[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Rules and Regulations]
[Pages 40635-40651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13831]



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  Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Rules 
and Regulations  

[[Page 40635]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 620, 621, 650, 651, 652, 653, 654, and 655

RIN 3052-AC18


Disclosure to Shareholders; Accounting and Reporting 
Requirements; Federal Agricultural Mortgage Corporation General 
Provisions; Federal Agricultural Mortgage Corporation Governance; 
Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; 
Federal Agricultural Mortgage Corporation Disclosure and Reporting 
Requirements

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, our, or we) issues this 
final rule governing the Federal Agricultural Mortgage Corporation 
(Farmer Mac or the Corporation) in the areas of non-program investments 
and liquidity. The intent of the rule is to ensure that Farmer Mac 
continues to hold high-quality, liquid investments to maintain a 
sufficient liquidity reserve, invest surplus funds, and manage 
interest-rate risk, while maintaining non-program investments at 
appropriate levels considering Farmer Mac's status as a Government-
sponsored enterprise.

EFFECTIVE DATE: This regulation will be effective 30 days after 
publication in the Federal Register during which time either or both 
Houses of Congress are in session. We will publish a notice of the 
effective date in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Joseph T. Connor, Associate Director 
for Policy and Analysis, Office of Secondary Market Oversight, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4364; TTY (703) 
883-4434; or Jennifer A. Cohn, Senior Attorney, Office of General 
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Farmer Mac's long-term liquidity is dependent on its ability to 
obtain funding from the securities markets. To aid in assuring market 
access, sources of liquid and low-risk investments are needed to 
provide liquidity in the short-term in the event of market disruptions 
or aberrations. The primary objectives of the final rule are to ensure 
the safety and soundness and continuity of Farmer Mac operations by:
     Establishing minimum liquidity standards that would 
require Farmer Mac to hold sufficient high-quality, marketable 
investments to provide adequate liquidity to fund maturing obligations, 
interest expense, and operating expenses for a minimum of 60 days;
     Specifying the type, quality, and maximum amount (or 
limit) of non-program investments \1\ that may be held by Farmer Mac;
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    \1\ Pursuant to title VIII of the Farm Credit Act of 1971, as 
amended (Act), Farmer Mac issues debt in order to purchase or commit 
to purchase (invest in) ``program'' assets and obligations under the 
Corporation's core programs known as the Farmer Mac I Program and 
the Farmer Mac II Program. Under these programs, Farmer Mac 
purchases, or commits to purchase, ``qualified loans,'' as that term 
is defined in section 8.0(9) of the Act. Generally, ``qualified 
loans'' consist of loans on agricultural real estate or portions of 
loans guaranteed by the United States Department of Agriculture. 
Under section 8.0(1) of the Act, ``agricultural real estate'' 
includes both (1) a parcel or parcels of land or a building or 
structure affixed to the parcel or parcels that is used for the 
production of one or more agricultural commodities or products and 
(2) single-family, moderately priced principal residential dwellings 
located in rural areas. In this supplementary information, we refer 
to loans made on this latter type of real estate as ``rural housing 
mortgages.'' The rule defines investments other than those in (1) 
``qualified loans,'' or (2) securities collateralized by ``qualified 
loans,'' as ``non-program'' investments.
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     Establishing diversification requirements, including 
portfolio limits on specific types of investments and counterparty 
exposure limits; and
     Requiring Farmer Mac's board of directors to approve 
liquidity and non-program investment management policies and implement 
appropriate internal controls to oversee the investment and liquidity 
management of the Corporation.
    Another objective of this proposal is to better organize current 
regulatory sections pertaining to Farmer Mac, details of which are 
discussed in section V. below.

II. Background

    On June 14, 2004, we published a proposed regulation for public 
comment.\2\ As discussed in the proposed rule's supplementary 
information, we proposed these regulations because Farmer Mac has grown 
significantly in the past 10 years in terms of on-balance sheet assets 
and off-balance sheet obligations. We believe its exposure to various 
business risks, including liquidity risk, also has grown and could grow 
significantly in the future. In addition, excessive or inappropriate 
use of non-program investments is not consistent with the Corporation's 
status as a Government-sponsored enterprise (GSE). This rule seeks to 
enhance both safety and soundness and the program focus of the 
Corporation.
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    \2\ 69 FR 32905.
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III. Comments

    We received four comment letters on the proposed rule; two from 
Farmer Mac, and one each from the Farm Credit Bank of Texas (FCBT) and 
AgFirst Farm Credit Bank (AgFirst). In general, the comments consider 
the proposed rule's provisions to be inappropriately detailed, 
specific, and restrictive. Specific comments are discussed in the next 
section of this supplementary information.

IV. FCA's Summary of the Provisions of the Final Rule and Responses to 
Comments on the Proposed Rule

    We begin by summarizing and responding to general comments on the 
proposed rule and then provide a section-by-section summary of 
provisions of the final rule. This summary includes a discussion of the 
comments on the proposed rule and FCA's responses to the comments.

A. General Comments

    Farmer Mac and AgFirst commented that, in general, policies and 
procedures for investments, liquidity and the management of interest 
rate risk are best left to the Corporation's board of directors, with 
FCA oversight through the examination process. FCBT echoed this general 
view, adding that any regulations should be flexible enough to

[[Page 40636]]

allow management the capability to react quickly to changing 
circumstances. All three commenters suggested that the level of 
specificity in the proposed rule could result in Farmer Mac's 
management being constrained to an undesirable degree under certain 
conditions.
    In responding to these concerns we note that a primary objective of 
the rule is to establish a regulatory framework governing non-program 
investments and liquidity. This framework includes several quantitative 
limits on which the liquidity policies of the Corporation are to be 
based. We intend this regulatory framework to provide management with 
an enhanced level of guidance with which to structure the Corporation's 
internal policies on liquidity and non-program investments as well as 
to establish FCA standards of acceptability through quantitative limits 
on these measurements.
    One specific requirement, the minimum liquidity reserve requirement 
(Farmer Mac must hold liquid investments sufficient to fund at least 60 
days of maturing obligations, interest expense, and operating expenses) 
\3\ should not be viewed as a target but as the minimum acceptable 
level under normal financial market conditions. The Corporation must 
also implement internal policy targets for days-of-liquidity. We 
believe the 60-day minimum provides the Corporation sufficient 
flexibility to manage liquidity under a variety of conditions and 
circumstances.
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    \3\ Also referred to in this supplementary information as 
``days-of-liquidity.''
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    We believe the provisions of the final rule achieve greater clarity 
of FCA guidance and expectations on internal policymaking for Farmer 
Mac while both avoiding an excessive level of specificity and 
minimizing the potential for imposing unnecessary constraints that 
could adversely impact Farmer Mac's operations.
    In their comments, Farmer Mac and FCBT expressed a preference for a 
regulatory approach similar to that in place for Farm Credit System 
(FCS) banks' investments and liquidity. We note that the approaches are 
similar in areas such as investment categories, category limits, 
obligor limits, and discounts, because we believe certain regulatory 
approaches and quantitative limits on liquidity and investments are 
reasonably applied to a wide variety of types of financial 
institutions. However, there are valid reasons to adopt differing 
regulatory approaches in certain areas because of the differences in 
the types of business conducted by the regulated institutions (e.g., 
Farmer Mac's large proportion of mortgage assets and off-balance sheet 
obligations relative to direct lenders). Other differences may exist in 
areas in which the approach governing FCS banks is not the only 
reasonable regulatory approach.
    In response to the commenters' contention that FCA should exercise 
its oversight authority over non-program and liquidity management 
through its examinations rather than through regulation, we state that 
while examinations are an integral component of our oversight, it is 
inappropriate for FCA to rely solely on examinations. Regulations are 
another oversight tool; they enhance the examination process by 
establishing clearly understood requirements in advance, thus enabling 
the reduction of potential problems that might become examination 
findings absent those regulations.

B. Section 652.1--Purpose

    This section provides the user with a basic understanding of the 
contents and purpose of this subpart. The purpose of this subpart is to 
ensure safety and soundness, continuity of funding, and appropriate use 
of non-program investments considering Farmer Mac's status as a GSE. It 
also highlights responsibilities of Farmer Mac's board of directors and 
management. No comments specific to this section were received and none 
of its provisions were changed in the final rule.

C. Section 652.5--Definitions

    This section alphabetically lists words or phrases that are 
applicable to this subpart and will help the user more fully understand 
the subpart and our requirements. Most of the definitions are self-
explanatory, but one definition will benefit from explanation.
    The definition of ``Government-sponsored agency'' includes 
Government-sponsored enterprises such as Fannie Mae and the Federal 
Home Loan Mortgage Corporation (Freddie Mac), as well as Federal 
agencies, such as the Tennessee Valley Authority, that issue 
obligations that are not explicitly guaranteed by the Government of the 
United States' full faith and credit. The definition in the final rule 
is slightly different from that in our proposal, although the meaning 
is the same; we have clarified that the term includes corporations, as 
well as agencies or instrumentalities, that are chartered or 
established to serve public purposes specified by Congress, and also 
that it includes GSEs. This information was provided in the 
supplementary information to the proposed rule but was not explicitly 
stated in the rule itself.
    No comments specific to this section were received but several of 
its provisions were changed for clarity in the final rule in response 
to comments on other sections. Specifically, we are adding definitions 
for ``program assets'' and ``program obligations'' and are substituting 
``regulatory capital'' for ``total capital.''

