[Federal Register Volume 76, Number 248 (Tuesday, December 27, 2011)]
[Proposed Rules]
[Pages 80817-80829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32698]


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FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC54


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Liquidity and Funding

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we or us) proposes to 
amend its liquidity regulation. The purpose of the proposed rule is to 
strengthen liquidity risk management at Farm Credit System (FCS or 
System) banks, improve the quality of assets in the liquidity reserve, 
and bolster the ability of System banks to fund their obligations and 
continue their operations during times of economic, financial, or 
market adversity.

DATES: Comments should be received on or before February 27, 2012.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency, commenters are encouraged to 
submit comments by email or through the FCA'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 
Comments'' and follow the directions for ``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Director, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or from 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: David J. Lewandrowski, Senior Policy 
Analyst, Office of Regulatory Policy, Farm Credit Administration, 1501 
Farm Credit Drive, McLean, VA, (703) 883-4498, TTY (703) 883-4434; or
    Richard A. Katz, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of the proposed rule are to:
     Improve the capacity of FCS banks to pay their obligations 
and fund their operations by maintaining adequate liquidity to 
withstand various market disruptions and adverse financial or economic 
conditions;
     Strengthen liquidity management at all FCS banks;
     Enhance the marketability of assets that System banks hold 
in their liquidity reserve;
     Require that cash and highly liquid investments comprise 
the first 30 days of the 90-day liquidity reserve;
     Establish a supplemental liquidity buffer that a bank can 
draw upon during an emergency and that is sufficient to cover the 
bank's liquidity needs beyond the 90-day liquidity reserve; and
     Strengthen each bank's Contingency Funding Plan (CFP).

II. Background

    The FCS is a nationwide network of borrower-owned financial 
cooperatives that lend to farmers, ranchers, aquatic producers and 
harvesters, agricultural cooperatives, rural utilities, farm-related 
service businesses, and rural homeowners. By law, FCS institutions are 
instrumentalities of the United States,\1\ and Government-sponsored 
enterprises (GSEs).\2\ According to section 1.1(a) of the Farm Credit 
Act of 1971, as amended, (Act), Congress established the System for the 
purpose

[[Page 80818]]

of furnishing ``sound, adequate, and constructive credit and closely 
related services'' to farmers, ranchers, aquatic producers and 
harvesters, their cooperatives, and certain farm-related businesses 
necessary to fund efficient agricultural operations in the United 
States.
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    \1\ See sections 1.3(a), 2.0(a), 2.10(a), 3.0, 4.25, and 
8.1(a)(1) of the Act; 12 U.S.C. 2011(a), 2071(a), 2091(a), 2121, 
2211, and 2279aa-1.
    \2\ See Public Law 101-73, sec. 1404(e)(1)(A), 103 Stat. 183, 
552-53 (Aug. 9, 1989).
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    In many respects, the FCS is different from other lenders. In 
contrast to commercial banks and most other financial institutions, the 
System lends mostly to agriculture and in rural areas. Unlike most 
other lenders, FCS banks and associations are cooperatives that are 
owned and controlled by their agricultural borrowers, and their common 
equity is not publicly traded.
    The System funds its operations differently than most commercial 
lenders. FCS banks issue System-wide debt securities, which are the 
System's primary source for funding loans to agricultural producers, 
their cooperatives, and other eligible borrowers.\3\ Although section 
4.2(a) of the Act authorizes FCS banks to borrow from commercial banks 
and other lending institutions, lines of credit with non-System lenders 
are a negligible source of FCS funding. FCS banks and associations are 
not depository institutions.
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    \3\ Farm Credit banks (which are the four Farm Credit Banks and 
the Agricultural Credit Bank) issue and market System-wide debt 
securities through the Federal Farm Credit Banks Funding Corporation 
(Funding Corporation). The Funding Corporation, which is established 
pursuant to section 4.9 of the Act, is owned by all Farm Credit 
banks.
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    The System's ability to finance agriculture, rural housing, and 
rural utilities in both good and bad economic times primarily depends 
on continuing access to the debt markets. During normal economic 
conditions, access to debt markets provides the System with funds it 
needs to operate. However, if access to the debt markets becomes 
impeded for any reason, Farm Credit banks must rely on assets to 
continue operations and pay maturing obligations. Liquidity is the 
ability to convert assets into cash quickly and at a price that is 
close to their book value.
    In contrast to commercial banks, savings associations, and credit 
unions, the FCS does not have guaranteed access to a government 
provider of liquidity in an emergency.\4\ If market access is impeded, 
FCS banks must rely on their liquidity reserves more heavily than other 
federally regulated lending institutions \5\ because they do not have 
an assured lender of last resort.\6\
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    \4\ The Federal Reserve Banks, the Federal Home Loan Banks, and 
National Credit Union Administration Central Liquidity Facility 
serve as a source of liquidity for commercial banks, savings 
associations, and credit unions both in ordinary times and during 
emergencies.
    \5\ Section 1101 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act amended section 13(3) of the Federal Reserve 
Act, 12 U.S.C. 343(3), to allow the Board of Governors of the 
Federal Reserve System, in consultation with the Secretary of the 
Treasury, to establish by regulation, policies and procedures that 
would govern emergency lending under a program or facility for the 
purpose of providing liquidity to the financial system. Under 
section 13(3) of the Federal Reserve Act, as amended, the Board of 
Governors of the Federal Reserve System must establish procedures 
that prohibit insolvent and failing entities from borrowing under 
the emergency program or facility. Pursuant to section 13(3) of the 
Federal Reserve Act, as amended, the Board of Governors of the 
Federal Reserve System, with the approval of the Secretary of the 
Treasury could authorize the Federal Reserve Banks to serve as an 
emergency source of liquidity for the FCS, but it is not obligated 
to do so. See Public Law 11-203, title XI, sec. 1101(a), 124 Stat. 
2113 (Jul. 21, 2010).
    \6\ If market access is completely impeded, the Farm Credit 
Insurance Fund would also be available to ensure the payments of 
maturing insured debt obligations. See 12 U.S.C. 2277a-9(c)(1).
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    The liquidity of System banks has drawn more scrutiny from the FCA, 
credit rating agencies, and investors as economic and financial turmoil 
have roiled the markets with greater frequency and magnitude in recent 
years. As a result, the FCA proposes to amend its liquidity regulations 
so that FCS banks are better able to withstand uncertainty and 
instability in the financial markets.\7\
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    \7\ The FCA has broad authority under various provisions of the 
Act to supervise and regulate liquidity management at FCS banks. 
Section 5.17(a) of the Act authorizes the FCA to: (1) Approve the 
issuance of FCS debt securities under section 4.2(c) and (d) of the 
Act; (2) establish standards regarding loan security requirements at 
FCS institutions, and regulate the borrowing, repayment, and 
transfer of funds between System institutions; (3) prescribe rules 
and regulations necessary or appropriate for carrying out the Act; 
and (4) exercise its statutory enforcement powers for the purpose of 
ensuring the safety and soundness of System institutions.
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    Liquidity is important for the financial system as a whole. Recent 
market disruptions have raised concerns among regulators, credit rating 
agencies, investors, and other market participants about the ability of 
financial institutions to maintain sufficient liquidity to meet their 
immediate funding needs during times of economic and financial 
turmoil.\8\ The experience of these crises demonstrates why sound 
liquidity risk management is important to the safety and soundness of 
individual financial institutions and the financial system as a whole.
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    \8\ For example, financial institutions collectively had 
difficulty maintaining sufficient short-term liquidity in the 
aftermath of the attacks on September 11, 2001, and again in 
September and October of 2008 after several large financial 
institutions collapsed. During these crises, the Federal Reserve 
injected additional liquidity into the financial system in the 
United States.
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    Regulatory agencies, in particular, have responded by formulating 
more comprehensive supervisory approaches toward liquidity risk 
management at financial institutions. For example, the Basel Committee 
on Banking Supervision (Basel Committee) issued in September 2008, the 
Principles for Sound Liquidity Risk Management and Supervision, which 
contains 17 principles detailing international supervisory guidance for 
sound liquidity risk management. In December, 2010, the Basel Committee 
issued Basel III: International framework for liquidity risk 
measurement, standards, and monitoring (Basel III Liquidity Framework). 
On March 22, 2010, the five Federal agencies that regulate depository 
institutions (Federal banking agencies) \9\ published their Interagency 
Policy Statement on Funding and Liquidity Risk Management \10\, which 
sets forth the supervisory expectations for depository institutions. 
The purpose of all these documents is to guide the supervisory efforts 
of Federal and international regulators of depository institutions into 
the future.
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    \9\ The five agencies are the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, the National Credit Union 
Administration, and the now-defunct Office of Thrift Supervision.
    \10\ See 75 FR 13656 (Mar. 22, 2010).
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    The FCA has considered the guidance of both the Basel Committee and 
the Federal banking agencies as part of its efforts to develop revised 
liquidity regulations. Many of the core concepts that the Basel 
Committee and the Federal banking agencies articulated about liquidity 
are appropriate for our proposed rule. However, the corporate, funding, 
and lending structures of the FCS are fundamentally different from 
those of depository institutions and, therefore, the FCA has modified 
and adapted the guidance of international regulators and Federal 
banking agencies concerning liquidity risk management so they are 
relevant to the System's unique circumstances, needs, and structure. 
The FCA also added other requirements that are tailored to the System's 
unique nature.
    In addition to the guidance of the Basel Committee and other 
Federal regulators, both the FCA and the System have implemented 
various measures to improve liquidity management so FCS banks are in a 
better position to withstand financial and economic shocks. More 
specifically, System banks agreed to a common framework that stipulated 
the days of liquidity coverage that they would maintain, and

