[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Rules and Regulations]
[Pages 27486-27503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12366]



[[Page 27485]]

Vol. 83

Tuesday,

No. 113

June 12, 2018

Part V





 Farm Credit Administration





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





12 CFR Parts 611 and 615





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

  Federal Register / Vol. 83 , No. 113 / Tuesday, June 12, 2018 / Rules 
and Regulations  

[[Page 27486]]


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

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: Final rule.

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

SUMMARY: The Farm Credit Administration (FCA, Agency, us, our, or we) 
adopts a final rule that amends our regulations governing investments 
of both Farm Credit System (FCS or System) banks and associations. The 
final rule strengthens eligibility criteria for investments that FCS 
banks purchase and hold, and implements section 939A of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or DFA) 
by removing references to and requirements for credit ratings and 
substituting other appropriate standards of creditworthiness. The final 
rule revises FCA's regulatory approach to investments by FCS 
associations by limiting the type and amount of investments that an 
association may hold for risk management purposes.

DATES: This regulation shall become effective on January 1, 2019.

FOR FURTHER INFORMATION CONTACT:

David J. Lewandrowski, Senior Policy Analyst, Office of Regulatory 
Policy, (703) 883-4414, TTY (703) 883-4212, [email protected];
J.C. Floyd, Associate Director of Finance and Capital Market Team, 
Office of Regulatory Policy, (703) 883-4321, TTY (703) 883-4212, 
[email protected]; or
Richard A. Katz, Senior Counsel, Office of General Counsel, (703) 883-
4020, TTY (703) 883-4056, [email protected].

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The final rule objectives are to:
     Strengthen investment practices at Farm Credit banks \1\ 
and associations \2\ to enhance their safety and soundness;
---------------------------------------------------------------------------

    \1\ Section 619.9140 of FCA regulations defines ``Farm Credit 
banks'' 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) Federal 
land bank associations, Federal land credit associations, production 
credit associations, and agricultural credit associations.
---------------------------------------------------------------------------

     Ensure that Farm Credit banks hold sufficient high-quality 
liquid investments for liquidity purposes;
     Enhance the ability of the Farm Credit banks and 
associations to supply credit to agricultural and aquatic producers and 
their cooperatives in times of financial stress;
     Comply with 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 the Farm Credit System, which consists of Farm 
Credit banks, associations, service corporations,\3\ and the Federal 
Farm Credit Banks Funding Corporation to provide permanent, stable, 
affordable, and reliable sources of credit and related services to 
American agricultural and aquatic producers.\4\ Farm Credit banks issue 
System-wide consolidated debt obligations in capital markets, which 
enable associations to fund short-, intermediate-, and long-term credit 
and related services to farmers, ranchers, producers and harvesters of 
aquatic products, rural residents for housing, and farm-related 
businesses.\5\
---------------------------------------------------------------------------

    \3\ A service corporation cannot extend credit or provide 
insurance services.
    \4\ The Federal Agricultural Mortgage Corporation (Farmer Mac), 
also a System institution, operates a secondary market for 
agricultural real estate mortgage loans, rural housing mortgage 
loans, and rural utility cooperative loans. This rulemaking does not 
affect Farmer Mac, and the use of the term ``System institution'' in 
this preamble and the final rule does not include Farmer Mac.
    \5\ One Farm Credit bank, is an agricultural credit bank, which 
lends to, and provides other financial services to farmer-owned 
cooperatives, rural utilities (electric and telephone), and rural 
water and waste water disposal systems. It also finances U.S. 
agricultural exports and imports, and provides international banking 
services to cooperatives and other eligible borrowers.
---------------------------------------------------------------------------

    Farm Credit banks depend on investments to provide liquidity and to 
manage surplus short-term funds and interest rate risk. Investments 
also help enable associations to manage the risks they confront.\6\ 
Although Farm Credit banks get their funding through issuing System-
wide consolidated debt securities, they must have enough available 
funds, cash and investments, to continue paying maturing obligations if 
access to the debt market becomes temporarily impeded.
---------------------------------------------------------------------------

    \6\ Under Sec.  611.1135(a), which we do not propose to revise, 
service corporations may hold investments for the purposes 
authorized for their organizers.
---------------------------------------------------------------------------

    FCA regulations in subpart E of part 615 impose comprehensive 
requirements on investment practices at all System institutions except 
Farmer Mac. We first proposed revisions to our investment regulations 
in 2011.\7\ In 2012, we issued a final rule that adopted many of these 
proposed requirements, particularly those guiding prudent investment 
management practices at System banks.\8\ However, that final rule did 
not substantively revise the rules governing investment eligibility in 
Sec.  615.5140, or association investments in Sec.  615.5142. In 2014, 
we proposed amendments to Sec. Sec.  615.5140 and 615.5142 to address 
comments from System institutions.\9\ More specifically, the proposed 
rule revised the eligibility criteria for System bank investments. In 
addition, proposed Sec.  615.5142 would: (1) Impose a portfolio limit 
on association investments; (2) limit association investments to 
certain securities issued or guaranteed as to principal and interest by 
the United States Government and its Agencies; and, (3) delete the 
specific investment purposes of reducing interest rate risk and 
managing surplus short-term funds.\10\
---------------------------------------------------------------------------

