[Federal Register Volume 81, Number 35 (Tuesday, February 23, 2016)]
[Proposed Rules]
[Pages 8860-8867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03626]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC86


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

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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[[Page 8861]]

SUMMARY: The Farm Credit Administration (FCA, Agency, us, our, or we) 
proposes to amend our regulations governing the eligibility of non-
program investments held by the Federal Agricultural Mortgage 
Corporation (Farmer Mac). We 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. We are also proposing 
a delayed compliance date for the rule.

DATES: You may send us comments by April 25, 2016.

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

FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, Associate Director for Policy and Analysis, Office of 
Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4364, TTY (703) 883-4056;

or

Laura McFarland, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4056.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The purpose of this proposed rule is to replace references to 
credit rating agencies in existing Farmer Mac investment regulations 
with other appropriate standards to determine the creditworthiness of 
investments and to revise exposure limits for investments involving one 
obligor. Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act or DFA) requires agencies to remove 
references to, and requirements relating to, credit ratings. This 
proposal would substitute other appropriate standards of 
creditworthiness. The proposed rule would also replace the table in 
existing regulations that sets forth criteria for non-program 
investment eligibility with standards that place a greater emphasis on 
management's due diligence responsibility in ascertaining credit 
quality of non-program investments so that only high quality 
investments are purchased and held. The proposed rule would also 
clarify how other non-program investments are treated and revise 
exposure limits for investments involving one obligor. We are also 
proposing a delayed compliance date for the rule.

II. Background

    Farmer Mac is an institution of the Farm Credit System, regulated 
by FCA through the FCA Office of Secondary Market Oversight (OSMO). 
Farmer Mac was established and chartered by Congress to create a 
secondary market for agricultural real estate mortgage loans, rural 
housing mortgage loans, and rural utilities loans, and it is a 
stockholder-owned instrumentality of the United States. Title VIII of 
the Farm Credit Act of 1971, as amended, (Act) governs Farmer Mac.\1\
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    \1\ Public Law 92-181, 85 Stat. 583, 12 U.S.C. 2001 et seq.
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    On July 21, 2010, the Dodd-Frank Act was enacted, and section 939A 
of the Dodd-Frank Act requires Federal agencies to review all 
regulatory references to nationally recognized statistical ratings 
organizations (NRSRO or credit rating agency) and replace those 
references with other appropriate standards for determining 
creditworthiness.\2\ The Dodd-Frank Act further provides that, to the 
extent feasible, agencies should adopt a uniform standard of 
creditworthiness for use in regulations, taking into account the 
entities regulated and the purposes for which such regulated entities 
would rely on the creditworthiness standard.
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    \2\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21, 
2010.
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    The existing rules on non-program investments for Farmer Mac are 
contained in 12 CFR part 652, subpart A, and rely, in part, on NRSRO 
credit ratings to characterize relative credit quality of various 
instruments. On June 16, 2011, we issued an Advance Notice of Proposed 
Rulemaking (ANPRM) soliciting comments on suitable alternatives to 
NRSRO credit ratings.\3\ On November 18, 2011, as part of another 
rulemaking, we again requested comment on potential sources of market-
derived information that could be used to replace NRSRO credit ratings 
in part 652 of our rules.\4\ In developing this proposed rule, we 
considered all suggestions from comments received and incorporated 
those we believed best addressed the objective of this rulemaking. In 
addition to these comments, we also considered the creditworthiness 
standards we proposed in a separate rulemaking for Farm Credit banks 
and associations \5\ in compliance with provisions in the Dodd-Frank 
Act directing agencies, to the extent feasible, to adopt a uniform 
standard of creditworthiness among regulated entities.
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    \3\ 76 FR 35138, June 16, 2011.
    \4\ Refer to Proposed rule, ``Federal Agricultural Mortgage 
Corporation Funding and Fiscal Affairs; Farmer Mac Investments and 
Liquidity Management'' (76 FR 71798, Nov. 18, 2011).
    \5\ 79 FR 43301, July 25, 2014.
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III. Section-by-Section

    The proposed rule would revise portfolio diversification 
requirements and revise the credit quality standards for eligible non-
program investments that Farmer Mac may hold by replacing the reliance 
on NRSRO credit ratings and clarifying terminology.

