
aspect of the final rule than existed previously. See Op. Gen. Counsel 
(May 22, 2000).
    Proposed Sec. 941.2(c)(ii)(C) (redesignated as Sec. 985.8(c)(3) of 
the final rule) would have required OF to define, implement and 
maintain investor suitability standards, and assure that these 
standards are met. Several commenters noted that investor suitability 
is more properly dealt with by underwriters than by issuers. The 
Finance Board agrees with these comments and has revised the final rule 
to address suitability by requiring OF to require that underwriters of 
COs have and maintain adequate suitability sales practices and policies 
governing the distribution of Bank debt that are acceptable to, and 
subject to review by, the OF.
    Proposed Sec. 941.2(c)(2)(iv) (redesignated as Sec. 985.6 of the 
final rule) would have required the OF to have systems in place for 
timely monitoring the unsecured credit exposure of the Banks, and 
appropriate systems to manage the Banks' counterparty risk. While the 
monitoring of counterparty risk is an existing function of the OF, 
management of counterparty risk, as at least two commenters pointed 
out, is a function more appropriately left to the Banks. The final rule 
has been revised to delete the requirement that the OF manage the 
Banks' counterparty risk, but retains the requirement that the OF 
timely monitor each Bank's and the Bank System's unsecured credit 
exposure to individual counterparties.
    Proposed Sec. 941.2(c)(1)(i) and (iii) (redesignated as 
Sec. 985.8(c)(4) of the final rule) required the OF to consider or 
promote the cooperative nature of the Bank System, and be mindful of 
and preserve the relationship between the Banks and their members, 
which are also issuers of debt in the capital markets. Several 
commenters objected to the inclusion of these concepts as ambiguous, 
onerous, confusing and lacking clarity as standards. One commenter 
suggested that this rule was not the optimal forum for addressing the 
matter of retail debt issuance by the Banks vis a vis Bank members. 
Another commenter, while acknowledging that Bank System debt is not 
currently distributed directly to retail level investors, speculated 
that such distributions could raise a policy issue of ``competition 
with the retail deposit offering of member institutions.''
    The Finance Board agrees that this regulation is the appropriate 
place to address the issue. The Finance Board agrees with the commenter 
that, ultimately, it should be up to the boards of directors of the 
Banks to determine such matters involving their members. Therefore, the 
final rule has been revised to prohibit the issuance of COs intended to 
be privately placed with or sold without the participation of an 
underwriter to retail investors, or issued with a concession structure 
designed to facilitate the placement of the COs in retail accounts, 
unless the OF has given notice to the board of directors of each of the 
Banks describing a policy permitting such issuances, soliciting 
comments from each Bank's board of directors, and considering the 
comments received before adopting a policy permitting such issuance 
activities. The language of the rule has been designed so as to have no 
effect on current debt issuance practices, which as noted above are not 
currently directed at retail level investors. Only departures from 
current practices would subject the issuance process to the notice 
procedure described in the rule. All other references to considering or 
promoting the cooperative nature of the Bank System have been deleted 
from the final rule.

E. Leverage Limit

    The proposed rule, and corresponding proposed changes to the FMP, 
did not include the 20-to-1 leverage limit from Sec. 910.1(b) of the 
Finance Board's regulations, or the 20-to-1 leverage limit on each Bank 
contained in the FMP. Instead, the proposed amendments to the FMP 
recast the leverage limit applicable to each Bank from a liability-
based limit to an asset-based limit, and required that each Bank 
maintain capital in an amount equal to at least 4.76 percent of the 
Bank's total assets. See 65 FR at 328, 339. This limit required that 
the assets of a Bank not exceed 21 times its capital.
    The Finance Board did not believe that either the elimination of 
the Bank System-wide leverage limit from the Finance Board's 
regulations, or 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 existing FMP provision 
prohibits a Bank from participating in COs if such transactions would 
cause the Bank's liabilities to

[[Page 36294]]

exceed 20 times the Bank's capital.\8\ The proposed revision to the FMP 
established 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 the proposed 
standard on each Bank would 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 noted that 
with the recent passage of the Gramm-Leach-Bliley Act, the Banks would 
be subject to asset-based statutory leverage limits and risk-based 
capital requirements. When implemented, the new risk-based capital 
regime would provide an additional safeguard to the Bank System and its 
bondholders by requiring Banks to hold capital in proportion to the 
risks they assume.
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    \8\ By resolution the Board of Directors of the Finance Board 
directed that, through June 30, 2000, a Bank may have leverage up to 
25 to 1 as long as that Bank's ratio of non-mortgage investments to 
COs does not exceed 12 percent. The Finance Board adopted this 
additional leverage flexibility on an interim basis to allow the 
Banks to provide Year 2000 funding to their members. See Res. No. 
99-33 (May 28, 1999).
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    The final rule incorporates the leverage change that originally was 
proposed to be part of the FMP. In addition, the final rule extends and 
makes permanent the additional leverage authority originally permitted 
to the Banks for Year 2000 liquidity. In particular, the final rule 
allows a Bank to have asset-based leverage of up to 25 to 1 if the 
Bank's non-mortgage assets after deducting deposits and capital, do not 
exceed 11 percent of its total assets. For the purpose of the final 
rule, non-mortgage assets equal the total assets after deducting core 
mission activity assets and assets described in sections II.B.8 through 
II.B.11 of the FMP.\9\ The Year 2000 leverage provision allowed a Bank 
to have liability-based leverage of up to 25 to 1 if its ratio of non-
mortgage investments did not exceed 12 percent of the liabilities for 
which the Bank was the primary obligor. This 25 to 1 leverage 
requirement is consistent with the leverage requirements of the Gramm-
Leach-Bliley Act.
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    \9\ On May 3, 2000, the Finance Board published for notice and 
comment a proposed rule that included a listing of activities that 
would qualify as core mission activities. See 65 FR 25676 at 25688 
(May 3, 2000).
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    A number of commenters objected to the proposed change on the basis 
that secured liabilities, principally repurchase agreements, are not 
now subject to a capital requirement. Under the proposed FMP, however, 
assets funded by repurchase agreements and other secured liabilities 
would be subject to capital charges.
    Repurchase agreements are a de minimis portion of Bank funding. At 
December 31, 1999, repurchase agreements were less than one-tenth of 
one percent of the total funding of the Banks, eight of the Banks had 
no repurchase agreements, and one Bank accounted for a majority of the 
Bank System's repurchase agreements.
    The Finance Board agrees with the recommendation that the leverage 
requirement be included in the Finance Board's regulations rather than 
in the FMP. The final rule incorporates the leverage limit provision 
into Sec. 966.3(a).
    The proposed rule deleted provisions of the Finance Board's 
regulations that purported to limit the Finance Board's ability to 
change the leverage limit only if the Finance Board received either 
written evidence from at least one major Nationally Recognized 
Securities Rating Organization (NRSRO) 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 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. See 
65 FR 324 at 328-329. As proposed, these provisions are deleted by the 
final rule.\10\ Instead, Sec. 966.3(b) of the final rule requires the 
Banks to seek, obtain and maintain a rating on the COs from an NRSRO. 
It requires each Bank to operate in such a manner and take whatever 
actions are necessary to ensure that the COs receive and maintain the 
highest rating from an NRSRO. Section 966.3(c) of the final rule 
requires each Bank to obtain a rating, such as a long-term credit 
issuer rating from Standard and Poor's or a financial strength rating 
from Moody's that is no lower than the second highest credit rating. 
Each of the Banks now has an Aaa long-term issuer credit rating from 
Standard and Poor's. Therefore, the ratings requirements in the final 
rule merely reflect current practice and will impose no new costs or 
burdens on the Banks.
---------------------------------------------------------------------------