[[Page 80819]]

established the parameter for the quality of investments held in their 
liquidity reserves.
    The FCA also took action to improve the ability of FCS banks to 
maintain sufficient liquidity to outlast episodes of market turbulence. 
On November 13, 2008, the FCA Board passed a Market Emergency Standby 
Resolution that waives the 90-day liquidity reserve requirement in 
Sec.  615.5134 for a limited period of time if a crisis shuts, or 
severely restricts access to, debt markets. On May 5, 2009, the FCA 
issued a letter to FCS banks and the Funding Corporation that required 
the standing monthly collateral certification of all banks to include 
detailed information about days of liquidity in a specified format. 
This directive also required reporting of days of liquidity for each 
FCS bank and the FCS in aggregate, and detailed information about the 
type and remaining term of the investments from which those days of 
liquidity are derived.
    FCS banks withstood recent economic and financial turmoil with 
their liquidity intact. Both the FCA and FCS have gained valuable 
experience and insights into the effects that sudden and severe stress 
have on liquidity at individual FCS institutions and the financial 
system as a whole. The FCA has identified several vulnerabilities that 
need to be addressed:
    (1) Banks must ensure that the liquidity reserve is managed 
primarily as an emergency source of funding;
    (2) Board policies need to provide clearer guidance to the asset-
liability committee (ALCO) for monitoring, measuring, and managing 
liquidity risk;
    (3) Risk analyses need to address how investments that the bank 
purchases and hold actually achieve its primary liquidity objective.
    (4) Contingency funding plans need to provide orderly and effective 
procedures that would allow the bank to maintain sufficient liquidity 
to fund its operations during each phase of an emerging crisis;
    (5) Discounts that FCS banks apply to the market values of assets 
in the liquidity reserve pursuant to current Sec.  615.5134(c) need to 
be increased for certain types of investments;
    (6) Counterparty risk needs to be reduced; and
    (7) Liquidity policies need to take into account the continuing 
uncertainty as to whether the Federal Reserve System would provide a 
line of credit to FCS banks under section 13(3) of the Federal Reserve 
Act during a systemic liquidity crisis.
    As our colleagues at international financial regulators and the 
Federal banking agencies are doing, we are drawing conclusions from the 
lessons that we learned during recent crises. As a result, we are 
revising our regulatory and supervisory approaches towards liquidity so 
that System institutions are in a better position to withstand whatever 
future crises may arise. As part of our ongoing efforts to limit the 
adverse effect of rapidly changing economic, financial, and market 
conditions on the liquidity of any FCS bank,\11\ we now propose 
amendments to Sec.  615.5134 that would redress these vulnerabilities.
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    \11\ The FCA has periodically amended its liquidity regulations 
over the past 18 years. The FCA originally adopted Sec.  615.5134 in 
1993, and subsequently amended it 1999 and 2005. See 58 FR 63056 
(Nov. 30, 1993); 64 FR 28896 (May 28, 1999); 70 FR 51590 (Aug. 31, 
2005). Originally, Sec.  615.5134 required each FCS bank to maintain 
15 days of liquidity, and to separately identify investments held 
for the purpose of meeting its liquidity reserve requirement. In 
1999, the FCA repealed the provision requiring FCS banks to 
separately identify investments held for liquidity. In 2005, the FCA 
expanded the liquidity reserve requirement to 90 days, increased the 
limit on investments from 30 to 35 percent of total outstanding 
loans, and for the first time, required all FCS banks to develop 
CFPs for liquidity.
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III. Section-by Section Analysis of the Proposed Rule

A. Section 615.5134(a)--Liquidity Policy

    The board of directors is responsible for ensuring that the bank 
always has readily available funds to continue operations and pay 
maturing obligations. The board discharges this responsibility by 
adopting policies and procedures for management to follow. A provision 
in the existing investment management regulation, Sec.  615.5133(c)(3), 
requires FCS banks to address liquidity risk in their investment 
policies. However, the only affirmative requirement that Sec.  
615.5133(c)(3) imposes on FCS banks is that their investment policies 
must describe the liquidity characteristics of eligible investments 
that they hold to meet their liquidity needs and institutional 
objectives. Although the existing regulation gives FCS banks ample 
flexibility to formulate liquidity policies that meet their particular 
needs and objectives, the FCA is proposing to add a new paragraph (a) 
to Sec.  615.5134 that for the first time, would require each FCS bank 
to address other specific issues in its liquidity policies. The banks 
have the option of either incorporating these new liquidity policies in 
their investment management policies required under Sec.  615.5133, or 
in a separate document.
    Proposed Sec.  615.5134(a) addresses the board's responsibility for 
establishing and implementing liquidity policies for the bank. Proposed 
Sec.  615.5134(a)(1) would require the board of directors of each FCS 
bank to adopt written liquidity policies that are consistent with the 
investment management policies that the board adopts under Sec.  
615.5133. The guidance that the FCA has provided to FCS banks about 
investment management policies and practices in Sec.  615.5133 also 
applies to their liquidity policies.\12\ The FCA expects the bank's 
liquidity policies to be consistent with, and fit into its overall 
investment strategy. Liquidity risk management is critically important 
to the long-term viability of the bank, and for this reason, it must be 
integrated into the bank's overall investment management and risk 
management processes.\13\
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    \12\ The FCA recently proposed substantive amendments to Sec.  
615.5133. The preamble to the proposed rule discusses the FCA's 
expectations concerning proper investment practices at FCS banks and 
associations. See 76 FR 51289 (Aug. 18, 2011). The FCA incorporates 
by reference its guidance about proper investment management 
practices in the preamble to Sec.  615.5133 into this preamble.
    \13\ See Interagency Policy Statement on Funding and Liquidity 
Risk Management, supra at 13661.
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    In discharging its responsibility, the board must establish 
appropriate strategies, policies, procedures, and limits that will 
enable the bank to monitor, measure, manage, and mitigate liquidity 
risk.\14\ The board's policy should provide adequate guidance to 
management as it develops and implements strategies for managing 
liquidity risk. At a minimum, the policy should provide clear direction 
to management about limiting and controlling risk exposures, and 
keeping them within the board's risk tolerance levels. Additionally, 
these policies should establish parameters that enable management to 
determine whether particular investments belong in the liquidity 
reserve given their potential suitability for managing interest rate 
risks.
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    \14\ Id.
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    Proposed Sec.  615.5134(a)(1) would also require the board to: (1) 
Review its liquidity policies at least once every year; (2) 
affirmatively validate the sufficiency of its liquidity policies; and 
(3) make any revisions it deems necessary. The purpose of this 
provision is to compel every FCS bank board to ascertain whether its 
policies enable the bank to respond promptly and effectively to events 
that may occur and threaten its liquidity. More specifically, the board 
should determine, as part of its review, whether its current policies 
enable the bank to consistently maintain sufficient liquidity for its 
ongoing funding needs, thus covering both

[[Page 80820]]