A. Definitions [Existing Sec.  652.5]

    In Sec.  652.5, we propose removing existing terminology, adding 
new terms, and revising existing definitions. We propose removing as 
obsolete several terms from the list of definitions in Sec.  652.5. We 
also propose removing terms from Sec.  652.5 because they do not 
require a separate definition. The specific terms we propose removing 
are:
     ``Contingency Funding Plan (CFP)'',
     ``Eurodollar time deposit'',

[[Page 8862]]

     ``Final maturity'',
     ``General obligations'',
     ``Liability Maturity Management Plan (LMMP)'',
     ``Liquid investments'',
     ``Liquidity reserve'',
     ``Nationally Recognized Statistical Rating Organization 
(NRSRO)'',
     ``Revenue bond'', and
     ``Weighted average life (WAL).''

    We propose making conforming changes to Sec.  652.20 to remove 
these terms where they appear.
    We next propose adding two new terms to the list of definitions to 
address other proposed changes in this rulemaking: ``Diversified 
investment fund'' and ``Obligor.'' We propose to define a ``diversified 
investment fund'' (DIF) as an investment company registered under 
section 8 of the Investment Company Act of 1940, 15 U.S.C. 80a-8. We 
selected this definition based on our current use of it in Sec.  
615.5140(a)(8) of our investment rules for Farm Credit banks and 
associations. We propose to define the term ``obligor'' because our 
current regulations use this term but do not define it. We propose 
defining ``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 proposed definition would also 
clarify that both a DIF and the entity or entities obligated to pay the 
underlying debt are treated as a single obligor. This clarification is 
intended to ensure DIF investments do not become an excessively 
concentrated part of the investment portfolio.
    Lastly, we propose changing three existing terms and their 
definitions to improve clarity: ``Government agency'', ``Government-
sponsored agency'', and ``mortgage securities.'' We propose replacing 
the existing term ``Government-sponsored agency'' with ``Government-
sponsored enterprise (GSE)'' and defining a 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 also propose replacing ``Government agency'' with ``U.S. 
Government agency.'' The proposed definition for U.S. Government agency 
would explain that it means an instrumentality of the United States 
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. Finally, we propose replacing the term ``mortgage 
securities'' with ``mortgage-backed securities (MBS)'' as this term is 
more widely used in the financial sector. We propose applying the 
existing definition for ``mortgage securities'' to the new MBS term. We 
propose a conforming change to the definition of ``asset-backed 
securities'', which uses ``mortgage securities'' in its definition.