    \10\ Without conceding that the terms of the current rule apply, 
but in an abundance of caution, so as to be in compliance with the 
terms of the current rule, a written opinion from an NRSRO that the 
changes to the leverage limit would not have a materially adverse 
effect on the creditworthiness of COs outstanding or next to be 
issued was obtained prior to adoption of the final rule.
---------------------------------------------------------------------------

    The ratings requirements in the final rule will enhance the 
protections afforded the holders of COs. Requiring each of the Banks on 
an ongoing basis to take whatever action may be necessary to maintain 
the rating of COs at the highest level is a substantially stronger 
protection than the current requirement of a one-time written statement 
from a rating agency or investment banking firm that a change in the 
leverage limit would not adversely affect the rating or 
creditworthiness of COs.

F. Other Changes

1. Amendments to Part 900
    As proposed, the duplicative definitions in part 966 of the terms 
``Board'' and ``Bank,'' which are now defined in part 900, have been 
deleted. The definition of ``consolidated obligation'' is adopted as 
proposed, with minor edits, in Sec. 900.1 of the final rule to clarify 
that it includes any bond, debenture or note authorized under part 966 
to be issued jointly by the Banks under section 11(a) of the Act, or 
any bond or note issued by the Finance Board on behalf of all Banks 
pursuant to section 11(c) of the Act, on which the Banks are jointly 
and severally liable.
2. Amendment to Part 905
    The proposal would have amended Sec. 905.30 to add a new paragraph 
(a)(3) 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 Act. By this provision, the Finance 
Board intended to transition itself out of, and the Banks into, the 
debt issuance function under the provisions of section 11(a) of the Act 
as soon as practicable.
    The Finance Board has determined that it can accomplish the same 
goal by deleting Sec. 905.30 in its entirety, and providing in 
Sec. 966.2 that the Finance Board may in its discretion from time to 
time delegate its issuance of COs under section 11(c) of the Act by 
resolution of the Board of Directors of the Finance Board.\11\ The 
Finance Board anticipates working with the OF to determine a mutually 
acceptable date on which the OF will begin issuing COs under the 
authority of section 11(a) of the Act and ceasing to issue COs under 
the authority of section 11(c) of the Act.
---------------------------------------------------------------------------

    \11\ The Finance Board annually adopts a debt-issuance 
authorization to the OF that includes parameters to which the debt 
must conform. See Res. No. 2000-11 (Feb. 23, 2000).
---------------------------------------------------------------------------

3. Amendments to Part 966--Consolidated Obligations
    Part 910 of the Finance Board's regulations was redesignated as 
part 966. The part has been reorganized and renumbered, terms have been 
modified

[[Page 36295]]