expected and unexpected deviations in the availability of funds to meet 
cash demands.\15\ A bank's viability often depends on effective 
liquidity risk management (that is fully integrated into its overall 
risk management strategies and processes), and the annual review should 
determine whether the policies achieve these objectives.\16\ As part of 
its review, the bank board should consider whether it needs to adjust 
its liquidity policies based both on past experiences and on expected 
trends in the economy, agriculture, and financial markets.
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    \15\ Id.
    \16\ Id.
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    The final provision of proposed Sec.  615.5134(a)(1) would require 
the board to ensure that adequate and effective internal controls are 
in place, and that management complies with and carries out the bank's 
liquidity policies. Besides preventing losses caused by fraud or 
mismanagement, strong internal controls will enable FCS banks to 
respond more quickly and effectively when significant market turmoil 
arises and impedes access to funding.
    The content of the board's liquidity policies are the focus of 
Sec.  615.5134(a)(2). This regulatory provision identifies seven 
different issues that, at a minimum, a bank must address in its 
liquidity policies. The bank's policies should be comprehensive and 
commensurate with the complexity of the bank's operations and risk 
profile.
    Proposed Sec.  615.5134(a)(2)(i) would require policies to address 
the purpose and objectives of the liquidity reserve. This section of 
the bank's policies should distinguish the purpose and objectives of 
the liquidity reserve from the other operations and asset-liability 
functions of the bank, including interest rate management. The board's 
philosophy and position on the purpose and objectives of the liquidity 
reserve are of prime importance to effective liquidity management at 
the bank. In normal times, access to the debt markets provides the 
System with ready liquidity. However, when market access is impeded, 
the liquidity reserve should enable each FCS bank to maintain 
sufficient cash flows to pay its obligations, meet its collateral 
needs, and fund operations in a safe and sound manner.\17\
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    \17\ Id at 13660.
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    In normal times, FCS banks may pay more attention to the financial 
performance of the liquidity reserve rather than its role as an 
emergency source of funding. Incorrectly prioritizing these two 
objectives is problematic because the liquidity reserve should consist 
of cash and high-quality investments that can be quickly converted into 
cash at, or close to, par value. Cash-like investments pose little risk 
to the investor and, therefore, they usually do not earn the highest 
rate of return.
    During the crisis in 2008, some FCS banks experienced losses that 
were larger than expected given the primary purpose of the liquidity 
reserve is an emergency source of funding. The FCA expects FCS banks to 
select investments for the liquidity reserve by their liquidity 
characteristics, and to match these assets closely to the bank's 
maturing liabilities. Choosing investments primarily for their ability 
to generate revenue is fundamentally incompatible with the System's GSE 
status.\18\ Pursuant to proposed Sec.  615.5134(a)(2)(i), the board 
should provide guidance to management about these issues when it 
addresses the objectives and purposes of the liquidity reserve in its 
policies.
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    \18\ See 70 FR 51587 (Aug. 31, 2005); 58 FR 63039 (Nov, 30, 
1993).
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    Proposed Sec.  615.5134(a)(2)(ii) would require the board's 
policies to address the diversification of the liquidity reserve 
portfolio. This diversification requirement would apply to both the 
liquidity reserve in proposed Sec.  615.5134(e) and the supplemental 
liquidity buffer in proposed Sec.  615.5134(f). Diversification by 
tenor, issuer, issuer type, size, asset type, and other factors can 
reduce certain investment risks. The bank's diversification policy 
should address the board's desired mix of cash and investments that the 
bank should hold for liquidity under a variety of scenarios, including 
both normal and adverse conditions. Within the spectrum of eligible 
qualified investments, proposed Sec.  615.5134(a)(2)(ii) would require 
the policy to establish criteria for diversifying these assets based on 
issuers, maturity, and other factors that the bank deems relevant. In 
formulating these criteria, each bank should consider, in light of its 
needs and circumstances, how diversification would better enable the 
liquidity reserve and supplemental liquidity buffer to serve as its 
emergency or supplemental funding source when market access is 
curtailed or fully impeded. The FCA expects each bank to tailor its 
policy to its individual circumstances and financial conditions, and to 
revise it in response to changes in the business environment.
    Proposed Sec.  615.5134(a)(2)(iii) would require the board's 
policies to establish maturity limits and credit quality standards for 
investments that the bank is holding in its liquidity reserve. This 
aspect of the bank's policies would help management to target and match 
cash inflows from loans and investments to outflows that pay its 
maturing obligations. In devising its diversification strategy the bank 
should consider how it may need to rely on its liquidity portfolio as 
an available funding source in the short-, intermediate-, and long-
term. As high-quality investments season and come closer to maturity, 
they become more liquid. In this context, a well-reasoned policy should 
guide management about deploying the strata of investments throughout 
the liquidity reserve and the supplemental liquidity buffer.
    Proposed Sec.  615.5134(a)(2)(iii) also focuses on the credit 
quality standards that board policies should establish for investments 
that the bank will hold to meet the liquidity reserve requirements of 
this regulation. Investments with short terms to maturity and high 
credit quality tend to be liquid and, therefore, are generally suitable 
for the bank's liquidity reserve and supplemental liquidity buffer. The 
preamble to Sec.  615.5134(c) below, will discuss many of the 
attributes of high-quality liquidity investments in greater detail. The 
bank's liquidity policies should base credit quality standards for 
investments on factors and standards that the financial services 
industry uses to determine that the risk of default for both the asset 
and its issuer are negligible. In determining the credit quality of a 
security, FCS banks may consider the credit ratings issued by a 
Nationally Recognized Statistical Rating Organization (NRSRO), but may 
not rely solely or disproportionately on such ratings. System banks 
must document their credit quality determinations.
    Under proposed Sec.  615.5134(a)(2)(iv), the board's policies 
should cover the target amount of days of liquidity that the bank needs 
based on its business model and its risk profile. Estimating the target 
amount of days of liquidity that the bank will need to outlast various 
stress events is an effective tool for managing and mitigating 
liquidity risks. The FCA expects each FCS bank to include a prudent 
amount of unfunded commitments in its calculation of the target amount 
of days of liquidity it will need to survive a liquidity crisis in the 
markets.
    Proposed Sec.  615.5134(a)(2)(v) would require the bank's policies 
address the elements of the Contingency Funding Plan (CFP) in paragraph 
(h) of the

[[Page 80821]]

proposed rule. The purpose of the CFP is to address unexpected events 
or unusual business conditions that increase liquidity risk at FCS 
banks. Our existing regulation, Sec.  615.5134(d), requires each FCS 
bank to have a formal written CFP to address liquidity shortfalls that 
may occur during market disruptions. The proposed rule would strengthen 
contingency funding planning at FCS banks. Under proposed Sec.  
615.5134(a)(2)(v), an effective CFP would cover at a minimum: (1) 
Strategies, policies, and procedures to manage a range of stress 
scenarios; (2) chains of communications and responsibility within the 
bank; and (3) implementation of the CFP during all phases of an adverse 
liquidity event. The preamble to proposed Sec.  615.5134(h) will 
discuss the substantive requirements of the CFP and our expectations of 
FCS banks in greater detail.
    The next provision of this regulation, proposed Sec.  
615.5134(a)(2)(vi), covers delegations of authority pertaining to the 
liquidity reserve in the bank's liquidity policies. As with all other 
aspects of the bank's operations, an explicit delegation of authority 
within a clearly defined chain of command strengthens the effectiveness 
and efficiency of an institution's operations and mitigates the risk of 
loss. The purpose of a delegation of authority is to clearly establish 
lines of authority and responsibility for managing the bank's liquidity 
risk.\19\ The policies should clearly identify those individuals and 
committees that are responsible for making decisions involving 
liquidity risk and implementing risk mitigation strategies. 
Additionally, the policies should ensure that the ALCO has sufficiently 
broad representation across the operational functions of the bank that 
influence the bank's liquidity risk profile.
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    \19\ See Interagency Policy Statement on Funding and Liquidity 
Risk, 75 FR 13656, 13661 (Mar. 22, 2010).
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    Under proposed Sec.  615.5134(a)(2)(vii), the policies must contain 
reporting requirements, which at a minimum, would require management to 
report to the board at least once every quarter about compliance with 
the bank's liquidity policies, and to what extent the liquidity reserve 
portfolio has achieved the bank's liquidity objectives. This provision 
would also require management to report immediately to the board about 
any deviation from its liquidity policies, or any failure to meet the 
liquidity targets in the board's policies. The purpose of this 
provision is to ensure that an effective reporting process is in place, 
and management communicates accurate and timely information to the 
board about the level and sources of the bank's exposure to liquidity 
risk. These reports should enable the board to take prompt corrective 
action. The board should also consider these quarterly reports when it 
conducts its annual review of the bank's liquidity policies and decides 
whether to make any revisions to its policies, pursuant to proposed 
Sec.  615.5134(a)(1).

B. Liquidity Reserve Requirement--Sec.  615.5134(b)

    Proposed Sec.  615.5134(b) is the cornerstone of the FCA's proposal 
because it articulates the core liquidity reserve requirements for FCS 
banks. Proposed Sec.  615.5134(b) is not a departure from the liquidity 
reserve requirement in FCA's existing liquidity regulation. Instead, it 
builds upon and strengthens the concepts, principles, and requirements 
of existing Sec.  615.5134. The purpose of proposed Sec.  615.5134(b) 
is to better prepare FCS banks so they can withstand future liquidity 
crises. The FCA designed this proposal to address the vulnerabilities 
identified during recent crises. In developing proposed Sec.  
615.5134(b), we also considered the Basel Committee's recommendations 
for an international framework for liquidity, and the Federal banking 
agencies' Interagency Policy Statement on Funding and Liquidity Risk 
Management.
    Both the existing and proposed regulations require each FCS bank to 
maintain a liquidity reserve sufficient to fund 90 days of the 
principal portion of maturing obligations and other borrowings of the 
bank at all times. However, in contrast to the existing regulation, 
proposed Sec.  615.5134(b) and (e) would divide the bank's liquidity 
reserve into two levels. The first level of the liquidity reserve would 
fund a bank's maturing obligations and operations for the first 30 days 
from the onset of a significant stress event. Cash and certain 
instruments that mature within 3 years or less must comprise at least 
15 days of the first level of the bank's liquidity reserve. The bank 
would draw on the second level of the reserve if market turmoil 
continued to persist for the subsequent 60 days after the initial 30 
days thereby comprising together a stratified 90-day liquidity reserve.
    Proposed Sec.  615.5134(b) would require FCS banks, for the first 
time, to maintain a supplemental liquidity buffer pursuant to proposed 
Sec.  615.5134(f). The new regulation would require each FCS bank to 
hold supplemental liquid assets (comprised of cash and other qualified 
assets listed in Sec.  615.5140) in excess of the 90-day minimum 
liquidity reserve. The supplemental liquidity buffer would complement 
the 90-day liquidity reserve, and its purpose is to enable each FCS 
bank to continue operations if market access becomes impeded for a 
prolonged period of time in differing stress scenarios.
    Proposed Sec.  615.5134(b) would also require FCS banks to discount 
the assets in their liquidity reserve by the percentages specified in 
proposed Sec.  615.5134(g). Although the existing regulation already 
requires FCS banks to discount assets in the liquidity reserve, the 
proposed rule would change some of the percentages to reflect the new 
two-tier structure of the liquidity reserve. The preamble to proposed 
Sec.  615.5134(g) discusses in detail how we are revising the 
discounting requirements for the liquidity reserve.
    The final sentence of proposed Sec.  615.5134(b) states that the 
liquidity reserve must be comprised only of cash, including cash due 
from traded but not yet settled debt, and qualified eligible 
investments under Sec.  615.5140 that are marketable under proposed 
Sec.  615.5134(d). Proposed Sec.  615.5134(b) is similar, but not 
identical, to existing Sec.  615.5134(a). Both the existing and the 
proposed rule specify that the liquidity reserve must be comprised of 
cash, including cash due from traded but not yet settled debt, and 
investments listed in Sec.  615.5140.
    The final sentence of proposed Sec.  615.5140(b), however, differs 
from existing Sec.  615.5140(a) in two crucial respects. First, the 
proposed rule emphasizes that all investments held in liquidity 
reserves must be marketable. As the preamble to proposed Sec.  
615.5134(d) explains in greater detail below, the new regulation would 
establish specific regulatory benchmarks for determining whether 
particular investments are marketable. Marketability of a security is 
an essential attribute of its liquidity and helps determine its 
suitability for the liquidity reserve.
    Second, the proposed rule would repeal the provisions in existing 
Sec.  615.5134(a) that impose specific credit ratings on investments 
that FCS banks hold in their liquidity reserves. Under the existing 
regulation, money market instruments and floating and fixed rate debt 
securities held in the banks' liquidity reserve must maintain one of 
the two highest NSRSO credit ratings. In the event that an unrated 
instrument is in the liquidity reserve, the existing regulation 
requires the issuer to carry one of the two highest NRSRO ratings. 
Section 939A of the Dodd-Frank Wall