B. Concentration Risk [New Sec.  652.10(c)(5)]

    We propose revising existing Sec.  652.10 to address concentration 
risk through portfolio diversification and obligor limits in new 
paragraph (c)(5). Portfolio diversification is crucial to safe and 
sound investment management and is achieved by the appropriate 
distribution of risk exposures across reasonably uncorrelated 
industries and obligors. When a portfolio is properly diversified, a 
crisis within one industry sector or the sudden weakening or default of 
one obligor should not significantly destabilize the financial 
condition of the investor. In new Sec.  652.10(c)(5), we propose 
specifying that Farmer Mac's investment policies address concentration 
risk by setting diversification standards. We propose that the 
diversification calculation used when setting these standards be based 
on the carrying value of the investment on Farmer Mac's balance sheet. 
By carrying value, we mean the amount an investment contributes to the 
asset section of Farmer Mac's balance sheet under GAAP, net of any 
impairment estimate or valuation allowance. We believe the carrying 
value would, when applied for this purpose, appropriately capture the 
value of capital at risk for an investment at any given time. We also 
propose the following parameters for Farmer Mac's establishment of 
these standards:
     Basing calculation of an investment's compliance with 
diversification requirements on the investment's carrying value;
     Limiting investments in one obligor to no more than 10 
percent of regulatory capital, unless the investments are obligations 
backed by U.S. Government agencies or GSEs; and
     Limiting the percentage of GSE-issued mortgage-backed 
securities that may comprise Farmer Mac's entire investment portfolio 
to 50 percent.
    We believe these parameters will not require changes in the current 
investment portfolio held by Farmer Mac and discuss them more fully 
below.
    We believe by placing specific diversification limits within the 
section that generally requires Farmer Mac to set diversification 
limits will improve the organization of the rule.
    We also propose removing the reference to geographic areas in 
existing Sec.  652.10(c)(1)(i). Farmer Mac should consider 
diversification by geographic location of issuer as appropriate based 
on the nature of its investment portfolio. For example, in the case of 
investments in municipal securities, geographic location might be an 
important consideration. However, we propose removing this specific 
category in the regulation to avoid misinterpretation. For example, we 
do not see the need to restrict obligors solely on the basis of where 
they happen to be headquartered or the location of an issuer's 
operations. The proposed change in the level of the single obligor 
limit is discussed below in section III.B.1.
1. Obligor Limit
    We propose to move the obligor limit from Sec.  652.20(d)(1) and 
reduce the current limit to 10 percent of regulatory capital. The 
proposed 10-percent obligor limit in new Sec.  652.10(c)(5)(i) would 
enhance Farmer Mac's long-term safety and soundness by ensuring that if 
an obligor were to default, only a modest portion of capital would be 
at risk. Currently, the proposed 10-percent obligor limit equates to an 
amount that is less than Farmer Mac's capital surplus and well within 
its risk-bearing capacity based on its current level of regulatory 
capital. Whereas, the current 25-percent obligor limit could expose 
Farmer Mac to financial challenges if it experienced an event of 
multiple defaults in its liquidity portfolio during a short time period 
(e.g., such as during the 2008 financial crisis), given the historical 
relationship between Farmer Mac's capital surplus over the minimum 
requirement and the dollar value of the 25-percent limit. Thus, we 
expect that the proposed 10-percent maximum will provide reasonable 
assurance that a single default will not significantly increase the 
risk of Farmer Mac's being unable to comply with the minimum capital 
requirement.
    This proposed obligor limit would recognize that the credit 
performance of a single obligor (unlike, for example, a single industry 
sector) is binary in nature, (i.e., the investment is either performing 
or it is in default) with potentially very low recovery rates. For that 
reason, we believe a cautious approach is warranted regarding the 
management of exposure concentrations in an individual obligor. We also 
believe the proposed obligor limit retains sufficient flexibility for 
Farmer Mac to manage its investment portfolio and still

[[Page 8863]]

maintain adequate diversification. While the proposed obligor limit 
would be a regulatory maximum, Farmer Mac should consider establishing 
lower obligor limits to fit its overall risk profile and risk-bearing 
capacity, including earnings capacity, as well as the risks in 
individual types and classes of investments.
    We seek specific comments and suggestions on how FCA might modify 
or adjust the obligor limit to make it more risk sensitive while 
achieving the overarching objectives of the limit for example, by 
scaling or risk-weighting assets based on internal or standardized 
models or other criteria such as the magnitude of Farmer Mac's surplus 
over the minimum capital requirement.
    The proposed Sec.  652.10(c)(5) would retain the existing exemption 
from the obligor limit, currently located in Sec.  652.20(d)(1), for 
investments that are backed by a U.S. Government agency or GSEs.
2. Asset Class Limits
    Existing Sec.  652.20(a) contains a table identifying nine asset 
classes with different investment portfolio limits. These nine asset 
classes are:
     Obligations of the United States,
     Obligations of GSEs,
     Municipal Securities,
     International and Multilateral Development Bank 
Obligations,
     Money Market Instruments,
     Mortgage Securities,
     Asset-Backed Securities,
     Corporate Debt Securities, and
     DIFs.