as proposed in the final rule for regulatory consistency (such as by 
substituting ``Finance Board'' for ``Board,'' ``Bank'' for ``Federal 
Home Loan Bank,'' and ``consolidated obligation'' for ``consolidated 
bond''), and a new Sec. 966.10 has been added.
    a. Definitions--Sec. 966.1. As proposed, the definitions of the 
terms ``Board'' and ``Bank,'' which are now defined in part 900, and of 
the term ``unsecured senior liabilities'' have been deleted. The 
definition of ``Nationally Recognized Statistical Rating 
Organizations'' has been adopted as proposed in Sec. 966.1.
    b. Sections 966.2 through 966.10. The negative pledge requirement 
is adopted as proposed, in Sec. 966.2(c), retaining the negative pledge 
requirement for debt previously issued by the OF on behalf of the 
Finance Board under section 11(c), and expressly requiring 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.
    Proposed Sec. Sec. 910.3 through 910.7 are adopted as proposed, 
with minor changes, in the final rule, but redesignated as 
Sec. Sec. 966.4 through 966.8. One commenter argued that the provision 
in proposed Sec. 910.3, reserving to the Finance Board the authority to 
prescribe the form of each CO, runs counter to the devolution of 
management issues. The Finance Board agrees and has therefore deleted 
that provision from Sec. 966.4 of the final rule.
    Proposed Sec. 910.7, redesignated as Sec. 966.8 in the final rule, 
provided the conditions under which the OF board of directors shall 
authorize the issuance of COs. As adopted, Sec. 966.8 provides that 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 thereof, subject to the provisions of 31 U.S.C. 9108. It 
also provides that COs may be offered for sale only to the extent that 
the Banks are committed to take the proceeds, and continues the 
existing prohibition on directly placing COs with another Bank. As 
discussed previously, the requirements in the proposal that 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, have been deleted from the final rule.
    Proposed Sec. 910.8 (joint-and-several liability) has been 
redesignated as Sec. 966.9 without change.
    One commenter recommended the inclusion in the final rule of a 
provision stating that agreements and instruments entered into in 
connection with the issuance of COs prior to implementation of the 
final rule will continue to be effective with respect to the issuance 
of COs issued under the authority of the final rule by operation of 
law, and that references to COs in those agreements and instruments 
shall be deemed to refer to all COs by whomever issued. The Finance 
Board agrees that such a savings clause would be prudent and would 
further its goal of effecting a smooth and seamless transition of the 
CO issuance process between it and the Banks. Accordingly, the Finance 
Board has added such a savings clause as Sec. 966.10 in the final rule.
4. Amendments to Part 985--the Office of Finance
    The final rule has been significantly reorganized in form, but not 
in substance, from the proposed rule. The most important conceptual 
difference between the proposed and final rules is that certain powers 
and duties proposed to be powers and duties of the OF board of 
directors have been recast as authorities and responsibilities of the 
OF itself in the final rule. Part 941 has been redesignated as part 
985.
    a. Definitions, oversight, authority of the Office of Finance, 
functions and funding. i. Definitions. Section 985.1 of the final rule 
defines ``OF'' as the Office of Finance, a joint office of the Banks 
pursuant to section 2B of the Act. See 12 U.S.C. 1422b(b)(2).
    ii. Authority of the OF. Proposed Sec. 941.5 (redesignated as 
Sec. 985.2(a)), which was entitled ``Powers of the OF board of 
directors,'' has been adopted as ``Authority of the OF,'' but otherwise 
is enacted substantively as proposed. It provides that the OF shall 
have the incidental powers under section 12(a) of the Act as are 
necessary, convenient and proper to accomplish the efficient operation 
and management of the OF, including having authority to contract with a 
Bank or Banks for the use of Bank facilities or personnel in order to 
perform its functions or duties. The rule empowers the OF to act as 
agent (rather than the OF board of directors) for the Banks in issuing 
COs pursuant to section 11(a) of the Act, for the Finance Board, by 
delegation, in issuing COs pursuant to section 11(c) of the Act, and in 
making principal and interest payments on COs issued in either 
capacity. Finally, Sec. 985.2 gives the OF authority to assess the 
Banks for the funding of its operations in accordance with the 
provisions of Sec. 985.5.
    iii. Functions of the OF. Proposed Sec. 941.2(b)(1) expressly 
provided that the OF could issue COs on which the Banks would be 
jointly and severally liable, on behalf of the Banks and the Finance 
Board under sections 11(a) and 11(c) of the Act, respectively. 12 
U.S.C. 1431(a) and (c). That proposal has been adopted in Sec. 985.3(a) 
of the final rule. Section 985.3 of the final rule goes on to provide 
that the OF shall prepare and issue the combined annual and quarterly 
financial reports for the Bank System, shall function as the Fiscal 
Agent for the Banks, and shall perform such duties and responsibilities 
for the Financing Corporation and the Resolution Funding Corporation as 
may be required under the Finance Board's regulations or the Act.
    iv. Finance Board oversight. Proposed Sec. 941.3 has been 
redesignated as Sec. 985.4 and adopted without other changes from the 
proposal.
    v. Funding of the OF. Proposed Sec. 941.7 incorporated, with modest 
revisions, the existing provisions of the Finance Board's regulations 
regarding the responsibility of the Banks to fund the operations of the 
OF. That section has been redesignated as Sec. 985.5 in the final rule 
and revised to eliminate unnecessary provisions and to more fully 
devolve the responsibility for this process. As adopted, Sec. 985.5 
retains the requirement that the Banks are responsible for jointly 
funding the OF, and makes explicit that this shall include the cost of 
indemnifying the members of the OF board of directors, the Managing 
Director, and other officers and employees of the OF. This requirement 
was added at the urging of several commenters, with whom the Finance 
Board agrees. As proposed, Sec. 985.5(b) of the final rule provides 
that, 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 to maintain sufficient operating funds 
under the budget approved by the OF board of directors. Also as 
proposed, the final rule provides that 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 final rule adopts the 
provision of the proposed rule providing authority for the OF board of 
directors, with the prior approval of the Finance Board, to implement 
an alternative formula for determining each Bank's respective share of 
the OF expenses or, by contract with a Bank or Banks, to 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

[[Page 36296]]

