[Federal Register Volume 79, Number 143 (Friday, July 25, 2014)]
[Proposed Rules]
[Pages 43301-43318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17493]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611 and 615

RIN 3052-AC84


Organization; Funding and Fiscal Affairs, Loan Policies and 
Operations, and Funding Operations; Investment Eligibility

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, our, or we) 
proposes to amend our regulations governing the eligibility of 
investments held by Farm Credit banks. We propose to strengthen these 
regulations by reinforcing that only high quality investments may be 
purchased and held. We also propose to revise these regulations to 
comply with section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act or DFA) by removing references 
to and requirements relating to credit ratings and substituting other 
appropriate standards of creditworthiness. The FCA also proposes to 
revise its regulatory approach to Farm Credit System (System) 
association investments in order to limit the type and amount of 
investments that an association may hold. The proposed rule also 
addresses investment and risk management practices at associations and 
funding bank supervision of association investments.

DATES: You may send us comments by October 23, 2014.

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

FOR FURTHER INFORMATION CONTACT: 
Paul K. Gibbs, Senior Accountant, or Timothy T. Nerdahl, Senior 
Financial Analyst, Office of Regulatory Policy, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-
4056; or
Jennifer A. Cohn, Senior Counsel, or Richard A. Katz, Senior Counsel, 
Office of General Counsel, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION: 

[[Page 43302]]

I. Objectives

    The objectives of this proposed rule are to:
     Strengthen the safety and soundness of Farm Credit banks 
\1\ and associations; \2\
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    \1\ Section 619.9140 of FCA regulations defines ``Farm Credit 
bank'' to include Farm Credit Banks, agricultural credit banks, and 
banks for cooperatives.
    \2\ Section 619.9050 of FCA regulations defines the term 
``association'' to include (individually or collectively) a Federal 
land bank association, a Federal land credit association, a 
production credit association, and an agricultural credit 
association.
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     Ensure that Farm Credit banks hold sufficient liquidity to 
continue operations and pay maturing obligations in the event of market 
disruption;
     Enhance the ability of the Farm Credit banks to supply 
credit to agricultural and aquatic producers;
     Comply with the requirements of section 939A of the Dodd-
Frank Act;
     Modernize the investment eligibility criteria for Farm 
Credit banks; and
     Revise the investment regulation for associations to 
improve their investment management practices so they are more 
resilient to risk.

II. Background

    Congress created System institutions, including Farm Credit banks 
and associations, to provide permanent, stable, and reliable sources of 
credit and related services to American agricultural and aquatic 
producers.\3\ Associations obtain funds from Farm Credit banks to 
provide short-, intermediate-, and long-term credit and related 
services to farmers, ranchers, producers and harvesters of aquatic 
products, to rural residents for housing, and to farm-related 
businesses.\4\
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    \3\ The Federal Agricultural Mortgage Corporation (Farmer Mac), 
also a System institution, provides a secondary market for 
agricultural real estate mortgage loans, rural housing mortgage 
loans, and rural utility cooperative loans. Farmer Mac is not 
affected by this rulemaking, and the use of the term ``System 
institution'' in this preamble and proposed rule does not include 
Farmer Mac.
    \4\ One Farm Credit bank, known as an agricultural credit bank, 
also provides lending and other financial services to farmer-owned 
cooperatives, rural utilities (electric and telephone), and rural 
sewer and water systems, and it is also authorized to finance U.S. 
agricultural exports and provide international banking services for 
farmer-owned cooperatives.
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    Farm Credit banks depend on investments to provide liquidity and to 
fulfill other needs,\5\ and investments also enable associations to 
manage the risks they confront.\6\ Although Farm Credit banks obtain 
their funding primarily through the issuance of System-wide debt 
securities,\7\ they must have enough available funds, including 
investments, to continue operations and pay maturing obligations if 
access to the debt market becomes temporarily impeded.
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    \5\ Section 615.5132(a) authorizes a Farm Credit bank to hold 
eligible investments to comply with its liquidity requirements, to 
manage surplus short-term funds, and to manage interest rate risk.
    \6\ As discussed below, proposed 615.5142 would enable 
associations, under specified conditions, to hold eligible 
investments to manage risk. Under Sec.  611.1135(a), which we do not 
propose to revise, service corporations may hold investments for the 
purposes authorized for their organizers.
    \7\ Farm Credit banks use the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation) to issue and market System-wide 
debt securities. The Funding Corporation is owned by the Farm Credit 
banks.
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    FCA regulations, at subpart E of part 615, impose comprehensive 
requirements regarding the investments of System institutions. We have 
recently revised many of these requirements, particularly those guiding 
prudent investment management practices.\8\ This rulemaking proposes to 
revise the requirements governing the eligibility of investments for 
Farm Credit banks and associations, which have been largely unchanged 
since 1999, as well as the permissible investment amounts and purposes 
for associations.\9\ The regulations this rulemaking proposes to amend 
should not be viewed in isolation, but rather as part of a 
comprehensive set of rules guiding the System's liquidity and 
investment management.
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    \8\ 77 FR 66362, Nov. 5, 2012.
    \9\ Currently, Sec.  615.5140 identifies eligible investments 
for both Farm Credit banks and associations. Section 615.5142 
governs investment purposes for associations, and the amount of 
association investments is not prescribed by regulation.
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    Investment products are becoming increasingly complex, and the 
financial crisis that began in 2007 made clear that some investments 
are riskier and less liquid than were previously believed. In addition, 
in July 2010 the President signed into law the Dodd-Frank Act to 
strengthen regulation of the financial industry in the wake of the 
financial crisis. Section 939A of the DFA requires each Federal agency 
to review all of its regulations that refer to or require the use of 
credit ratings to assess the creditworthiness of an instrument; to 
remove the reference or requirement; and to substitute other 
appropriate creditworthiness standards. FCA's existing investment 
eligibility regulations use credit ratings as a determinant of 
eligibility of some investments.
    We now propose to comply with the DFA by eliminating the 
regulations' reliance on credit ratings. The financial crisis that 
began in 2007 identified flaws in relying on credit ratings to 
determine credit risk, as many investments with similar labels and 
ratings exhibited substantially differing underlying risk 
characteristics, ultimately impacting marketability of the investments. 
Investment eligibility would no longer depend on external credit 
ratings, thus enhancing safety and soundness. We also propose other 
amendments to the provisions governing Farm Credit banks that would 
strengthen the safety and soundness of their investment activities by 
more accurately reflecting the risk in particular investments.
    Finally, we propose amendments to Sec.  615.5142, which governs the 
investment activities of associations. We recognize that many 
associations may need to hold investments for purposes other than 
managing surplus short-term funds and reducing interest rate risk, 
which are the only investment purposes authorized by the existing 
regulations. For this reason, the proposed rule would grant 
associations greater flexibility to hold investments for other risk 
management purposes. At the same time, we propose to limit the types 
and amount of investments that associations may hold.
    We first considered revisions to our Farm Credit bank and 
association investment regulations in 2011.\10\ As discussed above, we 
adopted many of these revisions in 2012, but we did not revise the 
provisions governing investment eligibility and association 
investments, which we are now proposing to revise. The revisions we now 
propose take into consideration the comments we received in response to 
the earlier rulemaking, as well as the approaches some of the other 
Federal banking regulatory agencies have taken toward compliance with 
the DFA credit ratings elimination requirement.\11\
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    \10\ 76 FR 51289, Aug. 18, 2011.
    \11\ Office of the Comptroller of the Currency (OCC), 77 FR 
35253 and 35259, June 13, 2012; Federal Deposit Insurance 
Corporation (FDIC), 77 FR 43151 and 43155, July 24, 2012.
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III. Section-by-Section Description of the Proposed Rule

    The proposed rule enhances the credit quality standards for 
eligible investments that Farm Credit banks may hold and revises the 
regulation governing association investment activities. It also 
contains conforming amendments to other regulations in parts 611 and 
615.

A. Section 615.5131--Definitions

    We propose to define asset class as a group of securities that 
exhibit similar characteristics and behave similarly in the 
marketplace. Asset classes include, but are not limited to, money 
market

[[Page 43303]]

instruments, municipal securities, corporate bond securities, mortgage-
backed securities (MBS), asset-backed securities (ABS) (excluding MBS), 
and any other asset class as determined by the FCA. We discuss this 
definition later in this preamble.
    We propose to define a collateralized debt obligation (CDO) as a 
debt security collateralized by MBS, ABS, or trust-preferred 
securities.
    One of our proposed criteria for Farm Credit bank investments with 
an obligor located outside of the United States is a high Country Risk 
Classification (CRC) (a 0 or a 1) as published by the Organization for 
Economic Cooperation and Development (OECD).\12\ We propose to define 
CRC, with respect to a sovereign, as the most recent consensus CRC 
published by the OECD as of December 31 of the prior calendar year that 
provides a view of the likelihood that the sovereign will service its 
external debt. This definition is identical to that adopted by the 
other Federal banking regulators in their capital rules to implement 
Basel III.\13\ We proposed the same definition in the proposed 
revisions to our regulatory capital rule that the FCA Board adopted on 
May 8, 2014.\14\
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    \12\ See proposed Sec.  615.5140(a)(3). We explain this 
criterion in the preamble discussion of that proposed provision.
    \13\ OCC and the Federal Reserve System, Final Rule, 78 FR 
62018, Oct. 11, 2013; FDIC, Interim Final Rule, 78 FR 55340, Sept. 
10, 2013, substantively adopted as final at 79 FR 20754, April 14, 
2014.
    \14\ The proposed capital rule has not yet been published in the 
Federal Register.
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    We propose to define a diversified investment fund as an investment 
company registered under section 8 of the Investment Company Act of 
1940, 15 U.S.C. 80a-8. This is consistent with our usage of the term in 
existing Sec.  615.5140(a)(8).
    We propose to replace the definitions for the existing terms 
``Government-sponsored agency'' and ``Government agency'' with 
definitions for the new terms ``Government-sponsored enterprise (GSE)'' 
and ``United States (U.S.) Government agency,'' respectively. We would 
define GSE as an entity established or chartered by the U.S. Government 
to serve public purposes specified by the U.S. Congress but whose debt 
obligations are not explicitly guaranteed by the full faith and credit 
of the U.S. Government. We would define U.S. Government agency as an 
instrumentality of the U.S. Government whose obligations are fully 
guaranteed as to the timely payment of principal and interest by the 
full faith and credit of the U.S. Government. These terminology changes 
would have no substantive effect.\15\
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    \15\ We propose to delete the word ``explicitly'' from our 
existing definition because all obligations guaranteed or insured by 
the U.S. Government are backed by the full faith and credit of the 
United States unless the law or the obligation itself provides 
otherwise. For this reason, the word ``explicitly'' is superfluous.
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    We propose to replace the defined term ``mortgage securities'' with 
``mortgage-backed securities'' or ``MBS.'' We also propose to change 
``mortgage securities'' to ``mortgage-backed securities'' in the 
definition of ABS. These technical changes are for consistency with 
other FCA regulations and would have no substantive effect.
    We propose to add a new definition for the term ``obligor.'' Our 
existing regulations use this term, as do provisions that we propose to 
add or revise, but we have no definition for this term. We propose to 
define the term to ensure a common understanding of its meaning.
    We would define obligor as an issuer, guarantor, or other person or 
entity who has an obligation to pay a debt, including interest due, by 
a specified date or when payment is demanded. This definition would 
include the debtor or immediate party that is obligated to pay a debt, 
as well as a guarantor of the debt. The definition would not include 
the sponsor (as we propose to define the term) of an investment, unless 
the sponsor has an obligation to pay the debt.
    We propose to define ``sponsor'' as a person or entity that 
initiates a transaction by selling or pledging to a specially created 
issuing entity, such as a trust, a group of financial assets that the 
sponsor either has originated itself or has purchased; the sponsor may 
retain the obligation to repay or may transfer that obligation to the 
trust. An example of a sponsor would be an entity such as a commercial 
bank that transfers financial assets, such as loans that it has 
originated or purchased, to a bankruptcy remote trust known as a 
special purpose vehicle (SPV). In this example, the SPV services the 
debt and has the obligation to repay.
    We propose to delete the following definitions because they will no 
longer be used in this subpart. We propose to delete ``eurodollar time 
deposits,'' ``final maturity,'' ``general obligations,'' ``liquid 
investments,'' ``nationally recognized statistical rating 
organization,'' ``revenue bond,'' and ``weighted average life''.