Of these, some asset classes have investment portfolio limits of 15 
percent, 20 percent, 25 percent, and 50 percent.
a. GSE-Issued Mortgage-Backed Securities Limit
    We propose moving to new Sec.  652.10(c)(5)(ii) the current Sec.  
652.20(a)(6) 50-percent limit on the volume of GSE-issued mortgage-
backed securities that may be held in Farmer Mac's investment 
portfolio. We believe the risk posed by GSE-backed MBS is significantly 
lower than other asset classes both in terms of default risk and 
liquidity risk, which supports retaining this relatively high limit. We 
also believe this limit is better situated within our rules with other 
risk tolerance provisions.
b. Other Asset Class Limits
    In section III.C.1 of this preamble, we discuss the proposed 
removal of the investment table at Sec.  652.20(a), while retaining 
some of its requirements. We have not proposed retaining any of the 
asset class portfolio limits contained in the table except the 
previously discussed 50-percent portfolio limit for GSE-issued 
securities. This is because existing Sec.  652.10(c)(1)(i) already 
requires Farmer Mac to establish within its investment policy 
concentration limits for ``asset classes or obligations with similar 
characteristics.'' We expect that Farmer Mac will review their 
investment policy limits at least annually and make adjustments based 
on their current risk profile and risk-bearing capacity, which may 
suggest lower limits than the current regulatory parameters. 
Nonetheless, we recognize there may be value in maintaining regulatory 
limits and, therefore, invite specific comment on whether the following 
existing asset class limitations should be retained in full or part:
     Municipal Securities: Revenue bonds limit of 15 percent,
     Money Market Instruments: Non-callable term Federal funds 
and Eurodollar time deposits limit of 20 percent,
     Money Market Instruments: Master notes limit of 20 
percent,
     Mortgage Securities: Non-Government agency or Government-
sponsored agency securities that comply with 15 U.S.C. 77d(5) or 15 
U.S.C. 78c(a)(41) and Commercial mortgage-backed securities combined 
15-percent limit,
     Asset-Backed Securities limit of 25 percent, and
     Corporate Debt Securities limit of 25 percent.

We are also interested in whether any of these limits should be changed 
and, if so, to what degree. We ask that your comment on this issue 
include the rationale for your suggestion(s).

C. Non-Program Investments [Existing Sec. Sec.  652.20 and 652.25; New 
Sec.  652.23]

1. Eligible Non-Program Investments [Sec.  652.20]
    We propose replacing the existing Sec.  652.20, including removing 
the ``Non-Program Investment Eligibility Criteria Table,'' with 
investment eligibility requirements that place greater responsibility 
on Farmer Mac management. The replacement of this section will result 
in removal of all references to NRSRO credit ratings from Sec.  652.20.
a. Eligible Non-Program Investment Categories [Sec.  652.20(a)]
    Our existing regulation at Sec.  652.20(a) contains a detailed 
listing of eligible investment asset classes and types of investments 
within each asset class. The existing regulation imposes final maturity 
limits, investment portfolio limits, and other requirements for many of 
these investments, including credit rating requirements that are based 
on NRSRO credit ratings. To replace this provision, we propose general 
categories of eligible non-program investments that Farmer Mac may 
purchase and hold. The proposed general categories are:
     Non-convertible senior debt securities,
     Certain money market instruments,
     Certain ABS/MBS backed by a U.S. Government-agency or GSE 
guarantee,
     Certain senior position mortgage related securities,
     Obligations of development banks where the United States 
is a voting member of the bank, and
     Certain diversified investment funds.

