[Federal Register Volume 76, Number 223 (Friday, November 18, 2011)]
[Proposed Rules]
[Pages 71798-71821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-29690]



[[Page 71797]]

Vol. 76

Friday,

No. 223

November 18, 2011

Part IV





Farm Credit Administration





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12 CFR Part 652





Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; 
Farmer Mac Investments and Liquidity Management; Proposed Rule

  Federal Register / Vol. 76 , No. 223 / Friday, November 18, 2011 / 
Proposed Rules  

[[Page 71798]]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC56


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Farmer Mac Investments and Liquidity Management

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) 
proposes to amend our regulations governing the Federal Agricultural 
Mortgage Corporation (Farmer Mac or the Corporation) in the areas of 
non-program investments and liquidity. We are proposing to modify the 
specific requirements supporting our objective to ensure that Farmer 
Mac maintains adequate liquidity to withstand stressful conditions in 
accordance with board-established risk tolerance and holds only high-
quality, liquid investments in its liquidity reserve. We also propose 
to expand the allowable purposes of Farmer Mac's non-program 
investments to include investments that would add value to Farmer Mac's 
operations by complementing its program activities. Further, we request 
comments on the best approach for compliance with section 939A of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act or DFA), which requires us to remove all references to and 
requirements relating to credit ratings and to substitute other 
appropriate standards of creditworthiness. Finally, we propose 
significant reorganizing of sections to make the flow of the issues 
covered more logical.

DATES: You may send us comments by January 17, 2012.

ADDRESSES: We offer a variety of methods for you to submit comments on 
this proposed rule. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through the Agency's Web 
site. As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Laurie A. Rea, Director, Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove email addresses to help reduce Internet spam.

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) 883-4280, TTY (703) 883-4434;

 or

Jennifer A. Cohn, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of this proposed rule is to ensure the safety and 
soundness and continuity of Farmer Mac operations for the purpose of 
furthering its public mission. To achieve this objective FCA is 
proposing to:
     Revise the permissible purposes of non-program 
investments;
     Modify the type, quality, maximum remaining term and 
maximum amount of non-program investments \1\ that may be held by 
Farmer Mac;
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    \1\ Section 652.5 defines ``non-program investments'' as 
investments other than those in (1) ``qualified loans'' as defined 
in section 8.0(9) of the Farm Credit Act of 1971, as amended (Act), 
or (2) securities collateralized by ``qualified loans.'' Section 
8.0(9) is codified at 12 U.S.C. 2279aa.
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     Strengthen diversification requirements, including 
portfolio limits on specific types of investments and counterparty 
exposure limits;
     Revise board policy and stress testing requirements;
     Modify the non-program investment portfolio limit;
     Revise the computation, and level of the minimum, 
liquidity reserve requirement;
     Reduce the regulatory burden associated with investments 
that fail to meet eligibility criteria after purchase or are otherwise 
unsuitable;
     Seek public input on approaches to remove reliance on 
credit ratings in compliance with section 939A of the Dodd-Frank Act; 
and
     Reorganize the regulations to make the flow of the issues 
covered more logical by delineating more clearly among sections 
governing investment management, interest rate risk management, and 
liquidity risk management.

II. Introduction

    On May 19, 2010, we published an advance notice of proposed 
rulemaking (ANPRM) that considered revisions to Farmer Mac's non-
program investment and liquidity requirements.\2\ The 45-day comment 
period ended on July 6, 2010. After considering the comments we 
received on this ANPRM, we now propose revisions to these requirements.
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    \2\ 75 FR 27951.
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III. Background

    Congress established Farmer Mac in 1988 as part of its effort to 
resolve the agricultural crisis of the 1980s. Congress expected that 
establishing a secondary market for agricultural and rural housing 
mortgages would increase the availability of competitively priced 
mortgage credit to America's farmers, ranchers, and rural homeowners.
    A guiding principle for FCA in establishing regulations governing 
Farmer Mac is to maintain an appropriate balance between the 
Corporation's mission achievement and risk. Specifically, the intent of 
this regulation is to allow Farmer Mac to sufficient flexibility to 
fully serve its customers and provide an appropriate return for 
investors while ensuring that it engages in safe and sound operations. 
We believe achieving an appropriate balance between mission achievement 
and risk should provide a high degree of certainty that Farmer Mac will 
continue to make its products available to serve customers without the 
need to issue debt to the Department of Treasury or seek any other form 
of government financial assistance.\3\
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    \3\ Under certain specific adverse circumstances, Farmer Mac is 
authorized to issue debt to the Department of the Treasury to meet 
obligations on guarantees. See section 8.13 of the Act (12 U.S.C. 
2279aa-13).
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    Existing FCA regulations currently authorize Farmer Mac to invest 
in non-program investments for three purposes;

[[Page 71799]]

to manage short-term surplus funds, to comply with interest rate risk 
requirements, and to comply with liquidity reserve requirements.\4\ 
Liquidity is a firm's ability to meet its obligations as they come due 
without substantial negative impact on its operations or financial 
condition. The availability of an appropriately sized portfolio 
comprised of highly liquid assets is necessary for the Corporation to 
conduct its business and to achieve its statutory purposes. Moreover, 
we believe that Farmer Mac's liquidity reserve portfolio, while it must 
be low risk, can appropriately include investments that provide a 
positive return on the portfolio and still fulfill the investment 
purposes authorized by regulation under most market conditions.
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    \4\ 12 CFR 652.25.
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    Liquidity risk is the risk that the Corporation could become unable 
to meet expected obligations and reasonably estimated unexpected 
obligations as they come due without substantial adverse impact on its 
operations or financial condition. Reasonably estimated liquidity risk 
should consider scenarios of debt market disruptions, asset market 
disruptions such as industry sector security price risk scenarios, and 
other contingent liquidity events. Contingent liquidity events include 
significant changes in overall economic conditions, events that would 
impact the market's perception of Farmer Mac (such as reputation risks 
and legal risks), and a broad and significant deterioration in the 
agriculture sector and its potential impact on Farmer Mac's need for 
cash to fulfill obligations under the terms of products such as Long-
Term Standby Purchase Commitments and AgVantage Plus bond guarantees.
    While the management of Farmer Mac's non-program investment 
portfolio and its liquidity risk are closely linked, they are not 
synonymous. Management of the non-program investment portfolio includes 
market risk, credit risk, and cash management, as well as earnings 
performance.\5\ Moreover, as discussed below, we propose to permit 
investments that complement program activities, even if those 
investments may not contribute significantly to liquidity risk 
management. The inclusion of investments of this nature highlights the 
distinction between investment management and liquidity risk 
management.
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    \5\ We view the management of non-program investment earnings 
performance as including both the avoidance of underperforming 
appropriate benchmarks for this portfolio as well as avoiding 
performance that is excessive relative to appropriate benchmarks--as 
excessive returns can reasonably be viewed as indications of 
excessive liquidity risk. We discuss this concept at length in our 
ANPRM, at 75 FR 27952-53. We continue to study this concept but do 
not propose regulatory guidance regarding the establishment of such 
benchmarks at this time.
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IV. General Discussion of Letters Commenting on the ANPRM

    We received four comment letters on the ANPRM, one each from the 
Farm Credit Council (Council), AgFirst Farm Credit Bank (AgFirst), Farm 
Credit West ACA (Farm Credit West), and Farmer Mac. We discuss in this 
preamble those comments that pertain to changes we are proposing or to 
certain provisions where we propose no changes. Some of the questions 
in our ANPRM, however, were very general and theoretical and discussed 
potential policy options that we have elected not to propose in this 
rulemaking. We do not discuss comments submitted in response to those 
questions, but we will consider them in future rulemakings as 
appropriate.
    The Council commented generally that Farmer Mac's liquidity 
requirements should be commensurate with its funding risk and 
equivalent to the liquidity standards required for Farm Credit System 
(System) lenders engaged in similar activities. The Council's letter 
also included detailed comments to many of the specific questions 
raised in the ANPRM, and it identified specific instances where the 
Council believes the Farmer Mac regulations should be more closely 
aligned with those governing the System. Ag First's and Farm Credit 
West's letters concurred with the opinions expressed in the Council's 
comment letter, and Ag First's letter also included several specific 
comments.
    In response to commenters, we agree, in general that the liquidity 
requirements governing Farmer Mac and the System should be consistent, 
and alignment is appropriate in certain areas. However, we also believe 
that Farmer Mac's business model, which focuses on secondary market 
activities (as opposed to the wholesale and retail lending models of 
FCS banks), combined with the other differences in their authorizing 
statutes, provide ample justification for differences in certain areas 
of their regulatory structures. We address the Council's and AgFirst's 
specific comments, including specific areas of alignment and 
differentiation, below in the section-by-section discussion.
    In its comment letter, Farmer Mac agreed that the ANPRM identified 
important questions relating to liquidity. It believes, however, that a 
number of these questions relate specifically to policies and 
procedures that should be set at its board level. It therefore reserved 
specific comments until FCA issues a proposed rule, and it instead 
submitted two conceptual level comments for FCA's consideration.
    Farmer Mac first suggested that ``any proposed regulation should 
establish broad guidelines that lead to prudent risk management rather 
than being prescriptive.'' Farmer Mac stated that in an economic 
environment that could change from 1 minute to the next, its ability to 
respond quickly to market forces and adjust its use of a range of asset 
classes is critical. It expressed concern that rigid and narrow 
eligibility criteria and amounts for its liquidity portfolio could lead 
to limited options and thus result in greater concentrations of 
relatively higher risk asset classes or particular assets. It 
recognized the FCA's regulatory responsibility to ensure safety and 
soundness, but it believes the onus of establishing appropriate 
specific policies and procedures should be left to its board and 
management.
    We agree that Farmer Mac's board of directors is ultimately 
accountable and responsible for effective implementation of prudent 
policies and practices. Nonetheless, as the Corporation's prudential 
regulator, we are charged with establishing an appropriate regulatory 
and supervisory framework to promote the long-term viability and safety 
and soundness of the Corporation as well as achievement of its public 
mission.
    Farmer Mac encouraged FCA to consider the 2010 Interagency Policy 
Statement on Funding and Liquidity Risk Management adopted by the other 
Federal banking regulatory agencies.\6\ Farmer Mac stated that this 
policy outlines a comprehensive yet flexible regulatory policy for 
funding and liquidity risk that promotes safety and soundness and yet 
allows for differences in board-approved policies across financial 
institutions as well as across market and economic environments. Farmer 
Mac further stated that regulations should allow for adherence in a 
variety of market situations to ensure real safety and soundness and, 
for this reason, regulations that establish guidelines or parameters, 
together with an examination process that tests board-approved policies 
and procedures,

[[Page 71800]]

would be the best framework for ensuring that Farmer Mac continues to 
maintain adequate amounts and types of liquidity.
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    \6\ See 75 FR 13656, Mar. 22, 2010. These agencies are the 
Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Federal Reserve), the 
Federal Deposit Insurance Corporation (FDIC), the Office of Thrift 
Supervision (OTS), and the National Credit Union Administration 
(NCUS).
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    In response to Farmer Mac's request that FCA consider the 
Interagency Policy Statement, we note that there are many similarities 
between that Statement and this proposed rule, particularly with 
respect to the definition of highly liquid assets, stress testing 
requirements, and contingency funding plans. In addition, this proposed 
rule has also, where appropriate, drawn on guidance issued to 
international regulators by the Basel Committee on Banking Supervision 
(Basel Committee) on the topic of liquidity risk management.\7\
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    \7\ ``Principles for Sound Liquidity Risk Management and 
Supervision,'' Basel Committee on Banking Supervision, September 
2008, and ``International framework for liquidity risk management, 
standards and monitoring,'' Consultative Document, Basel Committee 
on Banking Supervision, December 2009. These documents can be found 
on the Basel Committee's Web site at http://www.bis.org/bcbs.
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    However, both the Interagency Policy Statement and the guidance 
issued by the Basel Committee apply to a very large and diverse group 
of financial institutions with wide variation in structure, size, and 
complexity of operations. That breadth of covered institutions 
necessitates that any Interagency Policy Statement providing guidance 
to all of them must be general in its content.
    OSMO's role as regulator of one institution provides the 
opportunity to be more specific in its guidance. Nonetheless, we 
generally agree with Farmer Mac's main point to preserve as much of the 
flexibility embedded in the Interagency Policy Statement as is 
appropriate.
    Farmer Mac's second conceptual level comment is that, since its 
liquidity portfolio will continue to be a large part of its balance 
sheet, any new regulatory approach should recognize the tradeoff 
between the need for liquidity and the need for ``asset income'' (i.e., 
earnings). Farmer Mac states that prudent business practices cannot 
ignore the need to provide some return on investments, given the 
necessary size of its portfolio. Farmer Mac believes the need for 
return on its investments is even more critical because of the 
statutory requirements that it hold minimum capital of 275 basis points 
against the investments.\8\ Farmer Mac asserted the importance of 
balancing the costs of ``a strong liquidity position with the economic 
interests of Farmer Mac's customers and other stakeholders that serve 
rural America.'' Farmer Mac suggests this need for regulatory balance 
is even more critical in volatile financial markets, when asset prices 
or expected returns can change suddenly. The Corporation further states 
that regulations that establish ``guidelines'' rather than prescriptive 
``narrow targets or asset classes'' would provide Farmer Mac the 
flexibility to respond appropriately to volatile markets and 
``prudently reduce risk by adjusting policies and changing the asset 
mix to eliminate illiquid assets, while maintaining an appropriate 
return.'' Farmer Mac asserts that ultimately, this will lead to the 
safest and most liquid portfolio possible.
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    \8\ Section 8.33 of the Act (12 U.S.C. 2279bb-2).
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    In response to this point, we agree that our regulations should 
recognize the tradeoff between the need for liquidity and the need for 
a reasonable return on assets. This concept is central to this 
rulemaking and we discussed the policy implications of the risk and 
return tradeoff in detail in the ANPRM.\9\ There, we noted that the 
balance we target in the revised regulations is intended to serve all 
Farmer Mac stakeholders, who include not only customers who serve the 
financing needs of rural America and investors who require a return on 
investment, but also taxpayers. Liquidity risk management is a 
specified purpose of the non-program investment portfolio. Income, 
while acceptable within a reasonable range, is not a purpose of the 
non-program investment portfolio. Accordingly, our guiding principle is 
that high liquidity attributes must generally take precedence over 
earnings generation in Farmer Mac's non-program investment portfolio.
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    \9\ 75 FR 27952-53, May 19, 2010.
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V. Section-by-Section Discussion of Proposed Revisions

    We propose to reorganize the rule considerably and provide the 
following table to orient the reader to the proposed reorganization. 
The left column of the table contains the existing rule's section 
headings and the right column contains the proposed reorganization of 
section sequence and heading changes.

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           Existing regulations                Proposed reorganization
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Sec.   652.1 Purpose.                       Sec.   652.1 Purpose.
Sec.   652.5 Definitions.                   Sec.   652.5 Definitions.
Sec.   652.10 Investment management and     Sec.   652.10 Investment
 requirements.                               management.
Sec.   652.15 Interest rate risk            Sec.   652.15 Non-program
 management and requirements.                investment purposes and
                                             limitation.
Sec.   652.20 Liquidity reserve management  Sec.   652.20 Eligible non-
 and requirements.                           program investments.
Sec.   652.25 Non-program investment        Sec.   652.25 Management of
 purposes and limitation.                    ineligible and unsuitable
                                             investments.
Sec.   652.30 Temporary regulatory waivers  Sec.   652.30 Interest rate
 or modifications for extraordinary          risk management.
 situations.
Sec.   652.35 Eligible non-program          Sec.   652.35 Liquidity
 investments.                                management.
Sec.   652.40 Stress tests for mortgage     Sec.   652.40 Liquidity
 securities.                                 reserve requirement and
                                             supplemental liquidity.
Sec.   652.45 Divestiture of ineligible     Sec.   652.45 Temporary
 non-program investments.                    regulatory waivers or
                                             modifications for
                                             extraordinary situations.
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    We will address each section below in the order it appears in these 
proposed regulations and discuss, where applicable, the rationale for 
the reorganization. Generally, the proposed reorganization is meant to 
address sequentially as completely as possible the three major 
categories of management governed in the rule: Investment management; 
interest rate risk management; and liquidity management.
    Throughout this regulation, we propose minor technical, clarifying, 
and non-substantive language changes that we do not specifically 
discuss in this preamble.

A. Section 652.1--Purpose

    We propose to delete the first sentence of this section as 
unnecessary. There is no need to list the topics of the subpart.