B. Section 615.5134--Liquidity Reserve

    We propose to make technical, non-substantive revisions by adding 
the new terms ``Government-sponsored enterprise (GSE)'' and ``U.S. 
Government agency'' to our liquidity reserve regulation at Sec.  
615.5134, to conform to changes we made to those defined terms in Sec.  
615.5131. In addition, we propose changes to clarify that MBS must be 
fully guaranteed by a U.S. Government agency to qualify for Level 2 
liquidity and fully guaranteed by a GSE to qualify for Level 3 
liquidity.

C. Section 615.5140--Eligible Investments for Farm Credit Banks

    Our existing investment eligibility regulation at Sec.  615.5140 
contains a detailed listing of eligible investment asset classes and 
types of investments within each asset class. The regulation imposes 
final maturity limits, investment portfolio limits, and other 
requirements for many of these investments. It also imposes credit 
rating requirements, based on NRSRO \16\ credit ratings, for a number 
of the investments. The regulation currently applies to both Farm 
Credit banks and associations.
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    \16\ Nationally Recognized Statistical Rating Organization.
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    In revised Sec.  615.5140, we propose to revise the investment 
eligibility requirements governing Farm Credit banks to strengthen 
their safety and soundness by more accurately reflecting the risk in 
particular investments based on recent experience in the 
marketplace.\17\ In addition, to comply with section 939A of the DFA, 
we propose to replace the regulations' NRSRO credit ratings 
requirements with other standards of creditworthiness.
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    \17\ Revised Sec.  615.5140 would apply to Farm Credit banks 
only. As discussed below, all association eligibility requirements 
would be located in revised Sec.  615.5142.
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1. Paragraph (a)--Investment Eligibility Criteria
    We propose the following criteria for Farm Credit banks to 
determine whether an investment is eligible. These criteria would 
replace the listing of eligible investments in our existing 
regulations.
a. Paragraph (a)(1)--Purpose
    We propose to formalize our existing requirement that for an 
investment to be eligible, it must be purchased and held for an 
authorized purpose as set forth in Sec.  615.5132(a). A Farm Credit 
bank must be able to identify the authorized purpose or purposes for 
which each investment is held.
b. Paragraph (a)(2)--Eligible Investments
    The proposed regulation would specify the general requirements that

[[Page 43304]]

investments must satisfy to be eligible. Limiting investments to those 
that satisfy these general requirements will ensure that investments 
are of high quality.
i. Paragraph (a)(2)(i)--Non-convertible Senior Debt Securities
    Investments in senior debt securities that cannot be converted to 
any other type of securities would be eligible under the proposed rule. 
This investment category would include non-convertible U.S. Government 
agency senior debt securities, including U.S. Treasury securities, and 
senior non-convertible GSE bonds. Senior debt securities are those 
securities that have priority of claim over other securities issued. 
Senior debt securities may be secured by a specific pool of collateral 
or may be unsecured with priority of claims over other types of debt 
securities such as subordinated debt, preferred stock, or common 
equity. To be eligible under this criterion, a senior debt security 
must not be convertible into a non-senior security or an equity 
security.\18\
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    \18\ Since at least 1993, FCA has stated its belief that it is 
generally inappropriate for System institutions to maintain 
ownership interests in commercial enterprises by holding equity 
securities. See 58 FR 63034, 63049-50, Nov. 30, 1993.
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    Currently authorized investments such as municipal securities and 
corporate debt securities would be eligible under this criterion, as 
long as they are non-convertible senior debt securities. Other non-
convertible senior debt securities would also be eligible under this 
criterion.
ii. Paragraph (a)(2)(ii)--Money Market Instruments
    As under our existing rule, investments in money market instruments 
would be eligible under the proposed rule. The existing rule lists 
short-term instruments such as Federal funds, negotiable certificates 
of deposit, bankers acceptances, commercial paper, non-callable term 
Federal funds and Eurodollar time deposits, master notes, and 
repurchase agreements collateralized by eligible investments as money 
market instruments. The proposed rule's use of the term money market 
contemplates these instruments as well as other short-term instruments. 
For an investment to be eligible as a money market instrument, it must 
have a maturity of 1 year or less.
iii. Paragraph (a)(2)(iii)--Mortgage-Backed Securities and Asset-Backed 
Securities Guaranteed by U.S. Government Agencies
    We propose that MBS and ABS that are fully guaranteed as to the 
timely payment of principal and interest by a U.S. Government agency 
would be eligible securities because of their high credit quality. MBS 
and ABS that are partially guaranteed by a U.S. Government agency would 
not be eligible under this criterion (although they could be eligible 
under other criteria). Securities labeled ``government guaranteed'' 
satisfy this criterion only if they are fully guaranteed as to the 
timely payment of principal and interest.
iv. Paragraph (a)(2)(iv)--Mortgage-Backed Securities and Asset-Backed 
Securities Guaranteed by GSEs
    Under the proposed rule, MBS and ABS that are fully and explicitly 
guaranteed as to the timely payment of principal and interest by GSEs 
would be eligible investments. Farmer Mac MBS would be excluded from 
eligibility under this provision because they are separately authorized 
and governed by Sec.  615.5174.
    Securities are eligible under this provision only if a GSE fully 
guarantees the timely payment of both the principal and interest due. A 
GSE ``wrap'' (guarantee) does not make a security eligible under this 
provision unless it is a guarantee of all principal and interest. When 
considering whether to purchase a security with a GSE guarantee or 
wrap, an institution must ensure that it is fully guaranteed. This 
provision carries over and clarifies the existing authorities.
v. Paragraph (a)(2)(v)--Senior-Most Positions of Mortgage-Backed 
Securities and Asset-Backed Securities Not Guaranteed by U.S. 
Government Agencies or GSEs
    In our 2011 proposed rule on investment management,\19\ we proposed 
that a position in a mortgage security that is not guaranteed by a 
Government agency or Government-sponsored agency would be eligible only 
if it is the senior-most position at the time of purchase. In that 
proposed rule, we said that we consider a position in such a mortgage 
security to be the senior-most position only if it currently meets both 
of the following criteria:
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    \19\ 76 FR 51289, Aug. 18, 2011.
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     No other remaining position in the securitization has 
priority in liquidation. Remaining positions that are the last to 
experience losses in the event of default and which share those losses 
pro rata meet this criterion.
     No other remaining position in the securitization has a 
higher priority claim to any contractual cash flows. Remaining 
positions that have the first priority claim to contractual cash flows 
(including planned amortization classes), as well as those that share 
on a pro rata basis a first priority claim to cash flows meet this 
criterion.
    In their comments on the 2011 proposed rule, CoBank, ACB, the Farm 
Credit Bank of Texas, and The Farm Credit Council commented that the 
market understands the term ``senior-most'' to relate to liquidation 
preference rather than to the priority of claims to contractual cash 
flows prior to default. This is because investors, such as System 
institutions, are concerned with whether they receive a pro rata share 
of cash flows in the event of depleted credit support or issuer/
borrower default, not with whether contractual cash flows are paid 
first in the ordinary course of business. Institutions are able to 
successfully and safely invest in securities that are not the first 
priority with respect to contractual cash flows. These commenters, 
therefore, asked us to delete the second criterion from our 
understanding of the term ``senior-most.'' \20\
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    \20\ Farmer Mac made similar comments in response to the 2011 
proposed rule governing Farmer Mac investment management. 76 FR 
91798, Nov. 18, 2011.
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    We agree with these comments and eliminate the second criterion. 
The first criterion set forth above remains.
    In addition, as in the existing rule, we propose to retain the 
requirement that for a position in an MBS to be eligible, the MBS must 
satisfy the definition of ``mortgage related security'' in 15 U.S.C. 
78c(a)(41). We propose to delete the alternative that the MBS could 
instead comply with 15 U.S.C. 77d(5), because that statutory provision 
was repealed by the Dodd-Frank Act. We note that commercial MBS are 
included under this proposed eligibility provision.
    Private placements may be eligible under this proposed criterion 
(or other criteria), as long as they satisfy all of the proposed 
investment eligibility requirements. Private placement refers to the 
sale of securities to a relatively small number of sophisticated 
investors without registration with the Securities and Exchange 
Commission and, in many cases, without the disclosure of detailed 
financial information or a prospectus. Even private placements that may 
be eligible are generally not liquid. Farm Credit banks must be able to 
identify a permissible purpose for holding a private placement.

[[Page 43305]]