As proposed in new Sec.  652.20(a)(1), non-convertible senior debt 
securities (e.g., investments in senior debt securities that cannot be 
converted to any other type of securities) would be eligible under the 
proposed provision. 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 could be secured by a specific pool of collateral or 
may be unsecured with priority of claims over other types of debt 
securities of the issuer, but would not include those that are 
convertible into a non-senior security or an equity security.
    In proposed new paragraph (a)(3) and (a)(4), fully government-
guaranteed ABS or MBS that are guaranteed as to the payment of 
principal and interest by a U.S. Government agency or GSE would be 
eligible securities because of their high credit quality. Farmer Mac 
would have to verify that securities labeled ``government guaranteed'' 
are fully guaranteed as to the payment of principal and interest. 
Similarly, a GSE ``wrap'' (guarantee) would not make a security 
eligible under this proposed provision unless it is a guarantee of all 
principal and interest of the security. While partial guarantees would 
not satisfy this proposed requirement, they could be eligible under 
other criteria.
    We propose in new paragraph (a)(5) permitting investments in ABS 
and MBS that are not fully guaranteed, but only the senior-most 
position of such instruments. By senior-most position, we mean the 
tranche of a structured instrument that is last to experience losses in 
the event of default and that such losses be shared on a pro rata basis 
by investors in that tranche. In addition, we propose that for a 
position in an

[[Page 8864]]

MBS to be eligible, the MBS must satisfy the securities law definition 
of ``mortgage related security''.\6\ Collateralized debt obligations 
(CDOs), which are re-securitizations that have evolved for the MBS 
market, would be eligible under this criterion if their underlying 
collateral is comprised only of the senior-most positions of other 
securitizations. The underlying collateral of most CDOs consists of 
lower-rated tranches from other securitizations, and these CDOs would 
not be eligible under this criterion. Further, private placements may 
be eligible under this proposed criterion, as long as they satisfy all 
of the proposed investment eligibility requirements.\7\ We note, 
however, that private placements are generally not liquid and would 
therefore need to be acquired for an authorized purpose unrelated to 
liquidity.
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    \6\ 15 U.S.C. 78c(a)(41).
    \7\ 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.
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    We also propose in new paragraph (a)(7) that shares of a DIF would 
be eligible if the DIF's portfolio consists solely of securities that 
are eligible under these eligibility criteria. While the proposal for 
DIF eligibility is unchanged from the existing regulation, we are 
proposing more restrictive portfolio diversification limits on DIF 
investments than currently exist.
b. Investment Quality [Sec.  652.20(b)]
    We want to retain high creditworthiness standards for Farmer Mac 
eligible non-program investments.\8\ Accordingly, we propose in Sec.  
652.20(b)(1) requiring that obligors (whether debtor or guarantor) have 
strong capacity to meet the financial commitment for the expected life 
of the investment. This standard would apply to all investments, 
including those that are currently not subject to a NRSRO credit rating 
requirement. In general, we would view an investment as having met this 
standard if the expected average cumulative default rate of issuers of 
similar credit quality is low based on historical default data.\9\ We 
would expect Farmer Mac to document the source of its historical data 
and basis for investment criteria.
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    \8\ Our existing regulations governing Farmer Mac require that 
certain eligible investments meet the highest or the second highest 
whole-letter NRSRO rating (e.g., ``AAA'' or ``AA'' for Standard & 
Poors ratings, without regard to ``+'' or ``-'' levels within 
individual whole-letter ratings).
    \9\ One potential source of historical data for this purpose is 
the publicly available report entitled ``Annual Default Study: 
Corporate Bond Default and Recovery Rates'' which includes data 
since 1920 and is published by Moody's Investors Service. However, 
other sources including internally modeled forecasts could be used.
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    In addition to imposing standards on obligors, we also propose in 
Sec.  652.20(b)(2) requiring an eligible investment to exhibit low 
credit risk and other risk characteristics consistent with the purposes 
for which it is held. We are not proposing 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. For instance, if an investment is 
held for the purpose of liquidity, it would have to be readily 
marketable \10\ 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 may not be appropriate 
for a liquidity investment. Instead, it might be used effectively to 
manage interest rate risk. Finally, we propose moving to paragraph 
(b)(3) the existing requirement that the denomination of all 
investments must be in U.S. dollars.
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    \10\ Under Sec.  652.40(b), investments used to satisfy the 
liquidity reserve requirement must be ``readily marketable,'' as 
defined by that provision.
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2. Other Non-Program Investments [New Sec.  652.23]
    We propose moving the existing Sec.  652.20(e) provisions on 
seeking FCA approval for non-program investments that are not already 
identified in the regulation as an ``eligible non-program investment'' 
to new Sec.  652.23. The proposed new Sec.  652.23 explains the minimum 
considerations we give to such requests and reiterates our authority to 
impose in writing and enforce conditions of approval. We also add 
clarifying language that these investments, once approved, will be 
considered ``eligible non-program investments'' for purposes of 
applying the provisions in subpart A of part 652. We believe moving 
this aspect of the rule to its own section will make the provision 
easier to find and, along with the proposed clarifications, will 
facilitate the process by which such requests are submitted and 
reviewed.
3. Ineligible Investments [Existing Sec.  652.25]
    We are proposing revisions to existing Sec.  652.25 to conform with 
other proposed changes in this rulemaking and to add clarity. We 
propose adding language to clarify that this section applies to both 
those eligible non-program investments identified in the rule and to 
individual non-program investments that we approved on request. We also 
propose clarifying that those investments that were ineligible when 
purchased may not be used for liquidity purposes, but must still be 
included as part of the investment portfolio limit until their 
divestiture. We further propose removing the quarterly reporting 
requirements for investments that lose their eligibility after 
purchase.
4. Reservation of FCA Authority [Existing Sec.  652.25(d); New Sec.  
652.27]
    We propose moving the existing Sec.  652.25(d) provisions 
addressing FCA-required divestiture of an investment to new Sec.  
652.27. We believe moving this aspect of the rule to its own section 
will make the provision easier to find and reduce confusion on its 
applicability. In addition, 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 Farmer Mac as to the proper treatment of any such 
investment. We also propose conforming changes due to other proposed 
changes in this rulemaking to clarify that FCA-required divestiture may 
be based on a failure to comply with applicable regulations or written 
conditions of approval issued in connection with individual non-program 
investments that we approved on request.