B. Section 652.5--Definitions

    To enhance clarity of the rule, we propose to add a definition of 
``cash'' to

[[Page 71801]]

mean cash balances held at Federal Reserve Banks, proceeds from traded-
but-not-yet-settled debt, and the insured amount of balances held in 
deposit accounts at Federal Deposit Insurance Corporation-insured 
banks.
    We also propose to add definitions for two newly proposed planning 
requirements, the Liability Maturity Management Plan and the 
Contingency Funding Plan, which are discussed below in the discussion 
of Sec.  652.35.
    We propose to delete the definition of ``liquid investments,'' as 
well as the definition of ``marketable'' in current Sec.  652.20(c), 
and to replace those terms with a description of the term ``highly 
marketable'' in Sec.  652.40(c). This term is addressed in the 
discussion of that section.
    We propose to add a definition of ``liquidity reserve.'' This new 
definition is described in the discussion of proposed Sec.  652.40.
    Finally, we are proposing several technical changes. We propose to 
correct an erroneous regulatory reference in the definition of 
affiliate. We propose to clarify the definitions of FCA, Government 
agency, and Government-sponsored agency. And we define OSMO to mean 
FCA's Office of Secondary Market Oversight.

C. Section 652.10--Investment Management

    Section 652.10 would continue to require Farmer Mac to establish 
and follow certain fundamental practices to effectively manage risks in 
its investment portfolio. The recent crisis and its lingering effects 
have re-emphasized the importance of sound investment management, and 
we believe that strengthened regulation would further insure the safe 
and sound management of investments. Accordingly, we are proposing the 
revisions discussed herein. In addition, we propose minor technical, 
clarifying, and non-substantive language changes to this section that 
we do not specifically discuss in this preamble.
    We propose to revise the section heading to delete ``and 
requirements'' as it should be understood that the regulations contain 
requirements.
1. Section 652.10(a)--Responsibilities of the Board of Directors
    In Sec.  652.10(a), we propose to add the requirement that the 
Farmer Mac board of directors affirmatively validate the sufficiency of 
investment policies to ensure the board's full and in-depth 
understanding of, and control over, the policies.
2. Section 652.10(b)--Investment Policies--General Requirements
    Section 652.10(b) lists the items that the board's investment 
policy must address, and it includes every requirement of Sec.  652.10. 
Because we propose to change some of those requirements, we also 
propose to change the listing, to clarify our expectations as to the 
appropriate content of the board's policies. We discuss below the 
requirements we propose to revise.
    In addition, we propose to move existing Sec.  652.10(c)(2), which 
requires that Farmer Mac's records or minutes must document any 
analyses used in formulating policies or amendments of policies, to 
Sec.  652.10(b). With this move, this requirement would no longer be 
limited to policies governing market risk; it would apply to all 
investment management policies.
3. Section 652.10(c)--Investment Policies--Risk Tolerance
    Our proposed changes in this section add greater specificity to our 
expectations regarding our existing requirements. These proposed 
changes are intended to provide clarity to our expectations but are not 
intended to fundamentally change the requirements.
    Proposed Sec.  652.10(c)(1) requires Farmer Mac's investment 
policies to establish risk limits for credit risk. Policies would have 
to include credit quality standards, limits on counterparty risk, and 
risk diversification standards that appropriately limit concentrations 
based on geographical area, industry sectors, or asset classes or 
obligations with similar characteristics. Policies would also have to 
address management of relationship brokers, dealers and investment 
bankers, as well as collateral management related to margin 
requirements on repurchase agreements.
    Proposed Sec.  652.10(c)(2) requires Farmer Mac's investment 
policies to establish risk limits for market risk as the value of its 
holdings may decline in response to changes in interest rates or market 
conditions. 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.
4. Section 652.10(e)--Internal Controls
    In Sec.  652.10(e)(2), we propose adding to the list of personnel 
whose duties and supervision must be separated from personnel who 
execute investment transactions. These additional personnel are those 
who post accounting entries, reconcile trade confirmations, and report 
compliance with investment policy. We believe this additional 
separation is a best practice that Farmer Mac must have in place to 
ensure controls are sufficient and appropriate.
    In Sec.  652.10(e)(4), we propose to require Farmer Mac to 
implement an effective internal audit program to review, at least 
annually, its investment controls, processes, and compliance with FCA 
regulations and other regulatory guidance. The internal audit program 
would specifically have to include a review of Farmer Mac's process for 
ensuring all investments are eligible and suitable for purchase under 
its board's investment policies. We believe this requirement provides 
important guidance on Agency expectations regarding internal oversight 
of these operations.
5. Section 652.10(f)--Due Diligence
    Proposed Sec.  652.10(f) would cover the pre-purchase analysis, 
ongoing value determination, quarterly stress testing, and pre-sale 
value verification that Farmer Mac must perform on each non-program 
investment that it purchases. This provision would combine in one 
location requirements that are now primarily in existing Sec.  
652.10(f) and Sec.  652.40 and in other provisions as well. It would 
also contain a more detailed description of the due diligence 
procedures that are required for investments, but we do not intend to 
change the fundamental intent of the provision.
a. Section 652.10(f)(1)--Pre-Purchase Analysis
    Proposed Sec.  652.10(f)(1) would require Farmer Mac to satisfy 
certain requirements for each investment that it wishes to purchase. 
Proposed Sec.  652.10(f)(1)(i) sets forth pre-purchase requirements 
regarding the objective, eligibility, and suitability of investments. 
This provision would require Farmer Mac, before it purchases an 
investment, to document the Corporation's investment objective.\10\
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    \10\ A similar requirement is currently contained in Sec.  
652.15(d)(5), and we therefore propose to delete that provision.
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    Proposed Sec.  652.10(f)(1)(i) would also require Farmer Mac to 
conduct sufficient due diligence to determine whether the investment is 
eligible under Sec.  652.35 and suitable under its board-approved 
investment policies and to document the investment's eligibility and 
suitability. ``Suitability'' is a term that is new to our regulations. 
A non-program investment is ``suitable'' if it is eligible under Sec.  
652.35(a) and conforms to Farmer Mac board policy. A non-

[[Page 71802]]

program investment is unsuitable if it is eligible but does not conform 
to Farmer Mac board policy.
    Finally, proposed Sec.  652.10(f)(1)(i) would require Farmer Mac's 
investment policies to fully address the extent of pre-purchase 
analysis that management must perform for various types, classes, and 
structure of investments.
    In proposed Sec.  652.10(f)(1)(ii), we would retain from existing 
Sec.  652.10(f)(1) the requirement that prior to purchase, Farmer Mac 
must verify the value of an investment (unless it is a new issue) with 
a source that is independent of the broker, dealer, counterparty, or 
other intermediary to the transaction.
    In proposed Sec.  652.10(f)(1)(iii), we would require Farmer Mac to 
document its risk assessment of each investment, including, at a 
minimum, an evaluation of credit risk, market risk, and liquidity risk. 
In its evaluation of credit risk, Sec.  652.10(f)(1)(iii)(A) would 
require Farmer Mac to consider, as applicable, the nature and type of 
underlying collateral, credit enhancements, complexity of the 
structure, and any other available indicators of the risk of default.
    In its evaluation of market risk, Sec.  652.10(f)(1)(iii)(B) would 
require Farmer Mac to consider how various market stress scenarios 
including, at a minimum, potential changes in interest rates and market 
conditions (such as changes in market perceptions of creditworthiness), 
are likely to affect the cash flow and price of the instrument, using 
reasonable and appropriate methodologies for stress testing for the 
type or class of instrument to ensure the investment complies with risk 
limits established in its investment and interest rate risk policies.
    We note that in our existing regulations, the pre-purchase stress 
testing requirement is combined with a quarterly portfolio stress 
testing requirement in Sec.  652.40, which is a standalone stress 
testing regulation. With the intent of improving the organization of 
the regulations, we have moved the pre-purchase and quarterly stress 
testing requirements into the paragraph covering due diligence in our 
investment management regulation (Sec.  652.10) and have separated the 
two stress tests in that paragraph to make clearer the difference in 
stress tests to evaluate individual securities prior to purchase and 
quarterly stress tests conducted on the investment portfolio.\11\
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    \11\ In the proposal, the quarterly stress testing requirement 
would be located at Sec.  652.10(f)(3). We would delete Sec.  652.40 
as a stand-alone stress testing regulation. In addition, the 
proposed regulation would impose stress testing in Sec.  
652.30(c)(3), as part of interest rate risk management, and in Sec.  
652.35(e)(3)(v), as part of the contingency funding plan (CFP). We 
expect that Farmer Mac will integrate these stress testing 
requirements to the extent appropriate.
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    Existing Sec.  652.40 imposes stress testing requirements only on 
mortgage securities and requires consideration of interest rate risk 
scenarios only. The pre-purchase stress testing requirements in 
proposed Sec.  652.10(f)(1)(iii)(B) would apply to all non-program 
investments, including Treasury securities, and they would more broadly 
include market stress scenarios such as changes in market conditions, 
including market perceptions of creditworthiness, as well as stressed 
interest rate scenarios. We believe that all investments must be stress 
tested to provide for a comprehensive and internally consistent 
analytical framework from which to evaluate the risks in the investment 
portfolio. In addition, we believe that a broader consideration of 
changes in market conditions is necessary because of the potential for 
a direct impact on liquidity of adverse changes in those conditions.
    In its response to a question in our ANPRM about stress testing, 
the Council stated that stress testing should be an integral part of 
managing liquidity and that regulatory requirements should focus on 
requiring entities to regularly test various stress scenarios unique to 
their own balance sheet and potential liabilities. The Council further 
stated that an institution with a relatively low level of liquidity 
risk might appropriately accept relatively more risk in its liquidity 
portfolio, while the opposite might be true for an institution with 
more liquidity risk. We agree generally with these statements and 
consider them to be generally consistent with our proposals in the area 
of stress testing.
    In its evaluation of liquidity risk, Sec.  652.10(f)(1)(iii)(C) 
would require Farmer Mac to consider the investment structure, the 
depth of the market, and Farmer Mac's ability to liquidate the position 
under a variety of economic scenarios and market conditions.
b. Section 652.10(f)(2)--Ongoing Value Determination
    Proposed Sec.  652.10(f)(2) retains the requirement from the 
existing provision that at least monthly, Farmer Mac must determine the 
fair market value of each investment in its non-program investment 
portfolio and the fair market value of its entire non-program 
investment portfolio.
c. Section 652.10(f)(3)--Quarterly Stress Testing
    As discussed above, we propose moving our non-program investment 
quarterly stress-testing requirements into Sec.  652.10(f)(3), as part 
of our due diligence requirements, and removing existing Sec.  652.40 
as a standalone stress testing regulation. As with the pre-purchase 
stress testing discussed above, the proposed rule would impose the 
quarterly stress testing requirement on all non-program investments, 
including Treasury securities.
    Existing Sec.  652.40 is limited to interest rate stress scenarios. 
Proposed Sec.  652.10(f)(3)(ii) recognizes that there are stress 
scenarios other than interest rate risk that could also impact the 
value or marketability of investments including, at a minimum, changes 
in market conditions (including market perceptions of 
creditworthiness).
    The revisions would also include a change to the requirement that 
all stress testing assumptions be supported by verifiable information; 
we propose to qualify this requirement with ``to the maximum extent 
practicable'' to recognize that modeling treatments could require 
assumptions for which insufficient supporting data or information 
exists, thus requiring management to apply reasonable judgment. 
Moreover, Farmer Mac would be required to document the basis for all 
assumptions used.
6. Section 652.10(g)--Reports to the Board of Directors
    We propose revisions to Sec.  652.10(g), which specifies 
information that executive management must report to the board or a 
board committee each quarter. The requirements would be fundamentally 
unchanged but the language would be modified to add clarifying detail 
to FCA expectations. The following would have to be reported:
     Plans and strategies for achieving the board's objective 
for the investment portfolio;
     Whether the investment portfolio effectively achieves the 
board's objectives;
     The current composition, quality, and liquidity profile of 
the investment portfolio;
     The performance of each class of investments and the 
entire investment portfolio, including all gains and losses incurred 
during the quarter on individual securities sold before maturity and 
why they were liquidated;
     Potential risk exposure to changes in market interest 
rates as identified through quarterly stress testing and any

[[Page 71803]]

other factors that may affect the value of the investment holdings;
     How investments affect Farmer Mac's capital, earnings, and 
overall financial condition; and
     Any deviations from the board's policies. These deviations 
must be formally approved by the board of directors.

D. Section 652.15--Non-Program Investment Purposes and Limitation

    We propose to renumber existing Sec.  652.25 as Sec.  652.15. We 
propose in paragraph (a) to add a new permissible purpose for non-
program investments--investments that complement program business 
activities. This purpose would recognize that certain investments, such 
as investments with a rural focus that are backed by the full faith and 
credit of the United States Government, could advance Farmer Mac's 
mission. This provision would not add any new eligible investments to 
our authorized list; Farmer Mac would still need to seek FCA's prior 
approval for any investments not explicitly authorized on the list of 
eligible investments.
    Section 8.3(c)(12) of the Act permits Farmer Mac to ``purchase or 
sell any securities or obligations * * * necessary and convenient to 
the business of the Corporation.'' We believe this proposed broadening 
of investment purposes is compatible with Farmer Mac's statutory 
mandate and consistent with congressional intent.
    Neither the proposed purpose nor any of the three existing purposes 
authorize Farmer Mac to accumulate investment portfolios for arbitrage 
activities or to engage in trading for speculative or primarily capital 
gains purposes. Realizing gains on sales before investments mature is 
not a regulatory violation as long as the profits are incidental to the 
specified permissible investment purposes. Farmer Mac must ensure that 
its internal controls, required under Sec.  652.10(e), ensure that 
eligible investments purchased under Sec.  652.20(a) clearly fulfill 
one or more of the purposes authorized under Sec.  652.15(a).
    In addition, we propose to change the current regulatory maximum 
non-program investment parameters in paragraph (b) to delete the 
alternate maximum of a fixed $1.5 billion. While we continue to believe 
that excessive or inappropriate use of non-program investments is not 
consistent with the Corporation's statutory mission and status as a 
Government-sponsored enterprise (GSE), we believe the maximum 
investment parameter of 35 percent of program volume alone is 
sufficient and that there is no longer a need for the $1.5 billion 
ceiling on that maximum calculation. This proposed change is based on 
Farmer Mac's growth since the $1.5 billion ceiling was established in 
2005.
    We also propose to permit Farmer Mac to exclude investments pledged 
to meet margin requirements for derivative transactions (collateral) 
when calculating the 35-percent investment limit under paragraph 
(b).\12\ We note that investments that are pledged as collateral do not 
count toward Farmer Mac's compliance with its liquidity reserve 
requirement.\13\ We propose this change because the Dodd-Frank Act may 
result in additional margin requirements for Farmer Mac and we do not 
want to discourage the use of derivatives as an appropriate risk 
management tool.
---------------------------------------------------------------------------

    \12\ Paragraph (b) permits Farmer Mac to hold eligible non-
program investments, for specified purposes, up to 35 percent of 
program volume.
    \13\ Under existing Sec.  652.20(b), all investments held for 
the purpose of meeting the liquidity reserve requirement must be 
free of liens or other encumbrances. As discussed below, we propose 
a more detailed version of this requirement at Sec.  652.40(b).
---------------------------------------------------------------------------

E. Section 652.20--Eligible Non-Program Investments

    Under the current rule, Farmer Mac may purchase and hold the 
eligible non-program investments listed in Sec.  652.35(a). This list 
permits Farmer Mac to invest, within limits, in an array of highly 
liquid investments while providing a regulatory framework that can 
readily accommodate innovations in financial products and analytical 
tools.
    The recent financial crisis resulted in substantial turmoil in the 
financial markets. Based on this experience, we now propose amendments 
that would clarify the characteristics of eligible investments, 
eliminate certain investments, and reduce portfolio limits where 
appropriate. In addition, we ask questions about the most effective way 
to comply with section 939A of the DFA. As discussed in greater detail 
below, that provision requires each Federal agency to revise all 
regulations that refer to or require reliance on credit ratings to 
assess creditworthiness of an instrument to remove the reference or 
requirement and to substitute other appropriate creditworthiness 
standards. We also propose to renumber this regulation as Sec.  652.20.
1. Section 652.20(a)
    We propose revisions to the language in the introductory paragraph 
of paragraph (a). The existing language authorizes Farmer Mac to hold 
only the types, quantities, and qualities of investments that are 
listed. Like our existing regulation, our proposal would permit 
institutions to purchase only those investments that satisfy the 
eligibility criteria in Sec.  652.35 (which would be renumbered as 
Sec.  652.20). An investment that does not satisfy the eligibility 
criteria would not be eligible for purchase and would be subject to the 
divestiture requirements of proposed Sec.  652.25(a) if it were 
purchased.\14\
---------------------------------------------------------------------------

