[Federal Register Volume 77, Number 214 (Monday, November 5, 2012)]
[Rules and Regulations]
[Pages 66375-66388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26805]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC56


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) issues 
this final rule amending our regulations governing investment 
management practices of the Federal Agricultural Mortgage Corporation 
(Farmer Mac or Corporation). This final rule will help ensure that 
Farmer Mac maintains safe and sound non-program investment management 
practices in accordance with clearly articulated board-established 
guidance, streamlines the process for handling investments that fail to 
meet the eligibility criteria after purchase, and modifies the 
allowable purposes of Farmer Mac's non-program investments to include 
investments that would complement Farmer Mac's program activities. We 
are also finalizing the significant reorganization of these regulations 
that we proposed to make the regulations easier to follow.

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

FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, Associate Director for Policy and Analysis, Office of 
Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4280, TTY (703) 883-4434;
or
Jennifer A. Cohn, Senior Counsel, Office of the General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this final rule is to ensure that Farmer Mac has 
appropriate Board policies and operational procedures in place to 
manage its non-program investment portfolio safely and soundly with 
appropriate consideration of its public mission as a Government-
sponsored enterprise (GSE). This final rule will:
     Revise the permissible purposes of non-program 
investments;
     Revise board policy requirements, including stress-testing 
requirements;
     Modify the non-program investment portfolio limit;
     Reduce the regulatory burden associated with investments 
that fail to meet eligibility criteria after purchase; and
     Reorganize the regulations to make them easier to follow.

II. History of Rule

    On May 19, 2010, we published an Advanced Notice of Proposed 
Rulemaking that considered revisions to Farmer Mac's non-program 
investment and liquidity requirements.\1\ On November 18, 2011, we 
published a Notice of Proposed Rulemaking (NPRM) that would have 
revised these non-program investment and liquidity requirements.\2\ 
After considering the comments we received on the NPRM, we now plan to 
finalize the proposed provisions contained in the NPRM in phases.
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    \1\ 75 FR 27951.
    \2\ 76 FR 71798.
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    This first phase of final regulations will substantively revise the 
following regulations:

 Sec.  652.10--Investment Management
 Sec.  652.15--Non-Program Investment Purposes and Limitation 
(renumbered from Sec.  652.25)
 Sec.  652.25--Management of Ineligible Investments and 
Reservation of Authority to Require Divestiture (renumbered from Sec.  
652.45)
 Sec.  652.30--Interest Rate Risk Management (renumbered from 
Sec.  652.15)
 Sec.  652.45--Temporary Regulatory Waivers or Modifications 
for Extraordinary Situations (renumbered from Sec.  652.30)

    These revisions will help ensure that Farmer Mac maintains safe and 
sound non-program investment management practices in accordance with 
clearly articulated board-established guidance. They also streamline 
the process for handling investments that fail to meet the eligibility 
criteria after purchase and modify the allowable purposes of Farmer 
Mac's non-program investments to include investments that would 
complement Farmer Mac's program activities.
    We are also making minor technical changes to the following 
provisions:

 Sec.  652.1--Purpose
 Sec.  652.5--Definitions
 Sec.  652.20--Eligible Non-Program Investments (renumbered 
from Sec.  652.35)

    In addition, we are deleting existing Sec.  652.40, entitled 
``Stress Tests for

[[Page 66376]]

Mortgage Securities,'' and incorporating its provisions into Sec.  
652.10(f).
    Lastly, we are finalizing the proposed reorganization of the 
investment management and liquidity regulations to make the sequence of 
the issues covered more logical.
    We intend to address in one or more future rulemakings regulations 
covering all the areas of the proposed rule not covered in this final 
rule, including liquidity management and requirements and investment 
eligibility (including revised creditworthiness requirements). The 
regulations that we proposed to revise but that we are not issuing as 
final at this time (except to renumber them and, in some instances, to 
make minor technical changes) include:

 Sec.  652.5--Definitions
 Sec.  652.20--Eligible Non-Program Investments (renumbered 
from Sec.  652.35)
 Sec.  652.35--Liquidity Reserve Management and Requirements 
(renumbered from Sec.  652.20)

III. Guiding Principle of Rule

    The FCA is an independent agency in the executive branch of the 
Federal Government that serves as the regulator of Farmer Mac, as well 
as of the other institutions of the Farm Credit System (System) 
including, in pertinent part, Farm Credit banks and direct lender 
associations. The FCA regulates Farmer Mac through the Office of 
Secondary Market Oversight (OSMO). Farmer Mac is a stockholder-owned 
instrumentality of the United States, chartered by Congress to 
establish a secondary market for agricultural real estate, rural 
housing mortgage loans, and rural utilities loans. Farmer Mac also 
provides a secondary market for USDA-guaranteed farm program and rural 
development loans.
    A guiding principle for FCA in establishing regulations governing 
Farmer Mac is to maintain an appropriate balance between the 
Corporation's mission achievement and risk. We aim to ensure continuity 
of operations so that Farmer Mac can fulfill its mission during 
stressful economic conditions that may require sufficient access to 
secondary sources of liquidity. This final rule is intended to provide 
a high degree of certainty that Farmer Mac will be able to continue to 
serve its customers under a wide range of market or economic conditions 
without the need to issue debt to the Department of Treasury or seek 
any other form of Government financial assistance.\3\
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    \3\ Under certain specific adverse circumstances, Farmer Mac is 
authorized to issue debt to the Department of the Treasury to meet 
obligations on guarantees. See section 8.13 of the Farm Credit Act 
of 1971, as amended (Act) (12 U.S.C. 2279aa-13).
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IV. Discussion of Comments and Section-by-Section Analysis of Rule

    We received comment letters from Farmer Mac and from the Farm 
Credit Council (Council), which, in addition to submitting a comment 
letter directly responding to the NPRM, also asked us to consider, 
wherever applicable, comments it had submitted on FCA's similar 
proposed rule pertaining to System banks and associations.\4\
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    \4\ See 76 FR 51289, Aug. 18, 2011.
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    In addition to its comments on specific proposed regulation 
provisions, the Council generally encouraged us to adapt this rule to 
more closely mirror the requirements for System banks and associations. 
Although the two final rules continue to differ where appropriate, 
changes were made to both this rule and the System banks and 
associations rule to make the requirements more similar.\5\
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    \5\ In the interests of consistency, the FCA Board adopted the 
final rule governing the investment management of System banks and 
associations at the same time it adopted this final rule. That final 
rule is also published in today's issue of the Federal Register.
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    We will address each specific comment received in our discussion of 
the regulation provision to which the comment relates. Some of the 
minor changes we proposed received no comment. Unless otherwise 
discussed in this preamble, we are finalizing those provisions as 
proposed without further explanation. Interested persons are directed 
to our NPRM for a discussion of those changes. Throughout this 
regulation, we make minor technical, clarifying, and non-substantive 
language changes that we do not specifically discuss in this preamble.

A. Reorganization of Rule

    We are finalizing the rule's reorganization much the way we 
proposed it. We provide the following table to orient the reader to the 
reorganization. The left column of the table contains the existing 
rule's section headings, and the right column contains the proposed 
reorganization of section sequence and heading changes.