    Our existing eligibility rules limit investments in ABS to those 
secured by specified assets and with specified weighted average lives. 
We propose to permit investments in the senior-most position of any 
ABS, regardless of the secured asset or the weighted average life.\21\
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    \21\ Both existing and proposed Sec.  615.5133(c) require the 
investment policies of each institution to establish risk limits for 
different types of investments based on all relevant factors, 
including the institution's objectives, capital position, earnings, 
and quality and reliability of risk management systems.
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    In sum, the proposed rule would permit Farm Credit banks to invest 
in the senior-most position of any MBS that satisfies the statutory 
definition of ``mortgage related security'' and the senior-most 
position of any ABS.
vi. Paragraph (a)(2)(vi)--International and Multilateral Development 
Bank Obligations
    We retain the authority for Farm Credit banks to invest in 
obligations of international and multilateral development banks, as 
long as the United States is a voting shareholder.
vii. Paragraph (a)(2)(vii)--Shares of a Diversified Investment Fund
    Under the proposal, shares of a diversified investment fund (DIF) 
would be eligible if the DIF's portfolio consists solely of securities 
that are eligible under these eligibility criteria or under Sec.  
615.5174.\22\ The investment company's risk and return objectives and 
use of derivatives must be consistent with the investment policies of 
the Farm Credit bank. This DIF eligibility is unchanged from the 
existing regulation. As discussed below, however, we propose more 
restrictive portfolio diversification limits on DIF investments than 
those that currently exist.
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    \22\ Section 615.5174 authorizes Farm Credit banks to purchase 
and hold MBS that are issued or guaranteed as to both principal and 
interest by Farmer Mac.
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c. Paragraph (a)(3)--Obligors' Capacity To Meet Financial Commitment
    Existing Sec.  615.5140 imposes credit rating requirements, based 
on NRSRO credit ratings, to determine the eligibility of investments in 
a number of asset classes, including municipal securities, certain 
money market instruments, non-agency mortgage-backed securities, asset-
backed securities, and corporate debt securities.\23\
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    \23\ Existing Sec.  615.5140 imposes no credit rating 
requirements on investments in obligations of U.S. Government 
agencies, GSEs, and international and multilateral development 
banks, and in DIFs and certain money market instruments.
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    Section 939A of the DFA requires each Federal agency to revise all 
of its regulations that refer to or require reliance on credit ratings 
to assess creditworthiness of an instrument to remove the reference or 
requirement and to substitute other appropriate creditworthiness 
standards.
    We propose to comply with this requirement in a manner consistent 
with the approach of some of the Federal banking regulatory agencies. 
The OCC, for example, previously required national banks to determine 
whether a security was ``investment grade'' in order to determine 
whether purchasing the security was permissible. Under the previous 
definition of ``investment grade,'' a security could be characterized 
as ``investment grade'' if it was rated in the top four ``investment 
grade'' NRSRO ratings.
    In its revised regulations to comply with the DFA requirement, the 
OCC retained the term ``investment grade'' but eliminated the rating 
standard. Instead, it defined the term to mean ``the issuer of a 
security has an adequate capacity to meet financial commitments under 
the security for the projected life of the asset or exposure.''
    The OCC stated that it did not intend for the elimination of 
references to credit ratings to change substantively the standards 
national banks must follow when deciding whether a security is 
investment grade. Its new rule permits a national bank to consider 
credit ratings as part of its ``investment grade'' determination and 
due diligence, but the credit rating must be supplemented by the bank's 
own analysis. And the new rule does not require a national bank to use 
NRSRO credit ratings to make the ``investment grade'' 
determination.\24\
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    \24\ 77 FR 35253, June 13, 2012 (OCC rule); 77 FR 35259, June 
13, 2012 (OCC guidance). See also 77 FR 43151, July 24, 2012 (FDIC 
rule); 77 FR 43155, July 24, 2012 (FDIC guidance).
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    The OCC previously permitted national banks to invest in securities 
that were rated in one of the top four ratings. The OCC intends that 
its new definition--the issuer of a security has an adequate capacity 
to meet financial commitments under the security for the projected life 
of the asset or exposure--is substantively unchanged from its previous 
standards.
    Except for investments in a few asset classes such as U.S. 
Government agency and GSE obligations, as discussed above, FCA's 
existing regulations require that in order to be eligible, investments 
must meet the highest or the second highest NRSRO rating, depending on 
the asset class. We want to retain high creditworthiness standards for 
Farm Credit bank investments. Accordingly, we propose to require that 
for an investment to be eligible for Farm Credit banks, at least one 
obligor (whether debtor or guarantor) must have very strong capacity to 
meet its financial commitment for the expected life of the investment. 
Obligors that exhibit very strong capacity to meet financial 
commitments generally have very low probability of default. This 
standard would apply to all investments, including those that are 
currently not subject to a credit rating requirement.
    Like the OCC's regulations, our proposal permits but does not 
require Farm Credit banks to consider credit ratings. If a Farm Credit 
bank does consider credit ratings, it must still conduct its own due 
diligence to determine whether an investment satisfies this standard. 
An investment does not automatically satisfy this standard by virtue of 
its credit rating.
    We propose an additional standard for investments if a Farm Credit 
bank is relying upon the capacity of a non-U.S. obligor to meet the 
``very strong capacity'' standard. Unless such an investment is fully 
guaranteed as to the timely payment of principal and interest by a U.S. 
Government agency, the sovereign host country of the obligor whose 
capacity is being relied upon must have the highest Country Risk 
Classification (CRC) (a 0 or a 1) as published by the OECD or must be 
an OECD member that is unrated. If the Farm Credit bank is not relying 
upon the capacity of a non-U.S. obligor to satisfy the ``very strong 
capacity'' standard, then the proposal establishes no requirements 
regarding that obligor's sovereign host country.
    The OECD's CRCs are an assessment of a country's credit risk, used 
to set interest rate charges for transactions covered by the OECD 
arrangement on export credits. The OECD uses a scale of 0 to 7 with 0 
being the lowest possible risk and 7 being the highest possible risk. 
Furthermore, the OECD no longer assigns CRCs to certain high income 
countries that are members of the OECD and that have previously 
received a CRC of 0.\25\ OECD member countries that are no longer 
assigned a CRC exhibit a similar degree of country risk as that of a 
jurisdiction with a CRC of 0.
---------------------------------------------------------------------------

    \25\ See http://www.oecd.org/tad/xcred/cat0.htm.
---------------------------------------------------------------------------

    In their capital rules to implement Basel III, the Federal banking 
regulators adopted provisions basing risk weights for sovereign 
exposures on OECD CRCs (and on OECD membership, for

[[Page 43306]]

countries without a CRC).\26\ Like these other regulators, we believe 
that use of CRCs in this manner is permissible under section 939A of 
the Dodd-Frank Act and that section 939A was not intended to apply to 
assessments of creditworthiness of organizations such as the OECD. As 
discussed in those rules, section 939A was targeted at addressing the 
role, and the conflicts of interest, of commercial credit rating 
agencies that provide government-sanctioned credit ratings to their 
fee-paying clients. The OECD is not a commercial entity that produces 
credit assessments for fee-paying clients, nor does it provide the sort 
of evaluative and analytical services as credit rating agencies. 
Additionally, we propose to use CRCs only for this limited purpose.
---------------------------------------------------------------------------

    \26\ OCC and the Federal Reserve System, Final Rule, 78 FR 
62018, Oct. 11, 2013; FDIC, Interim Final Rule, 78 FR 55340, Sept. 
10, 2013, substantively adopted as final at 79 FR 20754, April 14, 
2014.
---------------------------------------------------------------------------

d. Paragraph (a)(4)--Credit and Other Risk in the Investment
    In addition to imposing standards on obligors, we also propose to 
require that for an investment to be eligible, it must itself exhibit 
low credit risk and other risk characteristics consistent with the 
purposes for which it is held. The other risks that institutions must 
consider include, but are not limited to, those listed in Sec.  
615.5133(c).
    We believe that all investments held by Farm Credit banks must have 
low credit risk. We do not propose to require that other risks in the 
investment be low in all cases. Instead, the risk characteristics in 
the investment must be consistent with the purposes for which the 
investment is held. Accordingly, Farm Credit banks must understand the 
purpose for which they purchase and hold an investment.
    For instance, if an investment is held for the purpose of 
liquidity, it would have to be marketable or liquid \27\ and would 
generally have to have low price volatility. On the other hand, an 
investment that is high quality but has high price volatility and 
questionable marketability or liquidity would not be appropriate for a 
liquidity investment, but it might be used effectively to manage 
interest rate risk, which is a permissible purpose for Farm Credit 
banks under Sec.  615.5132(a). Farm Credit banks must also consider 
whether other risks are consistent with the purpose for which an 
investment is held.
---------------------------------------------------------------------------

    \27\ Under Sec.  615.5134(d), investments used to satisfy the 
liquidity reserve requirement must be ``marketable,'' as defined by 
that provision. Under Sec.  615.5134(e), investments held in the 
liquidity buffer must be ``liquid,'' as explained in that provision.
---------------------------------------------------------------------------

e. Paragraph (a)(5)--Denomination
    As in our existing rule, the denomination of all investments must 
be in U.S. dollars. We propose no change from our existing rule.
2. Paragraph (b)--Investments That Do Not Satisfy Requirements
    We propose technical revisions to the regulatory provision 
authorizing institutions to hold other investments with FCA's prior 
approval. We intend no substantive change with these revisions.
3. Paragraph (c)--Ineligible Investments
    We propose to prohibit Farm Credit banks from purchasing CDOs, as 
that term is defined in Sec.  615.5131. Based on the experience of CDO 
investors during the recent financial crisis, we believe investments in 
CDOs pose unacceptable risk to System institutions.
4. Paragraph (d)--Reservation of Authority
    We propose to make explicit our authority, on a case-by-case basis, 
to determine that a particular investment imposes inappropriate risk, 
notwithstanding that it satisfies the investment eligibility criteria. 
The proposal also provides that FCA will notify a Farm Credit bank as 
to the proper treatment of any such investment.
5. Application of Investment Eligibility Criteria to Existing Farm 
Credit Bank Investments
    As discussed below, the FCA is contemplating that Farm Credit banks 
would have to comply with the rule's requirements pertaining to their 
own investments 6 months after the effective date of the rule. New Farm 
Credit bank investments made after that compliance date would be 
subject to the investment eligibility criteria in Sec.  615.5140(a).
    Existing Farm Credit bank investments (investments made before the 
compliance date) that were not eligible under the investment 
eligibility criteria that were in effect at the time of purchase (or 
that the FCA did not approve) would continue to be subject to the 
requirements of Sec.  615.5143(a), which governs the treatment of 
investments that are ineligible when purchased.
    Existing Farm Credit bank investments (investments made before the 
compliance date) that were eligible under the investment eligibility 
criteria that were in effect at the time of purchase but that are 
ineligible under the revised Sec.  615.5140(a) investment eligibility 
criteria would be treated as follows, unless the FCA specified 
different treatment. If an investment is not eligible because it does 
not satisfy the criteria in revised Sec.  615.5140(a)(2)--that is, it 
is a type of investment that was eligible under the previous criteria 
but is not eligible under the revised criteria--the Farm Credit bank 
may continue to hold the investment with no restriction. If an 
investment is not eligible because it does not satisfy the criteria in 
revised Sec.  615.5140(a)(1), (a)(3), or (a)(4)--which pertain to 
permissible investment purposes and to credit quality--the Farm Credit 
bank may continue to hold the investment subject to Sec.  615.5143(b), 
which governs the treatment of investments that were eligible to 
purchase but that no longer satisfy the eligibility criteria.
    We remind the Farm Credit banks that under Sec.  615.5143(c), the 
FCA would retain the authority to require divestiture of any investment 
at any time for failure to comply with Sec.  615.5132(a) or for safety 
and soundness reasons.

D. Section 615.5133--Investment Management

1. Overview
    Existing Sec.  615.5133 applies to all System institutions--Farm 
Credit banks, associations, and service corporations. Most of proposed 
revised Sec.  615.5133 would also apply to all System institutions. 
However, as discussed in greater detail below, proposed Sec.  
615.5133(f) and (g), which govern portfolio diversification 
requirements and obligor limits, would apply only to Farm Credit banks. 
Additionally, we propose to modify Sec.  615.5133(c), which addresses 
risk tolerance in investment policies, so it clearly distinguishes how 
liquidity is managed at Farm Credit banks from its treatment at 
associations. The investment management provisions of proposed Sec.  
615.5133 would apply to service corporations to the extent they are 
appropriate to the size, complexity, and risks of their investments.
2. Appropriate Use of Off-Balance Sheet Derivatives
    Off-balance sheet derivatives can be appropriate and useful for the 
purposes of hedging and risk management. While our regulations do not 
prohibit a System bank from using off-balance sheet derivatives to 
build an investment portfolio, use of these derivatives must be 
consistent with an authorized investment purpose and not be for 
speculative purposes. We note that such