[[Page 80822]]

Street Reform and Consumer Protection Act \20\ requires each Federal 
agency to: (1) Review any references or requirements in its regulations 
concerning the credit ratings of securities and money market 
instruments, and (2) replace references to, and requirements that 
regulated entities rely on such credit ratings with standards of 
creditworthiness that the agency determines is appropriate. In making 
this determination, every agency must seek to establish, to the extent 
feasible, uniform standards of creditworthiness. Our proposed liquidity 
regulation does not seek to replace the NRSRO rating requirements in 
existing Sec.  615.5134(a) with a specific alternate standard of 
creditworthiness. Instead, we propose to require FCS banks to hold 
investments in the liquidity reserve that are unencumbered under 
proposed Sec.  615.5134(c), and are marketable under proposed Sec.  
615.5134(d). In two other rulemakings, the FCA has invited the public 
to suggest options for replacing NRSRO credit ratings with other 
standards to determine the creditworthiness of financial instruments 
and their issuers.\21\ We also solicit your comments and suggestions 
about the best approach for addressing standards of creditworthiness 
for investments held in the liquidity reserves of FCS banks.
---------------------------------------------------------------------------

    \20\ See Public Law 111-203, sec. 939A, 124 Stat. 1376, 1887 
(Jul. 21, 2010).
    \21\ See 76 FR 51289, 51298 (Aug. 18, 2011) and 76 FR 53344 
(Aug. 26, 2011). The first cite is to the proposed rule on 
investment management. The FCA is soliciting comments on how to 
replace NRSRO credit ratings for eligible investments. The second 
cite is to an Advance Notice of Proposed Rulemaking concerning the 
NRSRO credit ratings in our capital regulations.
---------------------------------------------------------------------------

C. Unencumbered and Marketable Investments in the Liquidity Reserve

    Currently, existing Sec.  615.5134(b) states that all investments 
that an FCS bank holds for the purpose of meeting its regulatory 
liquidity reserve requirement must be free of lien. Proposed Sec.  
615.5134(c) would expand upon this concept by requiring FCS banks to 
hold only unencumbered investments in their liquidity reserves. Under 
proposed Sec.  615.5134(c), an asset is unencumbered if it is free of 
lien and is not explicitly or implicitly pledged to secure, 
collateralize, or enhance the credit of any transaction.\22\ 
Additionally, proposed Sec.  615.5134(c) also would prohibit any FCS 
bank from using an investment in the liquidity reserve as a hedge 
against interest rate risk pursuant to Sec.  615.5135 if liquidation of 
that particular investment would expose the bank to a material risk of 
loss. Unencumbered investments are free of the impediments or 
restrictions that would otherwise curtail the bank's ability to 
liquidate them to pay its obligations when normal access to the debt 
market is obstructed. Proposed Sec.  615.5134(c) strengthens the 
liquidity of FCS banks and improves the safety and soundness of the 
Farm Credit System as a whole.
---------------------------------------------------------------------------

    \22\ Basel Committee on Banking Supervision, Basel III: 
International framework for liquidity risk measurement, standards, 
and monitoring, (Dec. 2010) p. 6.
---------------------------------------------------------------------------

    Under both proposed Sec.  615.5134(b) and (d), all eligible 
investments that FCS banks hold in their liquidity reserves must be 
marketable. Proposed Sec.  615.5134(d) specifies the criteria and 
attributes that determine whether investments are marketable for the 
purposes of this regulation. Investments that meet all the 
marketability criteria in proposed Sec.  615.5134(d) would be deemed to 
possess the characteristics of high-quality liquid assets that are 
suitable for the liquidity reserves at FCS banks. Proposed Sec.  
615.5134(d) is based on many of the concepts that the Basel Committee 
articulated in the Basel III Liquidity Framework.\23\ The FCA tailored 
these concepts to the unique structure, needs, and circumstances of the 
FCS.
---------------------------------------------------------------------------

    \23\ Id at p. 5.
---------------------------------------------------------------------------

    Proposed Sec.  615.5134(d)(1) states that an investment is 
marketable if it can be easily and immediately converted into cash with 
little or no loss in value. Investments that exhibit this attribute are 
more likely to generate funds for the bank without incurring steep 
discounts even if they were liquidated in a ``fire sale'' during 
turmoil in the markets.\24\ The liquidity of an asset depends on its 
performance during a stress event, and is measured by the amount that 
the holder can convert into cash within a certain timeframe.\25\
---------------------------------------------------------------------------

    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

    On a related note, proposed Sec.  615.5134(d)(1) complements the 
definition of ``liquid investments'' in existing Sec.  615.5131(e).\26\ 
The existing regulation defines ``liquid investments'' as ``assets that 
can be promptly converted into cash without significant loss to the 
investor.'' \27\ We do not consider Sec.  615.5131(e) to be redundant 
or inconsistent with proposed Sec.  615.5134(d)(1). For this reason, we 
do not propose to repeal or amend Sec.  615.5131(e). However, we invite 
your comments about whether the final rule should retain, relocate, or 
modify Sec.  615.5131(e).
---------------------------------------------------------------------------

    \26\ The proposed rule on investment management would change the 
designation of Sec.  615.5131(e) by omitting the paragraph 
designations of all definitions in the regulation.
    \27\ Existing Sec.  615.5131(e) also states, ``In the money 
market, a security is liquid if the spread between its bid and ask 
price is narrow and a reasonable amount can be sold at those 
prices.''
---------------------------------------------------------------------------

    Another feature of a marketable investment is that it exhibits low 
credit and market risks, and we propose to incorporate this criterion 
into proposed Sec.  615.5134(d)(2). Assets tend to be more liquid if 
they are less risky. An investment has low credit risk if its issuer 
has a strong credit standing, is not heavily indebted, and its assets 
are not heavily leveraged. Low duration \28\ and low volatility 
indicate that an investment is more likely to be liquid because it has 
low market risk.\29\
---------------------------------------------------------------------------

    \28\ Duration measures the price sensitivity of a fixed income 
security to interest rate changes.
    \29\ See Basel III Liquidity Framework supra. at p. 5.
---------------------------------------------------------------------------

    Ease and certainty of valuation is also an attribute of marketable 
investments.\30\ We are incorporating this concept into proposed Sec.  
615.5134(d)(3). The liquidity of an asset is likely to increase if 
market participants are able to agree on its valuation. An instrument 
has ease and certainty of valuation if the components of its pricing 
formulation are publicly available. The pricing of high-quality liquid 
assets are usually easy to calculate because they do not depend 
significantly on numerous assumptions. In practice, proposed Sec.  
615.5134(d)(3) effectively excludes structured investments from the 
liquidity reservesat FCS banks, although banks may hold such assets in 
their supplemental liquidity buffers if they are eligible investments 
under Sec.  615.5140. The proposed rule, however, would allow FCS banks 
to hold mortgage-backed securities issued by the Government National 
Mortgage Association in their liquidity reserves because they are 
highly marketable securities backed by the full faith and credit of the 
United States.
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

    Under proposed Sec.  615.5134(d)(4), the final attribute of a 
marketable investment is that it can be easily bought or sold. Money 
market instruments generally qualify as marketable investments under 
this provision because they are easily bought and sold even though they 
are not traded on exchanges. Otherwise, marketable investments include 
assets listed on developed and recognized exchange markets. Listing on 
a public exchange enhances the transparency of the pricing mechanisms 
of investments, thus enhancing their marketability and liquidity.\31\ 
Investments would also

[[Page 80823]]

comply with the requirement of proposed Sec.  615.5134(d)(4) if 
investors can sell or convert them into cash through repurchase (repo) 
agreements in active and sizeable markets. For the purpose of this 
proposed rule, markets are active and sizeable if they have a large 
number of market participants, high-trading volume, and investors can 
sell or repo the asset at any time.\32\ Another feature of an active 
and sizeable market is that it historically has market breadth and 
market depth.\33\ Proposed Sec.  615.5134(d)(4) would exclude private 
placements from the banks' liquidity reserves, but not the supplemental 
liquidity buffer.
---------------------------------------------------------------------------