D. Section 652.10--Investment Management and Requirements

    This section requires Farmer Mac to establish and follow certain 
fundamental practices to effectively manage risks in its investment 
portfolio. An effective risk management process for investments 
requires financial institutions to establish: (1) Policies; (2) risk 
limits; (3) a mechanism for identifying, measuring, and reporting risk 
exposures; and (4) a strong system of internal controls. Accordingly, 
Sec.  652.10 requires Farmer Mac's board of directors to adopt written 
policies that establish risk limits and guide the decisions of 
investment managers. More specifically, board policies must establish 
objective criteria so investment managers can prudently manage credit, 
market, liquidity, and operational risks. Additionally, Sec.  652.10 
establishes other controls that are consistent with sound business 
practices, such as:
    (1) Clear delegation of responsibilities and authorities to 
investment managers;
    (2) Separation of duties;
    (3) Timely and effective securities valuation practices; and
    (4) Routine reports on investment performance.
    Both Farmer Mac and FCBT objected to the proposed rule's pre-
purchase and pre-sale securities valuation requirements for non-program 
investments, found in Sec.  652.10(f). Farmer Mac commented generally 
that because its board has established and monitors policies and 
procedures governing the valuation process for securities purchased and 
internal controls of investment management, there is no need for FCA to 
adopt a regulation prescribing the details of such policies and 
procedures.
    We agree that Farmer Mac should have flexibility in establishing 
its policies and procedures governing securities valuation. However, 
because of the potentially serious consequences of valuation errors, 
our regulations set forth basic requirements for Farmer Mac's policies 
and procedures. We believe, in general, that proposed Sec.  652.10(f) 
permits sufficient flexibility for Farmer Mac. Accordingly, the final 
rule retains the general structure of the

[[Page 40637]]

proposed rule, although we have made some changes in response to 
comments on specific provisions of this section.
    Section 652.10(f)(1) of the proposed regulation required Farmer Mac 
to evaluate a security's credit quality prior to purchase. In the 
supplementary information explaining this proposed provision, we stated 
that Farmer Mac:

may not rely exclusively on NRSRO \4\ ratings prior to purchasing 
investments. An independent and timely evaluation performed by 
Farmer Mac is needed because there may be a lag before an adverse 
event is reflected in the credit rating. Therefore, Farmer Mac's 
analysis must indicate whether the security's risk has changed 
subsequent to the most recent NRSRO rating.
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    \4\ Nationally recognized statistical rating organization.

    Farmer Mac commented that the proposed regulation, as interpreted 
by the supplementary information, effectively required Farmer Mac to 
``second guess'' the NRSROs and would not be practical. The FCBT made a 
similar comment. Farmer Mac was concerned that its practice of 
routinely monitoring rating watch lists and news reports for recent 
events that could indicate stress in individual businesses and industry 
sectors might not be sufficient to satisfy FCA.
    We reiterate that, because of potential lags before NRSRO ratings 
reflect adverse events, Farmer Mac must evaluate a security's risk 
subsequent to its most recent rating. Section 652.10(f)(1) does not, 
however, require a particular method of evaluating a security's risk. 
Farmer Mac may use any reliable approach to monitoring this risk. As a 
good business practice, Farmer Mac should retain documentation of its 
evaluation.
    Section 652.10(f)(1) of the proposed rule required Farmer Mac, 
among other things, to ``verify the value of a security that [it] 
plan[s] to purchase, other than a new issue, with a source that is 
independent of the broker, dealer, counterparty, or other intermediary 
of the transaction.'' Farmer Mac commented that no benefit would be 
provided by requiring alternative price quotes because it would not 
necessarily afford Farmer Mac the opportunity to purchase the 
investment at the same or a better price.
    FCA makes no change to this pre-purchase independent valuation 
verification requirement in the final rule. Accurate securities 
valuation is essential to measuring risk and monitoring compliance with 
Farmer Mac's objectives and risk parameters. Such valuation practices 
by the Corporation enable managers to better understand the risks and 
cashflow characteristics of their investments.
    In addition, we note that, as stated in the supplementary 
information to the proposed rule, independent verification of price can 
be as simple as obtaining a price from an industry-recognized 
information provider. Farmer Mac may satisfy this requirement by 
independently verifying the price of a security with an online market 
reporting service such as Bloomberg, Telerate, or Reuters. We believe 
the benefits of this provision exceed any added burden on Farmer Mac.
    Section 652.10(f)(1) of the proposed rule also would have required 
Farmer Mac, before it purchases a security, to document the size and 
liquidity of the secondary market for the security. The supplementary 
information stated that we expected Farmer Mac to monitor and update 
this information as market conditions change. Farmer Mac commented that 
this requirement is vague and difficult to accomplish, would be unduly 
time consuming, and would lead to missed investment opportunities. The 
FCBT commented that the requirement is not necessary for certain types 
of very high quality securities commonly known to trade in active 
secondary markets, such as agency-issued mortgage-backed securities. 
The FCBT also pointed out that the regulation does not specify what 
form the documentation should take.
    We agree that satisfying this documentation requirement could 
present a challenge in some instances and have removed this 
documentation requirement from the rule. We affirm the Agency's view 
that such documentation is a good business practice.
    Section 652.10(c)(2) of the proposed rule required Farmer Mac to 
evaluate how individual instruments and the investment portfolio as a 
whole affect the Corporation's overall interest rate profile. We have 
removed this requirement in the final rule. We believe that the 
limitations on the investment portfolio in Sec.  652.35 of this rule, 
combined with our oversight of Farmer Mac's internal procedures on 
interest rate risk management, warrant this removal.
    Section 652.10(c)(1)(ii) of the proposed rule provided that Farmer 
Mac's board must approve any changes to securities firms. Farmer Mac 
commented that, although it may be appropriate for the board to 
establish criteria for the selection of securities firms, the selection 
or removal of firms meeting the criteria is properly a function of 
management, with oversight by the board for compliance with board 
policy. We agree with this comment and have revised the provision to 
require pre-change notification to the board, or a designated 
subcommittee of the board, instead of board approval of the change.
    We emphasize that the selection of securities firms is an important 
aspect of effective management of counterparty credit risk. A 
satisfactory approval process includes a review of each firm's 
financial statements and an evaluation of its ability to honor its 
commitments, including an inquiry into the general reputation of the 
securities firm. We expect Farmer Mac to review information from 
Federal or state securities regulators and industry self-regulatory 
organizations, such as the National Association of Securities Dealers, 
concerning any formal enforcement actions against the securities firm, 
its affiliates, or associated personnel.

E. Section 652.15--Interest Rate Risk Management and Requirements

    Because interest rate risk management is such an important part of 
investment management, Sec.  652.15 establishes certain 
responsibilities of Farmer Mac's board of directors and management as 
well as policy requirements to address the management of interest rate 
risk exposure. The regulations outline our minimum expectations for the 
management of interest rate risk exposure.
    The potentially adverse effect that interest rate risk may have on 
net interest income and the market value of Farmer Mac's equity is of 
particular importance. Unless properly measured and managed, interest 
rate changes can have significant adverse effects on Farmer Mac's 
ability to generate earnings, build net worth, and maintain liquidity. 
We received no comments specific to this section. Other than two self-
explanatory, minor clarifications, we made no changes to this provision 
in the final rule.

F. Section 652.20--Liquidity Reserve Management and Requirements

    This section sets forth the minimum daily liquidity reserve 
requirement (i.e., the minimum days-of-liquidity), provides guidance on 
how that calculation is to be made, including specifying the discounts 
to be applied to various investments, and explains board 
responsibilities, required policies, and reporting requirements.
    Section 652.20(a) provides that, within 24 months of this rule's 
effective date, and thereafter, Farmer Mac must hold cash, eligible 
non-program investments, and/or on-balance sheet

[[Page 40638]]