D. Liquidity Reserve Requirements [Table to Sec.  652.40(c)]

    We propose to make conforming changes in the Table to Sec.  
652.40(c). These changes would incorporate the proposed terminology 
changes of Sec.  652.5. 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.

IV. Compliance Date

    In order to provide Farmer Mac with sufficient time to bring itself 
into compliance with these new requirements, we are proposing a 6-month 
compliance transition period. We invite your specific comments on this 
compliance timeframe.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. Farmer Mac

[[Page 8865]]

has assets and annual income in excess of the amounts that would 
qualify it as a small entity. Therefore, Farmer Mac is not a ``small 
entity'' as defined in the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 652

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

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

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

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

    Authority:  Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168; sec. 939A of Pub. 
L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note) (July 21, 
2010).

0
2. Amend Sec.  652.5 by:
0
a. Removing the definitions for ``Contingency Funding Plan (CFP)'', 
``Eurodollar time deposit'', ``Final maturity'', ``General 
obligations'', ``Government agency'', ``Government-sponsored agency'', 
``Liability Maturity Management Plan (LMMP)'', ``Liquid investments'', 
``Liquidity reserve'', ``Mortgage securities'', ``Nationally recognized 
statistical rating organization (NRSRO)'', ``Revenue bond'', and 
``Weighted average life (WAL)'';
0
b. Revising the last sentence to the definition for ``Asset-backed 
securities (ABS)''; and
0
c. Adding alphabetically five definitions to read as follows:


Sec.  652.5  Definitions.