    \31\ Id.
    \32\ Id. Many securities that System banks hold in their 
liquidity reserves are traded in high volume. Nevertheless, the FCA 
cautions that the potential volume that an FCS bank trades or holds 
in a particular security should not constitute a significant 
percentage of the overall trading volume in that security.
    \33\ Id. Market breadth refers to the price impact per unit of 
liquidity, whereas market depth refers to units of the asset that 
can be traded for a given price impact.
---------------------------------------------------------------------------

D. Composition of the Liquidity Reserve

    Proposed Sec.  615.5134(e) governs the composition of the liquidity 
reserve. This provision would require each FCS bank to continuously 
hold cash and the investments identified in the table to proposed Sec.  
615.5134(e) to meet the 90-day minimum liquidity reserve requirement of 
this regulation. Under this proposal, each bank would also apply the 
discounts in proposed Sec.  615.5134(g) to all cash and investments 
that it holds in its liquidity reserve.
    Although the existing regulation already requires every FCS bank to 
maintain a sufficient stock of liquid assets to fund its maturing 
obligations and other borrowings for at least 90 days, the proposed 
rule would divide the liquidity reserve into two levels. The first 
level of the liquidity reserve would provide sufficient liquidity for 
the bank to pay its obligations and continue operations for 30 days, 
whereas the second level of the reserve would cover the following 60 
days. Taken together, the two levels of the liquidity reserve should 
provide each FCS bank with adequate liquidity for 90 days.
    Proposed Sec.  615.5134(e) would require FCS banks to hold a 
minimum of 90 days of cash and liquid investments in their liquidity 
reserves. In other words, FCS banks may need to exceed 90daysbased on 
their individual liquidity needs. The FCA expects each bank, in 
accordance with its policies and procedures, to determine the 
appropriate level, size, and quality of its liquidity reserve based on 
its liquidity risk profile. Determining and maintaining an adequate 
level of liquidity depends on each bank's ability to meet both expected 
and unexpected cash flows and collateral needs without adversely 
affecting its daily operations and financial condition.\34\ 
Additionally, the size and level of the liquidity reserve should 
correlate to the bank's ability to fund its obligations at reasonable 
cost.\35\ Each FCS bank must document and be able to demonstrate to FCA 
examiners how its liquidity reserve mitigates the liquidity risk posed 
by the bank's business mix, balance sheet structure, cash flows, and 
on- and off-balance sheet obligations.\36\ Matching the size, level, 
and composition of the liquidity reserve to obligations that are 
maturing in a prescribed number of days is a sound banking practice, 
and is consistent with GSE status.
---------------------------------------------------------------------------

    \34\ See Interagency Policy Statement on Funding and Liquidity 
Risk Management, supra.at 13660.
    \35\ Id.
    \36\ Id.
---------------------------------------------------------------------------

    The proposed rule would require each FCS bank to maintain 
sufficient quantity of highly liquid assets in the first level of its 
liquidity reserve so it could continue normal operations for 30 days if 
a national security emergency, a natural disaster, or intense economic 
or financial turmoil impedes System access to the markets. As the first 
item in the left column of the table states, investments in the first 
level of the liquidity reserve would be available for the bank to 
sequentially apply to pay obligations that mature starting on day 1 
through day 30.
    Under the second provision in the left-hand column of the table, 
cash and instruments with a final maturity of 3 years or less must 
comprise at least 15 days of the first level of the liquidity reserve. 
As a result, the proposed rule would mandate that each bank have enough 
cash and short-term, highly liquid assets on hand so it could pay its 
obligations and fund its operations for 15 days if the debt markets 
were closed, or the System's cost of funding became uneconomical. FCS 
banks would draw first on this 15-day sublevel in the event of 
significant stress event.
    The right side of the table identifies the assets that proposed 
Sec.  615.5134(e) would require FCS banks to hold in Level 1 of their 
liquidity reserves. Again, all of these assets are highly liquid 
because they are cash, or investments that are high quality, close to 
their maturity, and marketable. All of the assets that banks hold in 
their liquidity reserve would be subject to the discounts specified in 
proposed Sec.  615.5134(g).
    Under the proposed rule, FCS banks are authorized to hold five 
classes of assets in the first level of their liquidity reserve. These 
assets are:
     Cash--
    (1) Cash balances on hand,
    (2) Cash due from traded but not yet settled debt, and
    (3) Insured deposits that FCS banks hold at federally insured 
depository institutions in the United States;
     United States Treasury securities--
    Each FCS bank must select Treasury securities that have final 
maturities and other characteristics that best enables it to fund 
operations if market access becomes obstructed;
     Other marketable obligations explicitly backed by the full 
faith and credit of the United States \37\
---------------------------------------------------------------------------

    \37\ Obligations that are backed by the full faith credit of the 
United States are not eligible for the liquidity reserve if they are 
not marketable under proposed Sec.  615.5134(d).
---------------------------------------------------------------------------

     Government-sponsored agency senior debt securities that 
mature within 60 days (debt obligations of the FCS are excluded);\38\
---------------------------------------------------------------------------

    \38\ A Government-sponsored agency means as 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. The FCA proposed 
to add this definition to Sec.  615.5132 on August 18, 2011. See 76 
FR 51289 (Aug. 18, 2011). This category would include the Federal 
Home Loan Banks, Federal National Mortgage Association (Fannie Mae), 
Federal Home Loan Mortgage Corporation (Freddie Mac), and the 
Tennessee Valley Authority. Although Fannie Mae and Freddie Mac are 
currently in conservatorship, their obligations are not explicitly 
backed by the full faith and credit of the United States.
---------------------------------------------------------------------------

     Diversified investment funds that are comprised 
exclusively of Level 1 instruments.
    As discussed earlier, the second level of the liquidity reserve 
would provide FCS banks with sufficient liquidity to fund their 
obligations and continue normal operations starting on day 31 through 
day 90. Under proposed Sec.  615.5134(e), FCS banks would use the 
assets in Level 2 during a prolonged stress event to fund obligations 
that mature during the subsequent 60 days of the 90-day liquidity 
reserve.
    The proposed rule would authorize FCS banks to hold the five 
following classes of assets in the second level of their liquidity 
reserves:
     Additional amounts of Level 1 instruments;
     Government-sponsored agency senior debt securities with 
maturities that exceed 60 days;\39\
---------------------------------------------------------------------------

    \39\ Once the Government-sponsored agency senior debt securities 
in Level 2 come within 60 days to maturity, the bank should move 
them to Level 1 of the liquidity reserve so they can cover maturing 
obligations.

---------------------------------------------------------------------------

[[Page 80824]]

     Government-sponsored agency mortgage-backed securities;
     Money market instruments that mature in 90 days; and
     Diversified investment funds that are comprised 
exclusively of Levels 1 and 2 instruments.
    Unfunded commitments are another issue that raises concerns for the 
FCA. FCS banks or their affiliated associations often have outstanding 
lines of credit to borrowers who may draw funds to meet their seasonal 
business needs. FCS banks and associations can be legally obligated to 
fund these commitments. A sudden surge in borrower demand for funds 
under these lines may impair the bank's liquidity at a time when market 
access is becoming impeded. For this reason, it is important that FCS 
banks adequately account for unfunded commitments and other 
contingencies, including those that are off balance sheet, when they 
calculate the amount and quality of liquid assets they need in their 
liquidity reserve to fund all maturing and contingent obligations 
during a particular time period. Each FCS bank has its own unique 
circumstances and risk profile and, therefore, exposure to unfunded 
commitments and other contingent obligations varies within the FCS.
    Unfunded commitments and other material contingent obligations, 
including those off balance sheet, potentially expose both FCS and 
other financial institutions to significant safety and soundness risks. 
Accordingly, contingent outflows raise substantial regulatory concerns 
for the FCA and other financial regulators.\40\ Proposed Sec.  
615.5134(e) does not specifically require FCS banks to maintain 
sufficient assets in the liquidity reserve to cover unfunded 
commitments and other contingent obligations. However, the FCA is 
contemplating whether to add a specific provision to the final 
regulation that would require the liquidity reserve to adequately cover 
unfunded commitments and other contingent obligations. Requiring FCS 
banks to hold sufficient liquidity to cover these contingencies could 
mitigate risks that pose a threat to the liquidity, solvency, and 
ultimate viability of FCS banks. However, such a requirement could also 
impose significant opportunity costs on FCS banks in that they would be 
compelled to provide for these contingencies with cash and short-term 
liquid investments.
---------------------------------------------------------------------------

    \40\ See Basel III Liquidity Framework supra. at p. 21-22. The 
Basel Committee on Banking Supervision focused on unfunded 
commitments throughout Basel III.
---------------------------------------------------------------------------

    The FCA considers the guidance of the Federal banking agencies and 
the Basel III Liquidity Framework in developing this proposed rule on 
liquidity, and evaluates whether it is appropriate for System banks. 
Specifically, the Basel Committee currently suggests that regulated 
entities account for unfunded commitments and other contingent 
obligations in their liquidity reserve calculations. We are evaluating 
to what extent we should incorporate the approach of the Basel III 
Liquidity Framework into our regulation.
    For this reason, we solicit your responses to the following 
questions:
     Should the final rule explicitly require the liquidity 
reserve to cover unfunded commitments and other contingent obligations? 
In your opinion, what would be the advantages and disadvantages of 
adding this requirement to Sec.  615.5134(e)?
     Should the FCA consider more stringent liquidity reserve 
requirements based on size and complexity of different FCS banks, or 
should the liquidity reserve requirements remain the same for all 
System banks?
     What cash inflows and outflows identified in the Basel III 
Liquidity Framework are relevant to System banks? For those that are 
relevant, how should we incorporate them into our regulation?
     Should we incorporate the Basel III Liquidity Framework 
stress parameters in the liquidity reserve requirement for System 
banks? If so, which ones? For those, please indicate what percentage of 
the unfunded commitments and other contingent obligations the FCS bank 
should cover in its liquidity reserve.
     How should an association's direct loan under the General 
Financing Agreement and its accompanying contingent commitments factor 
into the funding bank's liquidity reserve requirement?
    Please provide any information or data concerning unfunded 
commitments and other contingent obligations that support your answers 
to the above questions.