    \14\ In this context, ``purchase'' would include an acquisition 
such as a swap of one security in exchange for another. This 
interpretation is consistent with our interpretation of the existing 
rule.
---------------------------------------------------------------------------

    In a change from our existing approach, however, eligibility would 
be determined only at the time of purchase. An investment that 
satisfies the eligibility criteria at the time of purchase but that 
subsequently failed to satisfy the eligibility criteria would not 
become ineligible and would not have to be divested. Instead, Farmer 
Mac would be permitted to retain the investment subject to certain 
requirements. As discussed below, in our discussion of our proposed 
amendments to Sec.  652.25, we believe this change would reduce 
regulatory burden without creating safety and soundness concerns.
    In addition, existing Sec.  652.35(a) states that all investments 
must be denominated in United States dollars. We propose to relocate 
this language to paragraph (b) of redesignated Sec.  652.20.
    The table in Sec.  652.35(a) currently provides that a specified 
nationally recognized statistical rating organizations (NRSRO) credit 
rating is a criterion for eligibility for a number of asset classes, 
including municipal securities, money market instruments, mortgage 
securities, asset-backed securities, and corporate debt securities. 
Section 939A of the Dodd-Frank Act requires us to remove this criterion 
and to substitute other appropriate creditworthiness standards. Below, 
we discuss possible approaches as to how we can comply with this 
requirement. We do not propose any revisions to this criterion at this 
time.
    Finally, we discuss general comments on the table, received in 
response to the ANPRM. In the ANPRM, we asked, ``Would the experience 
gained during the financial markets crisis of 2008 and 2009 justify 
adjustments to many of the portfolio limits in Sec.  652.35 to add 
conservatism to them and improve diversification of the portfolio?'' We 
also invited comment on appropriate changes within each asset class 
regarding final maturity limit, credit rating requirement, portfolio

[[Page 71804]]

concentration limit, and other restrictions.
    The Council suggested making ``limited changes'' to the portfolio 
limits, stating that the financial markets, and specifically the market 
for mortgage securities, have arguably suffered through severe crisis 
and System entities have emerged in a solid financial position. The 
Council believes that existing limits, particularly on non-Agency 
mortgage securities, arguably prevented System entities from focusing 
on higher return sectors that would have resulted in larger losses. The 
Council suggested that the Farmer Mac regulations should be ``closely 
aligned with existing limits for other Farm Credit entities.''
    In our discussion below, we discuss the revisions we propose by 
eligible asset class, and we respond to the Council's general comments 
above as well as their specific comments on particular asset classes.
a. Section 652.20(a)(1)--Obligations of the United States
    Existing Sec.  652.35(a)(1)(which would become Sec.  652.20(a)(1)) 
permits Farmer Mac to invest in Treasuries and other obligations 
(except mortgage securities) fully insured or guaranteed by the United 
States Government or a Government agency without limitation.\15\ We 
note that Ginnie Mae securities fall under this provision.
---------------------------------------------------------------------------

    \15\ The proposed rule would make a minor, non-substantive 
change to the language in this provision to reflect the slightly 
revised definition of ``Government agency'' we propose in Sec.  
652.5. We intend no change in meaning with this proposed revision.
---------------------------------------------------------------------------

    In the ANPRM, we asked, ``Given that Farmer Mac might not always 
hold the `on the run' (i.e., highest liquidity) issuance of Treasury 
securities, would imposing maximum maturity limitations enhance the 
resale value of these investments in stressful conditions?'' In its 
comments, the Council stated that ``Treasury securities with longer 
dated maturities have the potential to provide less liquidity due to 
sensitivities to changes in interest rates.''
    We propose no change to this regulation. Although we agree with the 
Council that the value of longer term Treasuries can vary due to 
interest rate risk, we deal with interest rate risk in a separate 
section of these regulations. In this section, our concern is focused 
on differences in liquidity due to differences in trading volume and 
bid/ask spreads between on-the-run and off-the-run Treasury securities.
b. Section 652.20(a)(2)--Obligations of Government-Sponsored Agencies
    Existing Sec.  652.35(a)(2)(which would become Sec.  652.20(a)(2)) 
permits Farmer Mac to invest in obligations of Government-sponsored 
agencies,\16\ including Government-sponsored agency securities and 
other obligations fully insured or guaranteed by Government-sponsored 
agencies (but not mortgage securities). The only limitation currently 
imposed on these non-mortgage security investments is found in Sec.  
652.35(d)(1), which precludes Farmer Mac from investing more than 100 
percent of its regulatory capital in any one Government-sponsored 
agency.\17\
---------------------------------------------------------------------------

    \16\ Section 652.5 defines Government-sponsored agency as an 
agency, instrumentality, or corporation chartered or establish 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, including but not limited to any 
Government-sponsored enterprise. We propose a minor, technical 
change in this definition.
    \17\ In light of the proposed changes to this provision, we 
propose to delete the Sec.  652.35(d)(1) limitation. We discuss that 
proposal below.
---------------------------------------------------------------------------

    In the ANPRM we asked, ``In light of the recent financial 
instability of Government-sponsored agencies such as Fannie Mae and 
Freddie Mac, would it be appropriate to revise this section to put 
concentration limits on exposure to these entities in Sec.  
652.35(a)(2)?'' The Council stated that it is appropriate to maintain 
portfolio limits on securities issued by the Federal National Mortgage 
Corporation (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac) and even Government National Mortgage Corporation (Ginnie 
Mae) securities, which enjoy explicit government backing. The Council 
noted that the Federal government is currently contemplating regulatory 
GSE reform through the legislative process in this area.
    We do not propose concentration limits on exposures to Government-
sponsored agencies based on historical experience, including that 
observed in recent years, that the value of GSE debt has not declined 
materially even when the GSE has been under significant stress.
    Our proposal would limit investments in Government-sponsored agency 
obligations to senior debt securities. We believe counterparty 
exposures to Government-sponsored agencies should be confined only to 
the highest quality investments and should not include subordinated 
debt or hybrid equity issuances.
c. Section 652.20(a)(3)--Municipal Securities
    Existing Sec.  652.35(a)(3) (which would become Sec.  652.20(a)(3)) 
authorizes investments in municipal securities. Currently, revenue 
bonds are limited to 15 percent or less of Farmer Mac's total 
investment portfolio, while general obligations have no such 
limitations. The maturity limit is also longer for general obligations.
    In the ANPRM we asked whether it would be ``more appropriate for 
our regulation to limit both sub-categories [of municipal securities] 
equally?'' The Council stated that historically, general obligation 
bonds have been less risky than revenue bonds because of the taxing 
authority of the underlying issuer but also stated that in the recent 
economic downturn, the safety of many of these general obligation 
issues have been called into question due to the financial strains on 
many State and local governments. Accordingly, the Council commented 
that all municipal securities should carry similar limits.
    We agree. We also believe, in light of the ongoing financial strain 
at the municipal level, that additional limitations on municipal 
securities, whether general obligations or revenue bonds, are 
warranted. Accordingly, we propose to authorize investment in municipal 
securities only if the securities have a maximum remaining maturity of 
10 years or less at the time of purchase and the investments do not 
exceed 15 percent of the total non-program investment portfolio.
d. Section 652.20(a)(4)--International and Multilateral Development 
Bank Obligations
    Section 652.35(a)(4) (which would become Sec.  652.20(a)(4)) 
currently authorizes investments in obligations of international and 
multilateral development banks, provided the United States is a voting 
shareholder. Examples of eligible banks include the International Bank 
for Reconstruction and Development (World Bank), Inter-American 
Development Bank, and the North American Development Bank. Other highly 
rated banks working in concert with the World Bank to promote 
development in various countries are also eligible, subject to the 
shareholder-voting requirement above. There is no maturity limit or 
portfolio limit.
    We propose to revise this provision to authorize investment in such 
obligations with similar constraints as those applied to municipal 
securities. The nature of the obligations in this asset class is 
similar to municipal obligations in that the ultimate creditors

[[Page 71805]]

are a diverse group of governments with varying credit characteristics. 
While we view this asset class as generally strong credits, we do not 
believe its strength is equivalent to U.S. Treasuries, and therefore 
some limits are appropriate. On that basis, we propose a 10-year limit 
on their maximum maturity remaining at purchase and a portfolio 
concentration limit of 15 percent of Farmer Mac's total non-program 
investment portfolio.
e. Section 652.20(a)(5)--Money Market Instruments
    Existing Sec.  652.35(a)(5) (which would become Sec.  652.20(a)(5)) 
permits institutions to invest in repurchase agreements that satisfy 
specified conditions. If the counterparty defaults, the regulation 
requires the institution to divest non-eligible securities in 
accordance with the divestiture requirements of Sec.  652.45. Under our 
proposal, as discussed above, an eligible investment could not become 
ineligible, and would not be required to be divested. Accordingly, we 
propose to delete this divestiture requirement.
f. Section 652.20(a)(6)--Mortgage Securities
    Existing Sec.  652.35(a)(6) (which would become Sec.  652.20(a)(6)) 
requires stress testing of all mortgage securities. As discussed above, 
proposed Sec.  652.10(f) would require stress testing on all 
investments held in Farmer Mac's portfolio. Accordingly, we propose to 
delete the specific stress-testing requirement for mortgage securities.
    The first asset class listed in existing Sec.  652.25(a)(6) is 
mortgage securities that are issued or guaranteed by the United States 
or a Government agency. We propose to revise this asset class 
description to refer to mortgage securities that are fully guaranteed 
or fully insured by a Government agency. The deletion of ``United 
States'' is a technical, non-substantive change, because we propose to 
include ``United States'' in the definition of ``Government agency'' in 
Sec.  652.5. The addition of the word ``fully'' makes clear that this 
asset class includes only mortgage securities that are fully backed by 
the full faith and credit of the United States. If the United States 
Government issues a mortgage security that is not fully guaranteed or 
fully insured by the full faith and credit of the United States 
Government, it is not eligible under this asset class.
    The third asset class listed in existing Sec.  652.35(a)(6) 
authorizes investments in non-Government agency or Government-sponsored 
agency securities that comply with 15 U.S.C. 77d(5) or 15 U.S.C. 
78c(8)(41). These types of mortgage securities are typically issued by 
private sector entities and are mostly comprised of securities that are 
collateralized by ``jumbo'' mortgages with principal amounts that 
exceed the maximum limits of Fannie Mae or Freddie Mac programs. We 
propose technical, non-substantive changes to the language describing 
this asset class, for clarity. Furthermore, in this preamble we refer 
to these securities using the shorthand reference non-Agency mortgage 
securities.
    In the ANPRM, we invited comment on whether it is appropriate to 
continue to include non-Agency mortgage securities collateralized by 
``jumbo'' mortgages as an eligible liquidity investment. The Council 
commented that while these are not as liquid as agency collateralized 
mortgage obligations, and despite the fact that this sector is 
currently under stress, it believes the sector can provide viable 
diversification and should develop stronger credit quality over time 
with improved underwriting and increased credit enhancements. We do not 
propose to remove this asset class from the list of eligible 
investments at this time, but we will continue to evaluate the 
appropriateness of including this asset class.
    However, to reduce credit default risk that may be associated with 
certain positions in non-Agency mortgage securities, we propose to 
require that a position in such a security would be eligible only if it 
is the senior-most position at the time of purchase. The FCA considers 
a position in a non-Agency mortgage security to be the senior-most 
position only if it currently meets both of the following criteria:
     No other remaining position in the securitization has 
priority in liquidation. Remaining positions that are the last to 
experience losses in the event of default and which share those losses 
pro rata meet this criterion.
     No other remaining position in the securitization has a 
higher priority claim to any contractual cash flows. Remaining 
positions that have the first priority claim to contractual cash flows 
(including planned amortization classes), as well as those that share 
on a pro rata basis a first priority claim to cash flows meet this 
criterion.
    The tranche that is the senior-most position at the time Farmer Mac 
is considering purchase is not necessarily the same tranche that was in 
the senior-most position at the time of issue. Farmer Mac should be 
careful not to be misled by the labeling of tranches as ``super 
senior'' or ``senior'' in a prospectus (or on market reporting 
services). Farmer Mac may purchase non-Agency mortgage-backed 
securities (MBS) only if the securities satisfy the above two criteria 
at the time of purchase.
    Further, the existing rule's concentration limit for non-Agency 
mortgage securities is 15 percent when combined with another asset 
class--commercial mortgage-backed securities. However, because of our 
belief that commercial mortgage-backed securities pose undue risk due 
to the nature of the underlying collateral and the particularly weak 
performance of this asset class during the financial crisis, we propose 
to delete these securities as an eligible asset class. Given the 
existing rule's combined portfolio concentration limit of 15 percent 
for these two asset classes, we propose to set the portfolio 
concentration limit for non-Agency securities at 10 percent.
g. Section 652.20(a)(7)--Asset-Backed Securities
    Existing Sec.  652.35(a)(7) (which would become Sec.  652.20(a)(7)) 
authorizes Farmer Mac to invest in asset-backed securities (ABS) 
secured by credit card receivables; automobile loans; home equity 
loans; wholesale automobile dealer loans; student loans; equipment 
loans; and manufactured loans. The maximum weighted average life (WAL) 
\18\ for fixed rate or floating rate ABS at their contractual interest 
rate caps is 5 years, and all ABS combined are limited to 25 percent of 
Farmer Mac's non-program investment portfolio.
---------------------------------------------------------------------------

    \18\ Generally, the WAL is the average amount of time required 
for each dollar of invested principal to be repaid, based on the 
cashflow structure of an ABS and an assumed level of prepayments. 
Nearly all ABS are priced and traded on the basis of their WAL, not 
their final maturity dates.
---------------------------------------------------------------------------

    In its comment letter, AgFirst noted that the existing 25-percent 
portfolio limit is higher than the 20 percent permitted for other 
System institutions.\19\ AgFirst stated that there should be movement 
toward consistency. AgFirst further stated that ABS suffered from 
severe market deterioration during the recent credit crisis and that 
bringing the limit down to that in place for other System institutions 
would help reduce concentration risk.
---------------------------------------------------------------------------

    \19\ See Sec.  615.5140(a)(6).
---------------------------------------------------------------------------

    Because we agree with AgFirst's comment, and because of the 
relative lack of liquidity of all ABS in the wake of the recent 
financial crisis, we propose to reduce the portfolio limit to no more 
than 15 percent (combined) of Farmer Mac's total investment portfolio 
and to

[[Page 71806]]

limit any single collateral type to no more than 5 percent.\20\ In 
addition, given the significant instability in the ABS market in recent 
years, we propose a maximum WAL of 7 years for floating rate ABS with 
current coupon rates below their contractual interest rate cap.
---------------------------------------------------------------------------

    \20\ These limits are consistent with those recently proposed 
for the other System institutions. See 76 FR 51289, Aug. 18, 2011.
---------------------------------------------------------------------------

h. Section 652.20(a)(8)--Corporate Debt Securities
    Existing Sec.  652.35(a)(8) (which would become Sec.  652.20(a)(8)) 
authorizes investment in corporate debt securities, limited to 25 
percent of Farmer Mac's total non-program investment portfolio. In its 
comment letter, AgFirst noted that the existing limit is higher than 
the 20 percent permitted for other System institutions.\21\ AgFirst 
stated that there should be movement toward consistency. AgFirst 
further stated that corporate debt securities suffered from severe 
market deterioration during the recent credit crisis and that bringing 
the limit down to that in place for other System institutions would 
help reduce concentration risk.
---------------------------------------------------------------------------

    \21\ See Sec.  615.5140(a)(7).
---------------------------------------------------------------------------

    Because we agree with this comment, we propose to reduce the 
portfolio limit to 20 percent in total. In addition, we propose to 
limit corporate debt securities in any one of the industry sectors 
defined by the Global Industry Classification Standard (GICS) to no 
more than 10 percent of Farmer Mac's total investment portfolio.\22\ 
While financial services sector was not the only industry sector hit 
hard by the recent financial crisis, there were sectors, e.g., 
utilities, that were not as severely impacted. Sector diversification 
limits provide enhanced guidance regarding the Agency's expectations 
for portfolio diversification.
---------------------------------------------------------------------------