securities backed by portions of USDA guaranteed loans to maintain at 
all times sufficient liquidity to fund a minimum of 60 days of maturing 
obligations, interest expense, and estimated operating expense.
    AgFirst commented that the proposed minimum days-of-liquidity 
requirement should be increased to 90 days from 60 days, consistent 
with the self-imposed policy of the FCS, which was implemented after 
discussions with several NRSROs.\5\ We have made no change to the 
required 60-day minimum. The final rule imposes a minimum below which 
Farmer Mac must not drop for safety and soundness purposes.\6\ Section 
652.20(e) requires Farmer Mac's liquidity reserve policy to specify the 
minimum and target (or optimum) amounts of liquidity that the board 
believes are appropriate for Farmer Mac. These minimum and target 
amounts may need to be significantly higher than 60 days. FCA intends 
to monitor Farmer Mac's implementation of this provision.
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    \5\ AgFirst also commented that FCA should try to minimize the 
regulatory burden this rule imposes. We note that requiring 90 
rather than 60 days-of-liquidity would increase regulatory burden.
    \6\ Under new Sec.  652.30(a), if the FCA determines that an 
extraordinary situation exists that necessitates a temporary 
regulatory waiver or modification, it may, in its sole discretion, 
waive or modify this minimum.
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    Farmer Mac commented that the proposed rule's requirement, in Sec.  
652.20(a), that days-of-liquidity be calculated and documented daily 
was an overly burdensome time interval and recommended changing the 
interval to monthly. In the final rule, this time interval is revised 
to monthly with the added specification that the Corporation must have 
systems in place that provide it the ability to make this calculation 
daily, and must maintain liquidity greater than 60 days at all times. 
Prudent business practice dictates that, if circumstances warrant, 
Farmer Mac may need to calculate its days-of-liquidity more often than 
the regulation requires. Such circumstances could include management 
decisions relative to debt issuance, asset-liability management, and 
investment purchases, all of which must be made with knowledge of the 
institution's liquidity position. We expect Farmer Mac's liquidity 
management practices to be monitored by Farmer Mac's internal audit 
function.
    FCBT commented that, rather than specifying specific discount 
amounts, FCA's regulations should require Farmer Mac to apply discounts 
that are appropriate under prevailing market practices and expectations 
concerning liquidity. We believe it is appropriate for FCA to prescribe 
the discounts to ensure that an acceptable level of conservatism is 
applied to the Corporation's estimates of the liquidity of these 
instruments. As with other required calculations in this rule, we 
believe these discounts improve the clarity of the Agency's 
expectations on this subject to Farmer Mac and are best provided 
formally through rulemaking and in advance of the examination process. 
However, we have clarified in Sec.  652.20(a) that discounts are to be 
applied to liquid asset values that have been marked to market, and in 
Sec.  652.20(c)(3) and (c)(5) that discounts also apply to preferred 
stock investments.
    Farmer Mac and FCBT commented that the discounts applied in Sec.  
652.20(c) to non-program assets for purposes of the days-of-liquidity 
calculation in the proposed rule are too great at 5 percent on money 
market instruments and floating rate debt securities and 10 percent on 
fixed rate debt securities. Farmer Mac supported this comment on the 
basis of the lower discounts applied by the Federal Reserve Discount 
Window (Fed) and the New York Stock Exchange (NYSE) for pledged assets. 
Farmer Mac's comment noted that the two examples they offer are not 
exactly analogous to the discounts applied in the proposed rule, but 
the Corporation requested consideration of these alternatives as 
potentially more appropriate benchmarks for discounts.
    We acknowledge that the Fed discount window and NYSE discounts on 
margin collateral are lower but, with one exception, we have kept the 
discounts in this rule as proposed. The cited Fed discounts by their 
nature are applied to transactions with a very short-time horizon on 
average, typically overnight for the majority of the Fed discount 
window volume.\7\ While NYSE positions requiring margin accounts are, 
on average, likely longer term than overnight, we have no information 
that would suggest the typical period over which the NYSE holds such 
pledged assets is as long as the several-year terms of many of Farmer 
Mac's investments. Farmer Mac's generally longer investment terms 
inherently involve greater risk, as they provide more time for the 
liquidity of the security to change.
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    \7\ The information related to the Federal Reserve is taken from 
the Federal Reserve Web site's description of the Discount Window.
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    However, the term difference between Farmer Mac and the Fed 
Discount Window is not always the case, for example with Farmer Mac's 
use of overnight and very short-term money market investments. In 
recognition of this, we have partially accommodated the comment by 
reducing the discount on money market instruments with maturities of 5-
business days or less from 5 percent to 3 percent, in Sec.  
652.20(c)(2).
    As discussed below, Sec.  652.20(c)(7) of the rule reserves FCA's 
authority to modify or determine the appropriate discount for an 
investment if the otherwise applicable discount does not accurately 
reflect the investment's liquidity. FCA's Office of Secondary Market 
Oversight (OSMO) will consider any request Farmer Mac submits for a 
revised discount on particular items in its investment portfolio.
    Farmer Mac commented that the proposed rule's 50-percent discount 
of securities backed by portions of Farmer Mac program assets (loans) 
guaranteed by the USDA (the Farmer Mac II portfolio or USDA-Guaranteed 
Portions) in Sec.  652.20(c)(5) \8\ is excessive because: (1) The 
assets are backed by the full faith and credit of the U.S. Government; 
(2) there exists a well-developed, competitive and active secondary 
market for USDA-Guaranteed Portions among numerous broker/dealers and 
banks around the country; (3) the interest rates on a large portion of 
Farmer Mac's USDA-guaranteed loans reset within 1 year, thereby 
presenting very limited exposure to market pricing risk; and, (4) the 
50-percent discount is not consistent with FCA's June 25, 2004 
Informational Memorandum on Investments in Rural America, which 
expressly encourages FCS institutions to participate in the secondary 
market for USDA-Guaranteed Portions and does not suggest that such 
investments would be discounted.
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    \8\ Renumbered as Sec.  652.20(c)(6) in the final rule.
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    We agree with the comment that a 50-percent discount of the Farmer 
Mac II portfolio is too conservative an estimate of its liquidity. It 
is inherently difficult to evaluate precisely the depth of the market 
for USDA-Guaranteed Portions because they are traded through a broker 
market. However, FCA believes there is reasonable evidence pointing to 
greater liquidity of these instruments. Accordingly, the final rule 
decreases the discount to 25 percent of the on-balance sheet portion of 
the Farmer Mac II portfolio. In other words, the calculation now 
includes 75 percent of on-balance sheet Farmer Mac II assets as liquid 
investments, as a conservative estimate of the liquidity of the Farmer 
Mac II portfolio.
    As discussed in section G. below, we have made a corresponding 
change in

[[Page 40639]]

the formula for maximum non-program investments in Sec.  652.25(b) in 
order to be more consistent with our recognition of 75 percent of the 
on-balance sheet Farmer Mac II portfolio as a liquid investment in the 
days-of-liquidity calculation. It is logically consistent to conclude 
that if 75 percent of on-balance sheet Farmer Mac II volume is 
correctly viewed as a liquid investment, then the rest of that 
portfolio segment is by definition not liquid and is appropriately 
included among those program assets against which the liquidity 
investments are held.
    As explained in greater detail in section G. below, recognition of 
on-balance sheet Farmer Mac II assets as liquid investments could 
create a disincentive for Farmer Mac to sell these assets to investors, 
an incentive that FCA does not intend but which is unavoidable if the 
Agency intends, as it does, to make that recognition. Therefore, one 
reason why the 25-percent discount is not even smaller is due to 
concerns related to any potential disincentive to sell these securities 
that could be created through recognition of such a high percentage of 
the on-balance sheet Farmer Mac II portfolio in the days-of-liquidity 
calculation.
    We note that the referenced FCA Informational Memorandum does not 
expressly encourage these investments and did not factor into FCA's 
decision to change the percentage. The Informational Memorandum 
highlights these instruments as an option available to FCS institutions 
to make mission-related investments but does not express or imply any 
position on the relative liquidity of these assets.
    Farmer Mac commented on proposed Sec.  652.20(c)(6),\9\ which 
reserved FCA's authority to modify or determine the appropriate 
discount for any investment. Farmer Mac requested that it be provided 
30 working days prior notice, with a longer period for those cases 
requiring more fundamental restructuring of the portfolio. The final 
rule provides Farmer Mac 20 business days to implement a discount 
determined by FCA unless we specify otherwise.
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    \9\ Renumbered as Sec.  652.20(c)(7) in the final rule.
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    Commenting on the same section, FCBT noted that the provision is 
too general and could lead to arbitrary action on the part of FCA. The 
comment suggested FCA establish ``market-based'' criteria to guide FCA 
staff in making such determinations. We anticipate we would most likely 
exercise this provision if an adverse credit event or other adverse 
event caused an eligible investment to exhibit less liquidity. In such 
cases, we might increase the discount associated with that investment. 
Information related to such an event would be expected to be generally 
available to the public and readily verifiable.
    Accordingly, the final rule reserves FCA's authority to modify or 
determine the appropriate discount for any investment used to meet the 
minimum liquidity reserve requirement if the otherwise applicable 
discount does not accurately reflect the liquidity of that investment 
or if the investment does not fit wholly within one of the specified 
investment categories. In addition, it provides that in making any 
modification or determination, we will consider the liquidity of the 
investment as well as any other relevant factors. We will provide at 
least 20 business days notice before any modified discounts will take 
effect.
    Farmer Mac commented that the proposed rule's requirement that any 
breach of the minimum days-of-liquidity requirement in Sec.  652.20(g) 
be reported ``immediately'' to FCA was not sufficiently clear in terms 
of its time requirement and suggested it be revised to read ``as soon 
as reasonably possible, but no later than 3 business days after Farmer 
Mac determines (or should have determined) the breach.'' Further, 
Farmer Mac suggested an additional grace period of 5 business days for 
the cure of any such breach if Farmer Mac is taking action to achieve 
compliance.
    As discussed above, the final rule requires Farmer Mac to calculate 
its days-of-liquidity monthly, and we expect more frequent calculation 
if circumstances warrant it. We have revised the reporting requirement 
to require Farmer Mac to report a breach to FCA no later than the 
business day following Farmer Mac's discovery of the breach. This 
revision provides an objective time period for Farmer Mac to submit its 
report to FCA. In addition, we clarified that the regulation requires 
the report to be made in writing (which includes e-mail) to OSMO. In 
order to keep an objective standard for the reporting time frame, we 
did not include ``should have discovered'' language, as suggested by 
Farmer Mac. We did not include the requested grace period to cure any 
breach. Any cure of a breach in the minimum days-of-liquidity will be 
addressed as a part of the FCA's supervisory oversight of Farmer Mac. 
FCA adds no grace period in the final rule as any standing grace period 
could imply that the established minimum is less than a firm minimum. 
However, as affirmed in Sec.  652.30 of the final rule, FCA would 
consider modifications under unusual circumstances if requested by 
Farmer Mac.
    FCBT commented that it is unduly burdensome to require Farmer Mac 
to report to FCA whenever it breaches its regulatory liquidity reserve 
requirements, as the proposed rule required. Since the final rule 
requires Farmer Mac to calculate its days-of-liquidity monthly rather 
than daily, and to report a breach when it is discovered rather than 
when it occurs, any burden the proposed rule might have caused has been 
significantly reduced in the final rule.
    FCBT also commented that the provision in Sec.  652.20(g) of the 
proposed rule that required Farmer Mac to report to FCA when it 
discovers noncompliance with its own board policy requirements is 
inappropriate and constitutes ``micro-management'' that is inconsistent 
with the role of an arms-length regulator. FCA proposed this 
requirement so that it may learn in advance if liquidity is decreasing 
to a point where it might violate our regulatory minimum. However, so 
long as Farmer Mac's Board is aware of breaches of the Corporation's 
internal policy, we have determined that OSMO is well-positioned to 
track breaches of the policy and management's corrective actions 
through the examination process. We have, therefore, removed the 
provision from the final rule.