E. Supplemental Liquidity Buffer

    Proposed Sec.  615.5134(f) would introduce a new concept into the 
FCA's liquidity regulation by requiring all FCS banks to establish and 
maintain a supplemental liquidity buffer that would provide a longer 
term, stable source of funding beyond the 90-day minimum liquidity 
reserve. The supplemental liquidity buffer would complement the 90-day 
minimum liquidity reserve. Whereas the primary purpose of the 90-day 
minimum liquidity reserve is to furnish sufficient short-term funding 
to outlast an immediate crisis, the supplemental liquidity buffer would 
enable FCS banks to manage and mitigate their liquidity risk over a 
longer term horizon. Besides providing FCS banks with longer term and 
stable source of funding, each bank would be able to draw on the 
supplemental liquidity buffer if a heavy demand for funds strains its 
90-day minimum liquidity reserve during a significant stress event. The 
supplemental liquidity buffer is an additional stock of assets that 
would provide stable, longer term funding of the bank's operations 
beyond the first 90 days.
    The proposed rule does not specify the length of time that the 
supplemental liquidity buffer should cover. The Basel Committee on 
Banking Supervision recommends that a supplemental reserve should 
provide depository institutions and related banking organizations 
stable, long-term funding over a 1-year time horizon. We invite your 
comments about whether our final rule should establish a specific time 
horizon for the supplemental liquidity buffer at FCS banks. If you 
believe that we should establish a specific timeframe for the 
supplemental liquidity buffer, please tell us what you think it should 
be, and why. If you oppose a specific regulatory time horizon for the 
supplemental liquidity buffer, please explain your reasoning. We are 
also interested in hearing your views about how the similarities and 
differences between FCS banks and financial institutions under the 
supervision of other Federal and international regulators influence the 
answers to our questions about potential time horizons for the 
supplemental liquidity buffers at FCS banks.
    The first sentence of proposed Sec.  615.5134(f) would require each 
Farm Credit bank to hold supplemental liquid assets in excess of the 
90-day minimum liquidity reserve. Again, the supplemental liquidity 
buffer consists of the amount of stable longer term funding that a FCS 
bank has available, and it should match the amount of stable funding 
that the bank needs to operate during a prolonged period of time. For 
the purposes of proposed Sec.  615.5134(f), stable funding means that 
the instruments in the supplemental liquidity buffer are expected to 
furnish the bank with a reliable source of funds over a longer term 
time horizon under conditions of extended stress. The amount and 
composition of the supplemental liquidity buffer at a

[[Page 80825]]

particular bank ultimately depends on a number of different factors 
pertaining to its operations, including the funding of its assets and 
liabilities, off-balance sheet items, and contingent exposure, such as 
unfunded commitments.
    According to the second sentence of proposed Sec.  615.5134(f), the 
supplemental liquidity buffer must be comprised of cash and qualified 
eligible investments listed in Sec.  615.5140 of this part. Thus, the 
proposed rule would allow FCS banks to hold qualified eligible 
investments (listed in Sec.  615.5140) in their supplemental liquidity 
buffer that they could not hold in their 90-day liquidity reserve. 
However, the FCA expects each FCS bank to calibrate the quality and 
quantity of assets that it selects for the supplemental liquidity 
buffer to the amount of funding it will need to outlast significant 
stress scenarios. Each bank should configure its supplemental liquidity 
buffer so it realistically corresponds to the demands of its liquidity 
risk profile.
    The third sentence of proposed Sec.  615.5134(f) states that each 
FCS bank must be able to liquidate any qualified investment in its 
supplemental liquidity buffer within the timeframe established in the 
bank's liquidity policies at no less than 80 percent of its book value. 
The fourth sentence of proposed Sec.  615.5134(f) would require an FCS 
bank to remove from its supplemental liquidity buffer any investment 
that has, at any time, a market value that is less than 80 percent of 
its book value. These two provisions are designed to limit loss that 
the bank might incur on qualified investments that it holds in its 
supplemental liquidity buffer. From the FCA's perspective, the liquid 
and marketable characteristics of qualified investments in the 
supplemental liquidity buffer would be called into question if their 
market value falls 20 percent or more below their book value. In all 
probability, an FCS bank could no longer convert such assets easily or 
immediately into cash at little or no loss in value. Additionally, a 
qualified investment that has lost 20 percent or more of its book value 
no longer exhibits low credit or market risks. The proposed rule would 
instill strong discipline and control by requiring FCS banks to remove 
from their supplemental liquidity buffer an investment that has 
depreciated 20 percent or more off its book value. We invite your 
comments on the maximum percentage that the final rule should allow the 
market value of an asset to depreciate from its book value before the 
bank must remove it from the supplemental liquidity buffer.
    Finally, proposed Sec.  615.5134(f) would require the amount that 
each bank holds in its supplemental liquidity buffer, at a minimum, to: 
(1)Adhere to the requirements of the board's liquidity policies; (2) 
provide excess liquidity beyond the days covered by the 90-day minimum 
liquidity reserve; and (3) enable the bank to meet the needs of its 
CFP. The supplemental liquidity buffer is a stable longer term funding 
source that enables each bank, based on its business and risk profiles, 
to match the inflow and outflow of funds from its assets and 
liabilities.

F. Discounts

    Our existing liquidity regulation requires FCS banks to discount 
assets in their liquidity reserves. Existing Sec.  615.5134(c) 
specifies the discount percentage that applies to particular classes of 
assets. We propose to revise the provision in the rule pertaining to 
discounts so they are more appropriate to the new regulatory structure, 
which splits the liquidity reserve into two levels, establishes a 
supplemental liquidity buffer, and greatly strengthens contingency 
funding planning at FCS banks.
    Discounts approximate the cost of liquidating investments over a 
short period of time during adverse situations. The system of 
discounting assets is designed to accurately reflect true market 
conditions. For example, the proposed rule would assign only a minimal 
discount to investments that are less sensitive to interest rate 
fluctuations because they are exposed to less price risk. Conversely, 
the discount for long-term fixed rate instruments is higher because 
they expose FCS banks to greater market risk.
    Accordingly, the FCA proposes the following discounts for the 
classes of assets that FCS banks hold in their liquidity reserves and 
supplemental liquidity buffers:

------------------------------------------------------------------------
                Instrument                           Multiply by
------------------------------------------------------------------------
Cash and overnight investments............  100 percent.
United States Treasuries..................  97 percent of market value.
All other Level 1 instruments including     95 percent of market value.
 such instruments held in Level 2 to fund
 obligations maturing on day 31 through
 day 90.
All Level 2 instruments...................  93 percent of market value.
All other qualified investments held for    85 percent of market value.
 meeting the bank's liquidity policy and
 contingency plans unless they merit the
 discount for Level 1 or Level 2
 instruments.
------------------------------------------------------------------------

G. Contingency Funding Plan

    Contingency funding planning is an essential and crucial element of 
effective liquidity risk management at all financial institutions. The 
CFP is a blueprint that helps financial institutions respond to 
contingent liquidity events, which are unexpected events or conditions 
that may increase liquidity risk.\41\ Contingent liquidity events may 
arise from external factors that adversely affect the financial system, 
or they may be specific to the conditions at an individual 
institution.\42\
---------------------------------------------------------------------------

    \41\ See Interagency Policy Statement on Funding and Liquidity 
Risk Management, supra. at 13664.
    \42\ Id.
---------------------------------------------------------------------------

    Since 2005, our regulation has required all FCS banks to have a 
contingency funding plan that addresses liquidity shortfalls during 
market disruptions. Existing Sec.  615.5134(d) also requires the board 
of directors of each FCS bank to review the contingency funding plan 
every year and make any necessary changes. The crisis in 2008 revealed 
actual and potential vulnerabilities in contingency planning at FCS 
banks. As a result, the FCA proposes to strengthen contingency planning 
at FCS banks by amending the applicable provisions of our liquidity 
regulation. These amendments should reinforce the wherewithal of FCS 
banks to withstand future crises.
    The first sentence of proposed Sec.  615.5134(h) would require each 
FCS bank to have a CFP to ensure sources of liquidity are sufficient to 
fund normal operations under a variety of stress events. Whereas 
existing Sec.  615.5134(d) only requires the CFP to address liquidity 
shortfalls caused by market disruptions, proposed Sec.  615.5134(h) 
would require the CFP to explicitly cover other stress events that 
threaten the bank's liquidity. In addition to market disruptions, the 
proposed rule would require the CFP to specifically address:
    (1) Rapid increases in loan demand;
    (2) Unexpected draws on unfunded commitments;
    (3) Difficulties in renewing or replacing funding with desired 
terms and structures;

[[Page 80826]]