    For purposes of this subpart, the following definitions will apply:
* * * * *
    Asset-backed securities (ABS) * * * For the purpose of this 
subpart, ABS excludes mortgage-backed securities that are defined 
below.
* * * * *
    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.
    (3) This definition does not include agricultural mortgage-backed 
securities guaranteed by Farmer Mac itself.
* * * * *
    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. For a DIF, both the DIF itself and 
the entities obligated to pay the underlying debt are considered a 
single obligor.
* * * * *
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully guaranteed as to the payment of 
principal and interest by the full faith and credit of the U.S. 
Government.
0
3. Amend Sec.  652.10 by:
0
a. Removing the word ``four'' in the last sentence of the paragraph (c) 
introductory text;
0
b. Removing the phrase ``geographical areas,'' in paragraph (c)(1)(i); 
and
0
c. Adding a new paragraph (c)(5) to read as follows:


Sec.  652.10  Investment management.

* * * * *
    (c) * * *
    (5) Concentration risk. Your investment policies must set risk 
diversification standards. Diversification parameters must be based on 
the carrying value of investments.
    (i) The Corporation's maximum allowable investments in any one 
obligor may not exceed 10 percent of Regulatory Capital. Only 
investments in obligations backed by U.S. Government agencies or GSEs 
may exceed the 10-percent single obligor limit.
    (ii) Not more than 50 percent of the Corporation's entire 
investment portfolio may be comprised of GSE-issued MBS.
* * * * *
0
4. Section 652.20 is revised to read as follows:


Sec.  652.20  Eligible non-program investments.

    (a) Eligible investments consist of:
    (1) A non-convertible senior debt security.
    (2) A money market instrument with a maturity of 1 year or less.
    (3) A portion of an ABS or MBS that is fully guaranteed by a U.S. 
Government agency.
    (4) A portion of an ABS or MBS that is fully and explicitly 
guaranteed as to the timely payment of principal and interest by a GSE.
    (5) The senior-most position of an ABS or MBS that is not fully 
guaranteed 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).
    (6) An obligation of an international or multilateral development 
bank in which the U.S. is a voting member.
    (7) Shares of a diversified investment fund, if its portfolio 
consists solely of securities that satisfy investments listed in 
paragraphs (b)(1) through (b)(4) of this section.
    (b) Farmer Mac may only purchase those eligible investments 
satisfying all of the following:
    (1) The obligor(s) of the investment have strong capacity to meet 
financial commitments for the life of the investment. A strong capacity 
to meet financial commitments exits if the risk of default by the 
obligor(s) is very low. Investments whose obligors are located outside 
the U.S., and whose obligor capacity to meet financial commitments is 
being relied upon to satisfy this requirement, must also be fully 
guaranteed by a U.S. Government agency.
    (2) The investment must exhibit low credit risk and other risk 
characteristics consistent with the purpose or purposes for which it is 
held. At a minimum, obligors must have strong capacity to meet 
financial commitments and generally have a very low probability of 
default throughout the term of the investment even under severely 
adverse, stressful conditions in the obligors' business environment.
    (3) The investment must be denominated in U.S. dollars.
0
5. Add a new Sec.  652.23 to read as follows:

[[Page 8866]]

Sec.  652.23  Other non-program investments.

    (a) Farmer Mac may make a written request for our approval to 
purchase and hold other non-program investments that do not satisfy the 
requirements of Sec.  652.20. Your request for our approval to purchase 
and hold other non-program investments at a minimum must:
    (1) Describe the investment structure;
    (2) Explain the purpose and objectives for making the investment; 
and
    (3) Discuss the risk characteristics of the investment, including 
an analysis of the investment's impact to capital.
    (b) We may impose written conditions in conjunction with our 
approval of your request to invest in other non-program investments.
    (c) For purposes of applying the provisions of this subpart, except 
Sec.  652.20, investments approved under this section are treated the 
same as eligible non-program investments unless our conditions of 
approval state otherwise.
0
6. Section 652.25 is revised to read as follows:


Sec.  652.25  Ineligible investments.