------------------------------------------------------------------------
          Existing regulations                 Final reorganization
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Sec.   652.1 Purpose...................  Sec.   652.1 Purpose.
Sec.   652.5 Definitions...............  Sec.   652.5 Definitions.
Sec.   652.10 Investment management and  Sec.   652.10 Investment
 requirements.                            management.
Sec.   652.15 Interest rate risk         Sec.   652.15 Non-program
 management and requirements.             investment purposes and
                                          limitation.
Sec.   652.20 Liquidity reserve          Sec.   652.20 Eligible non-
 management and requirements.             program investments.
Sec.   652.25 Non-program investment     Sec.   652.25 Management of
 purposes and limitation.                 ineligible investments.
Sec.   652.30 Temporary regulatory       Sec.   652.30 Interest rate
 waivers or modifications for             risk management.
 extraordinary situations.
Sec.   652.35 Eligible non-program       Sec.   652.35 Liquidity reserve
 investments.                             management and requirements.
Sec.   652.40 Stress tests for mortgage  Sec.   652.40 [Reserved].
 securities.
Sec.   652.45 Divestiture of ineligible  Sec.   652.45 Temporary
 non-program investments.                 regulatory waivers or
                                          modifications for
                                          extraordinary situations.
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    Generally, the reorganization is meant to address sequentially and 
as completely as possible the three major categories of management 
governed in the rule: Investment management; interest rate risk 
management; and liquidity management.

B. Section 652.1--Purpose

    We received no comments on our proposal to delete the first 
sentence of this section as unnecessary, and we adopt the revision as 
proposed.

C. Section 652.5--Definitions

    Many of the definitions we proposed relate to revisions to 
regulations that will not be finalized until a later installment of 
this rulemaking, and we will not finalize those definitions until we 
finalize the regulations to which they relate. We received no comments

[[Page 66377]]

on the proposed technical clarification to the definition of FCA or the 
proposed definition of OSMO as FCA's Office of Secondary Market 
Oversight that we proposed, and we adopt these revisions as proposed.
    We proposed technical clarifications to the definitions of 
``Government agency'' and ``Government-sponsored agency.'' We are 
finalizing definitions for these terms with additional technical 
clarifications.
    The Council commented that our existing definition of non-program 
investments, which we did not propose to revise, is overly broad and 
allows for the holding of investments beyond the regulatory objectives 
of ensuring safety and soundness and continuity of funding as outlined 
in Sec.  652.1. It suggested that we modify the definition to clarify 
that non-program investments are those held for the investment purposes 
authorized by revised and renumbered Sec.  652.25. We note that as 
proposed and as discussed above, this final rule deletes the sentence 
in Sec.  652.1 to which the comment refers. Moreover, the definition of 
non-program investments does not itself allow for the holding of 
investments. Rather, Farmer Mac may hold non-program investments only 
for the permissible investment purposes. Accordingly, we do not change 
this definition.

D. Section 652.10--Investment Management

    Farmer Mac commented that several of the proposed changes to the 
rule go well beyond establishing a framework for safety and soundness 
and instead impose FCA's judgment on proper business operations. Our 
general response is that we revised some of the proposed requirements 
in the final rule to make them less prescriptive but that we retain 
some of the proposed requirements, with clarifications. We respond to 
the comments on specific provisions below.
    The Council requested that FCA follow a similar structure and 
approach for Farmer Mac as it proposed for the System banks and 
associations in their investment management rule. In the final rule, we 
revise the structure and approach of this rule. In addition, the 
structure and approach of the rule governing System banks and 
associations has also been revised. We believe the structure and 
approach of the two rules are now more similar; although, where 
appropriate, differences still exist.
1. Sec.  652.10(a)--Responsibilities of the Board of Directors
    The Council commented that the proposed requirement that the board 
must annually review and ``affirmatively validate'' the sufficiency of 
its investment policies is overly prescriptive, burdensome, and 
unclear. We agree that a requirement of annual board review is 
sufficient and delete ``affirmatively validate'' from the final rule. 
With the exception of a few minor technical, clarifying, and non-
substantive changes, this paragraph is unchanged from the existing 
rule.
2. Sec.  652.10(b)--Investment Policies--General Requirements
    The Council commented that the requirement (an existing requirement 
for Farmer Mac that had been proposed for System banks and 
associations) that Farmer Mac must document in its ``records or 
minutes'' any analyses used in formulating investment policies or 
amendments is burdensome and does not enhance the investment management 
process. We agree that specifying minutes as a possible location for 
this documentation is unnecessary. Accordingly, we are deleting ``or 
minutes'' from the final rule.
    We are moving the requirement (most of which is contained in 
existing Sec.  652.10(f)(1)) that Farmer Mac's investment policies must 
fully address the extent of pre-purchase analysis that management must 
perform for various types, classes, and structure of investments from 
proposed Sec.  652.10(f)(1)(i) to this paragraph because it is a more 
logical location.
    With these exceptions, we are adopting Sec.  652.10(b) as proposed, 
including several minor technical and clarifying changes. A discussion 
of these minor changes may be found in the preamble to the proposed 
rule.\6\
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    \6\ See 76 FR 71801, Nov. 18, 2011.
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3. Sec.  652.10(c)--Investment Policies--Risk Tolerance
    Proposed Sec.  652.10(c) would have required Farmer Mac's 
investment policies to ensure that the Corporation maintains prudent 
diversification of its investment portfolio and that its asset 
allocations and investment portfolio strategies do not expose its 
capital or earnings to excessive risk of loss. In final Sec.  
652.10(c), we revise this requirement to provide that Farmer Mac's 
investment policies must include concentration limits to ensure prudent 
diversification of credit, market, and liquidity risks in its 
investment portfolio. We believe this language is more specific, better 
reflects requirements that are necessary for safety and soundness, and 
provides consistency with the rule governing System banks and 
associations. We emphasize, however, that the objective of this 
requirement remains ensuring that Farmer Mac's asset allocations and 
investment portfolio strategies do not expose its capital or earnings 
to excessive risk of loss.
    In addition, our proposed rule, as well as our existing rule, 
provides that risk limits must be based on Farmer Mac's objectives, 
capital position, and risk tolerance. In the final rule, we further 
specify that risk limits must be based on all relevant factors, 
including Farmer Mac's objectives, capital position, earnings, and 
quality and reliability of risk management systems.
    Existing Sec.  652.10(c)(1)(ii) requires Farmer Mac's board (or a 
designated subcommittee) to review annually the criteria for selecting 
securities firms and the board to approve any changes to the criteria. 
It also requires that the board (or subcommittee) review annually the 
existing relationships with securities firms and be notified before any 
changes to securities firms are made.
    In our NPRM, we proposed clarifying changes to these requirements 
but did not intend a significant change in the meaning. Both Farmer Mac 
and the Council objected to the existing requirement that the board 
must review existing relationships and be notified before changes are 
made to these relationships. The Council commented that this 
requirement is confusing, creates an excessive burden, and results in 
an unnecessary distraction for the board.
    We agree that as long as Farmer Mac's board (or a designated 
committee) reviews the selection criteria on an annual basis, and the 
board approves any changes to the criteria, the board does not need to 
be involved in the approval of relationships. Accordingly, we have 
deleted the existing and proposed requirement that the board (or a 
subcommittee) must review existing relationships and be notified before 
changes are made to these relationships.
    We adopt several other minor technical, clarifying, and non-
substantive changes in this paragraph.
4. Sec.  652.10(e)--Internal Controls
    Existing Sec.  652.10(e)(2) requires Farmer Mac to establish and 
maintain a separation of duties and supervision between personnel who 
execute investment transactions and personnel who approve, revaluate, 
and oversee investments. Proposed Sec.  651.10(e)(2) would have added 
to the list of