    (4) Pledging collateral with counterparties; and
    (5) Reduced market access.
    Each of these events could weaken the bank's liquidity and impair 
its access to funding during a crisis.
    The second sentence of proposed Sec.  615.5134(h) would require 
each Farm Credit bank to maintain an adequate level of unencumbered and 
marketable assets in its liquidity reserve that could be converted into 
cash to meet its net liquidity needs based on estimated cash inflows 
and outflows for a 30-day time horizon under an acute stress scenario. 
As an integral and critical part of contingency planning, each FCS bank 
should quantitatively project and evaluate its expected funding needs 
and its available funding sources during likely stress scenarios. More 
specifically, each FCS bank must realistically assess and analyze its 
cash inflows, cash outflows, and its access to funding at different 
phases of a potential, but acute liquidity stress event that continues 
for 30 days. In addition to a realistic assessment of potential cash-
flow mismatches that may occur during different intervals of various 
stress events, effective contingency planning also requires the bank to 
evaluate whether it has a sufficient amount of marketable assets that 
it can convert into cash and continue operations for the duration of 
any potential crisis.
    The next provisions of proposed Sec.  615.5134(h) would require the 
CFP to address four specific areas that are essential to the bank's 
efforts to mitigate its liquidity risk. Taken together, these four 
provisions require each bank to have an emergency preparedness plan in 
place so it can effectively cope with a full range of contingencies 
that could endanger its liquidity, solvency, and viability.
    First, proposed Sec.  615.5134(h)(1) would require each FCS bank to 
customize the CFP to its individual financial condition and liquidity 
risk profile and the board's liquidity risk tolerance policy. The CFP 
is part of the bank's overall liquidity policies, and as such, it 
should be commensurate with the complexity, risk profile, and scope of 
the bank's operations.\43\ The CFP should cover a number of plausible 
scenarios that could adversely affect the bank's liquidity. In this 
context, the CFP should address contingencies that are both:
---------------------------------------------------------------------------

    \43\ Id. at 13665.
---------------------------------------------------------------------------

     Highly probable, but would have a low impact on the bank's 
liquidity; and
     Less likely to occur but would have a significant impact 
on the bank's liquidity.\44\
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    The CFP should identify stress events that could have a significant 
impact on the bank's liquidity based on its individual circumstances, 
such as its balance sheet structure, business model, and organizational 
configuration.\45\ The CFP should also assess how different stress 
events are likely to affect the bank's liquidity.
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

    Under proposed Sec.  615.5134(h)(2), the CFP must identify funding 
alternatives that the Farm Credit bank can implement whenever its 
access to funding is impeded. For the purposes of proposed Sec.  
615.5134(h)(2), funding alternatives include, at a minimum, 
arrangements for pledging collateral to secure funding and possible 
initiatives to raise additional capital. Each bank must be able to 
readily access its contingent funding sources during a stress event. 
The FCA expects every FCS bank to take appropriate measures, including 
advance planning and periodic testing, so it always has reliable 
funding alternatives available when normal market access becomes 
impeded.
    Pursuant to proposed Sec.  615.5134(h)(3), the CFP must require the 
bank to conduct periodic stress testing in order to analyze the 
possible impacts on the bank's cash inflows and outflows, liquidity 
position, profitability and solvency under a variety of stress 
scenarios. Periodic stress testing of its anticipated cash flows would 
enable the bank to estimate future funding surpluses and shortfalls 
under several different stress scenarios, which in turn, affects the 
bank's ability to fund its assets, liabilities, and operations 
throughout adverse situations.
    Proposed Sec.  615.5134(h)(4) would require each bank's CFP to 
establish a process for managing events that imperil its liquidity. 
This includes assigning appropriate personnel and having executable 
action plans to implement the CFP. Under this provision, the CFP would 
establish a framework for the bank to monitor contingent events that 
potentially threaten its liquidity. This framework should contain 
mechanisms, such as early-warning indicators and event triggers,\46\ 
which are tailored to the bank's liquidity profile. These early-warning 
systems help the, bank to identify potential adverse liquidity events 
that are looming on the horizon. This enables the bank to position 
itself and be ready for the various phases of the stress event as it 
evolves.
---------------------------------------------------------------------------

    \46\ Early warning signals and event triggers encompass events 
that are both global and bank specific. Examples of global warning 
signals and event triggers include: (1) Concerns over the credit 
quality of particular classes of assets widely held by financial 
institutions; (2) widening spreads between different types of 
securities, or derivatives; (3) macro-economic factors adversely 
affecting agriculture; and (4) debt market stagnation and 
constrictions. Warning signals and event triggers that are specific 
to individual FCS banks include: (1) Draws on unfunded commitments 
or letters of credit; (2) a rapid and substantial increase in loan 
demand; (3) actual and projected increases in collateral pledged; 
and (4) unrealized losses in its liquidity reserve. Events such as 
reduced market access and the downgrading of credit ratings could be 
either a global or bank-specific signal or trigger.
---------------------------------------------------------------------------

    The second prong of proposed Sec.  615.5134(h)(4) involves internal 
controls and management of contingency events. The CFP should establish 
a reliable crisis management team. Frequent communication and reporting 
among team members, management, and the board optimize the 
effectiveness of the CFP during a liquidity crisis by coordinating the 
bank's response and diminishing liquidity risks to the bank's 
operations.\47\ The CFP should also identify the processes and 
procedures that the bank will use to manage any evolving crisis.
---------------------------------------------------------------------------

    \47\ See Interagency Policy Statement on Funding and Liquidity 
Risk Management, supra. at 13665.
---------------------------------------------------------------------------

    The final sentence of proposed Sec.  615.5134(h) would require the 
board of directors of each FCS bank to review and approve the CFP at 
least once every year, and incorporate adjustments to reflect changes 
in the bank's risk profile and market conditions. Internal conditions 
and the external environment in which the FCS operates may shift, 
either gradually or suddenly, thus affecting the liquidity risk profile 
of each bank. The FCA expects each FCS bank to constantly monitor 
fluctuations in its operating environment and react effectively so it 
can quickly stem potential damage to its liquidity, solvency, and 
viability. Reviewing the CFP at least once every 12 months and more 
frequently as conditions warrant, is a necessary tool for FCS banks to 
manage and mitigate its liquidity risk.

H. The FCA's Reservation of Authority

    In addition to capital, asset quality, management, earnings, and 
interest rate sensitivity, liquidity is a prime barometer of the 
financial health, vitality, and viability of financial institutions. 
Illiquidity indicates that a financial institution is in an unsafe and 
unsound condition. More than the other indicia of safety and soundness, 
liquidity is often, but not always, determined by external factors that 
are

[[Page 80827]]

beyond the control of FCS banks and other financial institutions. For 
example, a national defense emergency (such as terrorist attacks), a 
catastrophic natural disaster, or a macroeconomic or financial crisis 
could suddenly and without warning close or impede access to the debt 
markets that FCS banks depend on to fund their normal operations.
    Congress designated the FCA as the Federal agency that is 
responsible for ensuring that all FCS institutions: (1) Comply with all 
applicable laws; (2) fulfill their public policy mission of extending 
credit to agriculture, rural utilities, and rural homeowners; and (3) 
operate safely and soundly. As a result, the Act grants the FCA 
comprehensive examination, enforcement, and regulatory powers to carry 
out these duties. The System's liquidity could come under sudden strain 
when economic uncertainty sparks financial turmoil and, therefore, the 
FCA must be able to act decisively so all FCS banks meet their 
obligations and continue operations until the crisis subsides. The FCA 
has various tools at its disposal to lessen the damage that a liquidity 
crisis could inflict on the FCS. These tools include exercising its 
enforcement powers under subtitle C of title V of the Act, and invoking 
its authority under Sec.  615.5136 to increase the amount of liquid 
investments that FCS banks may hold in their liquidity reserve during 
an emergency.
    The FCA now proposes to strengthen its supervisory and regulatory 
oversight of liquidity management at FCS banks. Under proposed Sec.  
615.5134(i), the FCA expressly reserves its right to require Farm 
Credit banks, either individually or jointly, to adjust their treatment 
of instruments (assets) in their liquidity reserves so they have 
liquidity that is sufficient and commensurate for the risks they face. 
This reservation of authority would enable the FCA to respond to 
adverse financial, economic, or market conditions by requiring any, 
some, or all Farm Credit bank(s) to take certain prescribed actions to 
protect FCS liquidity.
    More specifically, the FCA reserves the authority under proposed 
Sec.  615.5134(i) to require one or more FCS bank(s) to:
    (1) Apply a greater discount to any individual security or any 
class of 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 the supplemental liquidity buffer based on the 
performance of such asset(s), or based on financial, economic, or 
market conditions affecting the liquidity and solvency of the bank;
    (3) Spread out or otherwise change concentrations in the allocation 
of securities in any level of the bank's liquidity reserve and its 
supplemental liquidity buffer;
    (4) Perform additional stress tests using other or different stress 
criteria or scenarios;
    (5) Hold additional liquid assets to cover unfunded commitments and 
other contingent outflows; or
    (6) Take any other action that the Farm Credit Administration deems 
necessary to ensure that the bank has sufficient liquidity to meet its 
financial obligations as they fall due.
    We invite your comments about any specific scenario that you think 
we should include in our reservation of authority. We also ask whether 
you think that there are other actions that the FCA could or should 
take during a significant stress event so it can act rapidly and 
decisively to staunch or prevent deterioration in the liquidity 
position of FCS banks on an individual or collective basis.