[[Page 43307]]

derivatives generally do not provide a significant source of liquidity.
3. Paragraph (a)--Responsibilities of Board of Directors and Paragraph 
(b)--Investment Policies--General Requirements
    The FCA proposes no changes to Sec.  615.5133(a), which governs the 
responsibilities of the boards of directors of System institutions. We 
propose only minor stylistic and non-substantive changes to Sec.  
615.5133(b), which identifies the general requirements that System 
institutions must address in their investment policies.
4. Paragraph (c)--Investment Policies--Risk Tolerance
    We propose several technical modifications to Sec.  615.5133(c) 
that would enhance its clarity and provide better guidance to System 
institutions about compliance with it. For example, we propose a 
technical change to paragraph (c) to clarify that while operational 
risk must be addressed in investment policies, the policies do not need 
to establish quantitative risk limits for operational risk. 
Quantitative risk limits would continue to be required for the other 
identified risks--credit, market, and liquidity.
    We propose to split the requirements regarding credit quality 
standards and concentration risk in existing paragraph (c)(1)(i) into 
two paragraphs. We propose to incorporate the existing general 
requirements regarding risk diversification standards and counterparty 
(obligor) risk limits into more specific requirements contained in 
proposed paragraphs (f) and (g). We propose these revisions in order to 
clarify our requirements in this area and ensure that institutions are 
considering risk appropriately.
    Proposed paragraph (c)(1)(i) would address credit quality 
standards. It would require that an institution's investment policies 
establish credit quality standards for single or related obligors, 
sponsors, secured and unsecured exposures, and asset classes or 
obligations with similar characteristics. We propose to add sponsors to 
the existing requirements because, even though sponsors have no 
obligation to pay the debt (unless they are also obligors), we are 
concerned that a sponsor of low credit quality could present risk in a 
transaction that it initiates. We propose to add secured and unsecured 
investments to the existing requirements because we believe 
institutions should consider the differing levels of risk that these 
investments present.
    Proposed paragraph (c)(1)(ii) would address concentration risk. It 
would require that an institution's investment policies establish 
concentration limits for single or related obligors, sponsors, 
geographical areas, industries, unsecured exposures, and asset classes 
or obligations with similar characteristics. We propose to add sponsors 
to the existing requirements because we believe undue concentration in 
a sponsor could present excessive risk. We propose to add unsecured 
investments to the existing requirements because institutions should 
carefully consider the amount of unsecured investments they are 
prepared to hold. Concentration limits should be commensurate with the 
types and complexity of investments that an institution holds.
    We propose to revise Sec.  615.5133(c)(1)(iv), which addresses 
collateral margin requirements on repurchase agreements. Currently, 
this provision requires System institutions to regularly mark 
collateral to market and to ensure that they maintain appropriate 
control over collateral that they hold. We propose to modify Sec.  
615.5133(c)(1)(iv) to clarify that this provision would apply only to 
System institutions that engage in repurchase agreements.
    We propose to revise Sec.  615.5133(c), which governs investment 
policies pertaining to liquidity, into two separate paragraphs. We 
propose this revision to take into account the differences in how 
liquidity is managed at Farm Credit banks from its treatment at 
associations.
    Generally, Farm Credit banks hold liquidity reserves and manage 
liquidity risks for themselves, their affiliated associations, and 
certain service corporations. In contrast, System associations are not 
exposed to the same liquidity risks and they do not manage liquidity in 
the same way as their funding banks because their only substantial 
liability is their debt obligation to their funding bank.
    Existing Sec.  615.5133(c)(3) requires investment policies of all 
System institutions to describe the liquidity characteristics of 
eligible investments that the institutions will hold to meet their 
liquidity needs and other institutional objectives. Under proposed 
Sec.  615.5133(c)(3)(i), Farm Credit banks would remain subject to this 
existing requirement. This requirement is appropriate because of the 
liquidity needs and liquidity risk of Farm Credit banks.
    Under proposed Sec.  615.5133(c)(3)(ii), the investment policies of 
System associations would have to describe the liquid characteristics 
of their investments. Although System associations do not have the same 
liquidity needs and liquidity risk as Farm Credit banks do, if they 
invest their funds in investments authorized by Sec.  615.5142 they 
must be aware of the liquid characteristics of the assets that they 
purchase and hold. Proposed conforming changes throughout Sec.  
615.5133(c) would require System institutions to consider and address 
how investment decisions affect their liquidity risk, if and when 
applicable.
    Except for other minor stylistic and technical changes, we propose 
no other changes to paragraph (c).
5. Paragraph (d)--Delegation of Authority and Paragraph (e)--Internal 
Controls
    We propose no changes to paragraphs (d) and (e).
6. Paragraph (f)--Farm Credit Bank Portfolio Diversification
    We propose to add a new paragraph (f) to govern investment 
portfolio diversification. This paragraph would apply only to Farm 
Credit banks.
a. Paragraph (f)(1)--Well Diversified Portfolio
    Portfolio diversification is a key concept in ensuring the safety 
and soundness of investors such as Farm Credit banks. We propose 
requirements to ensure, at a minimum, that the investment portfolios of 
these institutions do not pose significant risk of loss due to 
excessive concentrations among asset classes, maturities, industries, 
geographic areas, and obligors. We also propose exemptions for certain 
investments from these portfolio diversification requirements. These 
exemptions would apply where the level of risk from concentration is 
low.
b. Paragraph (f)(2)--Exemptions
    We propose that certain investments would not be subject to our 
diversification requirements. In this preamble, we refer to investments 
that are not subject to diversification requirements as ``exempt'' 
investments. We refer to all other investments as ``covered'' 
investments, because they are subject to our proposed diversification 
requirements.
i. Paragraph (f)(2)(i)--Investments Guaranteed by U.S. Government 
Agencies
    Under the proposal, investments that are fully guaranteed as to the 
timely payment of principal and interest by a U.S. Government agency 
would be exempt from the proposed

[[Page 43308]]

diversification requirements. We propose this exemption because we 
believe these types of investments are of the highest quality. Our 
existing rules impose no portfolio diversification requirements on such 
investments.
ii. Paragraph (f)(2)(ii)--Investments Guaranteed by GSEs
    Under the proposal, investments, other than MBS, that are fully and 
explicitly guaranteed as to the timely payment of principal and 
interest by a GSE would be exempt from the proposed portfolio 
diversification requirements. No more than 50 percent of an 
institution's investment portfolio could be comprised of GSE MBS. These 
provisions are substantively unchanged from our existing regulations 
with respect to the Federal National Mortgage Association (Fannie Mae) 
and the Federal Home Loan Mortgage Corporation (Freddie Mac) MBS. 
Investments in Farmer Mac securities are governed by Sec.  615.5174 and 
would not be subject to this limitation.
    Our 2011 proposed investment management rule had also proposed to 
retain our 50-percent portfolio limit on Fannie Mae and Freddie Mac 
MBS. The Farm Credit Council, the Farm Credit Bank of Texas and CoBank, 
ACB commented in response to that proposal that this limit was too 
restrictive in light of the safe and liquid nature of these investments 
(especially since those GSEs were under U.S. Government 
conservatorship) and the positive yield that those investments provide. 
They asked us to eliminate portfolio limits for investments in these 
GSEs. The Council also expressed concern with language in our preamble 
suggesting that we might consider further restrictions on MBS 
investments in these GSEs in the future.
    We believe no portfolio limits are needed for non-MBS investments 
in GSEs, such as general obligations. We are concerned, however, about 
concentration in housing-related investments, and accordingly we 
propose to retain the 50-percent limit on GSE MBS.\28\ We do not 
contemplate further restrictions on investments in GSE MBS at this 
time.
---------------------------------------------------------------------------

    \28\ Under our recently finalized revisions to our liquidity 
rule (78 FR 23438, April 18, 2013), it is extremely unlikely that 
Farm Credit banks could approach 100 percent in GSE MBS.
---------------------------------------------------------------------------

c. Paragraph (f)(3)--Investment Portfolio Diversification Requirements
    We are proposing investment portfolio diversification requirements 
for covered investments. Under the proposal, a well-diversified 
investment portfolio would mean that, at a minimum, covered investments 
are comprised of different asset classes, maturities, industries, 
geographic areas, and obligors.
    Although we are not proposing specific maturity, industry, or 
geographic area requirements, the regulation would require each Farm 
Credit bank to diversify its investments by maturity, industry, and 
geographic area based on its risk profile.
    Covered investments would have to satisfy specified asset class and 
obligor diversification requirements. These diversification 
requirements would be calculated based on the entire investment 
portfolio. This means that both exempt and covered investments would be 
included in the denominator. The numerator would consist only of those 
investments that are covered investments for the asset class and 
obligor diversification requirements. These diversification parameters 
would be based on the portfolio valued at amortized cost.
    We note that these diversification requirements are regulatory 
maximums; each Farm Credit bank should establish diversification limits 
that fit its risk profile and that may be more restrictive than 
regulatory requirements.
    Our current regulations impose no investment portfolio limits on 
investments in DIFs, as long as an institution's shares in each DIF 
comprise 10 percent or less of its investment portfolio. Otherwise, the 
portfolio limits for each asset class apply. As discussed below, we now 
propose different treatment for DIF investments.
i. Paragraph (f)(3)(i)--Asset Class Diversification
    We propose to require Farm Credit banks to diversify their 
investment portfolios among various asset classes; no more than 15 
percent of their investment portfolios could be invested in any one 
asset class.\29\ As discussed above, we propose to define an asset 
class as a group of securities that exhibit similar characteristics and 
behave similarly in the marketplace.
---------------------------------------------------------------------------

    \29\ As discussed above, ``exempt'' investments would not be 
subject to this asset class diversification requirement, although 
under proposed Sec.  615.5133(f)(2)(ii), MBS that are fully and 
explicitly guaranteed by GSEs could only comprise up to 50 percent 
of the total investment portfolio. Investments in Farmer Mac 
securities are governed by Sec.  615.5174 and also would not be 
subject to this requirement.
---------------------------------------------------------------------------

    For purposes of this proposed asset class diversification 
requirement, we consider MBS to be an asset class. We also consider ABS 
(excluding MBS) to be an asset class that includes instruments such as 
student loans and car loans. In addition, we consider money market 
securities to be an asset class that includes securities such as 
federal funds and commercial paper. Other asset classes would include 
municipal securities, corporate bond securities, and any other asset 
class as determined by the FCA. Each of these asset classes is limited 
to 15 percent of the investment portfolio of a Farm Credit bank, 
regardless of the different types of instruments that comprise the 
asset class.
    For purposes of this proposed asset class diversification 
requirement, we do not consider DIFs to be an asset class, and 
therefore this requirement would impose no restrictions on the relative 
amount of DIF investments a Farm Credit bank could hold.\30\ The 
securities within DIFs, however, would be subject to the asset class 
diversification requirements.
---------------------------------------------------------------------------

    \30\ We believe that the obligor diversification requirements 
discussed next in this preamble, along with the obligor limit in 
proposed paragraph (g) of this section, would provide sufficient 
diversification among DIFs themselves.
---------------------------------------------------------------------------

    Our existing rule imposes portfolio limits of 15 percent, 20 
percent, or 50 percent, depending on the asset class. In our proposed 
rule in 2011 for banks and associations, we proposed asset class limits 
for investments that were similar to but generally more restrictive 
than our existing regulations. To simplify the rule, we are proposing a 
15-percent limit for all asset classes.
    We believe that diversification of investments is a fundamental 
part of risk management and that a 15-percent portfolio limit for asset 
classes is appropriate. Because the vast majority of System investments 
are in exempt securities, a 15-percent limit on investments in each 
asset class should provide sufficient flexibility for institutions to 
manage their investment portfolios.
    We seek comment on the reasonableness of this proposed limitation.
ii. Paragraph (f)(3)(ii)--Obligor Diversification
    We propose to require Farm Credit banks to diversify their 
investment portfolios among various obligors; no more than 3 percent of 
their investment portfolios could be invested in any one obligor.\31\ 
As discussed above, we

[[Page 43309]]

propose to define obligor as an issuer, guarantor, or other person or 
entity who has an obligation to pay a debt, including interest due, by 
a specified date or when payment is demanded. This definition would 
include the debtor or immediate party that is obligated to pay a debt, 
as well as a guarantor of the debt. Under this requirement, a Farm 
Credit bank must consider both the DIF itself and the entity or 
entities obligated to pay the underlying debt to be obligors. This 
requirement would ensure that an institution would not be able to use 
DIF investments to hold an excessively concentrated investment 
portfolio.
---------------------------------------------------------------------------