G. Section 652.25--Non-Program Investment Purposes and Limitation

    This section lists authorized purposes for Farmer Mac non-program 
investments and imposes a limitation on those investments. The rule 
seeks to reasonably relate investments made by Farmer Mac to its 
statutory purpose as set forth in section 701 of the Agricultural 
Credit Act of 1987 \10\ (12 U.S.C. 2279). We recognize non-program 
investments provide for a blend of Farmer Mac's needs; most fundamental 
of these needs is to provide highly liquid assets to meet immediate 
funding needs associated with Farmer Mac's business in agricultural and 
rural housing mortgages. Farmer Mac also uses non-program investments 
in managing interest rate risk and providing flexibility in responding 
to fluctuating liquidity and economic conditions.
---------------------------------------------------------------------------

    \10\ Public Law 100-233.
---------------------------------------------------------------------------

    Section 652.25(b)(1) of the proposed rule would have limited non-
program investments to the greater of $1.5 billion or the aggregate of 
30 percent of total assets and ``a reasonable estimate of off-balance 
sheet loans covered by guarantees or commitments that Farmer

[[Page 40640]]

Mac likely will be required to purchase during the upcoming 12-month 
period, not to exceed 15 percent of total off-balance sheet 
obligations.''
    Farmer Mac and FCBT commented that this formula is overly 
restrictive and could result in adverse effects on the Corporation. 
Farmer Mac also commented that the proposed policy is a departure 
``from the undertaking requested by FCA and given by Farmer Mac in 
1999, to limit non-program investments to the greater of $1.5 billion 
and 30 percent of all guarantees and commitments outstanding.'' Farmer 
Mac further suggested that the proposed policy is inconsistent with 
investment limitations contained in FCA regulations governing FCS 
banks. Finally, Farmer Mac commented that the proposed rule's treatment 
of off-balance sheet obligations both fails to respond to concerns 
raised by Congress and creates a disincentive for Farmer Mac to sell 
agricultural mortgage-backed securities. Instead of the proposal, 
Farmer Mac requested that FCA adopt the Corporation's currently 
existing investment limit, based on its 1999 communications with FCA, 
of the greater of $1.5 billion and 30 percent of the aggregate of 
Farmer Mac's on-balance sheet program assets and off-balance sheet 
program obligations.
    This rule is the first application of a regulatory maximum non-
program investment level to a secondary market institution. FCA has 
applied caution to minimize the possibility of imposing unnecessary 
constraints. With this framework established, the rule's quantitative 
limits can be refined in future rulemaking if necessary. Accordingly, 
we have modified the formula in the final rule to respond to Farmer 
Mac's comments, as detailed below.
    The final rule limits Farmer Mac's non-program investments to the 
greater of $1.5 billion or 35 percent of all program volume, excluding 
75 percent of the on-balance sheet program assets that are guaranteed 
by the United States Department of Agriculture as described in section 
8.9(9)(B) of the Farm Credit Act of 1971, as amended.\11\
---------------------------------------------------------------------------

    \11\ 12 U.S.C. 2279aa(9)(b).
---------------------------------------------------------------------------

    With this change, we have responded to Farmer Mac's request to 
adopt the general approach taken in our 1999 guidance to Farmer Mac. As 
Farmer Mac requested, we have generally based the formula for maximum 
non-program investments on a percentage of both on- and off-balance 
program investments, with one exclusion. The formula excludes from 
program investments 75 percent of the Farmer Mac II portfolio because, 
as discussed in the previous section of this supplementary information, 
that portion is recognized as a liquid investment in the minimum 
liquidity reserve calculation required by Sec.  652.20(a). Thus, the 
rule maintains logical consistency in its recognition (in both Sec.  
652.20(a) and Sec.  652.25(b)) of 75 percent of the on-balance sheet 
Farmer Mac II program assets as a source of liquidity rather than as 
less-liquid assets against whose funding obligations liquidity 
investments are held.
    This exclusion would generally result in a lower maximum non-
program investment limit, which was not the intent of the exclusion. 
Therefore, to compensate for this exclusion and to add regulatory 
flexibility generally to the final rule, we increased the limitation 
from 30 to 35 percent of the included assets. The new formula is 
consistent with the objective of establishing a regulatory framework 
that minimizes the potential of establishing unnecessary constraints on 
management's ability to respond to unforeseen circumstances.
    We believe the changes to this provision in the final rule should 
satisfy the concerns raised by Farmer Mac and the FCBT that the 
proposed provision was overly restrictive. Nevertheless, we respond to 
Farmer Mac's specific comments on the proposed rule below.
    Farmer Mac stated that the proposed rule failed to address concerns 
expressed at hearings of the Agriculture Committee of the U.S. House of 
Representatives (June 4, 2004), at which members raised questions about 
the adequacy of provisions for risks associated with off-balance sheet 
exposures. The concerns raised at this hearing were related to a 
General Accounting Office (GAO) \12\ report stating that Farmer Mac 
lacked a formal contingency plan for liquidity, and particularly for 
the potential obligation to purchase a significant volume of off-
balance sheet obligations.\13\ The GAO report did not imply any 
potential inadequacy of the Farmer Mac non-program investment levels.
---------------------------------------------------------------------------

    \12\ This agency has been renamed the Government Accountability 
Office.
    \13\ United States General Accounting Office, Farmer Mac: Some 
Progress Made, but Greater Attention to Risk Management, Mission, 
and Corporate Governance is Needed, GAO-04-116 (2003).
---------------------------------------------------------------------------

    In addition, Farmer Mac commented that the proposed rule, through 
its inclusion of 15 percent (at most) of off-balance sheet obligations 
in the maximum non-program investments formula, created a disincentive 
for it to sell AMBS to investors. As mentioned above in section F. with 
regard to changes made to the days-of-liquidity calculation, by 
including all off-balance sheet program obligations in the calculation 
of maximum non-program investments, the final rule largely removes any 
disincentive to sell program assets to investors. A small disincentive 
arguably remains related to the recognition of 75 percent of the on-
balance sheet Farmer Mac II portfolio as a liquid investment (described 
in section F. above). However, this disincentive is at least partially 
offset by a corresponding reduction in the same proportion (75 percent) 
of the on-balance sheet Farmer Mac II portfolio that is excluded from 
the maximum non-program investments calculation.
    Farmer Mac also commented that the proposed rule's maximum non-
program investment formula is inconsistent with FCA's 1993 rule 
governing FCS banks. We note that the provisions of this final rule, 
through the inclusion of off-balance sheet obligations in the 
calculation, are much closer to the structure established in the 1993 
regulation governing FCS banks on this maximum limit.
    Finally on this section, in the supplementary information to our 
proposed rule, we specifically sought comment on whether we should 
consider in this section other issues pertinent to Farmer Mac's non-
program investment needs or practices such as its ``debt issuance 
strategy.'' Farmer Mac commented that it would not be appropriate to 
impose regulations governing debt issuance strategies. Without agreeing 
or disagreeing with the comment, we note that no provision related to 
the strategy has been added to the final rule. Also, in response to 
this request for comment, FCBT said, ``given our view that portfolio 
limits should be flexible based on an institution's market environment, 
we do not believe that the regulation should fail to consider or 
preclude consideration of any factor that presents Farmer Mac with an 
actual need for liquidity, income stabilization, or diversification.'' 
We believe the regulation adequately considers these factors through 
the flexibility specifically inserted in the rule, e.g., Sec.  
652.30(b) and Sec.  652.35(e).

H. Section 652.30--Temporary Regulatory Waivers or Modifications for 
Extraordinary Situations

    This section provides that the FCA may waive or modify restrictions 
on Farmer Mac's liquidity reserve and/or may modify the amount, 
qualities, and types of eligible investments during times of economic 
stress, financial stress, or other extraordinary situations. As waivers 
or modifications are

[[Page 40641]]

approved, we may impose certain conditions, require plans to return to 
compliance, or set other limitations. The flexibility of this provision 
enables the agency to tailor specific remedies for particular problems 
or particular circumstances that might arise.
    Examples of extraordinary situations include, but are not 
necessarily limited to: (1) Disrupted access to capital markets due to 
financial, economic, agricultural, or national defense crises; and (2) 
situations specific to Farmer Mac that necessitate modified liquidity 
reserves, other investments, or other measures for continued market 
access. No comments specific to this section were received but 
clarifications were added to its provisions in the final rule to note 
FCA's willingness in extraordinary circumstances to consider waivers of 
the rule's provisions related to ineligible asset quality and type.

I. Section 652.35--Eligible Non-Program Investments

    This section permits Farmer Mac to invest, within limits, in an 
array of eligible high-quality, liquid investments while providing a 
regulatory framework that can readily accommodate innovations in 
financial products and analytical tools.
    Farmer Mac may purchase and hold the eligible non-program 
investments listed in Sec.  652.35(a) \14\ to maintain liquidity 
reserves, manage interest rate risk, and invest surplus short-term 
funds. Only investments that can be promptly converted into cash 
without significant loss are suitable for achieving these objectives. 
For this reason, the eligible investments listed in Sec.  652.35(a) 
generally have short terms to maturity and high credit ratings from 
NRSROs. All eligible investments are either traded in active and 
universally recognized secondary markets or are valuable as collateral. 
To enhance safety and soundness, for many of the investments, we 
require that they not exceed certain maximum percentages of the total 
non-program investment portfolio. We establish these portfolio caps to 
limit credit risk exposures, to promote diversification, and to curtail 
investments in securities that may exhibit considerable price 
volatility, price risk, or liquidity risks. For similar reasons, we 
establish obligor limits to help reduce exposure to counterparty risk.
---------------------------------------------------------------------------

    \14\ Section 652.35(a)(1) and (a)(2) authorize investments in 
``obligations of the United States'' and ``obligations of 
Government-sponsored agencies,'' respectively. The regulation lists 
eligible investments for each term; read in conjunction with the 
definition of Government-sponsored agency, we believe the meaning of 
these terms is clear. FCA regulation Sec.  615.5140 (a)(1), which 
lists eligible investments for Farm Credit banks and associations, 
uses the term ``obligations of the United States'' to refer to both 
obligations of the United States and obligations of Government-
sponsored agencies. Although new Sec.  652.35(a)(1) and (a)(2) use 
more precise language, the meaning is the same as Sec.  
615.5140(a)(1). Section 652.35(a) uses the more precise language 
only for the purpose of clarity.
---------------------------------------------------------------------------