IV. 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. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Rural areas.
    For the reasons stated in the preamble, part 615 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    1. The authority citation for part 615 is revised to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of 
Pub. L. 100-233, 101 Stat. 1568, 1608; sec. 939A of Pub. L. 111-203, 
124 Stat 1326, 1887.

    2. Revise Sec.  615.5134 to read as follows:


Sec.  615.5134  Liquidity reserve.

    (a) Liquidity policy.(1) Board responsibility. The board of each 
Farm Credit bank must adopt a written liquidity policy. The liquidity 
policy must be compatible with the investment management policies that 
the bank's board adopts pursuant to Sec.  615.5133 of this part. At 
least once every year, the bank's board must review its liquidity 
policy, affirmatively validate the sufficiency of its liquidity policy, 
and make any revisions it deems necessary. The board of each Farm 
Credit bank must ensure that adequate internal controls are in place so 
that management complies with and carries out this liquidity policy.
    (2) Policy content. At a minimum, the liquidity policy of each Farm 
Credit bank must address:
    (i) The purpose and objectives of the liquidity reserve;
    (ii) Diversification requirements for the liquidity reserve 
portfolio;
    (iii) Maturity limits and credit quality standards for investments 
that the bank is holding to meet the minimum liquidity reserve 
requirements of paragraphs (b) and (e) of this section;
    (iv) The target amount of days of liquidity that the bank needs 
based on its business model and risk profile;
    (v) The Contingency Funding Plan (CFP) required by paragraph (h) of 
this section;
    (vi) Delegations of authority pertaining to the liquidity reserve; 
and
    (vii) Reporting requirements, which at a minimum must require 
management to report to the board at least once every quarter about 
compliance with the bank's liquidity policy and the performance of the 
liquidity reserve portfolio. Management must report any deviation from 
the bank's liquidity policy, or failure to meet the board's liquidity 
targets immediately to the board.
    (b) Liquidity reserve requirement. Each Farm Credit bank must 
maintain a liquidity reserve, in accordance with paragraph (e) of this 
section, sufficient to fund at least 90 days of the principal portion 
of maturing obligations and other borrowings of the bank at all times. 
Each Farm Credit bank must also maintain a supplemental liquidity 
buffer in accordance with paragraph (f) of this section. Each Farm 
Credit bank must discount the liquid assets in its

[[Page 80828]]

liquidity reserve and its supplemental liquidity buffer in accordance 
with paragraph (g) of this section. The liquidity reserve must be 
comprised only of cash, including cash due from traded but not yet 
settled debt, and qualified eligible investments under Sec.  615.5140 
of this part that are unencumbered and marketable under paragraphs (c) 
and (d) of this section, respectively.
    (c) Unencumbered. All investments that a Farm Credit bank holds in 
its liquidity reserve in accordance with this section must be 
unencumbered. For the purpose of this section, an investment is 
unencumbered if it is free of lien, and it is not explicitly or 
implicitly pledged to secure, collateralize, or enhance the credit of 
any transaction. Additionally, an unencumbered investment held in the 
liquidity reserve cannot be used as a hedge against interest rate risk 
if liquidation of that particular investment would expose the bank to a 
material risk of loss.
    (d) Marketable. All investments that a Farm Credit bank holds in 
its liquidity reserve in accordance with this section must be 
marketable. For the purposes of this section, an investment is 
marketable if it:
    (1) Can be easily and immediately converted into cash with little 
or no loss in value;
    (2) Exhibits low credit and market risks;
    (3) Has ease and certainty of valuation; and
    (4) Except for money market instruments, is listed on a developed 
and recognized exchange market, and can be sold or converted to cash 
through repurchase agreements in active and sizable markets.
    (e) Composition of liquidity reserve. Each Farm Credit bank must 
continuously hold cash and the investments in the table below to meet 
the 90-day minimum liquidity reserve requirement in paragraph (b) of 
this section. A Farm Credit bank must apply the discounts in paragraph 
(g) of this section to all cash and investments in its liquidity 
reserve:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Level 1 Instruments:                      Cash;
    Each Farm Credit bank must            Treasury securities;
     sequentially apply Level 1           Other marketable
     instruments to fund obligations      obligations that are
     that mature starting on day 1        explicitly backed by the full
     through day 30.                      faith and credit of the United
                                          States;
    Cash and instruments with a final     Mortgage-backed
     remaining maturity of 3 years or     securities issued by the
     less must comprise at least 15       Government National Mortgage
     days of the liquidity reserve at     Association;
     Level 1.                             Government-sponsored
                                          Agency senior debt securities
                                          that mature within 60 days,
                                          excluding senior debt
                                          securities of the Farm Credit
                                          System; and
                                          Diversified investment
                                          Funds that are comprised
                                          exclusively of Level 1
                                          instruments.
------------------------------------------------------------------------
Level 2 Instruments:                      Additional amounts of
                                          Level 1 instruments;
    Each Farm Credit bank must            Government-sponsored
     sequentially apply Level 2           Agency senior debt securities
     instruments to fund obligations      with maturities that exceed 60
     that mature starting on day 31       days, excluding senior debt
     through day 90.                      securities of the Farm Credit
                                          System;
                                          Government-sponsored
                                          Agency mortgage-backed
                                          securities;
                                          Money market
                                          instruments maturing within 90
                                          days; and
                                          Diversified Investment
                                          Funds that are comprised
                                          exclusively of Levels 1 and 2
                                          instruments.
------------------------------------------------------------------------

     (f) Supplemental liquidity buffer. Each Farm Credit bank must hold 
supplemental liquid assets in excess of the 90-day minimum liquidity 
reserve. The supplemental liquidity buffer must be comprised of cash 
and qualified eligible investments listed in Sec.  615.5140 of this 
part. A Farm Credit bank must be able to liquidate any qualified 
eligible investment in its supplemental liquidity buffer within the 
liquidity policy timeframe established in the bank's liquidity policy 
at no less than 80 percent of its book value. A Farm Credit bank must 
remove from its supplemental liquidity buffer any investment that has, 
at any time, a market value that is less than 80 percent of its book 
value. The amount of supplemental liquidity that each Farm Credit bank 
holds, at minimum, must meet the requirements of its board's liquidity 
policy, provide excess liquidity beyond the days covered by the 
liquidity reserve, and satisfy the applicable portions of the bank's 
CFP in accordance with paragraph (h) of this section.
    (g) Discounts. Each Farm Credit bank must discount the liquid 
assets in its liquidity reserve under paragraph (d) of this section and 
in its supplemental liquidity buffer under paragraph (e) of this 
section 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 instruments by 95 percent of their 
market value, even if the bank holds them in Level 2 to fund 
obligations maturing starting on day 31 through day 90.
    (4) Multiply all Level 2 instruments by 93 percent of the market 
value.
    (5) Multiply all other qualified investments held for meeting the 
bank's liquidity policy and contingency plans by 85 percent of market 
value unless they merit Level 1 or Level 2 instrument discounts.
    (h) Contingency Funding Plan (CFP). The board of each Farm Credit 
bank must adopt a CFP to ensure sources of liquidity are sufficient to 
fund normal operations under a variety of stress events including 
market disruptions, rapid increase in loan demand, unexpected draws on 
unfunded commitments, difficulties in renewing or replacing funding 
with desired terms and structures, requirements to pledge collateral 
with counterparties, and reduced market access. Each Farm Credit bank 
must maintain an adequate level of unencumbered and marketable assets 
in its liquidity reserve that can be converted into cash to meet its 
net liquidity needs based on estimated cash inflows and outflows for a 
30-day time horizon under an acute stress scenario. The board of 
directors must review and approve the CFP at least once every year and 
make adjustments to reflect changes in the bank's risk profile and 
market conditions. The CFP must:
    (1) Be customized to the financial condition and liquidity risk 
profile of the bank and the board's liquidity risk tolerance policy.
    (2) Identify funding alternatives that the Farm Credit bank can 
implement whenever access to funding is impeded,

[[Page 80829]]

which must include, at a minimum, arrangements for pledging collateral 
to secure funding and possible initiatives to raise additional capital.
    (3) Require periodic stress testing, which analyzes the possible 
impacts on the bank's cash inflows and outflows, liquidity position, 
profitability and solvency under a variety of stress scenarios.
    (4) Establish a process for managing events that imperil the bank's 
liquidity, and assign appropriate personnel and implement executable 
action plans that carry out the CFP.
    (i) Reservation of Authority. The Farm Credit Administration 
reserves the right to require a Farm Credit bank to adjust the 
treatment of assets in its liquidity reserve so that it has liquidity 
that is sufficient and commensurate for the risks it faces. The Farm 
Credit Administration reserves the right to use this authority in 
response to adverse financial, economic, or market conditions by 
requiring any Farm Credit bank, on a case-by-case basis, to:
    (1) Apply a greater discount to any individual security or any 
class of 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 the supplemental liquidity buffer based on the 
performance of such asset(s), or based on financial, economic, or 
market conditions affecting the liquidity and solvency of the bank;
    (3) Spread out or otherwise change concentrations in the allocation 
of securities in any level of the bank's liquidity reserve and its 
supplemental liquidity buffer;
    (4) Perform additional stress tests using other or different stress 
criteria or scenarios;
    (5) Hold additional liquid assets to cover unfunded commitments and 
other contingent outflows; or
    (6) Take any other action that the Farm Credit Administration deems 
necessary to ensure that the bank has sufficient liquidity to meet its 
financial obligations as they fall due.

    Dated: December 15, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2011-32698 Filed 12-23-11; 8:45 am]
BILLING CODE 6705-01-P