[[Page 66378]]

personnel whose duties and supervision would have had to be separated 
from personnel who execute investment transactions. These additional 
personnel would have been those who post accounting entries, reconcile 
trade confirmations, and report compliance with investment policy.
    Both Farmer Mac and the Council objected to this proposed revision 
as overly prescriptive. Rather than itemizing all of the possible 
personnel functions, final Sec.  652.10(e)(2) provides that Farmer Mac 
must establish and maintain a separation of duties between personnel 
who supervise or execute investment transactions and personnel who 
supervise or engage in all other investment-related functions. These 
other investment-related functions include those itemized in the list 
in the proposed rule, as well as any other functions that are 
investment related. This regulation does not prohibit one person from 
performing or supervising more than one investment-related function 
(other than executing, or supervising the execution of, investment 
transactions), if appropriate controls are in place as warranted by the 
complexity and risk of Farmer Mac's investment operations.
    Proposed section 652.10(e)(4) would have added a new requirement 
that Farmer Mac must implement an effective internal audit program to 
review, at least annually, its investment controls, processes, and 
compliance with FCA regulations and other regulatory guidance. The 
internal audit program would have had to specifically include a review 
of its process for ensuring all investments were eligible and suitable 
for purchase under its board's investment policies.
    Both Farmer Mac and the Council commented that this requirement was 
too prescriptive and eliminated the flexibility that is necessary for 
Farmer Mac's internal auditors to establish their own risk-based 
approach to audits. Final Sec.  652.10(e)(4) requires Farmer Mac to 
implement an effective internal audit program to review, at least 
annually, its investment management functions, controls, processes, and 
compliance with FCA regulations. The scope of the annual review must be 
appropriate for the size, risk, and complexity of the investment 
portfolio.
5. Sec.  652.10(f)--Due Diligence
    We made a number of minor technical and non-substantive changes 
throughout this paragraph to clarify the requirements and to more 
closely match up with the language of the rule governing the System 
banks and associations. We do not identify these minor changes here. 
Below we discuss our responses to the comments we received, including 
the changes we make in response to those comments.
    Proposed Sec.  652.10(f)(1)(i) would have required Farmer Mac, 
before it purchased an investment, to conduct sufficient due diligence 
to determine whether the investment was eligible and suitable under its 
board-approved investment policies and to document this determination.
    This proposed requirement is retained in new Sec.  652.10(f)(1)(i), 
with minor clarifications. Since we had used the term ``suitable'' to 
mean an investment complied with Farmer Mac's board-approved investment 
policies, we simplify the regulation by eliminating that term and 
instead requiring Farmer Mac to determine whether an investment 
complies with those policies. We also clarify that Farmer Mac must 
determine whether an investment is for an authorized purpose.
    The Council commented that eligibility and the other pre-purchase 
assessments are often established for a class or segment of securities 
by specifying the criteria (credit risk, liquidity, market risk, etc.) 
that make a class of securities eligible and suitable per se, and it 
requested clarification that these pre-purchase assessments may be 
defined for segments or classes of securities that meet appropriate 
criteria rather on a security-by-security basis. We note that the 
regulation does not prohibit Farmer Mac from establishing criteria for 
various classes or segments of investments; nonetheless, Farmer Mac 
must continue to adequately document its evaluation and assessments of 
investments being purchased.
    We also added a sentence to Sec.  652.10(f)(1)(i) specifically 
authorizing Farmer Mac, with board approval, to hold investments that 
do not comply with its investment policies. This addition recognizes 
that such decisions are within the discretion of the board's business 
judgment. We emphasize that this provision does not authorize the board 
to approve investments that do not comply with our regulatory 
eligibility requirements and purpose limitations.
    Existing Sec.  652.10(f)(1) requires Farmer Mac to verify the value 
of a security that it plans to purchase, other than a new issue, with a 
source that is independent of the broker, dealer, counterparty, or 
other intermediary to the transaction. We proposed to relocate this 
requirement to Sec.  652.10(f)(1)(ii) but proposed no substantive 
changes to the requirement.\7\
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    \7\ The proposed requirement read: ``Prior to purchase, you must 
verify the value of the investment (unless it is a new issue) with a 
source that is independent of the broker, dealer, counterparty, or 
other intermediary to the transaction.''
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    Both Farmer Mac and the Council objected to this existing 
requirement. The Council commented that verifying value from an 
independent source is not realistic for investments of tranches of 
collateralized mortgage obligations (CMOs), including planned 
amortization class (PAC) bonds, purchased in the primary market. The 
Council stated that these securities are generally unique in nature and 
their value, when newly created, will be impossible to verify with a 
third party prior to purchase.
    In response, we reiterate that the third-party, pre-purchase 
valuation requirement explicitly excludes new issues. Accordingly, 
Farmer Mac need not seek third-party, pre-purchase valuation for new 
issues.
    Proposed Sec.  652.10(f)(1)(iii) would have contained extensive 
risk-assessment evaluation and documentation requirements. Both Farmer 
Mac and the Council objected to these requirements. The Council 
commented that the detail and prescriptiveness of this paragraph was 
unnecessary, burdensome, and redundant to the proposed investment 
policy requirements. The Council also stated that the proposed rule 
governing System banks and associations, while still excessive, was 
more ``streamlined'' and consistent with the overall objectives of the 
regulations.
    In response, we have revised the requirements of final Sec.  
652.10(f)(1)(iii) to be much less detailed than those in the NPRM as 
well as more similar, but not identical, to those in the final rule 
governing System banks and associations. The final rule specifies the 
risks that must be assessed but, other than stress-testing 
requirements, which are discussed below, it does not specify how these 
risks must be assessed. We explain in this preamble our expectations 
for how Farmer Mac should assess its risk. These expectations were 
stated as requirements in the proposed rule.
    In its assessment of credit risk, Farmer Mac should consider the 
nature and type of underlying collateral, credit enhancements, 
complexity of the structure, and any other available indicators of the 
risk of default.
    In its assessment of liquidity risk, Farmer Mac should consider the 
investment structure, depth of the market, and ability to liquidate the

[[Page 66379]]

position under a variety of economic scenarios and market conditions.
    In its assessment of market risk, Farmer Mac should consider how 
various market stress scenarios including, at a minimum, potential 
changes in interest rates and market conditions (such as changes in 
market perceptions of creditworthiness), are likely to affect the cash 
flow and price of the instrument.
    The proposed rule would have required Farmer Mac, in conducting its 
market risk assessment, to use reasonable and appropriate methodologies 
for stress testing for the type or class of instrument to ensure the 
investment complies with risk limits established in its investment and 
interest rate risk policies. Although we intended that this stress-
testing requirement would encompass structured instruments and those 
with uncertain cash flows, such as mortgage-backed securities and 
asset-backed securities, the proposed rule did not expressly specify 
what types or classes of instruments must be stress tested.
    The Council commented that this proposal was more lenient than the 
provisions that were proposed for System banks and associations, which 
would have expressly required stress testing of all instruments prior 
to purchase. In response to the Council's comment, and to clarify our 
intentions in our proposed regulation, final Sec.  651.10(f)(1)(iii) 
expressly requires Farmer Mac to stress test all investments that are 
structured or that have uncertain cash flows, including specifically 
mortgage-backed securities and asset-backed securities, prior to their 
purchase. The stress test must be commensurate with the risk and 
complexity of the investment.
    Existing Sec.  652.10(f)(2) requires Farmer Mac, at least monthly, 
to determine the fair market value of each security in its portfolio 
and the fair market value of its whole investment portfolio. In doing 
so, Farmer Mac must also evaluate the credit quality and price 
sensitivity to the change in market interest rates of each security in 
its portfolio and its whole investment portfolio. We had proposed to 
delete the entire second sentence. Final Sec.  652.10(f)(3) requires 
Farmer Mac to establish and maintain processes to monitor and evaluate 
changes in the credit quality of each security in its portfolio and its 
whole investment portfolio on an ongoing basis. We delete the price 
sensitivity evaluation requirement because that is addressed in our 
final interest rate risk management regulation at Sec.  652.30(c)(3).
    Final Sec.  652.10(f)(4)(i) requires Farmer Mac to stress test its 
entire investment portfolio, including stress tests of all investments 
individually and stress tests of the portfolio as a whole, at the end 
of each quarter. The stress test must enable Farmer Mac to determine 
that its investment securities, both individually and on a portfolio-
wide basis, do not expose its capital, earnings, or liquidity to risks 
that exceed the risk tolerance specified in its investment policies. 
These requirements combine and clarify the existing Sec.  652.40(a) 
requirement that Farmer Mac be able to identify individual securities 
that expose it to a high level of risk with the portfolio-wide stress 
testing required by proposed Sec.  652.10(f)(3)(i).
    The Council commented that the stress-testing requirements in 
proposed Sec.  652.10(f)(3)(ii) differed in subtle but important ways 
from what was proposed for System banks and associations, and it stated 
that this inconsistency was not supported by any business difference 
between Farmer Mac and System banks and associations. The Council did 
not, however, either specify the differences or explain why the 
differences were important. We have made a few minor changes in the 
final rule. We believe the final rule is substantially similar to the 
final rule governing the System banks and associations; any differences 
are not intended to be material.
6. Sec.  652.10(g)--Reports to the Board of Directors
    Farmer Mac commented that the board reporting requirements in 
proposed Sec.  652.10(g) go beyond establishing a framework for safety 
and soundness and instead effectively supplant Farmer Mac's business 
judgment with FCA's, but the Corporation provided no specific comments 
on the requirements. The Council, commenting on the proposed rule 
governing System banks and associations--which was somewhat more 
detailed than the proposed rule governing Farmer Mac--stated that the 
board reporting requirements were exceedingly prescriptive and limiting 
of the board's authority to direct management, and it requested that 
the provisions be generalized and simply require that the board receive 
a quarterly report containing information on the investment portfolio 
as the board deems appropriate.
    We are finalizing Sec.  651.10(g) as proposed. We believe this 
level of reporting is necessary to ensure the board has the information 
it needs about Farmer Mac's investments.