    We note that the final rule authorizes investment in shares of any 
investment company that is registered under section 8 of the Investment 
Company Act of 1940, 15 U.S.C. 80a-8, as long as the investment 
company's portfolio consists solely of investments that are authorized 
by Sec.  652.35. Prior to investing in a particular investment company, 
Farmer Mac would be required to evaluate the investment company's risk 
and return objectives. As part of this evaluation, Farmer Mac should 
determine whether the investment company's use of derivatives is 
consistent with FCA guidance and Farmer Mac's investment policies.
    Farmer Mac must maintain appropriate documentation on each 
investment, including a prospectus and analysis, so its investment and 
selection process can be independently and objectively verified. If 
Farmer Mac's shares in each investment company comprise 10 percent or 
less of Farmer Mac's total investment portfolio, no maximum portfolio 
limits are triggered. However, if Farmer Mac's shares in a particular 
investment company comprise more than 10 percent of Farmer Mac's total 
investment portfolio, then the pro rata interest in an asset class of 
security in an investment company must be added to the same asset class 
of Farmer Mac's other investments to determine investment portfolio 
limits. For example, if Farmer Mac has 12 percent of its total 
investment portfolio (i.e., more than 10 percent) in Diversified 
Investment Company Alpha (Alpha), then Farmer Mac would have to 
determine the composition of investments in Alpha's portfolio. The pro 
rata dollar amount of corporate debt securities (one example of the 
many asset classes) in Alpha would have to be added to Farmer Mac's 
corporate debt securities, and that combined amount would have to be 25 
percent or less of Farmer Mac's total investment portfolio. Corporate 
debt securities are used here only as an example. Any asset class in 
Farmer Mac's portfolio with an investment portfolio limit would have to 
be computed the same way.
    FCBT commented that FCA should reconsider its overall approach with 
respect to fixed percentage limits on the classes or types of 
investments that may be included in Farmer Mac's portfolio to allow 
Farmer Mac more flexibility to respond to changing market conditions. 
FCBT suggests that, rather than specifying investment limits, the 
regulation should require Farmer Mac to establish and justify 
appropriate limits. Limits on classes and types of investments are a 
prudent managerial practice. It is not clear from the comment how 
changing market conditions might warrant a degree of flexibility that 
is not already provided for in the regulation. However, as detailed 
later in this section, the final rule does make an adjustment to the 
obligor limits from 20 to 25 percent of regulatory capital. In 
addition, we note that the final rule clarifies that the temporary 
waivers under Sec.  652.30(b) could extend to asset quality and types, 
as well as amounts. In general, the regulation enhances guidance on 
OSMO's minimum expectations with regard to investment management 
policies and procedures related to concentration risk within Farmer 
Mac's investment portfolio.
    Farmer Mac commented that the 20-percent investment category 
concentration limits in the proposed regulation are generally too 
restrictive and that a 33-percent limitation would be more appropriate. 
No analytical support was provided to support a 33-percent limitation 
rather than a 20-percent limitation. We have made a change to two 
categories detailed below.
    Farmer Mac commented specifically that the proposed 20-percent 
limit on investments in corporate debt securities (Sec.  652.35(a)(8)) 
should be increased to 33 percent. The Corporation further objected to 
the proposed rule's requirement that corporate debt securities with 
maturities of less than 4 years, contending that an A rating is 
appropriate for such investments.\15\ We believe that a concentration 
of one-third (33 percent) of the investment portfolio is excessive, but 
have changed the limit for corporate debt securities to 25 percent. We 
believe this to be an acceptable maximum weight for this non-
Government-sponsored agency-backed or government-backed investment 
category and to be appropriate for this rule. We have made a similar 
change to the investment category limit for ABS. We note that if Farmer 
Mac were to request a waiver under the Sec.  652.30 to invest in ABS 
types that are not specifically listed in Sec.  652.35(a)(7), and such 
permission were granted, it could be granted subject

[[Page 40642]]

to reduced category limitations and other conditions.
---------------------------------------------------------------------------

    \15\ The Corporation acknowledged that AA is appropriate for 
investments with maturities of between 4 and 5 years.
---------------------------------------------------------------------------

    To support its request for a minimum A rating for securities with 
maturities of 4 years or less, Farmer Mac cites to NRSRO data that, the 
Corporation contends, demonstrates that A-rated bonds represent very 
high asset quality, with only a slightly higher historical rate of 
default than AA bonds. We agree that shorter-term holdings inherently 
have less risk, and the final rule therefore permits investments in 
corporate debt securities that are rated at least A by an NRSRO as long 
as their maturities are 3 years or less. We did not extend the A-rating 
accommodation to securities with maturities of between 3 and 4 years, 
as Farmer Mac requested, in recognition of their higher level of risk.
    Farmer Mac objects to Sec.  652.35(d), which limits investments 
issued by any single entity, issue, or obligor to 20 percent of Farmer 
Mac's capital, with the exception of Government agency or Government-
sponsored agency obligors. Farmer Mac suggests a limitation of 25 
percent of capital is more appropriate. We agree with the comment and 
have changed the limitation to 25 percent in the final rule. For 
example, if Farmer Mac had $250 million in capital, the change would 
permit obligor limits to rise from $50 million to $62.5 million.
    Farmer Mac also objects to the Sec.  652.35(d)(2) requirement that 
it must count securities that it holds through an investment company 
toward the 20-percent obligor limit unless the investment company's 
holdings of the securities of any one issuer do not exceed 5 percent of 
the investment company's total portfolio. Farmer Mac contends that this 
requirement is unnecessary because concentration risks are balanced by 
diversity in the portfolio. Farmer Mac also states that tracking 
portions of individual investments held within a diversified investment 
would be difficult and unduly time consuming.
    We believe that the Corporation's net exposure to a single obligor, 
when the portion found in diversified investment funds is significant, 
is important to consider regardless of the diversification benefits of 
the funds. When an obligor defaults, Farmer Mac absorbs the full 
financial impact of its net exposure to that obligor, even if a portion 
of that impact is realized in a lower return from an investment fund. 
For that reason, we believe the benefits of prudent obligor limits 
exceed the additional labor cost involved in tracking total obligor 
exposures. Therefore, we make no change to this provision in the final 
rule.
    Farmer Mac commented that the proposed rules' collateral 
restrictions on asset-backed securities (ABS) should be eliminated and 
that any AAA-rated ABS should be permitted. Farmer Mac did not identify 
additional ABS-collateralized groups in which it wishes to invest or 
suggest criteria for determining the suitability of new types of ABS 
that financial markets may create. Without more compelling evidence of 
the practical impact on Farmer Mac's operations, the final rule makes 
no change to this provision. We note that Sec.  652.35(e) of the final 
rule permits Farmer Mac to purchase non-program investments not listed 
in Sec.  652.35(a) with our prior approval.
    Farmer Mac commented that rather than using the term ``total 
capital,'' as we do in Sec.  652.35(d)(1) of the proposed rule, we 
should use either the term ``core capital'' or the term ``regulatory 
capital,'' both of which are defined in Farmer Mac's statute. We agree 
that using an already-defined term would provide consistent regulatory 
treatment. Accordingly, Sec.  652.35(d)(1) of the final rule uses the 
term ``regulatory capital'' as defined in section 8.31(5) of the 
Act.\16\ We also make the corresponding change in the definitions 
section, Sec.  652.5, replacing ``total capital'' with ``regulatory 
capital.''
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 2279bb(5).
---------------------------------------------------------------------------

    Finally, on this section, Farmer Mac commented that investments in 
Farmer's Notes should be deemed an eligible non-program investment 
under Sec.  652.35 if the FCA's currently pending proposed rule on 
Investments in Farmer's Notes becomes effective as proposed. However, 
as FCA did not propose such treatment of Farmer's Notes in its proposed 
rule on non-program investments and liquidity, we would have to propose 
it in another rulemaking process in order to consider this change. 
Therefore, the most practical process for Farmer Mac to obtain this 
treatment for Farmer's Notes would be to seek approval to invest in 
Farmer's Notes as provided for under Sec.  652.35(e).

J. Section 652.40--Stress Tests for Mortgage Securities

    Stress testing is essential when the cashflows from investments or 
assets of financial institutions change in response to fluctuations in 
market interest rates. For example, although credit risk on highly 
rated mortgage securities is low, mortgage securities may expose 
investors to significant interest rate risk. Since borrowers may prepay 
their mortgages, investors may not receive the expected cashflows and 
returns on these securities. Prepayments on these securities are 
affected by the spread between market rates and the actual interest 
rates of mortgages in the pool, the path of interest rates, and the 
unpaid balances and remaining terms to maturity on the mortgage 
collateral. The price behavior of a mortgage security also depends on 
whether the security was purchased at a premium or at a discount.
    To better control and manage these factors, this section requires 
that Farmer Mac employ appropriate analytical techniques and 
methodologies to measure and evaluate interest rate risk inherent in 
mortgage securities. More specifically, prudent risk management 
practices require Farmer Mac to examine the performance of each 
mortgage security under a wide array of possible interest rate 
scenarios. No comments specific to this section were received and none 
of its provisions were changed in the final rule.

K. Section 652.45--Divestiture of Ineligible Non-Program Investments

    This section requires an ineligible non-program investment or 
security to be divested within 6 months, unless FCA approves, in 
writing, a plan that authorizes the investment or its divesture over a 
longer period of time.\17\ Farmer Mac commented that this requirement 
should be revised to remove divestiture deadlines and to include a 
requirement that ineligible investments be tracked and reported monthly 
to the board's asset-liability management committee (ALCO) along with 
analysis and recommendations regarding strategy for remedial actions. 
FCA believes that 6 months is a reasonable period for Farmer Mac to 
divest of ineligible investments. Moreover, if over the 6-month period 
Farmer Mac develops analysis and a written plan that make a persuasive 
case for FCA to permit the retention of an ineligible investment over a 
period greater than 6 months, the final rule allows for such 
consideration.
---------------------------------------------------------------------------

    \17\ An acceptable plan generally requires Farmer Mac to divest 
of the ineligible investment or security as quickly as possible 
without substantial financial loss. Until the ineligible investment 
or security is actually divested of, Farmer Mac's investment manager 
must report at least quarterly to Farmer Mac's board of directors 
and to OSMO about the status and performance of the ineligible 
instrument, the reason why it remains ineligible, and the investment 
manager's progress in divesting of the investment or security.
---------------------------------------------------------------------------

    Farmer Mac also commented that any investments it owns prior to the 
effective date of this rule should be deemed eligible until they mature 
or are sold in the normal course of business. In response, we emphasize 
that

[[Page 40643]]

ineligible assets are deemed ineligible for safety and soundness 
reasons, and it is therefore not acceptable that such assets be held by 
Farmer Mac for an indefinite period of time. We make no change to this 
provision in the final rule, but note that the rule permits Farmer Mac 
to seek FCA approval for a longer divestiture period.