    \31\ As discussed above, ``exempt'' investments would not be 
subject to this obligor diversification requirement, although under 
proposed Sec.  615.5133(f)(2)(ii), MBS that are fully and explicitly 
guaranteed by GSEs could only comprise up to 50 percent of the total 
investment portfolio. Investments in Farmer Mac securities are 
governed by Sec.  615.5174 and also would not be subject to this 
requirement.
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    Our existing regulations contain no portfolio diversification 
requirements by obligor (although, as discussed below, they do limit 
the amount of total capital that institutions can invest in a single 
obligor). We propose this diversification requirement because we 
believe that concentration among obligors could lead to significant 
risk.
    We believe that this proposal would likely not require changes in 
the current investment portfolios of Farm Credit banks, although it 
might have required changes to those portfolios in the past. We believe 
that this requirement would provide these institutions with sufficient 
flexibility to manage their investment portfolios while ensuring 
adequate diversification to further safety and soundness. We seek 
comment on the reasonableness of this proposed limitation.
7. Paragraph (g)--Farm Credit Bank Obligor Limit
    We propose to limit the amount of capital that Farm Credit banks 
may invest in any one obligor. For Farm Credit banks, the limit would 
be 10 percent of total capital. This obligor limit would not apply to 
investments in obligations that are fully guaranteed as to the payment 
of principal and interest by a U.S. Government agency or fully and 
explicitly guaranteed as to the payment of principal and interest by a 
GSE. Under this requirement, a Farm Credit bank must consider both the 
DIF itself and the entity or entities obligated to pay the underlying 
debt to be obligors.
    Our existing regulations allow Farm Credit banks to invest up to 20 
percent of their total capital in eligible investments issued by any 
single institution, issuer, or obligor; this obligor limit does not 
apply to obligations, including mortgage securities, that are issued or 
guaranteed as to interest and principal by the United States, its 
agencies, instrumentalities, or corporations.
    The lower obligor limit that we propose for Farm Credit banks would 
enhance safety and soundness by ensuring that if an obligor were to 
default, only a small portion of capital would be at risk. For 
simplicity, we propose to continue to base the Farm Credit bank 
investment amount on total capital. As discussed above, however, the 
FCA Board adopted proposed revisions to our regulatory capital rule on 
May 8, 2014, and we may revise the basis for the obligor limit to 
incorporate any revisions to our regulatory capital rule that are 
adopted in final in the future.\32\
---------------------------------------------------------------------------

    \32\ The proposed capital rule has not yet been published in the 
Federal Register.
---------------------------------------------------------------------------

    We note that this obligor limit would be a regulatory maximum; each 
Farm Credit bank should establish obligor limits that fit its overall 
risk profile and risk-bearing capacity, including earnings capacity, as 
well as the risks in individual types and classes of investments. For 
example, more restrictive obligor limits may be warranted on unsecured 
investments.
    We seek comment on whether our proposed 10-percent obligor limit is 
appropriate. If you believe it is not appropriate, what should the 
regulatory maximum be, and why?
8. Paragraph (h)--Due Diligence
    We propose to redesignate existing paragraph (f) as paragraph (h).
    In paragraph (h)(1)(iii), we propose that a System institution must 
document its assessment of each investment at the time of purchase. 
While the assessment must be commensurate with the type of each 
investment, at a minimum the assessment must include an evaluation of 
the credit risk, liquidity risk as applicable, market risk, interest 
rate risk, and underlying collateral of the investment.
    The nature and degree of due diligence and documentation that is 
required under this provision to assess eligibility varies based on the 
risks inherent in different types of securities. For example, 
institutions should assess securities that they believe are guaranteed 
by a U.S. Government agency or a GSE to ensure they satisfy our 
definitions and eligibility requirements for such securities. As 
another example, institutions do not need to assess the 
creditworthiness of U.S. Government agency securities, because they 
exhibit low sovereign default (credit) risk; however, institutions 
should assess and document all other potential risks associated with 
these securities. Securities that are not guaranteed by a U.S. 
Government agency generally present varying degrees of credit risk as 
well as other types of risk, and the assessment and level of 
documentation should be sufficient to support the investment decision.
    All other changes that we propose to this paragraph are non-
substantive.
9. Paragraph (i)--Reports to the Board of Directors
    We propose to redesignate existing paragraph (g) as paragraph (i). 
We also propose to add the word ``risk'' to redesignated Sec.  
615.5133(i)(3) so it would require quarterly reports to the board or a 
designated board committee to address the current composition, quality, 
and the risk and liquidity profiles of the investment portfolio. This 
revision would ensure more comprehensive reporting to the board about 
how the current composition and quality of investments affect the risk 
and liquidity profile of the bank or association, which would enhance 
safety and soundness. We propose no other changes to this provision.

E. Section 615.5142--Association Investments

    The FCA proposes to revise Sec.  615.5142, which governs 
association investments. Existing Sec.  615.5142 does not impose a 
portfolio limit on the total amount of investments that each 
association is authorized to hold. Additionally, existing Sec.  
615.5140 permits associations to hold the same types of investments as 
Farm Credit banks even though associations are not subject to the 
liquidity reserve requirement in Sec.  615.5134, and they are not 
exposed to the same liquidity and market risks as their funding banks. 
Accordingly, the FCA proposes to revise its regulatory approach to 
association investments in order to limit the type and amount of 
investments that an association may hold.
    As discussed in more detail below, the proposed rule generally 
would limit association investments to obligations that are issued or 
fully guaranteed or insured as to the timely payment of principal and 
interest by the United States or any of its agencies in an amount that 
does not exceed 10 percent of its total outstanding loans. The proposed 
rule also addresses: (1) Core investment and risk management practices 
at System associations; (2) funding bank supervision of association 
investments; (3) requests by associations to the FCA to hold other 
investments; and (4) transition requirements for System associations to 
come into compliance with the new rule.

[[Page 43310]]

    Currently, Sec.  615.5142 authorizes each association to hold 
eligible investments listed in Sec.  615.5140, with the approval of its 
funding bank, for the purposes of reducing interest rate risk and 
managing surplus short-term funds. The existing regulation also 
requires each Farm Credit bank to review annually the investment 
portfolio of every association it funds.
    Most System associations have increased in size and complexity over 
the past two decades, offering a diversity of products and services to 
accommodate a changing and increasingly competitive agricultural 
sector. The changes in agriculture have introduced new risks to the 
associations. For example, while the associations have adopted adequate 
risk management strategies to effectively adapt to this changing 
environment, they are concentrated in agriculture and have limited 
ability to manage concentration risk. The associations currently can 
use investments to manage surplus short-term funds and reduce interest 
rate risk but cannot use investments to manage concentration risk. The 
proposed rule strikes a balance by granting associations greater 
flexibility in the purposes for which they may hold investments, while 
placing more limits on the amounts and types of investments they may 
hold. Accordingly, the proposed changes would provide the associations 
the flexibility to use full faith and credit instruments to manage 
concentration risk by diversifying assets. We believe the proposed 
change would help improve association risk management practices and, 
therefore, strengthen the safety and soundness of the System.
    The Farm Credit Act of 1971, as amended, (Farm Credit Act) 
specifically authorizes System associations to buy and sell obligations 
of, or insured by, the United States or any agency thereof, and make 
other investments as may be approved by their respective funding banks 
under regulations issued by the Farm Credit Administration.\33\
---------------------------------------------------------------------------

    \33\ See sections 2.2(10) and (11), and 2.12(17) and (18) of the 
Act. Additionally, sections 2.2(10) and 2.12(18) of the Act 
authorize System associations to deposit funds with any member bank 
of the Federal Reserve System, or with any bank insured by the 
Federal Deposit Insurance Corporation.
---------------------------------------------------------------------------

1. Paragraph (a)--Investment Eligibility Criteria
    The proposed rule would: (1) Revise the investment purposes for 
System associations; (2) limit the types of investments that 
associations may purchase and hold; and (3) impose a cap on the amount 
of such enumerated investments that each association may hold. 
Specifically, proposed Sec.  615.5142(a) would authorize each System 
association, with the approval of its funding bank, to manage risk by 
purchasing and holding obligations that are issued by, or are fully 
guaranteed or insured as to the timely payment of principal and 
interest by, the United States or any of its agencies in an amount that 
does not exceed 10 percent of its total outstanding loans.
    We are proposing to eliminate our requirements in the existing 
regulation, which authorize associations to hold investments for the 
purposes of reducing interest rate risks and managing surplus short-
term funds, because we believe these requirements are: (1) Too 
restrictive; and (2) do not provide associations flexibility to manage 
their risks in today's environment.
    As a result of mergers and consolidations, and the evolution of 
agricultural credit and financial management practices, System 
associations encounter various risk management environments. A few 
larger associations now have the capacity to manage interest rate risk 
separately from their funding banks. For many associations, a small 
portfolio of high quality investments could help diversify risks they 
experience as lenders that primarily lend to a single industry--
agriculture.
    Whereas the existing rule authorizes associations to hold 
investments for the purposes of reducing interest rate risks and 
managing surplus short-term funds, the proposed rule authorizes 
associations to hold investments to manage risks. We invite your 
comments about whether this proposed rule should identify specific 
purposes for associations to purchase and hold investments. If you 
believe that our rule should expressly identify and require specific 
purposes, please state which ones and why.
    Proposed Sec.  615.5142(a) would authorize System associations to 
invest solely in obligations that are issued, or are fully guaranteed 
or insured as to the timely payment of principal and interest by the 
United States or of any of its agencies. Obligations issued, insured, 
or guaranteed by the United States are expressly mentioned in the 
provisions of the Act governing association investments. Obligations 
issued or fully guaranteed or insured as to the timely payment of 
principal and interest by the United States and its agencies are 
usually liquid and many are actively traded, although MBS issued by 
Federal agencies could expose investors to significant market 
risks.\34\ These obligations pose virtually no credit risk to investors 
because they are backed by the full faith and credit of the United 
States, although they may expose investors to other risks, especially 
market risks. For these reasons, obligations issued or fully guaranteed 
or insured as to the timely payment of principal and interest by the 
United States and its agencies are suitable for risk management at 
System associations.
---------------------------------------------------------------------------

    \34\ Farmer Mac MBS are covered by Sec.  615.5174, not Sec.  
615.5142. Investments in Farmer Mac MBS cannot exceed the total 
amount of outstanding loans of a System bank or association.
---------------------------------------------------------------------------

    Proposed Sec.  615.5142(a) limits association investments to 10 
percent of total outstanding loans. This portfolio limit would ensure 
that loans to eligible borrowers always constitute the vast majority of 
System assets, which is consistent with the mission of each 
association. In this context, the FCA is imposing portfolio limits on 
investments so that loans to eligible borrowers always constitute a 
majority of assets at all System banks and associations. Our 
regulations authorize Farm Credit banks to hold significantly larger 
investment portfolios than System associations because the: (1) Banks 
maintain liquidity and manage interest rate risk for all System 
institutions operating in the district; and (2) associations borrow 
exclusively from their funding banks.
    At the same time, the proposed 10-percent portfolio limit on 
investments should be sufficient to enable associations to develop 
robust strategies to manage risks, as long as association investment 
activities are supported by strong investment policies, management 
practices and procedures, and appropriate internal controls. 
Furthermore, the proposed 10-percent limit should help associations 
manage their concentration risk as single-industry lenders. The 
policies at some System associations with active investment programs 
typically establish a 15-percent portfolio limit for investments, while 
in practice, investments at most associations rarely equal or exceed 10 
percent of total outstanding loans. For all these reasons, the FCA 
believes that the proposed 10-percent portfolio limit on investments 
strikes an appropriate balance by enabling associations to 
appropriately manage and diversify risks while continuing to serve 
their primary mission of funding agriculture and rural America.
    We are proposing that the 10-percent limit be computed based upon 
the 30-day average daily balance of