    \22\ GICS was developed by Morgan Stanley Capital International 
and Standard and Poor's. The GICS is an industry analysis framework 
for investment research portfolio management and asset allocation. 
The GICS structure consists of 10 sectors, 24 industry groups, 68 
industries, and 154 sub-industries. More information can be found at 
http://www.mscibarra.com/products/indices/gics.
---------------------------------------------------------------------------

    In the ANPRM, we asked whether is it appropriate to allow 
investments in subordinated debt as the current rule does. The Council 
stated it does not think subordinated debt is an appropriate investment 
for purposes of liquidity. It based its comment on lack of liquid 
markets for subordinated debt as well as the lack of expertise in most 
financial institutions to research and evaluate the risk of individual 
issuers.
    We generally agree with this comment and propose to limit eligible 
corporate debt securities to senior debt securities only. We note that, 
while we do not deem perfect consistency with regulations governing 
other System institutions to be appropriate in all cases, all of our 
proposed changes to investment in corporate debt securities are 
consistent with those recently proposed for other System 
institutions.\23\
---------------------------------------------------------------------------

    \23\ 76 FR 51289, Aug. 18, 2011.
---------------------------------------------------------------------------

i. Section 652.20(a)(9)--Diversified Investment Funds
    Existing Sec.  652.35(a)(9) (which would become Sec.  652.20(a)(9)) 
authorizes investment in diversified investment funds with the 
stipulation that the funds' holdings must consist solely of eligible 
investments as defined by this section of the rule. The existing rule 
contains no portfolio concentration limit so long as the shares in each 
investment company comprise less than 10 percent of Farmer Mac's 
portfolio. If the shares comprise more than 10 percent, the fund's 
holdings are counted toward the limits for each asset class set forth 
in this section.
    Under the existing rule, Farmer Mac could invest 100 percent of its 
non-program investment portfolio in 10 different funds. We believe this 
would not allow for sufficient diversification of the portfolio. 
Therefore, we propose to add a portfolio concentration limit with two 
components; no more than 50 percent of the total portfolio could be 
comprised of diversified investment funds and no more than 10 percent 
of the total portfolio could be in any single fund.
    In addition, we believe that in the existing rule the term 
``diversified investment funds'' could be interpreted to include 
closed-end funds, which are typically exchange-traded. We propose to 
add language stating that only open-end funds are eligible, in order to 
reduce the possibility that investments are purchased for potentially 
speculative purposes.
2. Dodd-Frank Act Compliance
    In July 2010, the President signed into law the Dodd-Frank Act to 
strengthen regulation of the financial industry in the wake of the 
financial crisis that unfolded in 2007 and 2008. Section 939A of the 
DFA requires the following:
     Each Federal agency must review (i) all of its regulations 
that require the use of an assessment of the creditworthiness of a 
security or money market instrument, and (ii) any references to or 
requirements in its regulations regarding credit ratings.
     Each Federal agency must modify its regulations to remove 
any reference to or requirement of reliance on credit ratings and to 
substitute in the regulations such standards of creditworthiness as the 
agency determines is appropriate. In making this determination, the 
agency must seek to establish, to the extent feasible, uniform 
standards of creditworthiness.
    We have completed our review of FCA regulations that impose 
creditworthiness requirements or that refer to or require the use of 
credit ratings. Existing Sec.  652.35 is one such regulation; it 
requires minimum NRSRO credit ratings for many categories of 
investments--including municipal securities, certain money market 
instruments, non-Agency mortgage securities, asset-backed securities, 
and corporate debt securities--for them to be eligible.
    We do not propose a method to replace NRSRO credit ratings in this 
rulemaking while we continue to focus our research on appropriate 
alternatives to them. We note that FCA has already published an ANPRM 
soliciting public input on the requirements of section 939A as it 
applies to the Agency's Risk-Based Capital Stress Test (RBCST) which 
sets regulatory minimum capital requirements for Farmer Mac.\24\ FCA 
has also published a Notice of Proposed Rulemaking seeking comments on 
how section 939A should be applied to the eligibility regulation 
governing other System institutions \25\--a regulation that is very 
similar to this one. Moreover, several other Federal regulators have 
also issued ANPRMs on this topic.\26\
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    \24\ 76 FR 35138, June 16, 2011.
    \25\ 76 FR 51289, Aug. 18, 2011.
    \26\ For example, the OCC, the Federal Reserve, the FDIC, and 
the OTS issued an ANPRM at 75 FR 52283, Aug. 25, 2010. The Federal 
Housing Finance Agency issued an ANPRM at 76 FR 5292, Jan. 31, 2011.
---------------------------------------------------------------------------

    In the discussion below, we explore various approaches that could 
be considered for assessing creditworthiness as a determinant of 
eligibility.\27\ We may want to propose several of these approaches in 
concert with one another.
---------------------------------------------------------------------------

    \27\ In addition, existing Sec.  652.35(b), which we propose to 
renumber as Sec.  652.20(c), provides that 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. The DFA requires 
us to replace that NRSRO standard with an appropriate substitute. 
The following discussion also applies to that provision.
---------------------------------------------------------------------------

    First, our regulation could specify financial measurements, 
benchmark indexes, and other measurable criteria against which 
institutions could evaluate the creditworthiness of their

[[Page 71807]]

investments. For example, the regulation might specify certain ranges 
within the total range of those measurements to stratify or rank 
relative levels of creditworthiness using labels such as ``Highest'' 
and ``Second Highest''--and establish the level within that ranking 
below which investments would be deemed insufficiently creditworthy for 
investment by Farmer Mac. Farmer Mac would need to ensure that these 
criteria were met for an investment to be eligible at the time of 
purchase and continue to satisfy the eligibility requirements and 
otherwise remain a suitable investment over the period it is held. Some 
of the factors that could be considered in establishing these criteria 
are as follows:
     Credit spreads (i.e., whether it is possible to 
demonstrate that a position in certain investments is subject to a 
minimal amount of credit risk based on the spread between the 
security's yield and the yield of Treasury or other securities, or 
based on credit default swap spreads that reference the security);
     Default statistics (i.e., whether providers of credit 
information relating to securities express a view that specific 
securities have a probability of default consistent with other 
securities with a minimal amount of credit risk);
     Inclusion on an index (i.e., whether a security or issuer 
of the security is commonly included as a component of a recognized 
index of instruments that are subject to a minimal amount of credit 
risk or are deemed by FCA to be sufficiently comparable to securities 
on an index based on specific criteria);
     Priorities and enhancements (i.e., the extent to which a 
security includes credit enhancement features, along with an evaluation 
of the relative strength of the enhancements, such as 
overcollateralization and reserve accounts, or has priority under 
applicable bankruptcy or creditors' rights provisions);
     Price, yield and/or volume (i.e., whether the price and 
yield of a security or a credit default swap that references the 
security are consistent with other securities that are subject to a 
minimal amount of credit risk and whether the price resulted from 
active trading); and
     Asset class-specific factors (e.g., in the case of 
structured finance products, the risk characteristics of the specific 
underlying collateral).
    Should FCA consider any of the above as useful sources from which 
to derive evaluative criteria that could replace NRSRO credit ratings? 
Are there other sources of information that should be included? More 
specifically, should the creditworthiness standard include specific 
standards for probability of default (PD) and loss given default (loss 
severity)? If so, why, and where could the agency source such data to 
derive such probabilities and loss severity standards? Also, should 
this vary by asset class and/or type of investment? Finally, would it 
be appropriate to combine this approach with one or more of the other 
approaches discussed below, and if so, which ones, and why?
    As a second alternative (or in combination with the first 
approach), our regulation could require Farmer Mac to develop its own 
internal assessment process or system for evaluating the 
creditworthiness of investments. One way to structure such a system 
could be to quantify expected loss rates and stratify creditworthiness 
categories by range of expected loss. This would require Farmer Mac to 
provide convincing evidence that probability of default and loss given 
default estimates are reasonably accurate. Any such internal evaluation 
system might need to be frequently recalibrated based on changes in the 
marketplace.
    Is this second approach--an FCA-approved internal Farmer Mac 
system--one that we should consider? If so, what principles should be 
applied in creating such a system, and why? Would the amount of 
resources needed to establish and maintain such a system potentially be 
overly burdensome to Farmer Mac? Would it be appropriate to combine 
this approach with one or more of the other approaches and if so, which 
ones, and why?
    As a third alternative, FCA could develop regulations that would 
require Farmer Mac to use third party assessments to assess 
creditworthiness. Organizations other than NRSROs may have the 
capability to evaluate creditworthiness, and this evaluation could be 
considered in Farmer Mac's creditworthiness assessment. We also believe 
that the DFA does not prohibit Farmer Mac from looking to the NRSROs as 
a tool for assessing creditworthiness. If Farmer Mac does so, however, 
it should evaluate the quality of third party assessments, including 
consideration of whether issuers or investors pay the rating fees. In 
either case, as we have seen in the recent crisis, reliance on third 
party analysis can be problematic and cannot be used in isolation. 
Accordingly, if we were to require this approach, it would be in 
concert with one or more of the other approaches.
    Is this third-party approach one that we should consider? What 
reliable third party sources exist? Should we distinguish between 
issuer-paid third party sources and investor-paid third party sources 
and, if so, how? How might we combine this approach with one or more of 
the other approaches to create an optimal regulatory structure?
    Unlike the proposed regulations governing the RBCST,\28\ this 
proposal's system of ranking investment creditworthiness need not be 
quantified in terms of specific expected loss rates. However, since a 
ranking based on expected loss rates could become available as a result 
of the rulemaking associated with the RBCST, we note that this system 
might also be applicable for purposes of these regulations governing 
liquidity and investment management. Moreover, if it were, it would add 
consistency to our regulations which, while not a necessity, is highly 
desirable.
---------------------------------------------------------------------------

    \28\ 76 FR 35138, June 16, 2011.
---------------------------------------------------------------------------

3. Changes to Remainder of Sec.  652.20
a. Section 652.20(b)--Dollar Denomination
    As discussed above, we propose to relocate to paragraph (b) the 
requirement, currently contained in the introductory paragraph of Sec.  
652.35(a), that all investments must be denominated in United States 
dollars.
b. Section 652.20(d)--Obligor Limits
    We have discussed the risks of investment concentrations and the 
benefits of a well-diversified and high quality investment portfolio. 
In Sec.  652.35(d)(1) of the existing rule, we prohibit Farmer Mac from 
investing more than 25 percent of its regulatory capital in eligible 
investments issued by any single entity, issuer, or obligor. However, 
the obligor limit does not currently apply to Government agencies or 
Government-sponsored agencies. Instead, we currently prohibit Farmer 
Mac from investing more than 100 percent of its regulatory capital in 
any one Government-sponsored agency. There are no obligor limits for 
Government agencies.
    In the ANPRM we asked whether the obligor limits provide for an 
adequate level of diversification and specifically whether, in light of 
the uncertainty associated with the current conservatorships of both 
Fannie Mae and Freddie Mac, it is appropriate to maintain a higher 
obligor limit for Government-sponsored agencies.
    Both the Council and AgFirst stated that for obligors other than 
Government agencies or Government-sponsored agencies, obligor limits 
should be reduced to 20 percent of total capital to be consistent with 
the limits on other System institutions. In a recent NPRM

[[Page 71808]]

governing the other System institutions, FCA proposed that these 
obligor limits should be reduced from 20 percent to 15 percent.\29\ We 
agree that consistency with other System institutions is appropriate in 
this case. We also believe 15 percent would help to ensure sufficient 
diversification among obligors. Accordingly, we propose to reduce the 
current obligor limit for non-Government agencies and non-Government-
sponsored agency obligors from 25 percent to 15 percent of regulatory 
capital.
---------------------------------------------------------------------------

    \29\ 76 FR 51289, Aug. 18, 2011.
---------------------------------------------------------------------------

    For Government-sponsored agencies, the Council stated that 
investment limits should be set at 50 percent of the total portfolio, 
in alignment with the limits placed on the System. The Council stated 
that the government support recently provided to Fannie Mae and Freddie 
Mac is very similar to that which would be provided to a government 
agency and that, because of the importance to the Federal government of 
the role filled by Fannie Mae and Freddie Mac, it appears this strong 
support will continue. The Council states that if future legislation 
weakens the ``implicit'' guarantee, the investment limits can be 
revisited at that time. The Council also stated that restrictions on 
Fannie Mae and Freddie Mac securities under regulatory liquidity 
requirements may cause institutions to take additional prepayment and 
extension risk in return for lower spreads by forcing the institutions 
to purchase Ginnie Mae securities, which have weaker cashflow stability 
and lower spreads as compared to similar Fannie Mae and Freddie Mac 
securities.
    While we may not agree with every detail of the supporting 
justification of the Council's position, we agree that our existing 50-
percent investment portfolio limit for Government-sponsored agency 
mortgage securities in existing Sec.  652.35(a)(6) is appropriate, and 
we propose no change to that limit.
    In addition, we believe that that obligor limits for obligations 
that are issued or guaranteed as to principal and interest by 
Government-sponsored agencies are not warranted due to the relatively 
low credit risk of Fannie Mae and Freddie Mac mortgage securities. 
Accordingly, we propose to delete the prohibition on Farmer Mac's 
investment of more than 100 percent of its regulatory capital in any 
one Government-sponsored agency.\30\
---------------------------------------------------------------------------

    \30\ We note that the other FCS institutions do not have an 
obligor limit for Government-sponsored agencies, and no such limit 
is proposed in the recent NPRM. See Sec.  615.5140(d)(1) of our 
regulations and 76 FR 51289, Aug. 18, 2011.
---------------------------------------------------------------------------

c. Section 652.20(e)--Other Investments Approved by FCA
    Under the current regulation at Sec.  652.35(e), with our prior 
written approval, Farmer Mac may purchase non-program investments in 
preferred stock issued by other System institutions and in other non-
program investments that are not listed in Sec.  652.35(a). We propose 
to revise paragraph (e) to require prior FCA approval for all 
investments not listed in paragraph (a), with no separate mention of 
FCS preferred stock. As the safety and soundness regulator for Farmer 
Mac, we have concerns regarding concentration and systemic risk that 
arise from Farmer Mac investments in large amounts of preferred stock 
issued by System institutions, and Farmer Mac should not expect that we 
will approve such investments without a compelling reason.
    No change is proposed from the existing rule's requirement that 
Farmer Mac's request for FCA approval to invest in other non-program 
investments must explain the risk characteristics of the investment and 
the Corporation's purpose and objective for making the investment. If 
we approve the investment, we would notify Farmer Mac of any conditions 
we would impose, as well as the appropriate discount on any such 
investments for purposes of complying with minimum liquidity standards 
set forth in proposed Sec.  652.40.

F. Section 652.40--Stress Tests for Mortgage Securities

    Because we propose to relocate our stress-testing requirements to 
Sec.  652.10(f), we also propose to remove this standalone, stress-
testing section from our regulations.