V. Better Organizing Rules That Apply to Farmer Mac

    In this final rule, we move some existing regulatory sections that 
pertain specifically to Farmer Mac to a centralized location in our 
regulations so they can be more easily located and used. The following 
table provides details of our proposal and shows where this final rule 
will be located.

                                        Organization of Farmer Mac Rules
----------------------------------------------------------------------------------------------------------------
   New part        New part name       New subpart     New subpart name      New sections            From
----------------------------------------------------------------------------------------------------------------
650...........  Federal              ..............  Receiver and         Sec.  Sec.   650.1  Existing Part 650,
                 Agricultural                         Conservator.         to 650.80.          Subpart C, Sec.
                 Mortgage                                                                      Sec.   650.50 to
                 Corporation--Gener                                                            650.68.
                 al Provisions.
651...........  Federal              ..............  Conflicts of         Sec.  Sec.   651.1  Existing Part 650,
                 Agricultural                         Interest.            to 651.4.           Subpart A, Sec.
                 Mortgage                                                                      Sec.   650.1 to
                 Corporation--Gover                                                            650.4.
                 nance.
652...........  Federal              A               Investment           Sec.  Sec.   652.1  New in this rule.
                 Agricultural                         Management.          to 652.45.
                 Mortgage
                 Corporation--Fundi
                 ng and Fiscal
                 Affairs.
652...........  Federal              B               Risk-Based Capital.  Sec.  Sec.          Existing Part 650,
                 Agricultural                                              652.50 to 652.105.  Subpart B, Sec.
                 Mortgage                                                                      Sec.   650.20 to
                 Corporation--Fundi                                                            650.31.
                 ng and Fiscal
                 Affairs.
653...........  Reserved...........
654...........  Reserved...........
655...........  Federal              A               Annual Report of     Sec.   655.1......  Existing Part 620,
                 Agricultural                         Condition of the                         Subpart G, Sec.
                 Mortgage                             Federal                                  620.40.
                 Corporation--Discl                   Agricultural
                 osure and                            Mortgage
                 Reporting                            Corporation.
                 Requirements.
655...........  Federal              B               Accounting and       Sec.   655.50.....  Existing Part 621,
                 Agricultural                         Reporting                                Subpart E, Sec.
                 Mortgage                             Requirements.                            621.20.
                 Corporation--Discl
                 osure and
                 Reporting
                 Requirements.
----------------------------------------------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    Farmer Mac has assets and annual income in excess of the amounts 
that would qualify it as a small entity. Therefore, Farmer Mac is not a 
``small entity'' as defined in the Regulatory Flexibility Act. Pursuant 
to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the FCA hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects

12 CFR Part 620

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 621

    Accounting, Agriculture, Banks, Banking, Penalties, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 650

    Agriculture, Banks, Banking, Conflicts of interest, Rural areas.

12 CFR Part 651

    Agriculture, Banks, Banking, Conflicts of interest, Rural areas.

12 CFR Part 652

    Agriculture, Banks, Banking, Rural areas, Investments, Capital.

12 CFR Part 655

    Accounting, Agriculture, Banks, Banking, Accounting and reporting 
requirements, Disclosure and reporting requirements, Rural areas.

0
For the reasons stated in the preamble, we are amending parts 620, 621, 
and 650 of chapter VI, adding parts 651, 652, and 655 to chapter VI, 
and reserving parts 653 and 654 of chapter VI, title 12 of the Code of 
Federal Regulations to read as follows:

PART 655--FEDERAL AGRICULTURAL MORTGAGE CORPORATION DISCLOSURE AND 
REPORTING REQUIREMENTS

0
1. Add the heading for a new part 655 to read as set forth above.

0
2. Add the authority citation for new part 655 to read as follows:

    Authority: Sec. 8.11 of the Farm Credit Act (12 U.S.C. 2279aa-
11).

PART 620--DISCLOSURE TO SHAREHOLDERS

0
3. The authority citation for part 620 continues to read as follows:

    Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 
Stat. 1568, 1656.

Subpart G--Annual Report of Condition of the Federal Agricultural 
Mortgage Corporation


Sec.  620.40  [Redesignated as Sec.  655.1]

0
4. Redesignate subpart G of part 620, consisting of Sec.  620.40, as 
subpart A of new part 655, consisting of Sec.  655.1.

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

0
5. The authority citation for part 621 continues to read as follows:

    Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11).

Subpart E--Reports Relating to Securities Activities of the Federal 
Agricultural Mortgage Corporation


Sec.  621.20  [Redesignated as Sec.  655.50]

0
6. Redesignate subpart E of part 621, consisting of Sec.  621.20, as 
subpart B of new part 655, consisting of Sec.  655.50.

[[Page 40644]]

PART 651--FEDERAL AGRICULTURAL MORTGAGE CORPORATION GOVERNANCE

0
7. Add the heading for a new part 651 to read as set forth above.

0
8. The authority citation for new part 651 is added to read as follows:

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.


0
9. Add a new part 652 to read as follows:

PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND 
FISCAL AFFAIRS

Subpart A--Investment Management

652.1 Purpose.
652.5 Definitions.
652.10 Investment management and requirements.
652.15 Interest rate risk management and requirements.
652.20 Liquidity reserve management and requirements.
652.25 Non-program investment purposes and limitation.
652.30 Temporary regulatory waivers or modifications for 
extraordinary situations.
652.35 Eligible non-program investments.
652.40 Stress tests for mortgage securities.
652.45 Divestiture of ineligible non-program investments.

Subpart B--Risk-Based Capital Requirements [Reserved]

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.

Subpart A--Investment Management


Sec.  652.1  Purpose.

    This subpart contains the Farm Credit Administration's (FCA) rules 
for governing liquidity and non-program investments held by the Federal 
Agricultural Mortgage Corporation (Farmer Mac). The purpose of this 
subpart is to ensure safety and soundness, continuity of funding, and 
appropriate use of non-program investments considering Farmer Mac's 
special status as a Government-sponsored enterprise (GSE). The subpart 
contains requirements for Farmer Mac's board of directors to adopt 
policies covering such areas as investment management, interest rate 
risk, and liquidity reserves. The subpart also requires Farmer Mac to 
comply with various reporting requirements.


Sec.  652.5  Definitions.

    For purposes of this subpart, the following definitions will apply:
    Affiliate means any entity established under authority granted to 
the Corporation under section 8.3(b)(13) of the Farm Credit Act of 
1971, as amended.
    Asset-backed securities (ABS) means investment securities that 
provide for ownership of a fractional undivided interest or collateral 
interests in specific assets of a trust that are sold and traded in the 
capital markets. For the purposes of this subpart, ABS exclude mortgage 
securities that are defined below.
    Eurodollar time deposit means a non-negotiable deposit denominated 
in United States dollars and issued by an overseas branch of a United 
States bank or by a foreign bank outside the United States.
    Farmer Mac, Corporation, you, and your means the Federal 
Agricultural Mortgage Corporation and its affiliates.
    FCA, our, or we means the Farm Credit Administration.
    Final maturity means the last date on which the remaining principal 
amount of a security is due and payable (matures) to the registered 
owner. It does not mean the call date, the expected average life, the 
duration, or the weighted average maturity.
    General obligations of a state or political subdivision means:
    (1) The full faith and credit obligations of a state, the District 
of Columbia, the Commonwealth of Puerto Rico, a territory or possession 
of the United States, or a political subdivision thereof that possesses 
general powers of taxation, including property taxation; or
    (2) An obligation that is unconditionally guaranteed by an obligor 
possessing general powers of taxation, including property taxation.
    Government agency means an agency or instrumentality of the United 
States Government whose obligations are fully and explicitly guaranteed 
as to the timely repayment of principal and interest by the full faith 
and credit of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not explicitly 
guaranteed by the full faith and credit of the United States 
Government, including but not limited to any Government-sponsored 
enterprise.
    Liquid investments are assets that can be promptly converted into 
cash without significant loss to the investor. A security is liquid if 
the spread between its bid price and ask price is narrow and a 
reasonable amount can be sold at those prices promptly.
    Long-Term Standby Purchase Commitment (LTSPC) is a commitment by 
Farmer Mac to purchase specified eligible loans on one or more 
undetermined future dates. In consideration for Farmer Mac's assumption 
of the credit risk on the specified loans underlying an LTSPC, Farmer 
Mac receives an annual commitment fee on the outstanding balance of 
those loans in monthly installments based on the outstanding balance of 
those loans.
    Market risk means the risk to your financial condition because the 
value of your holdings may decline if interest rates or market prices 
change. Exposure to market risk is measured by assessing the effect of 
changing rates and prices on either the earnings or economic value of 
an individual instrument, a portfolio, or the entire Corporation.
    Maturing obligations means maturing debt and other obligations that 
may be expected, such as buyouts of long-term standby purchase 
commitments or repurchases of agricultural mortgage securities.
    Mortgage securities means securities that are either:
    (1) Pass-through securities or participation certificates that 
represent ownership of a fractional undivided interest in a specified 
pool of residential (excluding home equity loans), multifamily or 
commercial mortgages, or
    (2) A multiclass security (including collateralized mortgage 
obligations and real estate mortgage investment conduits) that is 
backed by a pool of residential, multifamily or commercial real estate 
mortgages, pass-through mortgage securities, or other multiclass 
mortgage securities.
    (3) This definition does not include agricultural mortgage-backed 
securities guaranteed by Farmer Mac itself.
    Nationally recognized statistical rating organization (NRSRO) means 
a rating organization that the Securities and Exchange Commission 
recognizes as an NRSRO.
    Non-program investments means investments other than those in:
    (1) ``Qualified loans'' as defined in section 8.0(9) of the Farm 
Credit Act of 1971, as amended; or
    (2) Securities collateralized by ``qualified loans.''
    Program assets means on-balance sheet ``qualified loans'' as 
defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.

[[Page 40645]]

    Program obligations means off-balance sheet ``qualified loans'' as 
defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Regulatory capital means your core capital plus an allowance for 
losses and guarantee claims, as determined in accordance with generally 
accepted accounting principles.
    Revenue bond means an obligation of a municipal government that 
finances a specific project or enterprise, but it is not a full faith 
and credit obligation. The obligor pays a portion of the revenue 
generated by the project or enterprise to the bondholders.
    Weighted average life (WAL) means the average time until the 
investor receives the principal on a security, weighted by the size of 
each principal payment and calculated under specified prepayment 
assumptions.