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

    We are finalizing our proposal to renumber existing Sec.  652.25 as 
Sec.  652.15.
    We proposed in Sec.  652.15(a) to add a new permissible purpose for 
Farmer Mac's non-program investments--investments that complement 
program business activities. In the preamble to the proposed rule, we 
stated that this purpose would recognize that certain investments, such 
as investments with a rural focus that are backed by the full faith and 
credit of the United States Government, could advance Farmer Mac's 
mission by complementing its program business activities. We believe 
that even if an investment is not held for the purposes of complying 
with interest rate risk management requirements, complying with 
liquidity requirements, or managing surplus short-term funds, mission 
advancement could nevertheless be an appropriate purpose for which to 
hold investments.\8\
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    \8\ FCA has also approved mission-related investments for System 
banks and associations on a case-by-case basis.
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    Section 8.3(c)(12) of the Act permits Farmer Mac to ``purchase or 
sell any securities or obligations * * * necessary and convenient to 
the business of the Corporation.'' We believe this proposed broadening 
of investment purposes is compatible with Farmer Mac's statutory 
mandate and consistent with congressional intent.
    We emphasized in the preamble to the proposed rule that this 
provision would not add any new eligible investments to our authorized 
list; Farmer Mac would still need to seek FCA's prior approval for any 
investments not explicitly authorized on the list of eligible 
investments.
    In addition, we stated in the preamble to the proposed rule that 
neither the proposed purpose nor any of the three existing purposes 
authorize Farmer Mac to accumulate investment portfolios for arbitrage 
activities or to engage in trading for speculative or primarily capital 
gains purposes. We stated that realizing gains on sales before 
investments mature is not a regulatory violation as long as the profits 
are incidental to the specified permissible investment purposes. And we 
emphasized that Farmer Mac's internal controls must ensure that 
eligible investments clearly fulfill one or more of the authorized 
investment purposes.
    The Council strongly objected to the proposed purpose, stating that 
FCA ``specifically states'' that the purpose will allow Farmer Mac to 
use non-program investments as a business strategy to enhance returns 
for investors.

[[Page 66380]]

The Council stated that this purpose would authorize Farmer Mac to 
assume additional risk in its non-program investments and that Farmer 
Mac's authorized investment purposes should be the same as those for 
System banks. The Council also expressed concern that FCA did not 
define what constitutes ``business activities.'' The Council asked us 
to delete this proposed purpose entirely.
    We adopt this provision as proposed. We specifically state that 
this new purpose is to advance Farmer Mac's mission by complementing 
Farmer Mac's program business activities--not to enhance returns to 
investors. Positive returns are permissible only if they are incidental 
to this purpose or to one of the three existing purposes. FCA will use 
its supervisory authorities to ensure that all investments held for 
this purpose actually do complement Farmer Mac's program business 
activities and that the risk and return characteristics of such 
investments are appropriate.
    As stated above, Farmer Mac may hold only investments that are 
already on the list of eligible investments unless it seeks FCA's prior 
approval. In determining whether to grant approval, FCA will consider 
the risk of the investment and whether it actually does complement 
Farmer Mac's program business activities; where appropriate, we may 
impose conditions on the approval. Although System banks do not have 
such a purpose authorized by regulation, FCA has approved many mission-
related investments for System banks and associations. We further 
emphasize that Farmer Mac's investments held for any of the four 
permissible purposes will be subject to the 35-percent investment limit 
in Sec.  652.15(b). We believe this limitation will help ensure that 
Farmer Mac's mission achievement continues to be centered on providing 
a source of liquidity and credit support for agriculture and rural 
lenders directly through its secondary market and guarantee programs. 
Investments that complement program business activities should have an 
agricultural or rural focus.
    We adopt as final our proposal to change the current regulatory 
maximum non-program investment parameters in paragraph (b) to delete 
the alternate maximum of a fixed $1.5 billion. While we continue to 
believe that excessive or inappropriate use of non-program investments 
is not consistent with the Corporation's statutory mission and status 
as a Government-sponsored enterprise (GSE), we believe the maximum 
investment parameter of 35 percent of program volume alone is 
sufficient and that there is no longer a need for the $1.5-billion 
ceiling on that maximum calculation. This change is based on Farmer 
Mac's growth since the $1.5 billion ceiling was established in 2005. We 
received no comment on this proposal.
    Also in paragraph (b), we adopt as final our proposal to permit 
Farmer Mac to exclude investments pledged to meet margin requirements 
for derivative transactions (collateral) when calculating the 35-
percent investment limit under paragraph (b).\9\ We note that 
investments that are pledged as collateral do not count toward Farmer 
Mac's compliance with its liquidity requirements.\10\ We make this 
change because the Dodd-Frank Act may result in additional margin 
requirements for Farmer Mac, and we want to avoid the unintended 
consequence of discouraging the use of derivatives as an appropriate 
risk management tool. We received positive comments on this proposal 
from the Council.
---------------------------------------------------------------------------

    \9\ Paragraph (b) permits Farmer Mac to hold eligible non-
program investments, for specified purposes, up to 35 percent of 
program volume.
    \10\ Under new Sec.  652.35(b) (renumbered from existing Sec.  
652.20(b)), all investments held for the purpose of meeting the 
liquidity reserve requirement must be free of liens or other 
encumbrances.
---------------------------------------------------------------------------