issuance or servicing of COs or for other activities.
    One commenter suggested not using the Banks' paid-in capital as the 
allocation method for assessments on the Banks for the OF operating 
expense, stating that soon there would no longer exist any direct 
connection between the paid-in capital of a member of a Bank and the 
member's advances outstanding. The commenter suggested that the measure 
should more directly approximate the issuance costs for the Bank System 
and recommended further that the measure be the Banks' apportionment of 
the proceeds of aggregate CO issuance for the prior year or quarter. 
While the Finance Board believes that there may be some merit in these 
suggestions, no changes have been made at this time to the final rule. 
The Finance Board has proposed a risk-based capital rule, but it will 
be some time before the new capital system is fully in place. At such 
time as the new capital system has been implemented, the Finance Board 
will consider the need to change this provision of the rule. In the 
interim, the Banks can take advantage of the provision allowing for 
alternative formulae for assessments if the current formula becomes 
unworkable.
    The final rule does not require, as did the proposed rule, that the 
OF's checking account be called the Imprest Fund. The final rule does 
contain new provisions specifying that the OF's operating funds shall 
not be commingled with any proceeds received from the sale of COs, and 
that, pursuant to the provisions of section 2B(b)(1) of the Act, 12 
U.S.C. 1422b(b)(1), none of the OF's operating funds or any of the 
proceeds from the sale of any COs shall be construed to be Government 
funds or appropriated monies or subject to apportionment for the 
purposes of chapter 15 of title 31 of the United States Code or any 
other authority.
    b. Debt management activities. i. Debt management duties of the OF. 
Proposed Sec. 941.2(c) (redesignated as Sec. 985.6(a) in the final 
rule) set out the functions the OF is authorized to undertake in 
support of the issuance of debt; it also set forth functions the OF is 
authorized to undertake in support of joint asset activities which are 
not being addressed at this time. As adopted in Sec. 985.6 of the final 
rule, this section sets out an abbreviated version of the debt 
management duties of the OF proposed in Sec. 941.2(c), including: (1) 
That the OF shall issue and service COs pursuant to and in accordance 
with the policies and procedures established by the OF board of 
directors; (2) that the OF shall prepare and distribute the combined 
annual and quarterly financial reports for the Bank System (discussed 
previously in more detail); (3) that the OF shall manage relationships 
with the NRSROs; (4) that the OF shall conduct research reasonably 
related to the issuance or servicing of COs; and (5) that the OF shall 
timely monitor each Bank's and the Bank System's unsecured credit 
exposure to individual counterparties.
    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).
    ii. Structure of the OF board of directors. The proposed rule would 
have changed the current structure of the OF board of directors to 
accommodate proposed new functions for the OF. As discussed previously, 
no new functions for the OF are being adopted at this time, except the 
preparation of the Bank System's combined annual and quarterly 
financial reports. Therefore, no changes to the structure of the OF 
board of directors are being adopted in the final rule. Although the 
structure is not being changed, provisions relating to compensation and 
governance of the OF board of directors in the final rule have been 
revised to devolve responsibilities to the OF board of directors 
consistent with similar regulatory provisions relating to the boards of 
directors of the Banks.
    Section 985.7 of the final rule maintains the current three-member 
structure of the OF board of directors, composed of 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 well while the OF's only functions have been 
to issue COs and to make CO principal and interest payments when due. 
The Finance Board believes that this structure will continue to serve 
these purposes in an efficient and effective manner, under the 
oversight and supervision of the Finance Board.
    The final rule provides that the directors shall serve three-year 
terms. The initial terms are staggered so that \1/3\ of the terms will 
expire each year. The directors are subject to removal or suspension 
for cause by the Finance Board. The Finance Board fills vacancies, but 
only for the remainder of the term during which the vacancy occurs. 
Section 985.7(c) provides that the private citizen director shall serve 
as the Chair, with the Vice Chair being selected by a majority vote of 
the directors. The Chair is responsible for ensuring that the 
directives, resolutions and minutes of the OF board of directors are 
drafted and maintained.
    Proposed Sec. 941.4(e) (redesignated as Sec. 985.7(d) in the final 
rule) would have replaced the multiple provisions of the current rule 
with a single standard of compensation permitting 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. The final rule maintains the existing compensation 
provisions, with modifications to reflect recent amendments to the 
Finance Board's rules in light of the enactment of Gramm-Leach-Bliley. 
In light of the OF's role, Sec. 985.7 of the final rule also includes a 
new paragraph (e) requiring, rather than merely allowing, the OF to 
indemnify its directors, the Managing Director, and other officers and 
employees of the OF under such terms and conditions as shall be 
determined by the OF board of directors, provided that such terms and 
conditions shall be generally consistent with the terms and conditions 
of indemnification of directors, officers and employees of the Banks 
generally.
    iii. General Duties of the OF board of directors. Section 985.8 of 
the final rule sets forth general duties of the OF board of directors, 
adopting provisions from proposed Sec. 941.6 and applying to the OF 
board of directors appropriate provisions of the Finance Board's 
recently adopted rule on ``Powers and Responsibilities of Federal Home 
Loan Bank Boards of Directors and Senior Management'' at part 917. See 
65 FR 25267 (May 1, 2000). It retains existing requirements that the OF 
board of directors shall adopt bylaws, but provides that it shall do so 
in accordance with the provisions of Sec. 917.10 of the Finance Board's 
regulations, 12 CFR 917.10. It also retains existing requirements 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, but 
goes on to require, consistent with recently adopted provisions of 
Sec. 918.7, that the OF board of directors shall hold no fewer than 
nine meetings annually.
    Section 985.8(c) adopts provisions of proposed Sec. 941.6(b)(2) 
requiring the OF board of directors to establish policies regarding COs 
which shall govern the frequency and timing of issuance, issue

[[Page 36297]]

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, and selection of clearing 
organizations. It also requires that the policies be intended to cause 
CO issuance efficiently and at the lowest all-in funding costs over 
time, consistent with: (i) Prudent risk-management practices, 
prudential debt parameters, short and long-term market conditions, and 
the Banks' role as government-sponsored enterprises; (ii) maintaining 
reliable access to the short-term and long-term capital markets; and 
(iii) positioning the issuance of debt to take advantage of current and 
future capital market opportunities.
    Section 985.8(d) adopts without significant substantive change the 
provisions of proposed Sec. 941.6(b), and 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. The final rule authorizes the OF 
board of directors to approve a strategic business plan for the OF and 
monitor the progress of its operations under such plan; and to review, 
adopt, and monitor the annual operating budget of the OF. The final 
rule requires the OF board of directors to select, employ and define 
the duties of the Managing Director, who shall be the chief executive 
officer of the OF, 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 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). The final rule provides that the OF will be the 
Fiscal Agent of the Banks. Additionally, the final rule requires the OF 
board of directors to review and approve all contracts of the OF. 
Pursuant to the final rule, the OF board of directors will have the 
exclusive authority to employ and contract for the services of an 
independent, external auditor for the Banks' annual and quarterly 
combined financial statements; select, evaluate, determine the 
compensation of, and, where appropriate, replace the internal auditor, 
who may be removed only by vote of the OF board of directors. Under the 
final rule, the OF board of directors will assume any other 
responsibilities that may from time to time be delegated to it by the 
Finance Board. The final rule expressly states that no private rights 
of action are created and none may be deemed to be created under part 
985.
    Also adopted is the provision of proposed Sec. 941.4(f) that 
requires the OF board of directors to establish an audit committee. The 
final rule provides that the OF board of directors shall constitute and 
perform the duties of an audit committee, which to the extent possible 
shall operate consistent with the requirements of Sec. 917.6 and the 
requirements pertaining to audit committee reports set forth in Item 
306 of Regulation S-K promulgated by the SEC.
    Proposed Sec. 941.8, which would have retained a savings clause 
providing 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, is deleted, along with the rest of the provisions of 
current Sec. 941.12 (which were proposed to be deleted) as obsolete and 
no longer necessary. As discussed above, the appropriate savings clause 
applying to pre-existing contracts has been included as Sec. 966.10.
    The new Sec. 989.2 sets forth audit requirements. At the present 
time, the process for selecting the independent outside accountant for 
the Bank System and independent audit requirements is governed by 
Decision Memorandum 95-DM-09 (Feb. 9, 1995), as modified by Resolution 
96-94 (Dec. 12, 1996). These require the Banks to have a single 
independent outside accountant and that this independent outside 
accountant provide a separate opinion on the financial statements on 
each Bank and on the combined financial statements for all of the Banks 
that appears in the annual financial report for the Bank System. 
Although the selection of the independent outside accountant was up to 
the Banks, the Finance Board, as issuer of the COs under section 11(c) 
of the Act, annually ratified the Banks' selection.
    New Sec. 989.2 codifies most of the provisions of Decision 
Memorandum 95-DM-09, with the exception of the requirement that there 
be a single independent outside accountant for each Bank and the Bank 
System. It also removes the Finance Board from any role in selecting or 
ratifying the selection of the independent outside accountant.
    The method of selecting the independent outside accountant must 
change for two reasons. First, the Banks will be taking over the 
function of issuing COs under the authority of section 11(a) of the 
Act, with the OF acting as their agent in issuing and servicing the 
debt and in preparing the Bank System's combined financial reports. 
Section 985.8(d)(7) of the final rule gives the OF board of directors 
the exclusive authority to select the independent outside accountant 
for the combined financial report.
    Second, in its recently adopted governance rule, Sec. 917.7, the 
Finance Board gives the audit committee of each Bank a role in the 
selection or retention of the independent outside accountant for that 
Bank. Section 989.2 of the final rule sets the criteria for selecting 
the independent outside accountant that each Bank and the OF must 
follow.