Sec.  652.10  Investment management and requirements.

    (a) Investment policies--board responsibilities. Your board of 
directors must adopt written policies for managing your non-program 
investment activities. Your board must also ensure that management 
complies with these policies and that appropriate internal controls are 
in place to prevent loss. At least annually, your board, or a 
designated subcommittee of the board, must review these investment 
policies. Any changes to the policies must be adopted by the board. You 
must report any changes to these policies to FCA's Office of Secondary 
Market Oversight within 10 business days of adoption.
    (b) Investment policies--general requirements. Your investment 
policies must address the purposes and objectives of investments, risk 
tolerance, delegations of authority, exception parameters, securities 
valuation, internal controls, and reporting requirements. Furthermore, 
the policies must address the means for reporting, and approvals needed 
for, exceptions to established policies. Investment policies must be 
sufficiently detailed, consistent with, and appropriate for the 
amounts, types, and risk characteristics of your investments.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits and diversification requirements for the 
various classes of eligible investments and for the entire investment 
portfolio. These policies must ensure that you maintain prudent 
diversification of your investment portfolio. Risk limits must be based 
on the Corporation's objectives, capital position, and risk tolerance. 
Your policies must identify the types and quantity of investments that 
you will hold to achieve your objectives and control credit, market, 
liquidity, and operational risks. Your policies must establish risk 
limits for the following four types of risk:
    (1) Credit risk. Your investment policies must establish:
    (i) Credit quality standards, limits on counterparty risk, and risk 
diversification standards that limit concentrations based on a single 
or related counterparty(ies), a geographical area, industries or 
obligations with similar characteristics.
    (ii) Criteria for selecting brokers, dealers, and investment 
bankers (collectively, securities firms). You must buy and sell 
eligible investments with more than one securities firm. As part of 
your annual review of your investment policies, your board of 
directors, or a designated subcommittee of the board, must review the 
criteria for selecting securities firms. Any changes to the criteria 
must be approved by the board. Also, as part of your annual review, the 
board, or a designated subcommittee of the board, must review existing 
relationships with securities firms. In addition, the board, or a 
designated subcommittee of the board, must be notified before any 
changes to securities firms are made.
    (iii) Collateral margin requirements on repurchase agreements. You 
must regularly mark the collateral to market and ensure appropriate 
controls are maintained over collateral held.
    (2) Market risk. Your investment policies must set market risk 
limits for specific types of investments, and for the investment 
portfolio or for Farmer Mac generally. Your board of directors must 
establish market risk limits in accordance with these regulations 
(including, but not limited to, Sec. Sec.  652.15 and 652.40) and our 
other policies and guidance. You must document in the Corporation's 
records or minutes any analyses used in formulating your policies or 
amendments to the policies.
    (3) Liquidity risk. Your investment policies must describe the 
liquidity characteristics of eligible investments that you will hold to 
meet your liquidity needs and the Corporation's objectives.
    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls in 
accordance with paragraphs (d) and (e) of this section.
    (d) Delegation of authority. All delegations of authority to 
specified personnel or committees must state the extent of management's 
authority and responsibilities for investments.
    (e) Internal controls. You must:
    (1) Establish appropriate internal controls to detect and prevent 
loss, fraud, embezzlement, conflicts of interest, and unauthorized 
investments.
    (2) Establish and maintain a separation of duties and supervision 
between personnel who execute investment transactions and personnel who 
approve, revaluate, and oversee investments.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (f) Securities valuations. (1) Before you purchase a security, you 
must evaluate its credit quality and price sensitivity to changes in 
market interest rates. You must also verify the value of a security 
that you plan to purchase, other than a new issue, with a source that 
is independent of the broker, dealer, counterparty, or other 
intermediary to the transaction. Your investment policies must fully 
address the extent of the prepurchase analysis that management needs to 
perform for various classes of instruments. For example, you should 
specifically describe the stress tests in Sec.  652.40 that must be 
performed on various types of mortgage securities.
    (2) At least monthly, you must determine the fair market value of 
each security in your portfolio and the fair market value of your whole 
investment portfolio. In doing so you must also evaluate the credit 
quality and price sensitivity to the change in market interest rates of 
each security in your portfolio and your whole investment portfolio.
    (3) Before you sell a security, you must verify its value with a 
source that is independent of the broker, dealer, counterparty, or 
other intermediary to the transaction.
    (g) Reports to the board of directors. At least quarterly, Farmer 
Mac's management must report to the Corporation's board of directors, 
or a designated subcommittee of the board:
    (1) On the performance and risk of each class of investments and 
the entire investment portfolio;
    (2) All gains and losses that you incur during the quarter on 
individual securities that you sold before maturity and why they were 
liquidated;
    (3) Potential risk exposure to changes in market interest rates and 
any other factors that may affect the value of your investment 
holdings;
    (4) How investments affect your overall financial condition;
    (5) Whether the performance of the investment portfolio effectively 
achieves the board's objectives; and
    (6) Any deviations from the board's policies. These deviations must 
be

[[Page 40646]]

formally approved by the board of directors.


Sec.  652.15  Interest rate risk management and requirements.

    (a) The board of directors of Farmer Mac must provide effective 
oversight (direction, controls, and supervision) to the interest rate 
risk management program and must be knowledgeable of the nature and 
level of interest rate risk taken by Farmer Mac.
    (b) The management of Farmer Mac must ensure that interest rate 
risk is properly managed on both a long-range and a day-to-day basis.
    (c) The board of directors of Farmer Mac must adopt an interest 
rate risk management policy that establishes appropriate interest rate 
risk exposure limits based on the Corporation's risk-bearing capacity 
and reporting requirements in accordance with paragraphs (d) and (e) of 
this section. At least annually, the board of directors, or a 
designated subcommittee of the board, must review the policy. Any 
changes to the policy must be approved by the board of directors. You 
must report any changes to the policy to FCA's Office of Secondary 
Market Oversight within 10 business days of adoption.
    (d) The interest rate risk management policy must, at a minimum:
    (1) Address the purpose and objectives of interest rate risk 
management;
    (2) Identify and analyze the causes of interest rate risks within 
Farmer Mac's existing balance sheet structure;
    (3) Require Farmer Mac to measure the potential impact of these 
risks on projected earnings and market values by conducting interest 
rate shock tests and simulations of multiple economic scenarios at 
least quarterly;
    (4) Describe and implement actions needed to obtain Farmer Mac's 
desired risk management objectives;
    (5) Document the objectives that Farmer Mac is attempting to 
achieve by purchasing eligible investments that are authorized by Sec.  
652.35 of this subpart;
    (6) Require Farmer Mac to evaluate and document, at least 
quarterly, whether these investments have actually met the objectives 
stated under paragraph (d)(4) of this section;
    (7) Identify exception parameters and post approvals needed for any 
exceptions to the policy's requirements;
    (8) Describe delegations of authority; and
    (9) Describe reporting requirements, including exceptions to policy 
limits.
    (e) At least quarterly, Farmer Mac's management must report to the 
Corporation's board of directors, or a designated subcommittee of the 
board, describing the nature and level of interest rate risk exposure. 
Any deviations from the board's policy on interest rate risk must be 
specifically identified in the report and approved by the board, or a 
designated subcommittee of the board.


Sec.  652.20  Liquidity reserve management and requirements.

    (a) Minimum liquidity reserve requirement. Within 24 months of this 
rule becoming effective, and thereafter, Farmer Mac must hold cash, 
eligible non-program investments under Sec.  652.35 of this subpart, 
and/or on-balance sheet securities backed by portions of Farmer Mac 
program assets (loans) that are guaranteed by the United States 
Department of Agriculture as described in section 8.0(9)(B) of the Act 
(in accordance with the requirements of paragraphs (b) and (c) of this 
section), to maintain sufficient liquidity to fund a minimum of 60 days 
of maturing obligations, interest expense, and operating expenses at 
all times. You must document your compliance with this minimum reserve 
requirement at least once each month as of the last day of the month 
using month end data. Liquid asset values must be marked to market. In 
addition, you must have the capability and information systems in place 
to be able to calculate the minimum reserve requirement on a daily 
basis.
    (b) Free of lien. All investments held for the purpose of meeting 
the liquidity reserve requirement of this section must be free of liens 
or other encumbrances.
    (c) Discounts. The amount that may be counted to meet the minimum 
liquidity reserve requirement is as follows:
    (1) For cash and overnight investments, multiply the cash and 
investments by 100 percent;
    (2) For money market instruments with maturities of 5 business days 
or less, multiply the instruments by 97 percent of market value;
    (3) For money market instruments with maturities greater than 5 
business days and floating rate debt and preferred stock securities, 
multiply the instruments and securities by 95 percent of market value;
    (4) For diversified investment funds, multiply the individual 
securities in the funds by the discounts that would apply to the 
securities if held separately;
    (5) For fixed rate debt and preferred stock securities, multiply 
the securities by 90 percent of market value;
    (6) For securities backed by Farmer Mac program assets (loans) 
guaranteed by the United States Department of Agriculture as described 
in section 8.0(9)(B) of the Act, multiply the securities by 75 percent; 
and
    (7) We reserve the authority to modify or determine the appropriate 
discount for any investment used to meet the minimum liquidity reserve 
requirement if the otherwise applicable discount does not accurately 
reflect the liquidity of that investment or if the investment does not 
fit wholly within one of the specified investment categories. In making 
any modification or determination, we will consider the liquidity of 
the investment as well as any other relevant factors. We will provide 
notice of at least 20 business days before any modified discounts will 
take effect.
    (d) Liquidity reserve policy--board responsibilities. Farmer Mac's 
board of directors must adopt a liquidity reserve policy. The board 
must also ensure that management uses adequate internal controls to 
ensure compliance with the liquidity reserve policy standards, 
limitations, and reporting requirements established pursuant to this 
paragraph and to paragraphs (e), (f), and (g) of this section. At least 
annually, the board of directors or a designated subcommittee of the 
board must review and validate the liquidity policy's adequacy. The 
board of directors must approve any changes to the policy. You must 
provide a copy of the revised policy to FCA's Office of Secondary 
Market Oversight within 10 business days of adoption.
    (e) Liquidity reserve policy--content. Your liquidity reserve 
policy must contain at a minimum the following:
    (1) The purpose and objectives of liquidity reserves;
    (2) A listing of specific assets, debt, and arrangements that can 
be used to meet liquidity objectives;
    (3) Diversification requirements of your liquidity reserve 
portfolio;
    (4) Maturity limits and credit quality standards for non-program 
investments used to meet the minimum liquidity reserve requirement of 
paragraph (a) of this section;
    (5) The minimum and target (or optimum) amounts of liquidity that 
the board believes are appropriate for Farmer Mac;
    (6) The maximum amount of non-program investments that can be held 
for meeting Farmer Mac's liquidity needs, as expressed as a percentage 
of program assets and program obligations;
    (7) Exception parameters and post approvals needed;
    (8) Delegations of authority; and
    (9) Reporting requirements.
    (f) Liquidity reserve reporting--periodic reporting requirements. 
At least quarterly, Farmer Mac's management must report to the 
Corporation's board