    The Council requested that we also exclude various other 
investments from the investment limit calculation. The Council 
requested that we exclude securities purchased and designated for the 
primary purpose of posting collateral for derivative positions, even if 
the collateral is returned or the securities are never posted. The 
Council stated that including these securities in the limit would 
require Farmer Mac to maintain a cushion under the limit to accommodate 
the possibility of return, thereby limiting the amount of other 
investments it can hold to manage its liquidity position and derivative 
counterparty exposures.
    Both Farmer Mac and the Council asked that Treasury securities also 
be excluded from the 35-percent limit. Farmer Mac stated that the 
proposed rule would require it to hold significant amounts of Treasury 
securities to meet FCA's liquidity requirements, thereby utilizing a 
large portion of its liquidity and investment portfolio capacity. The 
Council stated that the 35-percent limit creates an economic constraint 
and disincentive to holding Treasury securities, even though they are 
the most liquid and marketable investment.
    Finally, the Council also requested that investment securities 
pledged in secured borrowing relationships be excluded from the 35-
percent limit. The Council cited State Ag-Linked lending programs and 
repurchase agreements as examples of these secured borrowing 
relationships. Under both arrangements, according to the Council, the 
pledging of securities acts as an alternative means of obtaining cash 
for operations. Under Sec.  652.35(b) (renumbered from Sec.  
652.20(b)), these investments may not be counted in the liquidity 
reserve because they are not unencumbered. The Council asserts that 
excluding securities pledged in secured borrowing relationships from 
the 35-percent limit would be consistent with use of the securities as 
an alternative method to secure financing and their treatment under the 
FCA regulatory liquidity measurement.
    We decline to exclude these investments from the investment limit. 
We view these types of transactions as part of Farmer Mac's normal cash 
management operations. Thus, under normal conditions, we expect Farmer 
Mac to manage the level of its investments within FCA's portfolio size 
limits to ensure regulatory compliance. If, in unusual business 
environments, Farmer Mac were to experience the unexpected need for a 
significant increase in pledgeable assets, and that increase could 
result in a short-term need for regulatory flexibility regarding the 
35-percent maximum limit, Sec.  652.45 of this regulation provides for 
FCA discretion to allow that flexibility.

F. Section 652.20--Eligible Non-Program Investments

    As proposed, we renumber existing Sec.  652.35, Eligible Non-
Program Investments, as Sec.  652.20. We delete the reference to 
divestiture that was contained in Sec.  652.35(a)(5), because we no 
longer require divestiture of investments that were eligible when 
purchased, and the treatment of investments that were ineligible when 
purchased is specified in Sec.  652.25(a). We also delete the 
references to stress-testing mortgage securities that were contained in 
Sec.  652.35(a)(6), because new Sec.  652.10(f) sets forth stress-
testing requirements for investments. We are reprinting this provision 
because of these changes, but we are making no other changes to the 
provision.

G. Section 652.25--Management of Ineligible Investments and Reservation 
of Authority To Require Divestiture

    As proposed, we delete existing Sec.  652.45 and replace it with 
new Sec.  652.25. Existing Sec.  652.45(a)(2) requires Farmer Mac to 
dispose of an investment that is ineligible \11\ within 6 months

[[Page 66381]]

unless we approve, in writing, a plan that authorizes divestment over a 
longer period of time. An acceptable divestiture plan generally must 
require Farmer Mac to dispose of the ineligible investment as quickly 
as possible without substantial financial loss. Until it actually 
disposes of the ineligible investment, Farmer Mac must report on 
specified matters to its board of directors and to FCA at least 
quarterly.
---------------------------------------------------------------------------

    \11\ Under existing Sec.  652.35.
---------------------------------------------------------------------------

    New Sec.  652.25(b) no longer requires Farmer Mac to divest of (or 
to receive approval of a divestiture plan for) an investment that was 
eligible \12\ when purchased but that no longer satisfies the 
eligibility criteria.\13\ Rather, Farmer Mac would be required to 
notify the OSMO within 15 calendar days of determining that the 
investment no longer satisfies the eligibility criteria, and the 
investment would be subject to specified requirements that are 
discussed below. This approach provides the Corporation with greater 
flexibility to manage its position and mitigate losses as compared with 
a forced divestiture during a specific time period (or the need to 
devote resources to developing and submitting a divestiture plan for 
FCA to consider).
---------------------------------------------------------------------------

    \12\ Under renumbered Sec.  652.20.
    \13\ Such an investment would no longer be considered 
``ineligible.''
---------------------------------------------------------------------------

    The proposed rule would have required Farmer Mac to notify the OSMO 
``promptly'' if an investment no longer satisfied the eligibility 
criteria. Farmer Mac commented that the term ``prompt'' leaves 
significant room for interpretation as to practical application, and it 
requested a specific timeframe. The Council commented that it was 
unsure what ``prompt'' meant in the context of the rule, and it stated 
that notification is redundant and unnecessary given the requirements 
of the regulation and the ongoing nature of FCA's examination function. 
If FCA retained this requirement, the Council suggested a 60-calendar-
day notice period.
    In response to these comments, we make the notification period 15 
calendar days after Farmer Mac determines that the investment no longer 
satisfies the eligibility criteria. We believe this notification period 
is adequate, since the timeframe does not begin until Farmer Mac makes 
the determination. Moreover, notification can be as simple as a 
telephone call or an email.
    The proposed rule would also have required notification to the OSMO 
when an investment that satisfied the regulatory eligibility criteria 
was not suitable because it did not satisfy the risk tolerance 
established in the institution's required board policy, and the 
investment would have been subject to the same specified requirements 
discussed below. We are deleting this notification requirement from the 
final rule because we do not want to create a disincentive for Farmer 
Mac to establish a risk tolerance that is stricter than FCA's 
regulatory eligibility criteria. Under the final rule, Farmer Mac does 
not have to notify the OSMO when an investment that satisfies FCA's 
regulatory eligibility criteria does not satisfy its own risk 
tolerance, nor is the investment subject to the other specified 
requirements discussed below.
    As we proposed, final Sec.  652.25(a) provides that an investment 
that does not satisfy the regulatory eligibility criteria at the time 
of purchase is ineligible. Under the final rule (as under the existing 
regulation), Farmer Mac may not purchase ineligible investments. If 
Farmer Mac does purchase an ineligible investment, it must notify the 
OSMO within 15 calendar days after determining that the investment was 
ineligible and must divest of the investment no later than 60 calendar 
days after the determination unless we approved, in writing, a plan 
that authorizes divestiture over a longer period of time.
    Although it is not stated in the regulation, we clarify here that 
an acceptable divestiture plan would have to require Farmer Mac to 
dispose of the investment as quickly as possible without substantial 
financial loss. The plan would also have to contain sufficient analysis 
to support continued retention of the investment, including its effect 
on the institution's capital, earnings, liquidity, and collateral 
position. Our decision would not be based solely on financial loss and 
would include consideration of all circumstances surrounding the 
purchase. Until Farmer Mac divests of the investment, it would be 
subject to the same specified requirements discussed below.
    Furthermore, we emphasize that any purchase of an ineligible 
investment would indicate weaknesses in Farmer Mac's internal controls 
and due diligence and would trigger increased FCA oversight if it 
occurs. We expect such a purchase to occur rarely, if ever. For this 
reason, we are retaining the divestiture requirement from the existing 
and proposed rules, despite the Council's request that we treat 
investments that are ineligible when purchased in the same manner as we 
treat investments that are eligible when purchased but that 
subsequently fail to meet the eligibility criteria. Furthermore, in 
response to the Council's comment that this provision essentially 
authorizes Farmer Mac to purchase ineligible investments that could be 
held for 60 calendar days, we emphasize that this provision does not 
authorize such a purchase. As stated, if Farmer Mac makes such a 
purchase, it should expect increased FCA oversight of its internal 
controls and due diligence process, as well as other enforcement 
actions as appropriate.
    The specified requirements that apply to investments retained by 
Farmer Mac that are ineligible or that no longer satisfy the 
eligibility requirements are specified in Sec.  652.25(c). We believe 
these specified requirements are warranted by safety and soundness 
concerns.
    Section 652.25(c)(1) contains reporting requirements. Each quarter, 
Farmer Mac is required to report to FCA and to its board on the status 
of all such investments. The report must demonstrate the effect that 
the investments may have on the Corporation's capital, earnings, and 
liquidity position. Additionally, the report must address how the 
Corporation plans to reduce its risk exposure from these investments or 
exit the position.
    Section 652.25(c)(2) provides that the investments may not be used 
to satisfy Farmer Mac's liquidity requirement(s) in Sec.  652.40 and 
that they must continue to be included in the investment portfolio 
limit calculation established in Sec.  652.15(b).
    Finally, Sec.  652.25(d) reserves FCA's authority to require Farmer 
Mac to divest of any investment at any time for failure to comply with 
Sec.  652.15(a) or for safety and soundness purposes. Although we did 
not propose failure to comply with the permissible investment purposes 
specified in Sec.  652.15(a) as a basis for requiring divestiture, this 
change makes explicit our authority to require divestiture of an 
investment that does not comply with our investment regulations. The 
timeframe FCA sets would consider the expected loss on the transaction 
(or transactions) and the effect on Farmer Mac's financial condition 
and performance. Because the final rule does not require automatic 
divestiture of any investment that was eligible when purchased, FCA is 
making express our authority to require divestiture of investments when 
necessary.