III. Regulatory Flexibility Act

    The final 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 final rule will not have significant economic impact on a 
substantial number of small entities.

IV. Paperwork Reduction Act

    This final 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.

V. Effective Date

    Because the final rule provides for revisions to the leverage limit 
previously authorized under Finance Board Resolution No. 99-33, dated 
May 28, 1999, which by its terms expires June 30, 2000, the Finance 
Board for good cause finds that the final rule should become effective 
on July 1, 2000. See 5 U.S.C. 553(d)(3).

List of Subjects

12 CFR Part 900

    Administrative practice and procedure.

12 CFR Part 905

    Organization and functions (Government agencies).

12 CFR Part 965

    Federal home loan banks, Finance.

12 CFR Part 966

    Federal home loan banks, Securities.

12 CFR 969

    Federal home loan banks, Finance.

12 CFR Part 985

    Federal home loan banks, Securities.

[[Page 36298]]

12 CFR Part 989

    Accounting, Federal home loan banks, Financial disclosure.

    For the reasons stated in the preamble, the Finance Board hereby 
amends 12 CFR parts 900, 905, 965, 966, 969, 985, and 989 as follows:

PART 900--DEFINITIONS

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

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


    2. Amend Sec. 900.1 to revise the definition of ``Consolidated 
obligations'' to read as follows:


Sec. 900.1  Definitions applying to all regulations.

* * * * *
    Consolidated obligation or CO means any bond, debenture, or note 
authorized under part 966 of this chapter to be issued jointly by the 
Banks pursuant to section 11(a) of the 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 jointly and severally liable.
* * * * *

PART 905--DESCRIPTION OF ORGANIZATION AND FUNCTIONS

    3. The authority citation for part 905 continues to read as 
follows:

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

Subpart C [Removed and Reserved]

    4. Remove and reserve subpart C.

    5. Add part 965 to read as follows:

PART 965--SOURCE OF FUNDS

Sec.
965.1   Definitions.
965.2   Authorized liabilities.
965.3   Liquidity reserves for deposits.

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


Sec. 965.1  Definitions.

    As used in this part:
    Deposits in banks or trust companies means:
    (1) A deposit in another Bank;
    (2) A demand account in a Federal Reserve Bank;
    (3) A deposit in, or a sale of Federal funds to:
    (i) An insured depository institution, as defined in section 
2(12)(A) of the Act (12 U.S.C. 1422(12)(A)), that is designated by a 
Bank's board of directors;
    (ii) A trust company that is a member of the Federal Reserve System 
or insured by the Federal Deposit Insurance Corporation, and is 
designated by a Bank's board of directors; or
    (iii) A U.S. branch or agency of a foreign bank, as defined in the 
International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.), 
that is subject to the supervision of the Board of Governors of the 
Federal Reserve System, and is designated by a Bank's board of 
directors.
    Repurchase agreement means an agreement in which a Bank sells 
securities and simultaneously agrees to repurchase those securities or 
similar securities at an agreed upon price, with or without a stated 
time for repurchase.


Sec. 965.2  Authorized liabilities.

    As a source of funds for business operations, each Bank is 
authorized to incur liabilities by:
    (a) Accepting proceeds from the issuance of consolidated 
obligations issued in accordance with part 966 of this chapter;
    (b) Accepting time or demand deposits from members, other Banks or 
instrumentalities of the United States, and cash accounts from members 
or associates pursuant to Sec. Sec. 969.2, 950.24(b)(2)(i)(B), 
950.24(d) or 961.4(a)(1), or other institutions for which the Bank is 
providing correspondent services pursuant to section 11(e) of the Act 
(12 U.S.C. 1431(e));
    (c) Purchasing Federal funds; and
    (d) Entering into repurchase agreements.


Sec. 965.3  Liquidity reserves for deposits.

    Each Bank shall at all times have at least an amount equal to the 
current deposits received from its members invested in:
    (a) Obligations of the United States;
    (b) Deposits in banks or trust companies; or
    (c) Advances with a maturity of not to exceed five years that are 
made to members in conformity with part 950 of this chapter.

    6. Revise part 966 to read as follows:

PART 966--CONSOLIDATED OBLIGATIONS

Sec.
966.1   Definitions.
966.2   Issuance of consolidated obligations.
966.3   Leverage limit and credit rating requirements.
966.4   Form of consolidated obligations.
966.5   Transactions in consolidated obligations.
966.6   Lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.
966.7   Administrative provision.
966.8   Conditions for issuance of consolidated obligations.
966.9   Joint and several liability.
966.10   Savings clause.

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


Sec. 966.1  Definitions.

    For purposes of this part:
    Financial Management Policy (FMP) has the meaning set forth in 
Sec. 956.1 of this chapter.
    NRSRO means a credit rating organization regarded as a Nationally 
Recognized Statistical Rating Organization by the Securities and 
Exchange Commission.


Sec. 966.2  Issuance of consolidated obligations.

    (a) 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. 
The Finance Board in its discretion from time to time may delegate this 
by resolution of the Board of Directors of the Finance Board, or may 
terminate such delegation.
    (b) 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 the provisions of this 
part and 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. 966.9 of this part.
    (2) Consolidated obligations shall be issued only through the 
Office of Finance, as agent of the Banks pursuant to this part and part 
985.
    (3) The authorization contained herein shall be deemed to 
constitute satisfaction of the requirement for Finance Board approval 
of the ``terms and conditions'' of the consolidated obligations 
pursuant to section 11(a) of the Act (12 U.S.C. 1431(a)).
    (c) Negative pledge requirement. Each Bank shall at all times 
maintain assets

[[Page 36299]]

described in paragraphs (c)(1) through (c)(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)) and 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 
(c). 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 therefor, 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 that NRSRO to consolidated obligations 
outstanding.