[[Page 43311]]

investments divided by loans. Investments would be calculated at 
amortized cost. Loans would be calculated as defined in Sec.  615.5131, 
which provides that loans are calculated quarterly (as of the last day 
of March, June, September, and December) by using the average daily 
balance of loans during the quarter. For the purpose of this 
calculation, loans would include accrued interest and not include any 
allowance for loan loss adjustments. Compliance with the calculation 
would be measured on the last day of every month.
    We also request your comments on whether using the average daily 
balance of loans during the quarter for computing the limit is adequate 
to limit any distortions caused by seasonality fluctuations in the 
amount of total loans.
2. Paragraph (b)--Risk Management Requirements
    The following provisions would help to ensure that System 
associations comply with prudent investment management practices. 
Therefore, we are proposing to require that each association evaluate 
its investment management policies, and determine and document how its 
investment activities are conducted in accordance with the risk 
management processes and procedures identified in proposed Sec.  
615.5142(b)(1), (b)(2), and (b)(3).
3. Paragraph (b)(1)--Compliance With Investment Management Requirements
    Proposed Sec.  615.5142(b)(1) would require each association to 
comply with proposed Sec.  615.5133(a), (b), (c), (d), (e), (h), and 
(i), which govern investment management practices at all System 
institutions.\35\ From the FCA's perspective, these provisions of 
proposed Sec.  615.5133 would ensure that System associations always 
follow prudent investment management practices. Additionally, 
compliance with these provisions of Sec.  615.5133 would instill 
discipline in investment management practices at each System 
association, which protects its safety and soundness. Therefore, we are 
proposing to require that each association document its compliance with 
the applicable provisions of Sec.  615.5133.
---------------------------------------------------------------------------

    \35\ Proposed Sec.  615.5142(b)(1) would not require System 
associations to comply with proposed Sec.  615.5133(f) and (g) 
because those two provisions explicitly apply only to System banks.
---------------------------------------------------------------------------

    Under proposed Sec.  615.5142(b)(1), each association's investment 
management processes must be appropriate for the size, risk 
characteristics, and complexity of the association and its investment 
portfolio. These risk management processes must take into account the 
association's unique circumstances, risk tolerances, and objectives. An 
association's board would not need to develop an investment policy if 
it elects not to hold investments authorized under Sec.  615.5142(a).
    We are particularly interested in comments on how the FCA can 
structure the documentation requirements so they do not impose undue 
regulatory burden on funding banks or associations.
4. Paragraph (b)(2)--Compliance With Interest Rate Risk Management 
Requirements
    Proposed Sec.  615.5142(b)(2) would require any association with 
significant interest rate risk exposure to comply with Sec. Sec.  
615.5180 and 615.5182. More specifically, Sec.  615.5182 requires any 
association with interest rate risk that could lead to significant 
declines in net income or in the market value of capital to comply with 
Sec.  615.5180, which establishes specific criteria for System banks to 
follow for managing interest rate risk. Under this regulatory 
framework, the interest rate risk management program must be 
commensurate with the level of interest rate risk at the association.
    The fiduciary responsibilities of association boards of directors 
obligate them to develop appropriate investment management policies and 
practices to manage interest rate risk. Additionally, it is incumbent 
upon each association's investment managers to fully understand the 
risks of its investments and make independent and objective evaluations 
of investments prior to purchase.
    Interest rate risk management is an important part of the overall 
financial management of investments at an association, and includes 
involvement by both senior management and the association's board of 
directors. To the extent an association has investments, its board must 
develop and implement an interest rate risk management program that is 
tailored to the association's needs and establishes a risk management 
process that effectively identifies, measures, monitors, and controls 
interest rate risk.
5. Paragraph (b)(3)--Other Relevant Factors
    Proposed Sec.  615.5142(b)(3) would require each association to 
consider and evaluate other relevant factors that are unique to its 
circumstances or to the nature of investments that could affect its 
risk-bearing capacity. Such factors include, but are not limited to, 
its management experience and capability to understand and manage 
complex structures and unique risks in the investments it purchases and 
holds. In this context, the size, risk characteristics, and complexity 
of the investment portfolio are other relevant factors that could 
affect an association's risk-bearing capacity when its unique 
circumstances, risk tolerance, and objectives are taken into account. 
Associations are authorized to purchase and hold investments only for 
the purpose of managing risks. Although the FCA does not expect 
associations to suffer losses or break even on investments, using 
investments primarily for speculative purposes or generating gains from 
trading is an impermissible activity. Likewise, the intentional 
mismatched funding of investments and the resulting increase in 
interest rate risk would typically be inappropriate unless used as an 
effective hedge against other risks in the balance sheet. Other factors 
that associations should consider and evaluate include option, premium 
and call risks of certain investments that they may acquire.
6. Paragraph (c)--Funding Bank Supervision of Association Investments
    Sections 2.2(10) and 2.12(18) of the Farm Credit Act require each 
association to obtain its funding bank's approval of the association's 
investment activities in accordance with FCA regulations. Accordingly, 
proposed Sec.  615.5142(c) addresses funding bank review, approval, and 
oversight of the investment activities of its affiliated associations. 
As required by statute, each association must request from its funding 
bank prior approval to buy and hold investments under this section. 
This proposed provision would not require that an association request 
approval for each and every investment. Instead, this proposed 
provision would provide flexibility for each association to choose 
whether it would prefer to request funding bank approval for each 
specific investment or instead request approval of a type or class of 
investments.
7. Paragraph (c)(1)--Funding Bank Review, and Approval or Denial of 
Association Investments
    Proposed Sec.  615.5142(c)(1) would require each funding bank to 
review and approve or deny requests by its affiliated associations to 
buy and hold investments. Additionally, the proposed rule would require 
the bank to explain in writing its reasons for approving or denying the 
association's request. Once

[[Page 43312]]

an association has established a satisfactory investment management 
program under Sec.  615.5142(b), which has been approved by its funding 
bank, the association would be permitted to buy and hold obligations 
that are issued, or are fully guaranteed or insured as to the timely 
payment of principal and interest by the United States government or 
any of its agencies. The intent of this proposed provision is to 
balance the funding needs of the associations with the funding capacity 
of the funding bank.
8. Paragraph (c)(2)--Bank Approval Process
    As part of the approval process, the funding bank must evaluate, 
determine and document that the association has: (1) Adequate policies, 
procedures, internal controls, and accounting and reporting systems for 
its investments; (2) the capability and expertise to effectively manage 
risks in investments; and (3) complied with requirements of Sec.  
615.5142(b). Any existing System association investment management 
program previously reviewed and approved by the funding bank would need 
to be re-reviewed and re-approved if proposed Sec.  615.5142 becomes 
final and effective.
    The intent of this proposed provision is to balance the risk 
management needs of the associations with the funding and oversight 
role of the funding bank. A number of satisfactory methods exist for 
System banks to oversee association investment activities under our 
regulatory framework. A bank may take an active role in advising and 
approving an association's investment decisions and strategies. For 
example, banks may provide research, analytical or advisory services 
that help associations to manage their investment portfolios.
9. Paragraph (c)(3)--Annual Review of Investment Portfolio
    Proposed Sec.  615.5142(c)(3) also retains the existing requirement 
that each System bank annually review the investment portfolio of every 
association that it funds. As part of its annual review, the bank must 
evaluate whether the association's: (1) Investments mitigate and manage 
its risks; and (2) risk management practices continue to be adequate.
    The FCA notes that the General Financing Agreement (GFA) (including 
any attached, referenced, or related documents) could establish 
covenants governing the investment activities of an affiliated 
association. As such, the GFA can be a useful tool for funding banks to 
review and monitor the investment activities of their affiliated 
associations.
10. Paragraph (d)--Other Investments Approved by the FCA
    Proposed Sec.  615.5142(d) would continue to allow an association 
to request the FCA's approval to purchase and hold other investments. 
We note that this provision represents no substantive change from 
current Sec.  615.5140(e), which allows all System institutions to hold 
other investments that the FCA approves on a case-by-case basis. 
Consistent with current practice, the request for our approval must 
explain the risk characteristics of the investment and the purpose and 
objectives for making the investment.
    These other investments approved by the FCA under proposed Sec.  
615.5142(d) would be subject to the portfolio limit on association 
investments under proposed Sec.  615.5142(a) unless otherwise provided 
for by the FCA. Furthermore, these other investments could also be 
subject to specific conditions of approval and subject to other limits 
on a case-by-case basis.
11. Paragraph (e)(1)--Transition and Divestiture Issues for Association 
Investments
    Under proposed Sec.  615.5142(e)(1), an association would not be 
required to divest of any investments held on or before the date this 
rule becomes effective if they were previously authorized under former 
Sec.  615.5140 or otherwise authorized by official written Agency 
action that allowed the association to continue to hold such 
investments. This transition rule would permit an association to 
continue to hold pre-existing investments that would no longer be 
authorized if proposed Sec.  615.5142 is adopted as a final rule and 
becomes effective. However, after this proposed rule is effective, once 
such investments mature, the association would not be permitted to 
renew them unless they are authorized pursuant to proposed Sec.  
615.5142(a) or (d).
12. Paragraph (e)(2)--Impact on Existing Investments of Subsequent 
Declines in Total Outstanding Loans
    Under proposed Sec.  615.5142(e)(2), an association would not be 
required to divest of investments purchased on or after the date this 
proposed rule becomes effective if a subsequent decline in total 
outstanding loans causes it to exceed the 10-percent portfolio limit in 
Sec.  615.5142(a).
    Accordingly, once an association purchases an eligible investment, 
it would not be required to dispose of such investment just because of 
a subsequent decline in total outstanding loans. This provision would 
help to ensure that an association would not have to divest of a 
previously purchased asset when loan demand is reduced.
13. Paragraph (e)(3)--Management of Ineligible Investments and 
Divestiture Under Sec.  615.5143
    Proposed Sec.  615.5142(e)(3) would apply to all investments that 
an association acquires after the new regulation becomes effective. 
More specifically, all investments that an association purchases after 
proposed Sec.  615.5142 becomes effective as a final rule would be 
subject to Sec.  615.5143 of this part, which governs the management 
and divestiture of ineligible investments. As a result, an association 
would need to comply with Sec.  615.5143 if any investment acquired 
after the effective date of this rule did not meet the investment 
criteria in Sec.  615.5142(a) on or after the date of purchase, if it 
was not approved by the FCA pursuant to Sec.  615.5142(d), or if it was 
approved by the FCA pursuant to Sec.  615.5142(d) but later failed to 
satisfy the conditions of approval.

F. Section 615.5143--Management of Ineligible Investments and 
Reservation of Authority To Require Divestiture

    We propose to revise Sec.  615.5143 to add references to proposed 
Sec.  615.5142, to reflect that associations are generally governed by 
the requirements of Sec.  615.5143. In addition, we propose to tailor 
Sec.  615.5143 to the investment and other authorities of Farm Credit 
banks as compared to associations. Specifically, we clarify that an 
association that purchases an ineligible investment would not be 
subject to the requirements relating to liquidity, collateral, and net 
collateral, because associations have no regulatory requirements in 
those areas. In addition, we propose to clarify that no investment is 
ineligible if it has been approved by the FCA, but an FCA-approved 
investment would be subject to the requirements of Sec.  615.5143(b) if 
it no longer satisfied the conditions of approval.

G. Conforming Changes to Other Regulation Sections

    We propose conforming changes to references in Sec. Sec.  611.1153, 
611.1155, 615.5174, and 615.5180.

IV. Compliance Date

    We recognize that Farm Credit banks may require time to bring their 
policies and procedures into compliance with the new requirements in 
the proposed rule. Accordingly, we are contemplating that Farm Credit 
banks would be

[[Page 43313]]

required to comply with the requirements governing their investments 6 
months after the effective date of the rule, if it is adopted as 
final.\36\ We invite your comments as to whether this delayed 
compliance timeframe is appropriate. We also invite your comments on 
whether a delayed compliance date would be appropriate for associations 
as well.
---------------------------------------------------------------------------

    \36\ Farm Credit bank compliance with requirements pertaining to 
their supervision of association investments would be required at 
the time associations are required to comply with this rule.
---------------------------------------------------------------------------

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, parts 611 and 615 of 
chapter VI, title 12 of the Code of Federal Regulations are proposed to 
be amended as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 continues to read as follows:

    Authority:  Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 
4.12, 4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 
5.25, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 
2122, 2123, 2124, 2128, 2129, 2130, 2142, 2154a, 2183, 2184, 2203, 
2208, 2209, 2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279f-1, 
2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 
1638; sec. 414 of Pub. L. 100-399, 102 Stat. 989, 1004.