H. Section 652.30--Interest Rate Risk Management

    We renumber existing Sec.  652.15 as Sec.  652.30. No comments were 
received on the proposed revisions to this section, and we finalize 
them as

[[Page 66382]]

proposed, with a minor, non-substantive change. The preamble to our 
proposed rule explains our changes.

I. Section 652.35--Liquidity Reserve Management and Requirements

    As proposed, we renumber existing Sec.  652.20, Liquidity Reserve 
Management and Requirements, as Sec.  652.35. We are reprinting this 
provision because of this renumbering, but we are making no other 
changes to the provision.

J. Section 642.40--Stress Tests for Mortgage Securities

    As proposed, we remove this standalone section from our regulations 
and incorporate its requirements into Sec.  652.10(f), as discussed 
above.

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

    We adopt the proposed revisions to Sec.  652.45. We relocate 
existing Sec.  652.30, which authorizes FCA to modify or waive 
regulatory investment management and liquidity management requirements 
in extraordinary situations, to new Sec.  652.45. We believe this 
location is more appropriate for this provision.
    In addition to the existing specific modifications and waivers the 
provision authorizes, we amend Sec.  652.45 to authorize FCA to take 
other actions as deemed appropriate. This added authority will give FCA 
additional flexibility to address extraordinary situations.
    We received no comments on this revision, and the Council was 
supportive of similar changes in the proposed rule governing System 
banks.

V. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 652

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

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

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

0
1. The authority citation for part 652 continues to read as follows:

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


0
2. Subpart A, consisting of Sec. Sec.  652.1 through 652.45, is revised 
to read as follows:
Subpart A--Investment Management
Sec.
652.1 Purpose.
652.5 Definitions.
652.10 Investment management.
652.15 Non-program investment purposes and limitation.
652.20 Eligible non-program investments.
652.25 Management of ineligible investments and reservation of 
authority.
652.30 Interest rate risk management.
652.35 Liquidity reserve management and requirements.
652.40 [Reserved]
652.45 Temporary regulatory waivers or modifications for 
extraordinary situations.

Subpart A--Investment Management


Sec.  652.1  Purpose.

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


Sec.  652.5  Definitions.

    For purposes of this subpart, the following definitions will apply:
    Affiliate means any entity established under authority granted to 
the Corporation under section 8.3(c)(14) of the Farm Credit Act of 
1971, as amended.
    Asset-backed securities (ABS) mean investment securities that 
provide for ownership of a fractional undivided interest or collateral 
interests in specific assets of a trust that are sold and traded in the 
capital markets. For the purposes of this subpart, ABS exclude mortgage 
securities that are defined below.
    Eurodollar time deposit means a non-negotiable deposit denominated 
in United States dollars and issued by an overseas branch of a United 
States bank or by a foreign bank outside the United States.
    Farmer Mac, Corporation, you, and your means the Federal 
Agricultural Mortgage Corporation and its affiliates.
    FCA, our, us, or we means the Farm Credit Administration.
    Final maturity means the last date on which the remaining principal 
amount of a security is due and payable (matures) to the registered 
owner. It does not mean the call date, the expected average life, the 
duration, or the weighted average maturity.
    General obligations of a state or political subdivision means:
    (1) The full faith and credit obligations of a state, the District 
of Columbia, the Commonwealth of Puerto Rico, a territory or possession 
of the United States, or a political subdivision thereof that possesses 
general powers of taxation, including property taxation; or
    (2) An obligation that is unconditionally guaranteed by an obligor 
possessing general powers of taxation, including property taxation.
    Government agency means the United States or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or guaranteed as to the 
timely repayment of principal and interest by the full faith and credit 
of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government, including but not limited to any Government-
sponsored enterprise.
    Liquid investments are assets that can be promptly converted into 
cash without significant loss to the investor. A security is liquid if 
the spread between its bid price and ask price is narrow and a 
reasonable amount can be sold at those prices promptly.
    Long-Term Standby Purchase Commitment (LTSPC) is a commitment by 
Farmer Mac to purchase specified eligible loans on one or more 
undetermined future dates. In consideration for Farmer Mac's assumption 
of the credit risk on the specified loans underlying an LTSPC, Farmer 
Mac receives an annual commitment fee on the outstanding

[[Page 66383]]

balance of those loans in monthly installments based on the outstanding 
balance of those loans.
    Market risk means the risk to your financial condition because the 
value of your holdings may decline if interest rates or market prices 
change. Exposure to market risk is measured by assessing the effect of 
changing rates and prices on either the earnings or economic value of 
an individual instrument, a portfolio, or the entire Corporation.
    Maturing obligations means maturing debt and other obligations that 
may be expected, such as buyouts of long-term standby purchase 
commitments or repurchases of agricultural mortgage securities.
    Mortgage securities means securities that are either:
    (1) Pass-through securities or participation certificates that 
represent ownership of a fractional undivided interest in a specified 
pool of residential (excluding home equity loans), multifamily or 
commercial mortgages, or
    (2) A multiclass security (including collateralized mortgage 
obligations and real estate mortgage investment conduits) that is 
backed by a pool of residential, multifamily or commercial real estate 
mortgages, pass-through mortgage securities, or other multiclass 
mortgage securities.
    (3) This definition does not include agricultural mortgage-backed 
securities guaranteed by Farmer Mac itself.
    Nationally recognized statistical rating organization (NRSRO) means 
a rating organization that the Securities and Exchange Commission 
recognizes as an NRSRO.
    Non-program investments means investments other than those in:
    (1) ``Qualified loans'' as defined in section 8.0(9) of the Farm 
Credit Act of 1971, as amended; or
    (2) Securities collateralized by ``qualified loans.''
    OSMO means FCA's Office of Secondary Market Oversight.
    Program assets means on-balance sheet ``qualified loans'' as 
defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Program obligations means off-balance sheet ``qualified loans'' as 
defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.
    Regulatory capital means your core capital plus an allowance for 
losses and guarantee claims, as determined in accordance with generally 
accepted accounting principles.
    Revenue bond means an obligation of a municipal government that 
finances a specific project or enterprise, but it is not a full faith 
and credit obligation. The obligor pays a portion of the revenue 
generated by the project or enterprise to the bondholders.
    Weighted average life (WAL) means the average time until the 
investor receives the principal on a security, weighted by the size of 
each principal payment and calculated under specified prepayment 
assumptions.


Sec.  652.10  Investment management.