G. Section 652.25--Management of Ineligible and Unsuitable Investments

    We propose to delete existing Sec.  652.45, which is labeled 
``Divestiture of Ineligible Non-Program Investments,'' and to replace 
it with Sec.  652.25, which would be labeled ``Management of Ineligible 
and Unsuitable Investments.''
    Existing Sec.  652.45(a)(2) requires Farmer Mac to dispose of an 
investment that is ineligible (under the existing Sec.  652.35 
criteria) within 6 months unless we approve, in writing, a plan that 
authorizes divestment over a longer period of time. An acceptable 
divestiture plan generally must require Farmer Mac to dispose of the 
ineligible investment as quickly as possible without substantial 
financial loss. Until it actually disposes of the ineligible 
investment, Farmer Mac must report on specified matters to its board of 
directors and to FCA at least quarterly.\31\
---------------------------------------------------------------------------

    \31\ Existing Sec.  652.45(a)(1) pertains to the divestiture 
requirements of investments that became ineligible when the 
divestiture regulation initially became effective in 2005. Because 
there is no longer a need for these initial divestiture 
requirements, we propose to delete them.
---------------------------------------------------------------------------

    As part of effective risk management of investments, we expect the 
Corporation to exit its position or develop a strategy to reduce risk 
exposure stemming from investments that were eligible at purchase but 
are no longer suitable. As part of its risk management process we would 
expect Farmer Mac to evaluate the potential for additional unrealized 
losses or write-downs under expected and stressed conditions. The risk 
management process for investments should be dynamic and robust. Thus, 
we are modifying our approach to ensure the Corporation has sufficient 
flexibility to manage its position and mitigate losses which may not 
necessarily be achieved through a forced divesture during a specific 
time period.
    Accordingly, proposed Sec.  652.25(b) would no longer require 
Farmer Mac, for an investment that satisfied the eligibility criteria 
set forth in Sec.  652.20 (renumbered from Sec.  652.35) when purchased 
but that no longer satisfies them,\32\ to divest of the investment 
within 6 months unless FCA approves a divesture plan authorizing a 
longer divestiture period. Rather, Farmer Mac would be required to 
notify the OSMO promptly, and the investment would be subject to 
specified requirements that are discussed below. These requirements 
would also apply to investments that become ineligible as result of 
changes to the investment eligibility regulations proposed herein.
---------------------------------------------------------------------------

    \32\ These investments would no longer be considered 
``ineligible.''
---------------------------------------------------------------------------

    Section 652.25(b) would also require prompt notification to the 
OSMO when an investment that satisfies the Sec.  652.20(a) eligibility 
criteria is not suitable because it does not satisfy the risk tolerance 
established in the institution's board policy pursuant to Sec.  
652.10(c), and the investment would be subject to the same specified 
requirements discussed below.
    Proposed Sec.  652.25(a) provides that an investment that does not 
satisfy the Sec.  652.20 eligibility criteria at the time of purchase 
is ineligible. Under the proposal (as under the existing regulation), 
Farmer Mac may not purchase ineligible investments. If Farmer Mac did 
purchase an ineligible investment, it would be required to notify us 
promptly and to divest of the

[[Page 71809]]

investment no later than 60 days after discovering that the investment 
is ineligible unless we approved, in writing, a plan that authorized 
divestiture over a longer period of time.\33\
---------------------------------------------------------------------------

    \33\ In this context, ``purchase'' would include an acquisition 
such as a swap of one ineligible security for another.
---------------------------------------------------------------------------

    Although it is not stated in the regulation, we clarify here that 
an acceptable divestiture plan would have to require Farmer Mac to 
dispose of the investment as quickly as possible without substantial 
financial loss. The plan would also have to contain sufficient analysis 
to support continued retention of the investment, including its impact 
on the institution's capital, earnings, liquidity, and collateral 
position. Our decision would not be based solely on financial loss and 
would include consideration of whether the investment was purchased by 
mistake or through the deliberate action of a Farmer Mac employee. 
Until Farmer Mac divested of the investment, it would be subject to the 
same specified requirements discussed below.
    Furthermore, we emphasize that any purchase of an ineligible 
investment would indicate weaknesses in Farmer Mac's internal controls 
and due diligence and would trigger increased FCA oversight if it 
occurs. We expect such a purchase to occur extremely rarely, if ever.
    The specified requirements that would apply to investments retained 
by Farmer Mac that are ineligible, that no longer satisfy the 
eligibility requirements, or that are unsuitable are specified in Sec.  
652.25(c). We believe these specified requirements are warranted by 
safety and soundness concerns.
    Proposed Sec.  652.25(c)(1) contains reporting requirements. Each 
quarter, Farmer Mac would be required to report to FCA and to its board 
on the status of all such investments. The report would have to 
demonstrate that impact that the investments may have on the 
Corporation's capital, earnings, and liquidity position. Additionally, 
the report would have to address how the Corporation planned to reduce 
its risk exposure from these investments or exit the position.
    Proposed Sec.  652.25(c)(2) contains other proposed requirements. 
We propose that the investments may not be used to fund Farmer Mac's 
liquidity reserve or supplemental liquidity required under Sec.  652.40 
and that they must continue to be included in the investment portfolio 
limit established in Sec.  652.15(b).
    Finally, proposed Sec.  652.25(d) would reserve FCA's authority to 
require Farmer Mac to divest of any investment at any time for safety 
and soundness purposes. The timeframe FCA sets would consider the 
expected loss on the transaction (or transactions) and the impact on 
Farmer Mac's financial condition and performance. Because the proposed 
rule would not require divestiture of any investment that was eligible 
when purchased, FCA must reserve the authority to require divestiture 
of investments when necessary.

H. Section 652.30--Interest Rate Risk Management

    We propose to reorganize the rule by moving provisions governing 
``Interest Rate Risk Management and Requirements'' found in the 
existing rule at Sec.  652.15 to new Sec.  652.30. We propose to revise 
the name of this section by deleting ``and requirements'' because the 
words are unnecessary since all sections of the regulation either 
define or describe requirements. This same deletion and reasoning is 
proposed to several other section headings.
    In this section, we propose in paragraph (a) two minor syntactical 
changes without any resulting substantive change. We propose to delete 
existing paragraph (b), which provides that Farmer Mac's management 
must ensure that interest rate risk is properly managed on both a long-
range and a day-to-day basis, because we establish the ultimate 
responsibility for interest rate risk management at the board level in 
paragraph (a) and we believe it should be understood that the board 
would delegate proper interest rate risk management to management.
    In paragraph (c)(2), we propose to require that the interest rate 
risk management policy identify the causes of interest rate risk and 
set appropriate quantitative limits consistent with a clearly 
articulated board risk tolerance. We believe this improves the clarity 
of requirements for board policy as compared with the existing 
corresponding regulation, at Sec.  615.15(d)(2), which requires the 
policy to identify and analyze the cause of interest rate risks within 
Farmer Mac's existing balance sheet structure. In paragraph (c)(3), we 
propose to replace the word ``shock'' with ``stress'' to make it 
consistent with stress testing terminology used throughout this subpart 
and to remove any uncertainty about whether we intend interest rate 
stress testing to be somehow fundamentally different from other stress 
testing referred to in this subpart--we do not. In other words, board 
policies and risk tolerance thresholds for interest rate risk should be 
generally consistent with the levels applied to stress testing policies 
referenced in other sections of this subpart.
    We further propose in this paragraph to enhance guidance on stress 
testing of interest rate risk by specifying that the results of stress 
tests must gauge the sensitivity of capital, earnings, and liquidity to 
interest rate stress scenarios. We further propose to specify that the 
methodology applied must be appropriate for the complexity of the 
structure and cash flows of the instruments held.
    We also propose to require interest rate risk management policies 
to consider the nature and purpose of derivative contracts and 
establish counterparty concentration limits for derivatives. We propose 
this change in furtherance of the emphasis on derivatives counterparty 
risk management in Title VII of the Dodd-Frank Act and due to the 
significant use of derivatives by Farmer Mac to modify synthetically 
the term structure of its debt.
    As with our quarterly stress testing requirement under Sec.  
650.10(f)(3), we propose to require that all assumptions applied in 
this stress test rely, to the maximum extent practicable, on verifiable 
information, in recognition that modeling treatments could require 
assumptions for which insufficient data or information exists. In 
addition, Farmer Mac would be required to document the basis for all 
assumptions.
    We propose to clarify in proposed paragraphs (d)(4) and (d)(5) the 
appropriate roles of the board and of management.
    We propose to delete existing paragraph (d)(5) because we propose 
to require Farmer Mac to document its objective when purchasing 
eligible investments in Sec.  652.10(f)(1) of this subpart. We believe 
the placement of this requirement is more logical in that section.
    Given that proposed deletion, we propose to re-number all 
paragraphs that follow in the existing Sec.  652.15 accordingly with 
minor clarifying changes to their wording.

I. Section 652.35--Liquidity Management

    As part of the proposed re-ordering of sections in this subpart, we 
propose to move and rename existing Sec.  652.20 ``Liquidity Reserve 
Management and Requirements'' to Sec.  652.35 ``Liquidity Management.''

[[Page 71810]]

    We also propose to reorganize the rule by moving provisions 
governing the minimum liquidity requirements found at existing Sec.  
652.20(a) to a new section, Sec.  652.40, to be named ``Liquidity 
Reserve Requirement and Supplemental Liquidity.''
1. Section 652.35(a)--Liquidity Policy--Board Responsibilities
    We propose to begin this section with paragraph (a) ``Liquidity 
Policy--Board Responsibilities'' (currently found at Sec.  652.20(d)). 
We propose only minor revisions to that paragraph, none of which are 
substantive. One of these revisions is a proposed requirement that 
Farmer Mac's liquidity policy must be consistent with its investment 
management policies, including the level of the board's risk tolerance 
in these areas.
2. Section 652.35(b)--Policy Content
    We propose to renumber existing Sec.  652.20(e) as Sec.  652.35(b). 
We propose to change the section heading from ``Liquidity Reserve 
Policy Content'' to ``Policy Content'' and to make several minor 
syntactical changes. We also propose to add paragraph (b)(10), a 
liability maturity management plan (LMMP), and paragraph (b)(11), a 
contingency funding plan (CFP). The rationale and expectations for the 
LMMP and CFP proposals are explained in detail in the discussions of 
Sec.  652.35(d) and Sec.  652.35(e), respectively, below.
3. Section 652.35(c)--Reporting Requirements
    Newly proposed paragraphs (c)(1)(i) and (c)(1)(ii) of Sec.  652.35 
contain, with some minor revisions, the Farmer Mac periodic and special 
board reporting requirements currently found at paragraphs (f) and (g), 
respectively, of Sec.  652.20(f). Newly proposed Sec.  652.35(c)(2) 
contains the FCA special reporting requirement currently found at Sec.  
652.20(g).
4. Section 652.35(d)--Liability Maturity Management Plan
    In the ANPRM, we asked if it would be appropriate to require Farmer 
Mac to establish a debt maturity management plan. The question was 
whether such a plan would be appropriate in light of the marginal 
funding instability that results from relying primarily on shorter term 
debt--even when the maturity is extended synthetically. Farmer Mac 
often synthetically extends the term of much of its short-funded debt 
using swap contracts, which results in a lower net cost of funds 
compared to simply issuing longer term debt (under normal yield curve 
conditions, as discussed in the ANPRM). The fact that these 
combinations of debt and derivative positions behave like longer term 
debt contributes to the stability and strength of its liquidity 
position. However, the practice adds counterparty risk on the swaps and 
short-term debt rollover risk to Farmer Mac's overall liquidity risk 
position compared to issuing long-term debt.
    The minimum days-of-liquidity reserve requirement also includes 
incentives to this same end of diversifying the term structure of 
Farmer Mac's debt. This additional planning requirement would augment 
the days-of-liquidity measurement and reinforces the importance of 
management of the term structure of debt and other obligations as a key 
component of the liquidity risk management.\34\
---------------------------------------------------------------------------

    \34\ We discussed this concept in our ANPRM at 75 FR 27953-
27954.
---------------------------------------------------------------------------

    The Council commented supportively, stating that each institution 
should have a funding strategy that provides for effective 
diversification of sources and tenors of funding and that maturity 
concentrations increase liquidity risk.
    Because we agree that Farmer Mac should have such a funding 
strategy, we now propose a new paragraph Sec.  652.35(d), which would 
require Farmer Mac's board to adopt a liability maturity management 
plan (LMMP) that establishes a funding strategy that provides for 
effective diversification of the sources and tenors of funding.\35\
---------------------------------------------------------------------------

    \35\ As discussed above, proposed Sec.  652.35(b)(10) would 
require that the LMMP be contained in Farmer Mac's liquidity policy.
---------------------------------------------------------------------------

    This proposed Sec.  652.35(d) sets forth specific contents and 
internal controls to be included in the LMMP. Under the proposal, the 
LMMP must:
     Include targets of acceptable ranges of the proportion of 
debt issuances maturing within specific time intervals;
     Reflect the Farmer Mac board's liquidity risk tolerance; 
\36\ and
---------------------------------------------------------------------------

    \36\ Although not specified in the rule, guidance must be 
focused on the avoidance of maturity concentrations that would cause 
the Corporation to exceed the board's risk tolerance.
---------------------------------------------------------------------------

     Consider components of the Corporation's funding strategy 
that offset or contribute to liquidity risk associated with debt 
maturity concentrations.
    The LMMP is intended to become a risk management tool that 
contributes to the management of, for example, targets for the term 
structure of debt. As the portion of total debt maturing within some 
appropriate short-term time interval increases, the amount of liquidity 
stress that would be experienced under a scenario of a disruption in 
Farmer Mac's access to debt markets (i.e., refunding risk) would likely 
also increase. We would expect the LMMP to place appropriate limits on 
that risk consistent with the board's risk tolerance level as defined 
in other areas of investment and liquidity risk management.
    We propose to refer to this plan as an LMMP rather than as a debt 
maturity management plan, as we discussed in the ANPRM, to make it more 
general, in contemplation of the possibility that Farmer Mac could use 
funding instruments that might not strictly take the form of debt. For 
example, the LMMP would have to address the use of swaps to 
synthetically extend debt tenors to offset liquidity risk. However, the 
LMMP would also have to recognize that the counterparty risk added 
through those swap positions contributes to liquidity risk due to the 
exposure to defaults of these counterparties generally (in terms of 
reduced expected cash inflows) as well as through the concentration of 
swap exposure to individual swap counterparties. The LMMP should also 
consider the potential expense (and even the potential infeasibility in 
certain scenarios) of replacing defaulted swap positions under 
stressful market conditions. Finally, if overall funding strategy also 
includes additional swap positions that synthetically shorten the 
effective maturity of debt positions, these positions and counterparty 
exposures too would have to be reflected in the LMMP.
5. Section 652.35(e)--Contingency Funding Plan
    In the ANPRM, we asked whether it would be appropriate for our 
regulations to require a liquidity contingency funding plan (CFP). If 
so, we asked how specific the regulation should be regarding required 
components of the plan versus simply requiring that the plan reasonably 
reflect current standards, for example, those specified by the Basel 
Committee on Banking Supervision.\37\
---------------------------------------------------------------------------

    \37\ ``Principles for Sound Liquidity Risk Management and 
Supervision,'' Basel Committee on Banking Supervision, September 
2008 (or successor document, in the future). This document can be 
found at http://www.bis.org/publ/bcbs144.htm.
---------------------------------------------------------------------------

    The Council commented in support of such a requirement, stating 
that each institution should maintain, regularly update, and test a 
formal liquidity contingency funding plan that clearly sets out the 
strategies for addressing liquidity shortfalls in emergency situations. 
The Council stated that such

[[Page 71811]]

a plan should delineate policies to manage a range of stress 
environments, establish clear lines of responsibility, and articulate 
clear implementation and escalation procedures. Further, it should be 
regularly tested and updated to ensure that it is operationally sound.
    We agree with this comment and we now propose a new Sec.  652.35(e) 
imposing CFP requirements. We view these proposed CFP requirements as 
prudent and integral to an organized and systematic approach to 
managing liquidity risk and ensuring ongoing compliance with board 
policy pertaining to liquidity risk--as well as generally consistent 
with the spirit of the guidance issued in the Interagency Policy 
Statement and by the Basel Committee and, thus, with emerging industry 
best practices.\38\
---------------------------------------------------------------------------

    \38\ 75 FR 13656, Mar. 22, 2010, and ``Principles for Sound 
Liquidity Risk Management and Supervision,'' Basel Committee on 
Banking Supervision, http://www.bis.org/bcbs, respectively.
---------------------------------------------------------------------------

    In Sec.  652.35(e)(1) we propose to require Farmer Mac to have a 
CFP to ensure sources of liquidity are sufficient to fund normal 
operating requirements under a variety of stress events, which we 
specify in paragraph (3)(v) and discuss below.\39\
---------------------------------------------------------------------------

    \39\ As discussed above, proposed Sec.  652.35(b)(1) would 
require that the CFP be contained in Farmer Mac's liquidity policy.
---------------------------------------------------------------------------

    Section 652.35(e)(2) would require Farmer Mac's board of directors 
to review and approve the CFP at least once each year and to make 
adjustments to reflect changes in the results of stress tests, the 
Corporation's risk profile, and market conditions. Under the CFP, 
Farmer Mac would have to maintain unencumbered and highly marketable 
assets as described in paragraphs (b) and (c) of Sec.  652.40 in its 
liquidity reserve sufficient to meet its liquidity needs based on 
estimated cash inflows and outflows for a 30-day time horizon under a 
stress scenario that is sufficiently acute as to be consistent with the 
level of the board's risk tolerance.
    This effectively creates an additional liquidity metric to the 
traditional days-of-liquidity metric in the existing rule--which is 
retained, though revised, in this proposed rule.\40\ The difference 
between the two metrics lies in the stress scenario considered in each. 
The existing days-of-liquidity metric compares highly marketable assets 
(appropriately discounted) to actual maturing debt over a given time 
interval at the date of calculation. In essence the stress applied is a 
lack of access of debt markets. The requirement proposed in Sec.  
652.35(e)(2) is based on an appropriately estimated, more 
comprehensive, stress scenario specifically calibrated to the board's 
established risk tolerance level. We propose this additional regulatory 
standard to achieve better consistency with the objectives and 
recommendations envisioned under Basel III.\41\
---------------------------------------------------------------------------