    (a) Investments ineligible when purchased. Non-program investments 
that do not satisfy the eligibility criteria set forth in Sec.  
652.20(a) or have not been approved by the FCA pursuant to Sec.  652.23 
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 
such 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, it may not be used to satisfy your liquidity requirement(s) 
under Sec.  652.40, but must continue to be included in the Sec.  
652.15(b) investment portfolio limit calculation.
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that a non-program investment no longer satisfies the 
criteria set forth in Sec.  652.20 or no longer satisfies the 
conditions of approval issued under Sec.  652.23, you must notify us 
within 15 calendar days after such determination. If approved by the 
FCA in writing, you may continue to hold the investment, subject to the 
following and any other conditions we impose:
    (1) You may not use the investment to satisfy your Sec.  652.40 
liquidity requirement(s);
    (2) The investment must continue to be included in your Sec.  
652.15 investment portfolio limit calculation; and
    (3) You must develop a plan to reduce the investment's risk to you.
0
7. Add a new Sec.  652.27 to read as follows:


Sec.  652.27  Reservation of authority for investment activities.

    FCA retains the authority to require you to divest of any 
investment at any time for failure to comply with applicable 
regulations, for safety and soundness reasons, or failure to comply 
with written conditions of approval. The timeframe set by FCA for such 
required divestiture will consider the expected loss on the transaction 
(or transactions) and the effect on your financial condition and 
performance. FCA may also, on a case-by-case basis, determine that a 
particular non-program investment poses inappropriate risk, 
notwithstanding that it satisfies the investment eligibility criteria 
or received prior approval from us. If so, we will notify you as to the 
proper treatment of the investment.
0
8. Amend Sec.  652.40 by revising the table in paragraph (c) to read as 
follows:


Sec.  652.40  Liquidity reserve requirement and supplemental liquidity.

* * * * *

                        Table to Sec.   652.40(c)
------------------------------------------------------------------------
                                                            Discount
        Liquidity level               Instruments       (multiply market
                                                            value by)
------------------------------------------------------------------------
Level 1.......................   Cash,          100 percent.
                                 including cash due
                                 from traded but not
                                 yet settled debt.
                                 Overnight      100 percent.
                                 money market
                                 instruments,
                                 including repurchase
                                 agreements secured
                                 exclusively by Level
                                 1 investments.
                                 Obligations    97 percent.
                                 of U.S. Government
                                 agencies with a final
                                 remaining maturity of
                                 3 years or less.
                                 GSE senior     95 percent.
                                 debt 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.
Level 2.......................   Additional     Discount for
                                 Level 1 investments.    each Level 1
                                                         investment
                                                         applies.
                                 Obligations    97 percent.
                                 of 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.
                                 Diversified    95 percent.
                                 investment funds
                                 comprised exclusively
                                 of Level 1 and 2
                                 instruments.
Level 3.......................   Additional     Discount for
                                 Level 1 or Level 2      each Level 1 or
                                 investments.            Level 2
                                                         investment
                                                         applies.
                                 GSE senior     93 percent for
                                 debt securities with    all instruments
                                 maturities exceeding    in Level 3.
                                 60 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.
                                 Qualifying
                                 securities backed by
                                 Farmer Mac program
                                 assets (loans)
                                 guaranteed by the
                                 United States
                                 Department of
                                 Agriculture
                                 (excluding the
                                 portion that would be
                                 necessary to satisfy
                                 obligations to
                                 creditors and equity
                                 holders in Farmer Mac
                                 II LLC).

[[Page 8867]]

 
Supplemental Liquidity........   Eligible       90 percent
                                 investments under       except
                                 Sec.   652.20 and       discounts for
                                 those approved under    Level 1, 2 or 3
                                 Sec.   652.23.          investments
                                                         apply to such
                                                         investments
                                                         held as
                                                         supplemental
                                                         liquidity.
------------------------------------------------------------------------


    Dated: February 12, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2016-03626 Filed 2-22-16; 8:45 am]
 BILLING CODE 6705-01-P