    (a) Responsibilities of the board of directors. Your board of 
directors must adopt written policies for managing your non-program 
investment activities. Your board must also ensure that management 
complies with these policies and that appropriate internal controls are 
in place to prevent loss. At least annually, your board, or a 
designated committee of the board, must review the sufficiency of these 
investment policies. Any changes to the policies must be adopted by the 
board. You must report any changes to these policies to the OSMO within 
10 business days of adoption.
    (b) Investment policies--general requirements. Your investment 
policies must address the purposes and objectives of investments, risk 
tolerance, delegations of authority, internal controls, due diligence, 
and reporting requirements. Moreover, your investment policies must 
fully address the extent of pre-purchase analysis that management must 
perform for various types, classes, and structure of investments. 
Furthermore, the policies must include reporting requirements and 
approvals needed for exceptions to the board's policies. Investment 
policies must be sufficiently detailed, consistent with, and 
appropriate for the amounts, types, and risk characteristics of your 
investments. You must document in the Corporation's records any 
analyses used in formulating your policies or amendments to the 
policies.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for the various types, classes, and sectors 
of eligible investments. These policies must include concentration 
limits to ensure prudent diversification of credit, market, and 
liquidity risks in the investment portfolio. Risk limits must be based 
on all relevant factors, including the Corporation's objectives, 
capital position, earnings, and quality and reliability of risk 
management systems. Your policies must identify the types and quantity 
of investments that you will hold to achieve your objectives and 
control credit, market, liquidity, and operational risks. Your policies 
must establish risk limits for the following four types of risk:
    (1) Credit risk. Your investment policies must establish:
    (i) Credit quality standards, limits on counterparty risk, and risk 
diversification standards that limit concentrations in a single or 
related counterparty(ies), geographical areas, industry sectors, and 
asset classes or obligations with similar characteristics.
    (ii) Criteria for selecting brokers, dealers, and investment 
bankers (collectively, securities firms). You must buy and sell 
eligible investments with more than one securities firm. As part of 
your review of your investment policies required under paragraph (a) of 
this section, your board of directors, or a designated committee of the 
board, must review the criteria for selecting securities firms. Any 
changes to the criteria must be approved by the board.
    (iii) Collateral margin requirements on repurchase agreements. You 
must regularly mark the collateral to market and ensure appropriate 
controls are maintained over collateral held.
    (2) Market risk. Your investment policies must set market risk 
limits for specific types of investments and for the investment 
portfolio.
    (3) Liquidity risk. Your investment policies must describe the 
liquidity characteristics of eligible investments that you will hold to 
meet your liquidity needs and the Corporation's other objectives.
    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls in 
accordance with paragraphs (d) and (e) of this section.
    (d) Delegation of authority. All delegations of authority to 
specified personnel or committees must state the extent of management's 
authority and responsibilities for investments.
    (e) Internal controls. You must:
    (1) Establish appropriate internal controls to detect and prevent 
loss, fraud, embezzlement, conflicts of interest, and unauthorized 
investments.
    (2) Establish and maintain a separation of duties between personnel 
who supervise or execute investment transactions and personnel who 
supervise or engage in all other investment-related functions.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, your investment management functions, controls, 
processes, and compliance with FCA regulations. The scope of the annual 
review must be appropriate for the size, risk, and complexity of the 
investment portfolio.

[[Page 66384]]

    (f) Due diligence--(1) Pre-purchase analysis--(i) Objective, 
eligibility, and compliance with investment policies. Before you 
purchase an investment, you must conduct sufficient due diligence to 
determine whether the investment is eligible under Sec.  652.20, is for 
an authorized purpose under Sec.  652.15(a), and complies with your 
board-approved investment policies. You must document its eligibility, 
purpose, and investment policy compliance and your investment 
objective. Your investment policies must fully address the extent of 
pre-purchase analysis that management must perform for various types, 
classes, and structure of investments. Your board must approve your 
decision to hold an investment that does not comply with your written 
investment policy requirements.
    (ii) Valuation. Prior to purchase, you must verify the value of the 
investment (unless it is a new issue) with a source that is independent 
of the broker, dealer, counterparty or other intermediary to the 
transaction.
    (iii) Risk assessment. Your risk assessment must be documented and, 
at a minimum, include an evaluation of credit risk, market risk, and 
liquidity risk and the underlying collateral of the investment. You 
must conduct stress testing before you purchase any investment that is 
structured or that has uncertain cash flows, including all mortgage-
backed securities or asset-backed securities. The stress testing must 
be commensurate with the risk and complexity of the investments and 
must comply with the requirements of paragraph (f)(4) of this section.
    (2) Monthly fair value determination. At least monthly, you must 
determine the fair market value of each investment in your portfolio 
and the fair market value of your whole investment portfolio.
    (3) Ongoing analysis of credit risk. You must establish and 
maintain processes to monitor and evaluate changes in the credit 
quality of each security and the whole investment portfolio on an 
ongoing basis.
    (4) Quarterly stress testing. (i) You must stress test your entire 
investment portfolio, including stress tests of all investments 
individually and stress tests of the portfolio as a whole, at the end 
of each quarter. The stress tests must enable you to determine that 
your investment securities, both individually and on a portfolio-wide 
basis, do not expose your capital, earnings, or liquidity to risks that 
exceed the risk tolerance specified in your investment policies. If 
your portfolio risk exceeds your investment policy limits, you must 
develop a plan to reduce risk and comply with your investment policy 
limits.
    (ii) Your stress tests must be comprehensive and appropriate for 
the risk profile of your investment portfolio and the Corporation. At a 
minimum, the stress tests must be able to measure the price sensitivity 
of investments over a range of possible interest rate/yield curve 
scenarios. The methodology that you use to analyze investment 
securities must be appropriate for the complexity, structure, and cash 
flows of the investments in your portfolio. You must rely to the 
maximum extent practicable on verifiable information to support all 
your assumptions, including prepayment and interest rate volatility 
assumptions, when you apply your stress tests. Your assumptions must be 
prudent and based on sound judgment, and you must document the basis 
for all assumptions that you use to evaluate the security and its 
underlying collateral. You must also document all subsequent changes in 
your assumptions.
    (5) Presale value verification. Before you sell an investment, you 
must verify its value with a source that is independent of the broker, 
dealer, counterparty, or other intermediary to the transaction.
    (g) Reports to the board of directors. At least quarterly, 
executive management must report on the following to the board of 
directors or a designated committee of the board:
    (1) Plans and strategies for achieving the board's objectives for 
the investment portfolio;
    (2) Whether the investment portfolio effectively achieves the 
board's objectives;
    (3) The current composition, quality, and liquidity profile of the 
investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses that you incurred 
during the quarter on individual securities that you sold before 
maturity and why they were liquidated;
    (5) Potential risk exposure to changes in market interest rates as 
identified through quarterly stress testing and any other factors that 
may affect the value of your investment holdings;
    (6) How investments affect your capital, earnings, and overall 
financial condition;
    (7) Any deviations from the board's policies. These deviations must 
be formally approved by the board of directors.


Sec.  652.15  Non-program investment purposes and limitation.

    (a) Farmer Mac is authorized to hold eligible non-program 
investments listed under Sec.  652.20 for the purposes of enterprise 
risk management, including complying with its interest rate risk 
requirements in Sec.  652.30; complying with its liquidity requirements 
in Sec.  652.40; managing surplus short-term funds; and complementing 
program business activities.
    (b) Non-program investments cannot exceed 35 percent of program 
assets and program obligations, excluding 75 percent of the program 
assets that are guaranteed by the United States Department of 
Agriculture as described in section 8.0(9)(B) of the Farm Credit Act of 
1971, as amended. When calculating the total amount of non-program 
investments under this section, exclude investments pledged to meet 
margin requirements on derivative transactions.


Sec.  652.20  Eligible non-program investments.