    \40\ Days-of-liquidity is discussed below.
    \41\ Page 3 of ``Basel III: International Framework for 
Liquidity Risk Measurement, Standards and Monitoring'' Basel 
Committee on Banking Supervision, December 2010, http://www.bis.org/bcbs.
---------------------------------------------------------------------------

    Under Sec.  652.35(e)(3), the CFP would have to:
     Be customized to the financial condition and liquidity 
risk profile of Farmer Mac, the board's liquidity risk tolerance, and 
the Corporation's business model;
     Identify funding alternatives that can be implemented as 
access to funding is reduced. For example, it would have to include, at 
a minimum, collateral pledging arrangements to secure funding and 
possible capital-raising initiatives;
     Establish a process for managing events that imperil the 
Corporation's liquidity. The process must assign appropriate personnel 
and executable action plans to implement the CFP; and
     Require periodic stress testing that analyzes the possible 
impacts on Farmer Mac's cash flows, liquidity position, profitability, 
and solvency for a wide variety of stress scenarios. Stress scenarios 
would have to be established and defined by the board and should be 
consistent with those applied in other areas of the Corporation's risk 
analysis, i.e., those proposed in Sec.  652.10 (Investment Management) 
and Sec.  652.30 (Interest Rate Risk Management). The basis for 
assumptions must be documented and well-reasoned. The stress scenarios 
would have to be at a level of severity consistent with the board's 
risk tolerance and include scenarios such as market disruptions; rapid 
increase in contractually required loan purchases; unexpected 
requirements to fund commitments or revolving lines of credit or to 
fulfill guarantee obligations; difficulties in renewing or replacing 
funding with desired terms and structures; requirements to pledge 
collateral with counterparties; or reduced access to debt markets as a 
result of asset quality deterioration (including both program assets 
and non-program assets). FCA would also retain the discretion to 
require certain specific stress scenarios in response to changes in 
market and economic outlooks.
    To satisfy these requirements, the CFP would have to set forth 
specific policies, procedures, and action steps (including which asset 
classes will be sold under specific scenarios) with designated 
responsibilities, to address a range of contingent scenarios that are 
internal to Farmer Mac or external, such as sector-wide or market-wide 
disruptions. For example, the CFP should include an external 
communications plan for how the Corporation will manage press inquiries 
during a liquidity event. Poor external communications during a 
liquidity event could directly, if inadvertently, increase the severity 
of the event. FCA could use its reservation of authority to require 
specific stress scenarios to be used, for example, in response to 
developments in the Agency's outlook for Farmer Mac's business 
environment.

J. Section 652.40--Liquidity Reserve Requirement and Supplemental 
Liquidity

    Existing Sec.  652.20(a) requires Farmer Mac to hold cash, eligible 
non-program investments, and/or Farmer Mac II assets (all subject to 
specified discounts) to maintain sufficient liquidity to fund a minimum 
of 60 days of maturing obligations, interest expense, and operating 
expenses. The purpose of this minimum liquidity requirement is to 
enable Farmer Mac to continue its operations if its access to the 
capital markets were impeded or otherwise disrupted.
    As discussed in the ANPRM, we recognize that a drawback of the 
``days-of-liquidity'' metric is that it provides no projected 
information; a large days-of-liquidity today provides little or no 
information about what the measurement might be even the following day. 
For example, a bank with 150 days-of-liquidity today might issue a very 
large volume of discount notes the following day that mature in 100 
days. This issuance could significantly reduce the days-of-liquidity 
calculated only the day before. A well-managed financing operation will 
evaluate the days-of-liquidity metric against its short-term 
anticipated funding needs, i.e., how that measurement might change in 
the very near future. A funding strategy that combines short-term debt 
with long-term swaps could make the days-of-liquidity measurement 
highly volatile under plausible scenarios.
    Both the Council and AgFirst commented that that the days-of-
liquidity approach to liquidity management is appropriate and widely 
used. We received no comments suggesting alternative metrics, and we do 
not propose any such alternative. We note, however, that the proposed 
LMMP

[[Page 71812]]

discussed above would contribute to management of the shortcomings in 
the days-of-liquidity metric.
1. Section 652.40(a)--General
    In contrast to current regulation, proposed Sec.  652.40(a) (which 
would replace existing Sec.  652.20(a) in the existing regulations) 
would require Farmer Mac to maintain a liquidity reserve equal to at 
least 90 days of maturing obligations and other borrowings. In its 
comment letter, AgFirst suggested that a 90-day liquidity reserve would 
lead to improved liquidity risk management as well as to consistency 
with System bank practices.
    We established the current 60-day minimum in 2005 as part of our 
first rulemaking governing Farmer Mac's liquidity risk management. We 
set the minimum lower than minimums discussed in the regulatory 
literature at the time, e.g., regulations governing other Farm Credit 
System institutions, to avoid unintended consequences on Farmer Mac's 
operations as we introduced this regulation for the first time. Farmer 
Mac has since increased its liquidity position substantially and in our 
view a higher minimum would advance the Corporation's safety and 
soundness.
    In addition to the proposed increase in the minimum requirement, we 
propose to simplify the components of the calculation of days-of-
liquidity in proposed Sec.  652.40(a) by including only obligations and 
other borrowings \42\ and to no longer include interest obligations or 
operational expenses. While those obligations are deemed no less 
relevant, the increased minimum will, we believe, more than compensate 
for the exclusion of these obligations from the calculation while 
gaining the benefit of reduced complexity in the regulatory structure. 
Thus, while we do not suggest that the effects of the increased 
requirement and the simplified calculation are perfectly offsetting, we 
note that there is such an overall offsetting effect and that a net 
increase in the standard is intended.
---------------------------------------------------------------------------

    \42\ The term ``other borrowings'' is used to make clear that 
all forms borrowing should be included even if some do not 
technically take the form of debt, such as obligations under 
repurchase agreements.
---------------------------------------------------------------------------

    The liquidity reserve could be comprised only of cash and of 
specified, highly marketable investments that are discussed below. Also 
as discussed below, the investments would have to be discounted as 
specified.
    We also propose in Sec.  652.40(a) to require Farmer Mac to 
maintain supplemental liquidity as required by the table in paragraph 
(d) of this section. As discussed below, the supplemental liquidity 
requirement in the table at paragraph (d) would require Farmer Mac to 
maintain assets to fund obligations maturing after 90 calendar days in 
an amount necessary to meet its board liquidity policy. As discussed 
below, supplemental liquidity could be comprised of cash, eligible 
investments, and qualifying securities backed by Farmer Mac program 
assets (loans); the investments and qualifying securities would have to 
be discounted as specified.
2. Section 652.40(b)--Unencumbered
    In proposed Sec.  652.40(b), we would require that all investments 
and qualifying securities used to meet the liquidity reserve and 
supplemental liquidity requirements must be unencumbered, and we 
propose a description of the term ``unencumbered.'' This requirement 
would replace the requirement in existing Sec.  652.20(b) that 
investments held to meeting the liquidity reserve requirement must be 
free of liens or other encumbrances.
    We propose this new terminology to bring greater clarity and 
precision to this requirement. We propose the term unencumbered to mean 
free of lien and not pledged either explicitly or implicitly in any way 
to secure, collateralize, or enhance the credit of any transaction. 
Investments held as a hedge against any other exposure would also not 
be unencumbered.
    As noted throughout this preamble, FCA considers the guidance of 
other regulators in developing its policy proposals and evaluates their 
benefits and appropriateness for Farmer Mac. We note that the Liquidity 
Coverage Ratio standard recommended by Basel includes various forms of 
funding commitments and contingency funding commitments of the 
regulated entity.\43\ We request comment on whether such commitments 
should be incorporated into the minimum liquidity reserve requirements 
in this rule. Specifically with regard to Farmer Mac, should Long-term 
Standby Purchase Commitments (LTSPC) be considered contingent 
obligations and some portion of the outstanding LTSPC volume be 
included in the days-of-liquidity calculation? Should its revolving 
lines of credit be included among these and, if so, what proportion? 
Should an estimated draw on its commitments on processing facilities, 
if any, be included in obligations?
---------------------------------------------------------------------------

    \43\ Page 12 of ``Basel III: International Framework for 
Liquidity Risk Measurement, Standards and Monitoring,'' http://www.bis.org/bcbs.
---------------------------------------------------------------------------

3. Section 652.40(c)--Highly Marketable
    In proposed Sec.  652.40(c) we relocate and replace the requirement 
currently found at Sec.  652.35(c) that non-program investments be 
readily marketable with the requirement that investments held for the 
purpose of meeting the liquidity reserve minimum must be highly 
marketable. An investment is considered to be highly marketable if it 
possesses the following characteristics:
     It is easily and immediately convertible to cash with 
little or no loss in value;
     It has low credit and market risk;
     It has ease and certainty of valuation; and
     Except for money market instruments, it is listed on a 
developed and recognized exchange market and is able to be sold or 
converted to cash through repurchase agreements in active and sizable 
markets.

The first three characteristics are consistent with the expectations of 
the other regulators concerning highly liquid investments.\44\ The 
final characteristic is unchanged from the existing rule.
---------------------------------------------------------------------------

    \44\ See Interagency Policy Statement, 75 FR 13658, 13664, Mar. 
22, 2010.
---------------------------------------------------------------------------

    The newly proposed language clarifies that the requirement applies 
only to investments included in the liquidity reserve and not to all 
eligible investments generally. The relocation of this requirement to a 
regulation dealing with liquidity from one governing eligible 
investments generally further emphasizes the scope of the requirement. 
In addition, investments held to provide supplemental liquidity would 
not have to meet the ``highly marketable'' test. We note that our 
interpretation of the term ``immediate'' in the description of ``highly 
marketable'' will consider the overall quality of the investment. For 
example, if an investment is both backed by the full faith and credit 
of the United States Government but also thinly traded, its conversion 
at little or no loss in value may be uncertain within a single trading 
day, yet very certain within a very small number of days. Such very 
high credit-quality investments would qualify for Level 1 or Level 2 
depending on a conservative estimate of the number of days required--
and not be relegated to supplemental liquidity simply on the basis that 
liquidation could take a very small number of days.

[[Page 71813]]

4. Section 652.40(d)--Composition of Liquidity Reserve and Supplemental 
Liquidity
    The existing liquidity requirement, at Sec.  652.20(a), requires 
Farmer Mac to hold sufficient cash, eligible non-program investments, 
and/or Farmer Mac II assets sufficient to fund at least 60 days of 
maturing obligations, interest expense, and operating expenses. The 
requirement does not currently differentiate among the relatively 
different liquidity characteristics of different types of investments.
    We asked in the ANPRM whether it would be appropriate to establish 
a subcategory of the minimum days-of-liquidity requirement that would 
include assets that would not lose liquidity value in a market 
downturn, such as cash and Treasury securities, that would be 
sufficient to meet maturing obligations for a lesser number of days. In 
its comment letter, the Council stated that augmentation of liquidity 
through a short-term liquidity calculation contemplating cash and 
highly liquid investment securities is part of a prudent liquidity 
strategy. AgFirst commented that the days-of-liquidity approach to 
liquidity management can be enhanced by including subcategories of 
minimum days provided by different types of assets, and it noted that 
it and the other System banks have adopted a tiered liquidity system 
such as this.
    We agree with these comments and propose to strengthen the existing 
days-of-liquidity requirement by adopting a tiered approach to the 
liquidity requirement.
    Proposed Sec.  652.65(d) would require Farmer Mac to continuously 
maintain Level 1 and Level 2 investments sufficient to meet the 90-day 
minimum liquidity requirement. It would also require Farmer Mac to 
maintain supplemental liquidity in an amount necessary to meet its 
board's liquidity policy.
    Level 1 investments would be the most liquid investments. 
Investments that would qualify as Level 1 investment are cash, Treasury 
securities, other Government agency obligations, Government-sponsored 
agency securities (except mortgage securities) that mature within 60 
days, and diversified investment funds comprised exclusively of Level 1 
instruments.
    Under the proposal, only Level 1 instruments could be used to fund 
obligations maturing in calendar days 1 through 30. In addition, at 
least 15 days must be comprised only of cash or instruments with 
remaining maturities of less than 3 years.
    Level 2 investments, while still highly marketable, are deemed to 
be generally less liquid than Level 1 instruments. Investments that 
qualify as Level 2 instruments include Level 1 instruments to the 
extent Level 1 qualifying volume exceeds 30 days of maturing 
obligations, Government-sponsored agency securities (excluding mortgage 
securities) with maturities exceeding 60 days, Government-sponsored 
agency mortgage securities (excluding Farmer Mac's own securities), 
money market instruments maturing within 90 days, and diversified 
investments funds with holdings comprised entirely of Level 1 or Level 
2 instruments.
    Under the proposal, the third tier of liquidity investments are 
those that can be held for supplemental liquidity. Supplemental 
liquidity investments are used to fund obligations maturing after 90 
calendar days, as necessary to meet the Farmer Mac board's liquidity 
policy.
    Investments that can be held for supplemental liquidity include all 
eligible investments, as well as qualifying securities backed by Farmer 
Mac program assets (loans) guaranteed by the USDA, excluding the 
portion that would be necessary to satisfy obligations to creditors and 
equity holders in Farmer Mac II LLC. We consider this portion to be 
encumbered and therefore not appropriate for inclusion in supplemental 
liquidity under Sec.  652.65(b). These are generally the investments 
that are counted toward the liquidity reserve requirement under 
existing Sec.  652.20(a).
5. Section 652.40(e)--Discounts
    Existing Sec.  65.20(c) specifies discounts for various classes of 
investments in the liquidity reserve, including money market 
instruments, floating and fixed rate debt and preferred stock 
securities, diversified investment funds, and Farmer Mac II assets. In 
the ANPRM, we asked whether, in the wake of recent disruptions in 
financial markets, it would be appropriate to re-evaluate these 
discounts to reflect better the risk of diminished marketability of 
liquid investments under adverse conditions. We asked commenters to 
identify any changes they believed we should make. In addition, we 
specifically asked whether the discount currently applied to Farmer Mac 
II securities is appropriate. We also asked whether we should consider 
basing discounts on credit ratings.
    We received no comments on our general question about discounts or 
on our question about Farmer Mac securities. The Council did comment 
that discounts should not be based on credit ratings, because the 
market value of a security (discounts applied to market values) is a 
timelier and more accurate reflection of liquidity and risk than credit 
ratings are. For this reason, and also because of section 939A of the 
DFA, we agree that discounts should not be based on credit ratings.
    In proposed Sec.  652.40(e), we propose discounts that better fit 
the proposed tiered structure of the minimum liquidity reserve 
requirement. We believe the proposed discounting structure results in 
reduced complexity in the regulation.
    The proposed discounts are as follows:
     Multiply cash and overnight investments by 100 percent.
     Multiply Treasury securities by 97 percent of their market 
value. This would be a lessening of the current discount for Treasury 
securities which, along with all other fixed rate debt securities, are 
currently multiplied by 90 percent.\45\ This level is reasonably 
consistent with discounts applied by the Federal Reserve; \46\ and
---------------------------------------------------------------------------

    \45\ Section 652.20(c)(5).
    \46\ Information on Federal Reserve collateral margins can be 
found at http://www.frbdiscountwindow.org. Click on the link to 
Collateral Margins Table.
---------------------------------------------------------------------------

     Multiply all other Level 1 qualifying investments by 95 
percent of their market value (even if some of these instruments are 
counted toward the Level 2 liquidity reserve requirements due to a 
surplus of Level 1 qualifying instruments over the Level 1 liquidity 
reserve requirements). We believe this discount level is likely to be 
lower than the average discount applied to this portion of Farmer Mac's 
portfolio historically, but we believe it is warranted by the relative 
liquidity of these instruments; \47\
---------------------------------------------------------------------------