Sec. 966.3  Leverage limit and credit rating requirements.

    (a) Bank leverage. (1) Except as provided in paragraph (a)(2) of 
this section, the total assets of any Bank shall not exceed 21 times 
the total of paid-in capital stock, retained earnings, and reserves 
(excluding loss reserves and liquidity reserves for deposits pursuant 
to 12 U.S.C. 1431(g)) of that Bank.
    (2) The aggregate amount of assets of any Bank may be up to 25 
times the total paid-in capital stock, retained earnings, and reserves 
of that Bank, provided that non-mortgage assets, after deducting the 
amount of deposits and capital, do not exceed 11 percent of such total 
assets. For the purposes of this section, the amount of non-mortgage 
assets equals total assets after deduction of core mission activity 
assets and assets described in sections II.B.8 through II.B.11 of the 
FMP.
    (b) Credit ratings. (1) The Banks, collectively, shall obtain from 
an NRSRO and, at all times, maintain a current credit rating on the 
Banks' consolidated obligations.
    (2) Each Bank shall operate in such a manner and take any actions 
necessary, including without limitation reducing Bank leverage, to 
ensure that the Banks' consolidated obligations receive and continue to 
receive the highest credit rating from any NRSRO by which the 
consolidated obligations have then been rated.
    (c) Individual Bank credit rating. Each Bank shall operate in such 
a manner and take any actions necessary to ensure that the Bank has and 
maintains an individual issuer credit rating of at least the second 
highest credit rating from any NRSRO providing a rating, where such 
rating is a meaningful measure of the individual Bank's financial 
strength and stability, and is updated at least annually by an NRSRO, 
or more frequently as required by the Finance Board, to reflect any 
material changes in the condition of the Bank.
    (d) Transition provision. Each Bank shall obtain the credit rating 
from an NRSRO required under paragraph (c) of this section by July 1, 
2001.


Sec. 966.4  Form of consolidated obligations.

    (a) All consolidated obligations shall be issued in pari passu.
    (b) Consolidated obligations with maturities of one year or less 
may be designated consolidated notes.


Sec. 966.5  Transactions in consolidated obligations.

    The general regulations of the Department of the Treasury now or 
hereafter in force governing transactions in United States securities, 
except 31 CFR part 357 regarding book-entry procedure, are hereby 
incorporated into this part 966, 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 987 of this subchapter.


Sec. 966.6  Lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.

    United States statutes and regulations of the Department of the 
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. 966.7  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. 966.5 and 966.6, and 
to delegate such authority at their discretion to other officers, 
employees, and agents of the Department of the Treasury. Any such 
regulations may be waived on behalf of the Finance Board and the Banks 
by the Secretary of the Treasury, the Acting Secretary of the Treasury, 
or by an officer of the Department of the 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. 966.8  Conditions for issuance of consolidated obligations.

    (a) 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. 
9108.
    (b) COs may be offered for sale only to the extent that Banks are 
committed to take the proceeds.
    (c) COs shall not be directly placed with any Bank.


Sec. 966.9  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 Act (12 U.S.C. 1431(c)) 
and by the Banks pursuant to section 11(a) of the 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

[[Page 36300]]

in section 11(g) of the Act (12 U.S.C. 1431(g)), and the Finance 
Board's FMP 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 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 part 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.


Sec. 966.10  Savings clause.

    Any agreements or other instruments entered into in connection with 
the issuance of COs prior to the amendments made to this part shall 
continue in effect with respect to all COs issued under the authority 
of section 11 of the Act and pursuant to this part. References to 
consolidated obligations in such agreements and instruments shall be 
deemed to refer to all joint and several obligations of the Banks.

PART 969--DEPOSITS

    7. The authority citation for part 969 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b(a)(1) and 1431.


Sec. 969.3  [Removed]

    8. Remove Sec. 969.3.

    9. Revise part 985 to read as follows:

PART 985--THE OFFICE OF FINANCE

Sec.
985.1   Definitions.
985.2   Authority of the OF.
985.3   Functions of the OF.
985.4   Finance Board oversight.
985.5   Funding of the OF.
985.6   Debt management duties of the OF.
985.7   Structure of the OF board of directors.
985.8   General duties of the OF board of directors.
Appendix A to Part 985--Exceptions to the General Disclosure 
Standards


Sec. 985.1  Definitions.

    For purposes of this part:
    Bank System means the Banks and the Office of Finance.
    Chair means the Chairperson of the board of directors of the Office 
of Finance.
    Managing Director means the managing director of the Office of 
Finance.
    OF means the Office of Finance, a joint office of the Banks 
pursuant to

[[Page 36301]]

section 2B of the Act (12 U.S.C. 1422b(b)(2)).


Sec. 985.2  Authority of the OF.

    (a) General. The OF 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 execution of its 
duties and functions pursuant to this part, including the authority to 
contract with a Bank or Banks for the use of Bank facilities or 
personnel in order to perform its functions or duties.
    (b) Agent. The OF 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) By delegation of the Finance Board under Sec. 966.2 of this 
chapter 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) Assessments. The OF shall have authority to assess the Banks 
for the funding of its operations in accordance with Sec. 985.5.


Sec. 985.3  Functions of the OF.

    (a) Joint debt issuance. Subject to parts 965 and 966 of this 
chapter, and this part, the OF as agent shall offer, issue and service 
(including making timely payments on principal and interest due) 
consolidated obligations on which the Banks are jointly and severally 
liable on behalf of the Finance Board pursuant to section 11(c) of the 
Act (12 U.S.C. 1431(c), or the Banks pursuant to section 11(a) of the 
Act (12 U.S.C. 1431(a)).
    (b) Preparation of combined financial reports. The OF shall prepare 
and issue the combined annual and quarterly financial reports for the 
Bank System in accordance with the requirements of Sec. 985.6(b) and 
Appendix A of this part.
    (c) Fiscal agent. The OF shall function as the Fiscal Agent of the 
Banks.
    (d) Financing Corporation and Resolution Funding Corporation. The 
OF shall perform such duties and responsibilities for the Financing 
Corporation (FICO) as may be required under part 995 of this chapter, 
or for the Resolution Funding Corporation (REFCorp) as may be required 
under part 996 of this chapter or authorized by the Finance Board 
pursuant to section 21B(c)(6)(B) of the Act (12 U.S.C. 1441b(c)(6)(B)).