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

                                Non-Program Investment Eligibility Criteria Table
----------------------------------------------------------------------------------------------------------------
                                                                                              Maximum percentage
                                    Final maturity      NRSRO issue or                           of total non-
           Asset class                   limit           issuer credit    Other requirements  program investment
                                                      rating requirement                           portfolio
----------------------------------------------------------------------------------------------------------------
(1) Obligations of the United     None..............  NA................  None..............  None.
 States.
 Treasuries

[[Page 66385]]

 
 Other obligations
 (except mortgage securities)
 fully insured or guaranteed by
 the United States Government or
 a Government agency.
(2) Obligations of Government-    None..............  NA................  None..............  None.
 sponsored agencies.
 Government-sponsored
 agency securities (except
 mortgage securities).
 Other obligations
 (except mortgage securities)
 fully insured or guaranteed by
 Government-sponsored agencies.
(3) Municipal Securities:
 General obligations....  10 years..........  One of the two      None..............  None.
                                                       highest.
 Revenue bonds..........  5 years for fixed   Highest...........  None..............  15%.
                                   rate bonds and 10
                                   years for index/
                                   floating rate
                                   bonds.
(4) International and             None..............  None..............  The United States   None.
 Multilateral Development Bank                                             must be a voting
 Obligations.                                                              shareholder.
(5) Money Market Instruments:
 Federal funds..........  1 day or            One of the two      None..............  None.
                                   continuously        highest short-
                                   callable up to      term.
                                   100 days.
 Negotiable certificates  1 year............  One of the two      None..............  None.
 of deposit.                                           highest short-
                                                       term.
 Bankers acceptances....  None..............  One of the two      Issued by a         None.
                                                       highest short-      depository
                                                       term.               institution.
 Prime commercial paper.  270 days..........  Highest short-term  None..............  None.
 Non-callable term        100 days..........  Highest short-term  None..............  20%.
 Federal funds and Eurodollar
 time deposits.
 Master notes...........  270 days..........  Highest short-term  None..............  20%.
 Repurchase agreements    100 days..........  NA................  ..................  None.
 collateralized by eligible
 investments or marketable
 securities rated in the highest
 credit rating category by an
 NRSRO.
(6) Mortgage Securities:
 Issued or guaranteed by  None..............  NA................  ..................  None.
 the United States or a
 Government agency.
 Government-sponsored     None..............  One of the two      ..................  50%.
 agency mortgage securities.                           highest.
 Non-Government agency    None..............  Highest...........  ..................  15% combined.
 or Government-sponsored agency
 securities that comply with 15
 U.S.C. 77d(5) or 15 U.S.C.
 78c(a)(41).
 Commercial mortgage-     None..............  Highest...........   Security
 backed securities.                                                        must be backed by
                                                                           a minimum of 100
                                                                           loans.
                                                                           Loans
                                                                           from a single
                                                                           mortgagor cannot
                                                                           exceed 5% of the
                                                                           pool..
                                                                           Pool must
                                                                           be geographically
                                                                           diversified
                                                                           pursuant to the
                                                                           board's policy..

[[Page 66386]]

 
(7) Asset-Backed Securities       None..............  Highest...........  Maximum of 5-year   25% combined.
 secured by:                                                               WAL for fixed
 Credit card receivables                                           rate or floating
 Automobile loans.......                                           rate ABS at their
 Home equity loans......                                           contractual
 Wholesale automobile                                              interest rate
 dealer loans.                                                             caps.
 Student loans..........
 Equipment loans........
 Manufactured housing
 loans.
(8) Corporate Debt Securities...  5 years...........  One of the highest  Cannot be           25%.
                                                       two for             convertible to
                                                       maturities          equity securities.
                                                       greater than 3
                                                       years, and one of
                                                       the highest three
                                                       for maturities of
                                                       three years or
                                                       less.
(9) Diversified Investment Funds  NA................  NA................  The portfolio of    None, if your
Shares of an investment company                                            the investment      shares in each
 registered under section 8 of                                             company must        investment
 the Investment Company Act of                                             consist solely of   company comprise
 1940..                                                                    eligible            less than 10% of
                                                                           investments         your portfolio.
                                                                           authorized by       Otherwise counts
                                                                           this section.       toward limit for
                                                                          The investment       each type of
                                                                           company's risk      investment.
                                                                           and return
                                                                           objectives and
                                                                           use of
                                                                           derivatives must
                                                                           be consistent
                                                                           with FCA guidance
                                                                           and your
                                                                           investment
                                                                           policies..
----------------------------------------------------------------------------------------------------------------
Note: You must also comply with requirements of paragraphs (b), (c), and (d) of this section, and Sec.   651.40
  when applicable. ``NA'' means not applicable.

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


Sec.  652.25  Management of ineligible investments and reservation of 
authority.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in Sec.  652.20 at the time 
of purchase are ineligible. You must not purchase ineligible 
investments. If you determine that you have purchased an ineligible 
investment, you must notify the OSMO within 15 calendar days after such 
determination. You must divest of the investment no later than 60 
calendar days after the determination unless we approve, in writing, a 
plan that authorizes you to divest of the investment over a longer 
period of time.
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that an investment (that satisfied the eligibility criteria 
set forth in Sec.  652.20 when purchased) no longer satisfies the 
eligibility criteria, you must notify the OSMO within 15 calendar days 
of the determination.
    (c) Requirements for investments that are ineligible or no longer 
satisfy eligibility criteria--(1) Reporting requirements. Each quarter, 
you must report to the OSMO and your board on the status of investments 
identified in paragraph (a) or (b) of this section. Your report must 
demonstrate the effect that these investments may have on the 
Corporation's capital, earnings, and liquidity position. Additionally, 
the report must address how the Corporation plans to reduce its risk 
exposure from these investments or exit the position(s).
    (2) Other requirements. Investments identified in paragraph (a) or 
(b) of this section may not be used to satisfy the liquidity 
requirement(s) in Sec.  652.40. These investments must continue to be 
included in the investment portfolio

[[Page 66387]]

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


Sec.  652.30  Interest rate risk management.

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


Sec.  652.35  Liquidity reserve management and requirements.

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

[[Page 66388]]

    (3) Diversification requirements of your liquidity reserve 
portfolio;
    (4) Maturity limits and credit quality standards for non-program 
investments used to meet the minimum liquidity reserve requirement of 
paragraph (a) of this section;
    (5) The minimum and target (or optimum) amounts of liquidity that 
the board believes are appropriate for Farmer Mac;
    (6) The maximum amount of non-program investments that can be held 
for meeting Farmer Mac's liquidity needs, as expressed as a percentage 
of program assets and program obligations;
    (7) Exception parameters and post approvals needed;
    (8) Delegations of authority; and
    (9) Reporting requirements.
    (f) Liquidity reserve reporting--periodic reporting requirements. 
At least quarterly, Farmer Mac's management must report to the 
Corporation's board of directors or a designated subcommittee of the 
board describing, at a minimum, liquidity reserve compliance with the 
Corporation's policy and this section. Any deviations from the board's 
liquidity reserve policy (other than requirements specified in Sec.  
652.20(e)(5)) must be specifically identified in the report and 
approved by the board of directors.
    (g) Liquidity reserve reporting--special reporting requirements. 
Farmer Mac's management must immediately report to its board of 
directors any noncompliance with board policy requirements that are 
specified in Sec.  652.20(e)(5). Farmer Mac must report, in writing, to 
FCA's Office of Secondary Market Oversight no later than the next 
business day following the discovery of any breach of the minimum 
liquidity reserve requirement at Sec.  652.20(a).


Sec.  652.40  [Reserved]


Sec.  652.45  Temporary regulatory waivers or modifications for 
extraordinary situations.

    Whenever the FCA determines that an extraordinary situation exists 
that necessitates a temporary regulatory waiver or modification, the 
FCA may, in its sole discretion:
    (a) Modify or waive the minimum liquidity reserve requirement in 
Sec.  652.40 of this subpart;
    (b) Modify the amount, qualities, and types of eligible investments 
that you are authorized to hold pursuant to Sec.  652.20 of this 
subpart; and/or
    (c) Take other actions as deemed appropriate.

    Dated: October 25, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-26805 Filed 11-2-12; 8:45 am]
BILLING CODE 6705-01-P