    \47\ The reason we use the term ``Level 1 qualifying 
instruments'' is to make clear that if Farmer Mac holds cash, 
Treasuries, and other Level 1 investments such that a portion of 
that Level 1 qualifying investment volume exceeds the 30 calendar 
days required of Level-1 investment volume and therefore is 
available to cover a portion of the 60-day Level 2 requirement, 
those Level 1 qualifying investments will not be discounted at seven 
percent as all other Level 2 investments but rather at the 
applicable Level 1 discount. This ensures equal discounting 
treatment regardless of whether Level 1 investments are applied to 
the Level 1 or Level 2 requirement. It also removes the potential 
incentive for Farmer Mac to reduce the proportion of higher 
liquidity assets that qualify as Level 1 instruments in excess of 
the Level 1 minimum requirement that it might prefer to hold absent 
this regulatory structure.
---------------------------------------------------------------------------

     Multiply all Level 2 investments by 93 percent of their 
market value, except the volume of Level 1 qualifying investments that 
exceed the Level 1 liquidity reserve requirement and is therefore 
applied to the Level 2 liquidity reserve requirement. This level is

[[Page 71814]]

similar to the existing rule's treatment of such investments with 
similar cash flows; and
     Multiply all other investments held for supplemental 
liquidity by 85 percent of market value, except:
     Multiply the volume of Level 1-qualifying investments that 
exceed the Level 1 or Level 2 liquidity reserve requirement by 95 
percent;
     Multiply the volume of Level 2 qualifying investments that 
exceed the Level 2 liquidity reserve requirements by 93 percent; and
     Multiply 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 by 75 percent, the same as 
the existing discount.
    We believe the 15-percent supplemental liquidity discount is 
warranted in light of our proposal not to require these investments to 
be ``highly marketable.'' Moreover, this requirement is also based on 
guidance in Basel III.\48\
---------------------------------------------------------------------------

    \48\ Page 9 of ``Basel III: International Framework for 
Liquidity Risk Measurement, Standards and Monitoring,'' December 
2010, http://www.bis.org/bcbs.
---------------------------------------------------------------------------

    The proposed 25-percent discount for Farmer Mac II assets is 
unchanged from the existing rule.
6. Section 652.40(f)--Reservation of Authority
    In Sec.  652.40(f), we propose to reserve the right, on a case-by-
case basis, to require Farmer Mac to adjust its treatment of 
instruments (assets) in its liquidity reserve and supplemental 
liquidity so that it has liquidity that is sufficient and commensurate 
for the risks its faces. This reservation of authority enables FCA to 
respond to adverse financial, economic, or market conditions by 
requiring Farmer Mac, on a case-by-case basis, to:
     Increase the specified discounts that are applied to any 
individual security or any class of securities due to changes in market 
conditions or marketability of such securities;
     Shift individual or multiple securities from one level of 
the liquidity reserve to another, or between one of the levels of the 
liquidity reserve and supplemental liquidity, based on the performance 
of such asset(s), or based on financial, economic, or market conditions 
affecting the liquidity and solvency of Farmer Mac;
     Change portfolio concentration limits in Sec.  652.20(a); 
or
     Take any other action that we deem necessary to ensure 
that Farmer Mac has sufficient liquidity to meet its financial 
obligations as they come due.

This reservation of authority would enable FCA to respond to adverse 
financial, economic, or market conditions by giving us the authority to 
require Farmer Mac to maintain liquidity that is sufficient and 
commensurate for the risks its faces.

K. Section 652.45--Temporary Regulatory Waivers or Modifications for 
Extraordinary Situations

    We propose to relocate existing Sec.  652.30, which authorizes FCA 
to modify or waive regulatory investment management and liquidity 
management requirements in extraordinary situations, to new Sec.  
652.45. We believe this location is more appropriate for this 
provision.
    In addition to the existing specific modifications and waivers the 
provision authorizes, we propose to authorize FCA to take other actions 
as deemed appropriate. This added authority would give FCA additional 
flexibility to address extraordinary situations.

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

List of Subjects in 12 CFR Part 652

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

    For the reasons stated in the preamble, part 652 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

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

    1. Subpart A, consisting of Sec. Sec.  652.1 through 652.45, is 
revised to read as follows:
Subpart A--Investment Management
Sec.
652.1 Purpose.
652.2 Definitions.
652.10 Investment management.
652.15 Non-program investment purposes and limitation.
652.20 Eligible non-program investments.
652.25 Management of ineligible and unsuitable investments.
652.30 Interest rate risk management.
652.35 Liquidity management.
652.40 Liquidity reserve requirement and supplemental liquidity.
652.45 Temporary regulatory waivers or modifications for 
extraordinary situations.

    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; sec. 939A of Pub. 
L. 11-203, 124 Stat. 1326, 1887.

Subpart A--Investment Management


Sec.  652.1  Purpose.

    The purpose of this subpart is to ensure safety and soundness, 
continuity of funding, and appropriate use of non-program investments 
considering the Federal Agricultural Mortgage Corporation's (Farmer Mac 
or Corporation) special status as a Government-sponsored enterprise 
(GSE). The subpart contains requirements for Farmer Mac's board of 
directors to adopt policies covering the management of non-program 
investments, funding and liquidity risk, and interest rate risk. 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(c)(14) of the Farm Credit Act of 
1971, as amended.
    Asset-backed securities (ABS) mean investment securities that 
provide for ownership of a fractional undivided interest or collateral 
interests in specific assets of a trust that are sold and traded in the 
capital markets. For the purposes of this subpart, ABS exclude mortgage 
securities that are defined below.
    Cash means cash balances held at Federal Reserve Banks, proceeds 
from traded-but-not-yet-settled debt, and the insured amount of 
balances held in deposit accounts at Federal Deposit Insurance 
Corporation-insured banks.
    Contingency Funding Plan (CFP) is described in Sec.  652.35(e).
    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, or your means the Federal 
Agricultural Mortgage Corporation and its affiliates.
    FCA, our, us, or we means the Farm Credit Administration.

[[Page 71815]]

    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 mean:
    (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 the United States Government or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or 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 
insured or guaranteed by the full faith and credit of the United States 
Government, including but not limited to any Government-sponsored 
enterprise.
    Liability Maturity Management Plan (LMMP) is described in Sec.  
652.35(d).
    Liquidity reserve is described in Sec.  652.40.
    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 mean maturing debt and other obligations that 
may be expected, such as buyouts of LTSPCs or repurchases of 
agricultural mortgage securities.
    Mortgage securities mean 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 mean 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.''
    OSMO means FCA's Office of Secondary Market Oversight.
    Program assets mean on-balance sheet ``qualified loans'' as defined 
in section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Program obligations mean 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.

    (a) Responsibilities of the board of directors. 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 committee of the board, must review and affirmatively 
validate the sufficiency of these investment policies. Any changes to 
the policies must be adopted by the board. You must report any changes 
to these policies to the OSMO 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, internal controls, due diligence, 
and reporting requirements. Furthermore, the policies must include 
reporting requirements and approvals needed for exceptions to the 
board's policies. Investment policies must be sufficiently detailed, 
consistent with, and appropriate for the amounts, types, and risk 
characteristics of your investments. You must document in the 
Corporation's records or minutes any analyses used in formulating your 
policies or amendments to the policies.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for the various types, classes, and sectors 
of eligible investments. These policies must ensure that you maintain 
prudent diversification of your investment portfolio and that your 
asset allocations and investment portfolio strategies do not expose the 
Corporation's capital or earnings to excessive risk of loss. 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 as follows: 
Concentration limits must be based on a single or related 
counterparty(ies). Concentration limits must also be based on 
geographical area, industry sectors, or asset classes 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 review of your investment policies required under paragraph (a) of

[[Page 71816]]

this section, your board of directors, or a designated committee 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 review required under paragraph (a) of this section, the board, or 
a designated committee of the board, must review existing relationships 
with securities firms and determine whether to continue your 
relationships with them. Any changes to the existing relationships with 
securities firms must be approved by the board.
    (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.
    (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 
post accounting entries, reconcile trade confirmations, report 
compliance with investment policy, and approve, revalue, and oversee 
investments.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, your investment controls, processes, and compliance 
with FCA regulations and other regulatory guidance. Your internal audit 
program must specifically include a review of your process for ensuring 
all investments are eligible and suitable for purchase under your 
board's investment policies.
    (f) Due diligence--(1) Pre-purchase analysis--
    (i) Objective, eligibility, and suitability. Before you purchase an 
investment, you must document your investment objective. In addition, 
you must conduct sufficient due diligence to determine whether the 
investment is eligible under Sec.  652.20 and suitable under your 
board-approved investment policies, and you must document the 
investment's eligibility and suitability. Your investment policies must 
fully address the extent of pre-purchase analysis that management must 
perform for various types, classes, and structure of investments.
    (ii) Valuation. Prior to purchase, you must verify the value of the 
investment (unless it is a new issue) with a source that is independent 
of the broker, dealer, counterparty or other intermediary to the 
transaction.
    (iii) Risk assessment. You must document your risk assessment of 
each investment. Your risk assessment must at a minimum include an 
evaluation of:
    (A) Credit risk. As applicable, you must consider the nature and 
type of underlying collateral, credit enhancements, complexity of the 
structure, and any other available indicators of the risk of default.
    (B) Market risk. You must consider how various market stress 
scenarios including, at a minimum, potential changes in interest rates 
and market conditions (such as changes in market perceptions of 
creditworthiness), are likely to affect the cash flow and price of the 
instrument, using reasonable and appropriate methodologies for stress 
testing for the type or class of instrument to ensure the investment 
complies with risk limits established in your investment and interest 
rate risk policies.
    (C) Liquidity risk. Your evaluation of liquidity risk must consider 
the investment structure, depth of the market, and ability to liquidate 
the position under a variety of economic scenarios and market 
conditions.
    (2) Monthly fair value determination. At least monthly, you must 
determine the fair market value of each investment in your portfolio 
and the fair market value of your whole investment portfolio.
    (3) Quarterly stress testing.
    (i) You must stress test your entire investment portfolio on a 
quarterly basis. If your portfolio risk exceeds your investment policy 
limits, you must develop a plan to reduce risk and comply with your 
investment policy limits.
    (ii) Your stress tests must be comprehensive and appropriate for 
the risk profile of your investment portfolio and the Corporation. At a 
minimum, the stress tests must consider how potential changes in 
interest rates and market conditions (including market perceptions of 
creditworthiness) are likely to affect the cash flow and price of the 
instrument. The methodology that you use to analyze investment 
securities must be appropriate for the complexity, structure, and cash 
flows of the investments in your portfolio. The stress tests must 
enable you to determine that your investment securities, either 
individually or on a portfolio-wide basis, do not expose your capital, 
earnings, or liquidity to excessive risks. You must rely to the maximum 
extent practicable on verifiable information to support all your 
assumptions, including prepayment and interest rate volatility 
assumptions, when you apply your stress tests. Your assumptions must be 
conservative and you must document the basis for all assumptions that 
you use to evaluate the security and its underlying collateral. You 
must also document all subsequent changes in your assumptions.
    (4) Presale value verification. Before you sell an investment, 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, 
executive management must report on the following to the board of 
directors or a designated committee of the board:
    (1) Plans and strategies for achieving the board's objectives for 
the investment portfolio;
    (2) Whether the investment portfolio effectively achieves the 
board's objectives;
    (3) The current composition, quality, and liquidity profile of the 
investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses that you incurred 
during the quarter on individual securities that you sold before 
maturity and why they were liquidated;
    (5) Potential risk exposure to changes in market interest rates as 
identified through quarterly stress testing and any other factors that 
may affect the value of your investment holdings;
    (6) How investments affect your capital, earnings, and overall 
financial condition;
    (7) Any deviations from the board's policies. These deviations must 
be formally approved by the board of directors.

[[Page 71817]]

Sec.  652.15  Non-program investment purposes and limitation.

    (a) Farmer Mac is authorized to hold eligible non-program 
investments listed under Sec.  652.20 for the purposes of enterprise 
risk management, including complying with the interest rate risk 
requirements in Sec.  652.30 and the liquidity requirements in Sec.  
652.40; managing surplus short-term funds; and complementing program 
business activities.
    (b) Non-program investments cannot exceed 35 percent of program 
assets and program obligations, excluding qualifying securities that 
are both guaranteed by the United States Department of Agriculture and 
included as a potential source of supplemental liquidity in Sec.  
652.40(d). When calculating the total amount of non-program investments 
under this section, exclude investments pledged to meet margin 
requirements on derivative transactions.


Sec.  652.20  Eligible non-program investments.

    (a) You may purchase only the investments that satisfy the 
eligibility criteria in this section. An investment that does not 
satisfy the eligibility criteria at the time of purchase is not 
eligible for purchase and is subject to the requirements of Sec.  
652.20(a) if purchased. An investment that satisfies the eligibility 
criteria at the time of purchase but subsequently fails to satisfy the 
eligibility criteria is subject to the requirements of Sec.  652.25(b).

----------------------------------------------------------------------------------------------------------------
                                                        NRSRO Issue or                        Maximum percentage
                                    Final maturity       issuer credit                           of total non-
           Asset class                   limit              rating        Other requirements  program investment
                                                          requirement                              portfolio
----------------------------------------------------------------------------------------------------------------
(1) Obligations of the United     None..............  NA................  None..............  None.
 States.
 Obligations (except
 mortgage securities) fully
 insured or guaranteed by a
 Government agency.
----------------------------------------------------------------------------------------------------------------
(2) Obligations of Government-    None..............  NA................  Senior debt         None.
 sponsored agencies.                                                       securities only.
 Government-sponsored
 agency securities (except
 mortgage securities).
 Other obligations
 (except mortgage securities)
 fully insured or guaranteed by
 Government-sponsored agencies.
----------------------------------------------------------------------------------------------------------------
(3) Municipal Securities
 General obligations....  10 years..........  One of the two      None..............  15%.
                                                       highest.
 Revenue bonds..........  10 years..........  Highest...........  None..............  15%.
----------------------------------------------------------------------------------------------------------------
(4) International and             10 years..........  None..............  The United States   15%.
 Multilateral Development Bank                                             must be a voting
 Obligations.                                                              shareholder.
----------------------------------------------------------------------------------------------------------------
(5) Money Market Instruments
 Federal funds..........  1 day or            One of the two      None..............  None.
                                   continuously        highest short-
                                   callable up to      term.
                                   100 days.
 Negotiable certificates  1 year............  One of the two      None..............  None.
 of deposit.                                           highest short-
                                                       term.
 Bankers acceptances....  None..............  One of the two      Issued by a         None.
                                                       highest short-      depository
                                                       term.               institution.
 Prime commercial paper.  270 days..........  Highest short-term  None..............  None.
 Non-callable term        100 days..........  Highest short-term  None..............  20%.
 Federal funds and Eurodollar
 time deposits.
 Master notes...........  270 days..........  Highest short-term  None..............  20%.
 Repurchase agreements    100 days..........  NA................  ..................  None.
 collateralized by eligible
 investments or marketable
 securities rated in the highest
 credit rating category by an
 NRSRO.
----------------------------------------------------------------------------------------------------------------
(6) Mortgage Securities
 Fully insured or         None..............  NA................  ..................  None.
 guaranteed by a Government
 agency.
 Government-sponsored     None..............  One of the two      ..................  50%.
 agency mortgage securities.                           highest.
 Securities that are not  None..............  Highest...........  Senior-most         10%.
 fully insured or fully                                                    position only.
 guaranteed by a Government
 agency or Government-sponsored
 agency and that comply with 15
 U.S.C. 77d(5) or 15 U.S.C.
 78c(a)(41).
----------------------------------------------------------------------------------------------------------------

[[Page 71818]]

 
(7) Asset-Backed Securities       None..............  Highest...........  Maximum of 5-year   15% in total, and
 secured by:                                                               WAL for fixed       no more than 5%
 Credit card receivables                                           rate or floating    of any single
 Automobile loans.......                                           rate ABS at their   collateral type.
 Home equity loans......                                           contractual
 Wholesale automobile                                              interest rate
 dealer loans.                                                             caps.
 Student loans..........                                          Maximum of 7-year
 Equipment loans........                                           WAL for floating
 Manufactured housing                                              rate ABS that
 loans.                                                                    remain below
                                                                           their contractual
                                                                           interest rate
                                                                           caps.
----------------------------------------------------------------------------------------------------------------
(8) Corporate Debt Securities...  5 years...........  One of the highest  Senior debt         20% in total, and
                                                       two for             securities only.    no more than 10%
                                                       maturities         Cannot be            in any one of the
                                                       greater than 3      convertible to      10 industry
                                                       years, and one of   equity securities.  sectors as
                                                       the highest three                       defined by the
                                                       for maturities of                       Global Industry
                                                       three years or                          Classification
                                                       less.                                   Standard (GICS).
----------------------------------------------------------------------------------------------------------------
(9) Diversified Investment Funds  NA................  NA................  Open-end funds      50% in total. No
Shares of an investment company                                            only.               more than 10% in
 registered under section 8 of                                            The portfolio of     any single fund.
 the Investment Company Act of                                             the investment
 1940.                                                                     company must
                                                                           consist solely of
                                                                           eligible
                                                                           investments
                                                                           authorized by
                                                                           this section.
                                                                          The investment
                                                                           company's risk
                                                                           and return
                                                                           objectives and
                                                                           use of
                                                                           derivatives must
                                                                           be consistent
                                                                           with FCA guidance
                                                                           and your
                                                                           investment
                                                                           policies.
----------------------------------------------------------------------------------------------------------------
Note: You must also comply with requirements of paragraphs (b), (c), and (d) of this section. ``NA'' means not
  applicable.