Sec. 985.4  Finance Board oversight.

    (a) Oversight and enforcement actions. The Finance Board shall have 
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 985, and the operations 
and activities of the OF, as provided for in the Act or any regulations 
promulgated pursuant thereto.


Sec. 985.5  Funding of the OF.

    (a) Generally. The Banks are responsible for jointly funding all of 
the expenses of the Office of Finance, including the costs of 
indemnifying the members of the OF board of directors, the Managing 
Director and other officers and employees of the OF, as provided for in 
this part.
    (b) Funding policies. (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 in order to maintain 
sufficient operating funds under the budget approved by the OF board of 
directors. The OF operating funds shall be:
    (i) Available for expenses of the Office of Finance and the OF 
board of directors, according to their approved budgets; and
    (ii) Subject to withdrawal by check, wire transfer or draft signed 
by the Managing Director or other person designated 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.
    (c) Alternative formula for assessment. 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.
    (d) Prompt reimbursement. Each Bank from time to time shall 
promptly forward funds to the OF in an amount representing its share of 
the reimbursement described in paragraph (b) of this section when 
directed to do so by the Managing Director pursuant to procedures of 
the OF board of directors.
    (e) Indemnification expenses. All expenses incident to 
indemnification of the members of the OF board of directors, the 
Managing Director, and other officers and employees of the OF shall be 
treated as an expense of the OF to be reimbursed by the Banks under the 
provisions of this part.
    (f) Operating funds shall be segregated. (1) Any funds received by 
the OF from the Banks pursuant to this section for OF operating 
expenses promptly shall be deposited into one or more accounts and 
shall not be commingled with any proceeds from the sale of consolidated 
obligations in any manner.
    (2) Neither the proceeds from the sale of consolidated obligations 
under part 966, nor any operating expense reimbursements received by 
the OF from assessments on the Banks under this section shall be 
construed to be Government Funds or appropriated monies or subject to 
apportionment for the purposes of chapter 15 of title 31 of the United 
States Code, or any other authority, in accordance with section 
2B(b)(1) of the Act (12 U.S.C. 1422b(b)(1)).


Sec. 985.6  Debt management duties of the OF.

    (a) Issuance and servicing of COs. The OF shall issue and service 
(including making timely payments on principal and interest due, 
subject to Secs. 966.8 and 966.9 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.
    (b) Combined financial reports requirements. The OF shall prepare 
and distribute the combined annual and quarterly financial reports for 
the Bank System in accordance with the following requirements:
    (1) 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).
    (2) 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.
    (3) The standards set forth in paragraphs (b)(1) and (2) of this 
section

[[Page 36302]]

are subject to the exceptions set forth in the Appendix to this part.
    (4) The combined Bank System annual report shall be filed with the 
Finance Board and distributed to each Bank and Bank member within 90 
days after the end of the fiscal year. The combined Bank System 
quarterly reports shall be filed with the Finance Board and distributed 
to each Bank and Bank member within 45 days after the end of the first 
three fiscal quarters of each year.
    (5) The Finance Board in its sole discretion shall determine 
whether or not a combined Bank System annual or quarterly financial 
report complies with the standards of this part.
    (6) The OF board of directors shall comply promptly with any 
directive of the Finance Board regarding the preparation, filing, 
amendment or distribution of the combined Bank System annual or 
quarterly financial reports.
    (7) Nothing in this section shall create or be deemed to create any 
rights in any third party.
    (c) Capital markets data. The OF board of directors shall provide 
capital markets information concerning debt to the Banks.
    (d) NRSROs. The OF board of directors shall manage relationships 
with Nationally Recognized Statistical Rating Organizations in 
connection with their rating of consolidated obligations.
    (e) Research. The OF shall conduct research reasonably related to 
the issuance or servicing of consolidated obligations.
    (f) Monitor Banks' credit exposure. The OF shall timely monitor 
each Bank's and the Bank System's unsecured credit exposure to 
individual counterparties.


Sec. 985.7  Structure of the OF board of directors.

    (a) Membership. The OF board of directors shall consist of three 
part-time members appointed by the Finance Board as follows:
    (1) Two Bank Presidents; and
    (2) A citizen of the United States with a demonstrated expertise in 
financial markets. Such appointee may not be an officer, director or 
employee of a Bank or Bank System member, hold shares, or any other 
financial interest in, any member of a Bank, or be affiliated with any 
consolidated obligation selling or dealer group member under contract 
with the OF.
    (b) Terms. (1) Except as provided in paragraph (b)(2) of this 
section, the members of the OF board of directors shall serve for 
three-year terms (which shall be staggered), and shall be subject to 
removal or suspension for cause by the Finance Board.
    (2) The Finance Board shall fill any vacancy occurring on the OF 
board of directors. An appointment to fill a vacancy shall be only for 
the remainder of the term during which the vacancy occurred.
    (3) Any member of the OF board of directors is authorized to 
continue to serve on the OF board of directors after the expiration of 
the member's term until a successor has been appointed by the Finance 
Board.
    (c) Chair. (1) The private citizen member of the OF board of 
directors shall serve as the Chair, and the Vice Chair shall be 
selected by a majority vote of the members of the OF board of 
directors.
    (2) The Chair shall preside over the meetings of the OF board of 
directors. In the absence of the Chair, the Vice Chair shall preside.
    (3) The Chair shall be 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.
    (d) Compensation. (1) The Bank President members shall not receive 
any additional compensation or reimbursement as a result of their 
service on the OF board of directors.
    (2) Each Bank shall be entitled to be reimbursed by from the Office 
of Finance for its expenditure of travel and per diem expenses 
associated with its Bank President's attendance at an OF board of 
directors meeting as a director member thereof.
    (3) The Office of Finance shall pay compensation and expenses to 
the private citizen member of the OF board of directors in accordance 
with the requirements for payment of compensation and expenses to Bank 
chairs as set forth in part 918 of this chapter.
    (e) Indemnification. (1) The OF board of directors shall indemnify 
its members, the Managing Director, and other officers and employees of 
the OF under such terms and conditions as shall be determined by the OF 
board of directors, 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) The OF board of directors shall adopt indemnification 
procedures, which shall be supplemented by a contract of insurance.
    (f) Delegation. The OF board of directors may delegate any of its 
authority or duties to any employee of the OF in order to enable the OF 
to carry out its functions.