[[Page 40647]]

of directors or a designated subcommittee of the board describing, at a 
minimum, liquidity reserve compliance with the Corporation's policy and 
this section. Any deviations from the board's liquidity reserve policy 
(other than requirements specified in Sec.  652.20(e)(5)) must be 
specifically identified in the report and approved by the board of 
directors.
    (g) Liquidity reserve reporting--special reporting requirements. 
Farmer Mac's management must immediately report to its board of 
directors any noncompliance with board policy requirements that are 
specified in Sec.  652.20(e)(5). Farmer Mac must report, in writing, to 
FCA's Office of Secondary Market Oversight no later than the next 
business day following the discovery of any breach of the minimum 
liquidity reserve requirement at Sec.  652.20(a).


Sec.  652.25  Non-program investment purposes and limitation.

    (a) Farmer Mac is authorized to hold eligible non-program 
investments listed under Sec.  652.35 for the purposes of complying 
with the interest rate risk requirements of Sec.  652.15, complying 
with the liquidity reserve requirements of Sec.  652.20, and managing 
surplus short-term funds.
    (b) Non-program investments cannot exceed the greater of $1.5 
billion or thirty-five (35) percent of program assets and program 
obligations, excluding 75 percent of the program assets that are 
guaranteed by the United States Department of Agriculture as described 
in section 8.0(9)(B) of the Farm Credit Act of 1971, as amended.


Sec.  652.30  Temporary regulatory waivers or modifications for 
extraordinary situations.

    Whenever the FCA determines that an extraordinary situation exists 
that necessitates a temporary regulatory waiver or modification, the 
FCA may, in its sole discretion:
    (a) Modify or waive the minimum liquidity reserve requirement in 
Sec.  652.20 of this subpart; and/or
    (b) Modify the amount, qualities, and types of eligible investments 
that you are authorized to hold pursuant to Sec.  652.25 of this 
subpart.


Sec.  652.35  Eligible non-program investments.

    (a) You may hold only the types, quantities, and qualities of non-
program investments listed in the following Non-Program Investment 
Eligibility Criteria Table. These investments must be denominated in 
United States dollars.

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    (b) Rating of foreign countries. Whenever the obligor or issuer of 
an eligible investment is located outside the United States, the host 
country must maintain the highest sovereign rating for political and 
economic stability by an NRSRO.
    (c) Marketable investments. All eligible investments, except money 
market instruments, must be readily marketable. An eligible investment 
is marketable if you can sell it promptly at a price that closely 
reflects its fair value in an active and universally recognized 
secondary market. You must evaluate and document the size and liquidity 
of the secondary market for the investment at time of purchase.
    (d) Obligor limits. (1) You may not invest more than 25 percent of 
your regulatory capital in eligible investments issued by any single 
entity, issuer or obligor. This obligor limit does not apply to 
Government-sponsored agencies or Government agencies. You may not 
invest more than 100 percent of your regulatory capital in any one 
Government-sponsored agency. There are no obligor limits for Government 
agencies.
    (2) Obligor limits for your holdings in an investment company. You 
must count securities that you hold through an investment company 
towards the obligor limits of this section unless the investment 
company's holdings of the security of any one issuer do not exceed 5 
percent of the investment company's total portfolio.
    (e) Preferred stock and other investments approved by the FCA. (1) 
You may purchase non-program investments in preferred stock issued by 
other Farm Credit System institutions only with our written prior 
approval. You may also purchase non-program investments other than 
those listed in the Non-Program Investment Eligibility Criteria Table 
at paragraph (a) of this section only with our written prior approval.
    (2) Your request for our approval must explain the risk 
characteristics of the investment and your purpose and objectives for 
making the investment.


Sec.  652.40  Stress tests for mortgage securities.

    (a) You must perform stress tests to determine how interest rate 
changes will affect the cashflow and price of each mortgage security 
that you purchase and hold, except for adjustable rate mortgage 
securities that reprice at intervals of 12 months or less and are tied 
to an index. You must also use stress tests to gauge how interest rate 
fluctuations on mortgage securities affect your capital and earnings. 
The stress tests must be able to measure the price sensitivity of 
mortgage instruments over different interest rate/yield curve scenarios 
and be consistent with any asset liability management and interest rate 
risk policies. The methodology that you use to analyze mortgage 
securities must be appropriate for the complexity of the instrument's 
structure and cashflows. Prior to purchase and each quarter thereafter, 
you must use the stress tests to determine that the risk in the 
mortgage securities is within the risk limits of your board's 
investment policies. The stress tests must enable you to determine at 
the time of purchase and each subsequent quarter that the mortgage 
security does not expose your capital or earnings to excessive risks.
    (b) You must rely on verifiable information to support all your 
assumptions, including prepayment and interest rate volatility 
assumptions. You must document the basis for all assumptions that you 
use to evaluate the security and its underlying mortgages. You must 
also document all subsequent changes in your assumptions. If at any 
time after purchase, a mortgage security no longer complies with 
requirements in this section, Farmer Mac's management must report to 
the Corporation's board of directors in accordance with Sec.  
652.10(g).


Sec.  652.45  Divestiture of ineligible non-program investments.

    (a) Divestiture requirements--(1) Initial divestiture requirements. 
Within 6 months of this rule's effective date, you must divest of all 
ineligible non-program investments or securities unless we approve, in 
writing, a plan that authorizes you to divest the instruments over a 
longer period of time. An acceptable plan generally would require you 
to divest of the ineligible investments or securities as quickly as 
possible without substantial financial loss.
    (2) Subsequent divestiture requirements. Subsequent to the initial 
divestiture period set forth in paragraph (a)(1) of this section, you 
must divest of an ineligible non-program investment or security within 
6 months unless we approve, in writing, a plan that authorizes you to 
divest the instrument over a longer period of time. An acceptable plan 
generally would require you to divest of the ineligible investment or 
security as quickly as possible without substantial financial loss.
    (b) Reporting requirements. Until you divest of the ineligible non-
program investment or security, you must report at least quarterly to 
your board of directors and to FCA's Office of Secondary Market 
Oversight about the status and performance of the ineligible 
instrument, the reasons why it remains ineligible, and the manager's 
progress in divesting of the investment.

Subpart B--Risk-Based Capital Requirements [Reserved]

PART 650--FEDERAL AGRICULTURAL MORTGAGE CORPORATION GENERAL 
PROVISIONS

0
10. The authority citation for part 650 continues to read as follows:

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.

0
11. Amend part 650 by revising the part heading to read as set forth 
above.


Sec. Sec.  650.1 through 650.68  [Redesignated]

0
12. Redesignate Sec. Sec.  650.1 through 650.68 as follows:

------------------------------------------------------------------------
                Old section                          New section
------------------------------------------------------------------------
650.1, subpart A..........................  651.1
650.2, subpart A..........................  651.2
650.3, subpart A..........................  651.3
650.4, subpart A..........................  651.4
650.20, subpart B.........................  652.50, subpart B
650.21, subpart B.........................  652.55, subpart B
650.22, subpart B.........................  652.60, subpart B
650.23, subpart B.........................  652.65, subpart B
650.24, subpart B.........................  652.70, subpart B
650.25, subpart B.........................  652.75, subpart B
650.26, subpart B.........................  652.80, subpart B
650.27, subpart B.........................  652.85, subpart B
650.28, subpart B.........................  652.90, subpart B
650.29, subpart B.........................  652.95, subpart B
650.30, subpart B.........................  652.100, subpart B
650.31, subpart B.........................  652.105, subpart B


------------------------------------------------------------------------
                                             Appendix A to Subpart B of
    Appendix A to Subpart B of Part 650               Part 652
------------------------------------------------------------------------
650.50, subpart C.........................  650.1
650.51, subpart C.........................  650.5
650.52, subpart C.........................  650.10
650.55, subpart C.........................  650.15
650.56, subpart C.........................  650.20
650.57, subpart C.........................  650.25
650.58, subpart C.........................  650.30
650.59, subpart C.........................  650.35
650.60, subpart C.........................  650.40
650.61, subpart C.........................  650.45
650.62, subpart C.........................  650.50
650.63, subpart C.........................  650.55
650.64, subpart C.........................  650.60
650.65, subpart C.........................  650.65
650.66, subpart C.........................  650.70
650.67, subpart C.........................  650.75
650.68, subpart C.........................  650.80
------------------------------------------------------------------------


[[Page 40651]]

Subpart A--General Provisions


Sec.  650.75  [Amended]

0
13. Amend newly designated Sec.  650.75 by removing the reference 
``Sec.  620.40'' and adding in its place, the reference ``Sec.  655.1'' 
in paragraph (c).

PART 653--[ADDED AND RESERVED]

PART 654--[ADDED AND RESERVED]

0
14. Add and reserve parts 653 and 654.

    Dated: July 7, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-13831 Filed 7-13-05; 8:45 am]
BILLING CODE 6705-01-P