    (b) Denomination. All investments must be denominated in United 
States dollars.
    (c) 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.
    (d) Obligor limits.
    (1) You may not invest more than 15 percent of your regulatory 
capital in eligible investments issued by any single entity, issuer or 
obligor, except that there are no obligor limits on obligations 
(including mortgage securities) that are issued or guaranteed as to 
principal and interest by Government agencies or Government-sponsored 
agencies.
    (2) Obligor limits for your holdings in an investment company. You 
must count securities that you hold through an investment company 
toward 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) Other investments approved by the FCA.
    (1) You may purchase and hold other non-program investments only 
with our prior written approval. Your request for our approval must 
explain the risk characteristics of the investment and your purpose and 
objectives for making the investment.


Sec.  652.25  Management of ineligible and unsuitable investments.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in Sec.  652.20 at the time 
of purchase are ineligible. You may not purchase ineligible 
investments. If you determine that you have purchased an ineligible 
investment, you must notify the OSMO promptly after such determination 
and must divest of the investment no later than 60 calendar days after 
the determination unless we approve, in writing, a plan that authorizes 
you to divest of the investment over a longer period of time.
    (b) Investments that no longer satisfy eligibility criteria or are 
unsuitable. If an investment (that satisfied the eligibility criteria 
set forth in Sec.  652.20 when purchased) no longer satisfies the 
eligibility criteria, or if an investment is unsuitable under your 
board's policy, you must notify the OSMO promptly.
    (c) Requirements for investments that are ineligible, no longer 
satisfy eligibility criteria, or are unsuitable.
    (1) Reporting requirements. Each quarter, you must report to the 
OSMO and your board on the status of investments identified in 
paragraph (a) or (b). Your report must demonstrate the impact that 
these investments may have on the Corporation's capital, earnings, and 
liquidity position. Additionally, the report must address how the 
Corporation plans to reduce its risk exposure from these investments or 
exit the position(s).
    (2) Other requirements. Investments identified in paragraph (a) or 
(b) may not be used to fund your liquidity reserve or supplemental 
liquidity required under Sec.  652.40. These investments must continue 
to be

[[Page 71819]]

included the investment portfolio limit established in Sec.  652.15(b).
    (d) Reservation of authority. FCA retains the authority to require 
you to divest of any investment at any time for safety and soundness 
reasons. The timeframe set by FCA for such required divestiture will 
consider the expected loss on the transaction (or transactions) and the 
impact on the Corporation's financial condition and performance.


Sec.  652.30  Interest rate risk management.

    (a) The board of directors of Farmer Mac must provide effective 
oversight (direction, controls, and supervision) of interest rate risk 
management and must be knowledgeable of the nature and level of 
interest rate risk taken by Farmer Mac.
    (b) 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 (c) and (d) of 
this section. At least annually, the board of directors, or a 
designated committee 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 the OSMO within 10 business days of 
adoption.
    (c) The interest rate risk management policy must, at a minimum:
    (1) Address the purpose and objectives of interest rate risk 
management;
    (2) Identify the causes of interest rate risk and set appropriate 
quantitative limits consistent with a clearly articulated board risk 
tolerance;
    (3) Require management to establish and implement comprehensive 
procedures to measure the potential impact of these risks on the 
Corporation's projected earnings and market values by conducting 
interest rate stress tests and simulations of multiple economic 
scenarios at least quarterly. Your stress tests must gauge how interest 
rate fluctuations affect the Corporation's capital, earnings, and 
liquidity position. The methodology that you use must be appropriate 
for the complexity of the structure and cash flows of your on- and off-
balance sheet positions, including the nature and purpose of derivative 
contracts, and establish counterparty risk thresholds and limits for 
derivatives. It must also ensure an appropriate level of consistency 
with the stress-test scenarios considered under Sec.  652.10(f)(3). 
Assumptions applied in stress tests must be conservative and, to the 
maximum extent practicable, must rely on verifiable information. You 
must document the basis for all assumptions that you use.
    (4) Describe and authorize management to implement actions needed 
to achieve Farmer Mac's desired risk management objectives;
    (5) Ensure procedures are established to evaluate and document, at 
least quarterly, whether actions taken have actually met the 
Corporation's desired risk management objectives;
    (6) Identify exception parameters and approvals needed for any 
exceptions to the policy's requirements;
    (7) Describe delegations of authority; and,
    (8) Describe reporting requirements, including exceptions to policy 
limits.
    (d) At least quarterly, management must report to the Corporation's 
board of directors, or a designated committee 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 
committee of the board.


Sec.  652.35  Liquidity management.

    (a) Liquidity policy--board responsibilities. Farmer Mac's board of 
directors must adopt a liquidity policy, which may be integrated into a 
comprehensive asset-liability management or enterprise-wide risk 
management policy. The risk tolerance embodied in the liquidity policy 
must be consistent with the investment management policies required by 
Sec.  652.10 of this part. The board must ensure that management uses 
adequate internal controls to ensure compliance with its liquidity 
policy. At least annually, the board of directors or a designated 
committee of the board must review and affirmatively validate the 
sufficiency of the liquidity policy. The board of directors must 
approve any changes to the policy. You must provide a copy of the 
revised liquidity policy to the OSMO within 10 business days of 
adoption.
    (b) Policy content. Your liquidity policy must contain at a minimum 
the following:
    (1) The purpose and objectives of liquidity reserves;
    (2) A listing of specific asset classes and characteristics that 
can be used to meet liquidity objectives;
    (3) Diversification requirements for your liquidity reserve 
portfolio;
    (4) Maturity limits and credit quality standards for non-program 
investments used to meet the minimum liquidity requirements of Sec.  
652.40 (d);
    (5) The minimum and target (or optimum) amounts of liquidity that 
the board has established for Farmer Mac, expressed in days of maturing 
obligations;
    (6) The maximum amount of non-program investments that can be held 
for meeting Farmer Mac's liquidity needs, expressed as a percentage of 
program assets and program obligations;
    (7) Exception parameters and post approvals needed with respect to 
the liquidity reserve;
    (8) Delegations of authority pertaining to the liquidity reserve;
    (9) Reporting requirements which must comply with the requirements 
under paragraph (c) of this section;
    (10) A liability maturity management plan (LMMP), as described in 
Sec.  652.35(d); and,
    (11) A contingency funding plan (CFP), as described in Sec.  
652.35(e).
    (c) Reporting requirements--(1) Board reporting--
    (i) Periodic. At least quarterly, Farmer Mac's management must 
report to the Corporation's board of directors or a designated 
committee of the board describing, at a minimum, the status of the 
Corporation's compliance with board policy and the performance of the 
liquidity reserve portfolio.
    (ii) Special. Management must report any deviation from the bank's 
liquidity policy, or failure to meet the board's liquidity targets 
immediately to the board.
    (2) OSMO reporting. Farmer Mac must report, in writing, to the OSMO 
no later than the next business day following the discovery of any 
breach of the minimum liquidity reserve requirement at Sec.  652.40.
    (d) Liability maturity management plan. Your board must adopt a 
LMMP that establishes a funding strategy that provides for effective 
diversification of the sources and tenors of funding. The LMMP must:
    (1) Include targets of acceptable ranges of the proportion of debt 
issuances maturing within specific time periods;
    (2) Reflect the board's liquidity risk tolerance; and
    (3) Consider components of the Corporation's funding strategy that 
offset, or contribute to, liquidity risk.
    (e) Contingency funding plan--
    (1) General. Farmer Mac must have a CFP to ensure sources of 
liquidity are sufficient to fund normal operating requirements under a 
variety of stress events described in paragraph (e)(3)(iv) of this 
section.
    (2) CFP requirements. The board of directors must review and 
approve the CFP at least once each year and must make adjustments to 
reflect changes in the results of stress tests, the

[[Page 71820]]

Corporation's risk profile, and market conditions. Under the CFP, 
Farmer Mac must maintain unencumbered and highly marketable assets as 
described in paragraphs (b) and (c) of Sec.  652.40 in its liquidity 
reserve sufficient to meet its liquidity needs based on estimated cash 
inflows and outflows for a 30-day time horizon under a stress scenario 
that is sufficiently acute as to be consistent with the level of the 
board's risk tolerance.
    (3) The CFP must:
    (i) Be customized to the financial condition and liquidity risk 
profile of Farmer Mac, the board's liquidity risk tolerance, and the 
Corporation's business model;
    (ii) Identify funding alternatives that can be implemented as 
access to funding is reduced;
    (iii) Establish a process for managing events that imperil Farmer 
Mac's liquidity. The process must assign appropriate personnel and 
executable action plans to implement the CFP; and,
    (iv) Require periodic stress testing that analyzes the possible 
impacts on Farmer Mac's cash flows, liquidity position, profitability, 
and solvency for a wide variety of stress scenarios. Stress scenarios 
must be established and defined by the board and consistent with those 
applied in other areas of the Corporation's risk analysis. Assumptions 
applied must be conservative and their basis documented. The stress 
scenarios must be at a level of severity consistent with the board's 
risk tolerance and include scenarios such as market disruptions; rapid 
increase in contractually required loan purchases; unexpected 
requirements to fund commitments or revolving lines of credit or to 
fulfill guarantee obligations; difficulties in renewing or replacing 
funding with desired terms and structures; requirements to pledge 
collateral with counterparties; or reduced access to debt markets as a 
result of asset quality deterioration (including both program assets 
and non-program assets). FCA may, at its discretion, require certain 
specific stress scenarios in response to changes in market and economic 
outlooks.


Sec.  652.40  Liquidity reserve requirement and supplemental liquidity.

    (a) General. Farmer Mac must maintain a liquidity reserve in 
accordance with paragraph (d) of this section sufficient to fund 90 
days of the principal portion of maturing obligations and other 
borrowings at all times. The liquidity reserve must be comprised only 
of cash and investments, eligible under Sec.  652.20, that are 
specified under paragraph (d) of this section. Farmer Mac must also 
maintain supplemental liquidity as required by paragraph (d) of this 
section. Supplemental liquidity must be comprised of cash, investments 
that are eligible under Sec.  652.20, and qualifying securities backed 
by Farmer Mac program assets (loans) as specified in paragraph (d) of 
this section. Investments and qualifying securities comprising the 
liquidity reserve and supplemental liquidity must be discounted in 
accordance with paragraph (e) of this section.
    (b) Unencumbered. All investments and qualifying securities held 
for the purpose of meeting the liquidity reserve and supplemental 
liquidity requirements of this section must be unencumbered, meaning 
free of lien, not pledged either explicitly or implicitly in any way to 
secure, collateralize, or enhance the credit of any transaction, and 
not held as a hedge against any other exposure.
    (c) Highly marketable. All investments that Farmer Mac holds for 
the purpose of meeting the liquidity reserve minimum requirements of 
this section must be highly marketable. For purposes of this section, 
an investment is highly marketable if it possesses the following 
characteristics:
    (1) It is easily and immediately convertible to cash with little or 
no loss in value;
    (2) It has low credit and market risk;
    (3) It has ease and certainty of valuation; and
    (4) Except for money market instruments, it is listed on a 
developed and recognized exchange market and is able to be sold or 
converted to cash through repurchase agreements in active and sizable 
markets.
    (e) Composition of liquidity reserve and supplemental liquidity. 
Farmer Mac must continuously maintain Level 1 and Level 2 investments 
described in the table below sufficient to meet the 90-day minimum 
liquidity requirement in paragraph (a) of this section. Farmer Mac must 
also maintain supplemental liquidity as required by the table below.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Level 1 Investments:                  Cash.
    Instruments used to fund          Treasury securities.
     obligations maturing in          Other Government agency
     calendar days 1 through 30.      obligations.
    At least 15 days of the Level 1   Government-sponsored
     requirement must be comprised    agency securities (excluding
     of cash or instruments with      mortgage securities) that mature
     remaining maturities of less     within 60 days.
     than 3 years.                    Diversified Investment
                                      Funds comprised exclusively of
                                      Level 1 instruments.
------------------------------------------------------------------------
Level 2 Investments:                  Additional amounts of
                                      Level 1 Instruments.
    Instruments used to fund          Government-sponsored
     obligations maturing in          agency securities (excluding
     calendar days 31 through 90.     mortgage securities) with
                                      maturities exceeding 60 days.
                                      Government-sponsored
                                      agency mortgage securities
                                      (excluding Farmer Mac securities).
                                      Money Market instruments
                                      maturing within 90 days.
                                      Diversified Investment
                                      Funds comprised of Level 1 or 2
                                      instruments.
------------------------------------------------------------------------
Supplemental Liquidity:               Eligible investments under
                                      Sec.   652.20.
    Assets to fund obligations        Qualifying securities
     maturing after 90 calendar       backed by Farmer Mac program
     days in an amount necessary to   assets (loans) guaranteed by the
     meet board liquidity policy in   United States Department of
     accordance with Sec.   652.35.   Agriculture (excluding the portion
                                      that would be necessary to satisfy
                                      obligations to creditors and
                                      equity holders in Farmer Mac II
                                      LLC).
------------------------------------------------------------------------

    (e) Discounts. The liquid assets of the liquidity reserve and 
supplemental liquidity are discounted as follows:
    (1) Multiply cash and overnight investments by 100 percent;
    (2) Multiply Treasury securities by 97 percent of the market value;
    (3) Multiply all other Level 1 qualifying instruments by 95 percent 
of their market value, even if some of these instruments are counted 
toward the

[[Page 71821]]

Level 2 liquidity reserve requirements due to a surplus of Level 1 
qualifying instruments over the Level 1 liquidity reserve requirements.
    (4) Multiply all Level 2 Instruments by 93 percent of the market 
value, except the volume of Level 1 qualifying instruments that exceeds 
the Level 1 liquidity reserve requirement and is therefore applied to 
the Level 2 liquidity reserve requirement, as described in paragraph 
(e)(3) of this section; and
    (5) Multiply all other investments held for supplemental liquidity 
by 85 percent of market value, except:
    (i) The volume of Level 1 qualifying instruments that exceeds the 
Level 1 or Level 2 liquidity reserve requirements, as described in 
paragraph (e)(3) of this section; and
    (ii) The volume of Level 2 qualifying instruments that exceeds the 
Level 2 liquidity reserve requirements, as described in paragraph 
(e)(4) of this section; and,
    (iii) Multiply 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 by 75 percent.
    (f) Reservation of authority. FCA reserves the right, on a case-by-
case basis, to require Farmer Mac to adjust its treatment of 
instruments (assets) in its liquidity reserve and supplemental 
liquidity so that it has liquidity that is sufficient and commensurate 
for the risks it faces. This reservation of authority enables FCA to 
respond to adverse financial, economic, or market conditions by 
requiring Farmer Mac, on a case-by-case basis, to:
    (1) Increase the discounts specified in paragraph (e) of this 
section that are applied to any individual security or any class of 
securities due to changes in market conditions or marketability of such 
securities;
    (2) Shift individual or multiple securities from one level of the 
liquidity reserve to another, or between one of the levels of the 
liquidity reserve and supplemental liquidity based on the performance 
of such asset(s), or based on financial, economic, or market conditions 
affecting the liquidity and solvency of Farmer Mac;
    (3) Change portfolio concentration limits in Sec.  652.20(a); or
    (4) Take any other action that the Farm Credit Administration deems 
necessary to ensure that Farmer Mac has sufficient liquidity to meet 
its financial obligations as they come due.


Sec.  652.45  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.  652.40 of this subpart;
    (b) Modify the amount, qualities, and types of eligible investments 
that you are authorized to hold pursuant to Sec.  652.20 of this 
subpart; and/or
    (c) Take other actions as deemed appropriate.

    Dated: November 10, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2011-29690 Filed 11-17-11; 8:45 am]
BILLING CODE 6705-01-P