Sec.  611.1153  [Amended]

0
2. Section 611.1153 is amended by removing in paragraph (i)(1) the 
reference ``Sec.  615.5140(e)'' and adding in its place, the reference 
``Sec.  615.5140(b) or Sec.  615.5142(d)''.


Sec.  611.1155  [Amended]

0
3. Section 611.1155 is amended by removing in paragraph (a)(1) the 
reference ``Sec.  615.5140(e)'' and adding in its place the reference 
``Sec.  615.5140(b) or Sec.  615.5142(d)''.

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

0
4. The authority citation for part 615 is revised to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the 
Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), 
Pub. L. 100-233, 101 Stat. 1568, 1608; sec. 939A, Pub. L. 111-203, 
124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note).


Sec.  615.5131  [Amended]

0
5. Section 615.5131 is amended by:
0
a. Removing the definitions for ``eurodollar time deposit'', ``final 
maturity'', ``general obligations'', ``Government agency'', 
``Government-sponsored agency'', ``liquid investments'', ``mortgage 
securities'', ``Nationally Recognized Statistical Rating Organization 
(NRSRO)'', ``revenue bond'', and ``weighted average life (WAL)'';
0
b. In the definition of ``asset-backed securities (ABS)'', remove the 
words ``mortgage securities'' and add in their place, the words 
``mortgage-backed securities;''
0
c. Adding in alphabetical order the new definitions for ``Asset 
class'', ``Collateralized debt obligation (CDO)'', ``Country risk 
classification (CRC)'', ``Diversified investment fund (DIF)'', 
``Government-sponsored enterprise (GSE)'', ``Mortgage-backed securities 
(MBS)'', ``Obligor'', ``Sponsor'', and ``United States (U.S.) 
Government agency'' to read as follows:


Sec.  615.5131  Definitions.

* * * * *
    Asset class means a group of securities that exhibit similar 
characteristics and behave similarly in the marketplace. Asset classes 
include, but are not limited to, money market instruments, municipal 
securities, corporate bond securities, MBS, ABS (excluding MBS), and 
any other asset class as determined by the FCA.
    Collateralized debt obligation (CDO) means a debt security 
collateralized by MBS, ABS, or trust-preferred securities.
    Country risk classification (CRC) with respect to a sovereign, 
means the most recent consensus CRC published by the Organization for 
Economic Cooperation and Development (OECD) as of December 31 of the 
prior calendar year that provides a view of the likelihood that the 
sovereign will service its external debt.
    Diversified investment fund (DIF) means an investment company 
registered under section 8 of the Investment Company Act of 1940.
    Government-sponsored enterprise (GSE) means an entity established 
or chartered by the United States Government to serve public purposes 
specified by the United States Congress but whose debt obligations are 
not explicitly guaranteed by the full faith and credit of the United 
States Government.
* * * * *
    Mortgage-backed securities (MBS) 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 MBS, or other multiclass MBS.
    Obligor means an issuer, guarantor, or other person or entity who 
has an obligation to pay a debt, including interest due, by a specified 
date or when payment is demanded.
    Sponsor means a person or entity that initiates a transaction by 
selling or pledging to a specially created issuing entity, such as a 
trust, a group of financial assets that the sponsor either has 
originated itself or has purchased.
    United States (U.S.) Government agency means an instrumentality of 
the U.S. Government whose obligations are fully guaranteed as to the 
timely payment of principal and interest by the full faith and credit 
of the U.S. Government.
* * * * *
0
6. Section 615.5133 is revised to read as follows:


Sec.  615.5133  Investment management.

    (a) Responsibilities of board of directors. Your board of directors 
must adopt written policies for managing

[[Page 43314]]

your 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, the 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 and 
be documented.
    (b) Investment policies--general requirements. Your board's written 
investment policies must address the purposes and objectives of 
investments; risk tolerance; delegations of authority; internal 
controls; due diligence; and reporting requirements. Your investment 
policies must fully address the extent of pre-purchase analysis that 
management must perform for various classes of investments. Your 
investment policies must also address the means for reporting, and 
approvals needed for, exceptions to established policies. If you are a 
Farm Credit bank, your investment policies must address portfolio 
diversification and obligor limits under paragraphs (f) and (g) of this 
section. Investment policies must be sufficiently detailed, consistent 
with, and appropriate for the amounts, types, and risk characteristics 
of your investments.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for eligible investments and for the entire 
investment portfolio. Your investment policies must include 
concentration limits to ensure prudent diversification of credit, 
market, and, as applicable, liquidity risks in the investment 
portfolio. Risk limits must be based on all relevant factors, including 
your institutional objectives, capital position, earnings, and quality 
and reliability of risk management systems and must take into 
consideration the interest rate risk management program required by 
Sec.  615.5180 or Sec.  615.5182, as applicable. Your investment 
policies must identify the types and quantity of investments that you 
will hold to achieve your objectives and control credit risk, market 
risk, and liquidity risk as applicable. Each association or service 
corporation that holds significant investments and each Farm Credit 
bank must establish risk limits in its investment policies, as 
applicable, for the following types of risk:
    (1) Credit risk. Investment policies must establish:
    (i) Credit quality standards. Credit quality standards must be 
established for single or related obligors, sponsors, secured and 
unsecured exposures, and asset classes or obligations with similar 
characteristics.
    (ii) Concentration limits. Concentration limits must be established 
for single or related obligors, sponsors, geographical areas, 
industries, unsecured exposures, and asset classes or obligations with 
similar characteristics.
    (iii) 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.
    (iv) Collateral margin requirements on repurchase agreements. To 
the extent you engage in repurchase agreements, you must regularly mark 
the collateral to market and ensure appropriate controls are maintained 
over collateral held.
    (2) Market risk. Investment policies must set market risk limits 
for specific types of investments and for the investment portfolio.
    (3) Liquidity.
    (i) Liquidity risk at Farm Credit banks. Investment policies must 
describe the liquidity characteristics of eligible investments that you 
will hold to meet your liquidity needs and other institutional 
objectives.
    (ii) Liquidity at associations. Investment policies must describe 
the liquid characteristics of eligible investments that you will hold.
    (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 function, 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.
    (f) Farm Credit bank portfolio diversification.
    (1) Well-diversified portfolio. Subject to the exemptions set forth 
in paragraph (f)(2) of this section, a Farm Credit bank must maintain a 
well-diversified investment portfolio as set forth in paragraph (f)(3) 
of this section.
    (2) Exemptions from investment portfolio diversification 
requirements. The following investments are not subject to the 
investment portfolio diversification requirements specified in 
paragraph (f)(3) of this section:
    (i) Investments that are fully guaranteed as to the timely payment 
of principal and interest by a U.S. Government agency; and
    (ii) Investments that are fully and explicitly guaranteed as to the 
timely payment of principal and interest by a GSE, except that no more 
than 50 percent of the investment portfolio may be comprised of GSE 
MBS. Investments in Farmer Mac securities are governed by Sec.  
615.5174 and are not subject to this limitation.
    (3) Investment portfolio diversification requirements. A well-
diversified investment portfolio means that, at a minimum, investments 
are comprised of different asset classes, maturities, industries, 
geographic areas, and obligors. These diversification requirements 
apply to each individual security that a Farm Credit bank holds within 
a DIF. To satisfy the asset class and obligor diversification 
requirements, a Farm Credit bank must, at a minimum, comply with the 
following requirements, except as exempted by paragraph (f)(2) of this 
section. These diversification parameters must be based on the 
portfolio valued at amortized cost.
    (i) Asset class diversification. The investment portfolio must be 
diversified among various asset classes. No more than 15 percent of the 
investment portfolio may be invested in any one asset class. Securities 
within each DIF count toward the appropriate asset class.
    (ii) Obligor diversification. The investment portfolio must be 
diversified among various obligors. No more than 3 percent of the 
investment portfolio may be invested in any one obligor. For a DIF, 
both the DIF itself and the entities obligated to pay the underlying 
debt are obligors.
    (g) Farm Credit bank obligor limit. No more than 10 percent of a 
Farm Credit bank's total capital may be invested in

[[Page 43315]]

any one obligor. This obligor limit does not apply to investments in 
obligations that are fully guaranteed as to the timely payment of 
principal and interest by U.S. Government agencies or fully and 
explicitly guaranteed as to the timely payment of principal and 
interest by GSEs. For a DIF, both the DIF itself and the entities 
obligated to pay the underlying debt are obligors.
    (h) Due diligence.
    (1) Pre-purchase analysis.
    (i) Eligibility and compliance with investment policies. Before you 
purchase an investment, you must conduct sufficient due diligence to 
determine whether it is eligible under Sec.  615.5140 or Sec.  
615.5142, as applicable, and complies with your board's investment 
policies. You must document your assessment and the information used in 
your assessment. You may hold an investment that does not comply with 
your investment policies only with the prior approval of your board.
    (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 assessment of each investment at the 
time of purchase must at a minimum include an evaluation of the credit 
risk, liquidity risk as applicable, market risk, interest rate risk, 
and underlying collateral of the investment, as applicable. This 
assessment must be documented and commensurate with the complexity and 
type of the investment. You must perform stress testing on any 
investment that is structured or that has uncertain cash flows, 
including all MBS and ABS, before you purchase it. The stress test must 
be commensurate with the type and complexity of the investment and must 
enable you to determine that the investment does not expose your 
capital, earnings, or liquidity, if applicable, to risks that are 
greater than those specified in your investment policies. The stress 
testing must comply with the requirements in paragraph (h)(4)(ii) of 
this section.
    (2) Ongoing 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 investment in your portfolio and in your 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, if applicable, 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 comply with those limits.
    (ii) Your stress tests must be defined in a board-approved policy 
and must include defined parameters for the types of securities you 
purchase. The stress tests must be comprehensive and appropriate for 
the risk profile of your institution. 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. 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.
    (i) Reports to the board of directors.
    At least quarterly, your management must report on the following to 
your board of directors or a designated board committee:
    (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 the risk and liquidity 
profiles of the investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses realized during 
the quarter on individual investments 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 (must be specifically 
identified);
    (8) The status and performance of each investment described in 
Sec.  615.5143(a) and (b) or that does not comply with your investment 
policies; including the expected effect of these investments on your 
capital, earnings, liquidity, as applicable, and collateral position; 
and
    (9) The terms and status of any required divestiture plan or risk 
reduction plan.
0
7. In Sec.  615.5134 paragraph (b) is amended by revising the table to 
read as follows:


Sec.  615.5134  Liquidity reserve.

* * * * *
    (b) Liquidity reserve requirement.
* * * * *

 
------------------------------------------------------------------------
                                                     Discount  (multiply
    Liquidity level             Instruments                  by)
------------------------------------------------------------------------
Level 1...............   Cash, including    100 percent.
                         cash due from traded but
                         not yet settled debt.
                         Overnight money    100 percent.
                         market investments.
                         Obligations of     97 percent.
                         U.S. Government agencies
                         with a final remaining
                         maturity of 3 years or
                         less.
                         GSE senior debt    95 percent.
                         securities that mature
                         within 60 days, excluding
                         securities issued by the
                         Farm Credit System.
                         Diversified        95 percent.
                         investment funds
                         comprised exclusively of
                         Level 1 instruments.