Sec. 985.8  General duties of the OF board of directors.

    (a) General. (1) Conduct of business. Each director shall have the 
duties prescribed in Sec. 917.2(b) of this chapter, as appropriate.
    (2) Bylaws. The OF board of directors shall adopt bylaws in 
accordance with the provisions of Sec. 917.10 of this chapter.
    (b) Meetings and quorum. The OF board of directors shall conduct 
its business by majority vote of its members at meetings convened in 
accordance with its bylaws, and shall hold no fewer than nine meetings 
annually. Due notice shall be given to the Finance Board by the Chair 
prior to each meeting. A quorum, for purposes of meetings of the OF 
board of directors, shall be not less than two members.
    (c) Duties regarding COs. The OF board of directors shall establish 
policies regarding COs that shall:
    (1) Govern the frequency and timing of issuance, issue size, 
minimum denomination, CO 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, which 
shall be in accordance with the requirements and limitations set forth 
in paragraph (c)(4) of this section;
    (2) Prohibit the issuance of COs intended to be privately placed 
with or sold without the participation of an underwriter to retail 
investors, or issued with a concession structure designed to facilitate 
the placement of the COs in retail accounts, unless the OF has given 
notice to the board of directors of each Bank describing a policy 
permitting such issuances, soliciting comments from each Bank's board 
of directors, and considering the comments received before adopting a 
policy permitting such issuance activities;
    (3) Require all broker-dealers or underwriters under contract to 
the OF to have and maintain adequate suitability sales practices and 
policies, which shall be acceptable to, and subject to review by, the 
Office of Finance;
    (4) Require that COs shall be issued efficiently and at the lowest 
all-in funding costs over time, consistent with:
    (i) Prudent risk-management practices, prudential debt parameters, 
short and long-term market conditions, and the Banks' role as 
government-sponsored enterprises;

[[Page 36303]]

    (ii) Maintaining reliable access to the short-term and long-term 
capital markets; and
    (iii) Positioning the issuance of debt to take advantage of current 
and future capital market opportunities.
    (d) Other duties. The OF board of directors shall:
    (1) Set policies for management and operation of the OF;
    (2) Approve a strategic business plan for the OF in accordance with 
the provisions of Sec. 917.5 of this chapter, as appropriate;
    (3) Review, adopt and monitor annual operating and capital budgets 
of the OF in accordance with the provisions of Sec. 917.8 of this 
chapter, as appropriate;
    (4) Constitute and perform the duties of an audit committee, which 
to the extent possible shall operate consistent with:
    (i) The requirements of Sec. 917.6 of this chapter, and
    (ii) The requirements pertaining to audit committee reports set 
forth in Item 306 of Regulation S-K promulgated by the Securities and 
Exchange Commission.
    (5) Select, employ, determine the compensation for, and assign the 
duties and functions of a Managing Director of the OF who shall:
    (i) Be the chief executive officer for the OF and shall direct the 
implementation of the OF board of directors' policies;
    (ii) Serve as 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) Serve as 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;
    (7) Have the exclusive authority to employ and contract for the 
services of an independent, external auditor for the Banks' annual and 
quarterly combined financial statements;
    (8) Select, evaluate, determine the compensation of, and, where 
appropriate, replace the internal auditor, who may be removed only by 
vote of the OF board of directors; and
    (9) Assume any other responsibilities that may from time to time be 
delegated to it by the Finance Board.
    (e) No rights created. Nothing in this part shall create or be 
deemed to create any rights in any third party.

Appendix A to Part 985--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 ten holders of 
advances in the Bank System and the top five 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 Managing Director 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 Managing Director of the OF. Since stock 
in each Bank trades at par, the Office of Finance 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 ten largest holders of capital stock in the Bank 
System and a listing of the five 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.

PART 989--FINANCIAL STATEMENTS OF THE BANKS

    10. The authority citation for part 989 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, 1431 and 1440.

    11. Add Sec. 989.1 to read as follows:


Sec. 989.1  Definitions.

    For purposes of this part:
    Audit means an examination of the financial statements by an 
independent accountant in accordance with Generally Accepted Accounting 
Principles for the purpose of expressing an opinion thereon.
    Audit report means a document in which an independent accountant 
indicates the scope of the audit made and sets forth an opinion 
regarding the financial statement taken as a whole, or an assertion to 
the effect that an overall opinion cannot be expressed. When an overall 
opinion cannot be expressed, the reasons therefor shall be stated.


Secs. 989.2 and 989.3  [Redesignated]

    12. Redesignate Secs. 989.2 and 989.3 as Secs. 989.3 and 989.4, 
respectively.

    13. Add Sec. 989.2 to read as follows:


Sec. 989.2  Audit requirements.

    (a) Each Bank, the OF and the Financing Corporation shall obtain 
annually an independent, external audit of and an audit report on its 
individual financial statement.
    (b) The OF board of directors shall obtain an audit and an audit 
report on the combined annual financial statements for the Bank System.
    (c) All audits must be conducted in accordance with generally 
accepted auditing standards and in accordance with the most current 
government auditing standards issued by the Office of the Comptroller 
General of the United States.
    (d) An independent, external auditor must meet at least twice each 
year with the audit committee of each Bank, the OF board of directors, 
and the Financing Corporation Directorate.
    (e) Finance Board examiners shall have unrestricted access to all 
auditors' work papers and to the auditors to address substantive 
accounting issues that may arise during the course of any audit.

    14. Revise newly designated Sec. 989.3 to read as follows:


Sec. 989.3  Requirement to provide financial and other information to 
the Finance Board and the Office of Finance.

    In order to facilitate the preparation by the Office of Finance of 
combined Bank System annual and quarterly reports, each Bank shall 
provide to the Office of Finance in such form and within such 
timeframes as the Finance Board or the Office of Finance shall specify, 
all financial and other information and assistance the Office of 
Finance shall request for that purpose. Nothing in this section shall 
contravene or be deemed to circumscribe in any manner the authority of 
the Finance Board to obtain any information from any Bank related to 
the preparation or review of any financial report.

[[Page 36304]]

Sec. 989.4  [Amended]

    15. Amend newly designated Sec. 989.4 by removing the words 
``Finance Board'' wherever they appear and adding in their place the 
words ``Office of Finance.''

    Dated: June 2, 2000.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-14366 Filed 6-6-00; 8:45 am]
BILLING CODE 6725-01-P