[[Page 43316]]

 
Level 2...............   Additional Level   Discount for each
                         1 investments.              Level 1 investment
                                                     applies.
                         Obligations of     97 percent.
                         U.S. Government agencies
                         with a final remaining
                         maturity of more than 3
                         years.
                         MBS that are       95 percent.
                         fully guaranteed by a
                         U.S. Government agency as
                         to the timely repayment
                         of principal and interest.
                         Diversified        95 percent.
                         investment funds
                         comprised exclusively of
                         Levels 1 and 2
                         instruments.
Level 3...............   Additional Level   Discount for each
                         1 or Level 2 investments.   Level 1 or Level 2
                                                     investment applies.
                         GSE senior debt    93 percent for all
                         securities with             instruments in
                         maturities exceeding 60     Level 3.
                         days, excluding senior
                         debt securities of the
                         Farm Credit System.
                         MBS that are
                         fully guaranteed by a GSE
                         as to the timely
                         repayment of principal
                         and interest.
                         Money market
                         instruments maturing
                         within 90 days.
                         Diversified
                         investment funds
                         comprised exclusively of
                         levels 1, 2, and 3
                         instruments.
------------------------------------------------------------------------

* * * * *
0
8. Section 615.5140 is revised to read as follows:


Sec.  615.5140  Eligible investments for Farm Credit banks.

    (a) Investment eligibility criteria. A Farm Credit bank may 
purchase an investment only if it satisfies the following investment 
eligibility criteria:
    (1) The investment must be purchased and held for one or more 
investment purposes authorized in Sec.  615.5132.
    (2) The investment must be one of the following:
    (i) A non-convertible senior debt security;
    (ii) A money market instrument with a maturity of 1 year or less;
    (iii) A portion of an MBS or ABS that is fully guaranteed as to the 
timely payment of principal and interest by a U. S. Government agency;
    (iv) A portion of an MBS or ABS that is fully and explicitly 
guaranteed as to the timely payment of principal and interest by a GSE, 
except a security permitted under Sec.  615.5174 of this part;
    (v) The senior-most position of an MBS or ABS that is not fully 
guaranteed as to the timely payment of principal and interest by a U.S. 
Government agency or fully and explicitly guaranteed as to the timely 
payment of principal and interest by a GSE, provided that the MBS 
satisfies the definition of ``mortgage related security'' in 15 U.S.C. 
78c(a)(41);
    (vi) An obligation of an international or multilateral development 
bank in which the U.S. is a voting member; or
    (vii) Shares of a diversified investment fund, if its portfolio 
consists solely of securities that satisfy paragraphs (a)(2)(i), 
(a)(2)(ii), (a)(2)(iii), (a)(2)(iv), (a)(2)(v), or (a)(2)(vi) of this 
section or that are eligible under Sec.  615.5174. The investment 
company's risk and return objectives and use of derivatives must be 
consistent with the Farm Credit bank's investment policies.
    (3) At least one obligor of the investment must have very strong 
capacity to meet its financial commitment for the expected life of the 
investment. If any obligor whose capacity to meet its financial 
commitment is being relied upon to satisfy this requirement is located 
outside the U.S., either:
    (i) That obligor's sovereign host country must have the highest or 
second-highest consensus Country Risk Classification (0 or 1) as 
published by the Organization for Economic Cooperation and Development 
(OECD) or be an OECD member that is unrated, or
    (ii) The investment must be fully guaranteed as to the timely 
payment of principal and interest by a U.S. Government agency.
    (4) The investment must exhibit low credit risk and other risk 
characteristics consistent with the purpose or purposes for which it is 
held.
    (5) The investment must be denominated in U.S. dollars.
    (b) Investments that do not satisfy requirements. Farm Credit banks 
may request our approval to purchase and hold other investments that do 
not satisfy the requirements of this section. Farm Credit banks may 
purchase and hold such investments as approved. A Farm Credit bank's 
request for our approval must explain the risk characteristics of the 
investment and the purpose and objectives for making the investment.
    (c) Ineligible investments. Notwithstanding any other provision of 
this section, Farm Credit banks may not purchase CDOs without approval 
under paragraph (b) of this section.
    (d) Reservation of authority. FCA may, on a case-by-case basis, 
determine that a particular investment of a Farm Credit bank poses 
inappropriate risk, notwithstanding that it satisfies the investment 
eligibility criteria. If so, we will notify the Farm Credit bank as to 
the proper treatment of the investment.
0
9. Section 615.5142 is revised to read as follows:


Sec.  615.5142  Eligible investments for System associations.

    (a) Subject to the conditions, restrictions and limits set forth in 
this section, each Farm Credit System association, with the approval of 
its funding bank, may only purchase and hold investments to manage 
risk. Each System association that purchases investments must identify 
and evaluate how investments contribute to the management of its risks. 
Each investment purchased must be an obligation issued, or fully 
guaranteed or insured as to the timely payment of principal and 
interest, by the United States or its agencies and the total amount of 
investments held must not exceed 10 percent of the association's total 
outstanding loans. In computing the 10-percent limit for association 
investments, the 30-day average daily balance of investments is divided 
by loans. Investments are calculated at amortized cost. Loans are 
calculated as defined in Sec.  615.5131. For the purpose of this 
calculation, loans include accrued interest and do not include any 
allowance for loan loss adjustments. Compliance with the calculation is 
measured on the last day of every month.
    (b) Risk management requirements. Each System association that 
purchases investments must evaluate its investment management policies, 
and

[[Page 43317]]

determine and document how its investment activities are conducted in 
accordance with the following risk management processes and procedures:
    (1) Investment management requirements. Each association that 
purchases investments must comply with Sec.  615.5133(a), (b), (c), 
(d), (e), (h) and (i) of this part. These investment management 
processes must be appropriate for the size, risk and complexity of the 
association's investment portfolio.
    (2) Interest rate risk management requirements. If interest rate 
risk in investments could lead to significant declines in net income or 
in the market value of capital, the association must comply with 
Sec. Sec.  615.5180 and 615.5182.
    (3) Other relevant risk management factors. Each association that 
purchases investments must consider and evaluate any other relevant 
factors unique to the association or to the nature of the investments 
that could affect such association's risk-bearing capacity, including 
but not limited to management experience and capability to understand 
and manage complex structures and unique risks in investments 
purchased.
    (c) Funding bank supervision of association investments.
    (1) An association must not purchase and hold an investment without 
the prior approval of its funding bank. The bank must review each 
affiliated association's request to buy and hold investments and 
explain in writing the bank's reasons for approving or denying the 
request.
    (2) In deciding whether or not to approve an association's request 
to buy and hold investments, the bank must evaluate, and document that 
the association:
    (i) Has adequate policies, procedures, internal controls, and 
accounting and reporting systems for its investments;
    (ii) Has the capability and expertise to effectively manage the 
risks in investments; and
    (iii) Complies with paragraph (b) of this section.
    (3) The bank must review annually the investment portfolio of every 
association that it funds. This annual review must evaluate whether the 
association's investments mitigate and manage risk over time, and the 
continued adequacy of the associations' risk management practices.
    (d) Other investments approved by the FCA. An association may 
purchase and hold other investments that we approve. The request for 
our approval must explain the risk characteristics of the investment 
and the purpose and objectives for making the investment. These other 
investments are subject to the funding bank's approval and if approved 
by the FCA are subject to the portfolio limit on association 
investments in paragraph (a) of this section unless otherwise provided 
for by the FCA.
    (e) Transition and divestiture for association investments.
    (1) No association is required to divest any investments held on 
the date this rule becomes effective that were previously authorized 
under former Sec.  615.5140 or otherwise authorized by official written 
FCA action that allowed the association to continue to hold such 
investments. Once such investments mature, the association must not 
renew them unless they are authorized pursuant to paragraphs (a) or (d) 
of this section.
    (2) An association is not required to divest of investments if a 
decline in total outstanding loans causes it to exceed the portfolio 
limit in paragraph (a) of this section. However, the association must 
not purchase new investments unless after they are purchased, the total 
amount of investments held falls within the portfolio limit in 
paragraph (a) of this section.
    (3) Section 615.5143 of this part applies to investments that an 
association acquires after the date that this rule becomes effective, 
if such investments:
    (i) Do not comply with the investment criteria in paragraph (a) of 
this section on or after the date of purchase;
    (ii) Have not been approved by the FCA pursuant to paragraph (d) of 
this section; or
    (iii) Were approved by the FCA pursuant to paragraph (d) of this 
section but no longer satisfy the conditions of approval.
0
10. Section 615.5143 is revised to read as follows:


Sec.  615.5143  Management of ineligible investments and reservation of 
authority to require divestiture.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in Sec.  615.5140(a) or the 
investment criteria set forth in Sec.  615.5142(a) or that have not 
been approved by the FCA pursuant to Sec.  615.5140(b) or Sec.  
615.5142(d), as applicable, 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 us within 15 
calendar days after the determination. You must divest of the 
investment no later than 60 calendar days after you determine that the 
investment is ineligible unless we approve, in writing, a plan that 
authorizes you to divest the investment over a longer period of time. 
Until you divest of the investment:
    (1) If you are a Farm Credit bank, it must not be used to satisfy 
your liquidity requirement(s) under Sec.  615.5134;
    (2) It must continue to be included in the Sec.  615.5132 Farm 
Credit bank investment portfolio limit calculation or in the Sec.  
615.5142(a) association portfolio limit, as applicable; and
    (3) If you are a Farm Credit bank, it must be excluded as 
collateral under Sec.  615.5050 and net collateral under Sec.  
615.5301(c).
    (b) Investments that no longer satisfy investment eligibility 
criteria. If you determine that an investment (that satisfied the 
eligibility criteria set forth in Sec.  615.5140(a) or the investment 
criteria set forth in Sec.  615.5142(a), as applicable, when purchased) 
no longer satisfies the criteria, or that an investment that the FCA 
approved pursuant to Sec.  615.5140(b) or Sec.  615.5142(d), as 
applicable, no longer satisfies the conditions of approval, you may 
continue to hold the investment, subject to the following requirements:
    (1) You must notify us within 15 calendar days after such 
determination;
    (2) If you are a Farm Credit bank, you must not use the investment 
to satisfy your liquidity requirement(s) under Sec.  615.5134;
    (3) You must continue to include the investment in the Sec.  
615.5132 Farm Credit bank investment portfolio limit calculation or in 
the Sec.  615.5142(a) association portfolio limit, as applicable;
    (4) If you are a Farm Credit bank, you may continue to include the 
investment as collateral under Sec.  615.5050 and net collateral under 
Sec.  615.5301(c) at the lower of cost or market value; and
    (5) You must develop a plan to reduce the investment's risk to you.
    (c) Reservation of authority. FCA retains the authority to require 
you to divest of any investment at any time for failure to comply with 
Sec.  615.5132(a) or Sec.  615.5142 or for safety and soundness 
reasons. The timeframe set by FCA will consider the expected loss on 
the transaction (or transactions) and the effect on your financial 
condition and performance.


Sec.  615.5174  [Amended]

0
11. Section 615.5174 paragraph (d) is amended by removing the reference 
``Sec.  615.5133(f)(1)(iii) and Sec.  615.5133(f)(4)'' and adding in 
its place, ``Sec.  615.5133(h)(1)(iii) and Sec.  615.5133(h)(4)''.

[[Page 43318]]

Sec.  615.5180  [Amended]

0
12. Section 615.5180 paragraph (c)(3) is amended by removing the 
reference ``Sec.  615.5133(f)(4)'' and adding in its place, the 
reference ``Sec.  615.5133(h)(4)''.

    Dated: July 21, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014-17493 Filed 7-24-14; 8:45 am]
BILLING CODE 6705-01-P