    \7\ 76 FR 51289, August 18, 2011.
    \8\ 77 FR 66362, November 5, 2012.
    \9\ See 79 FR 43301, July 25, 2014.
    \10\ Final Sec.  615.5140 identifies eligible investments for 
both Farm Credit banks and associations. Former Sec.  615.5142 
governs investment purposes for associations, but it did not 
prescribe the amount of association investments.
---------------------------------------------------------------------------

    A major reason that we engaged in this rulemaking is that 
investment products are becoming increasingly complex, and some 
investments are riskier and less liquid than previously believed. 
Section 939A of the DFA requires each Federal agency to review all its 
regulations that reference or require the use of credit ratings issued 
by a Nationally Recognized Statistical Rating Organization (NRSRO) to 
assess the creditworthiness of an instrument. Under this provision of 
the Dodd-Frank Act, Federal agencies must also remove references to 
NRSRO credit ratings from their regulations and substitute other 
appropriate creditworthiness standards in their place. As a result, FCA 
is removing the actual references to NRSRO credit ratings in our 
regulations in subpart E of part 615.
    FCA received over 1250 comment letters about our 2014 proposed 
regulations. FCS banks and associations submitted 12 comment letters, 
and we received separate comment letters from a System trade 
association and Farmer Mac. Commercial banks, and their various trade 
associations, as well as their directors, officers, and employees 
submitted the remaining comment letters. Most of the letters from bank 
commenters were form letters, and several individuals associated with 
the same bank submitted multiple or

[[Page 27487]]

duplicate copies of the same letter. System and Farmer Mac commenters 
sought revisions to the bank and association regulations to clarify 
specific provisions, or to address their concerns. The bank commenters 
opposed all provisions of the proposed rule, except the provisions 
implementing section 939A of the DFA. All the bankers asked FCA to 
withdraw the rule, and to refrain from revising the investment 
regulations for System banks and associations, unless the amendments 
implemented new statutory authority.

III. Final Rule

    After reviewing and considering the comment letters, FCA now enacts 
a final rule that governs investment activities at System banks, 
associations, and service corporations. The final rule: (1) Implements 
section 939A of the DFA; (2) strengthens investment management 
practices at FCS institutions, other than Farmer Mac; (3) improves the 
quality of System bank investments and streamlines the list of eligible 
investments; (4) revises the investment purposes and types associations 
may hold; and (5) clarifies the rules of divestiture of ineligible 
investments, and establishes new transition rules. Additionally, we 
updated the definitions for investments in subpart E of part 615, and 
we made conforming amendments to other regulations. FCA plans to 
rescind two Informational Memoranda, revise a third Informational 
Memorandum, and updating FCA Bookletter BL-064 so that FCA guidance 
conforms with this final rule.
    FCA notes that all regulations in part 615, subpart E, together 
create a regulatory investment management framework for System 
institutions. In this context, System institutions need to consider and 
follow all requirements specified in Sec. Sec.  615.5132, 615.5133, 
615.5134, and 615.5140, as applicable. A System institution's decision 
to purchase and hold investments must be driven by an internal 
assessment of their risk tolerances and liquidity needs, plus eligible 
investments held.

A. Definitions

    The definitions in Sec.  615.5131 apply to all our investment 
regulations in subpart E of part 615. We proposed to remove or revise 
several definitions in Sec.  615.5131 that pertain to eligible 
investments and credit ratings. These amendments align the definitions 
in FCA's investment regulations with other FCA regulations, or with the 
definitions that other Federal agencies, such as the Board of Governors 
of the Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, and Securities and 
Exchange Commission use in their regulations.
    We received a comment from a bank trade association about the 
proposed definition of ``asset class.'' Under the proposal, ``asset 
class means a group of securities that exhibit similar characteristics 
and behave similarly in the marketplace.'' As we noted in the preamble 
to the proposed rule, asset classes for bank investments include, but 
are not limited, to money market instruments, municipal securities, 
corporate bonds, mortgage-backed securities (MBS), asset-backed 
securities (ABS) (excluding MBS), and ``any other asset class as 
determined by FCA.'' The commenter opposed this provision because it 
authorizes FCA to approve other asset class types. The commenter 
asserted that FCA should not approve new asset classes except through a 
formal rulemaking. FCA responds that it has authority under various 
provisions of section 5.17 of the Farm Credit Act of 1971, as amended, 
(Act) to approve new investments, including new asset classes. As 
appropriate, FCA will decide how best to approve any new asset classes 
based on the circumstances and characteristics of the instrument when 
the issue arises. Sometimes, a notice and comment rulemaking is 
appropriate, while at other times, FCA may decide to issue a bookletter 
or informational memorandum, or approve such instruments under case-by-
case authority. We adopt this definition as proposed.
    The same bank trade association also commented on the definition of 
``obligor'' in the proposed regulation. The commenter expressed 
concerns that the definition of ``obligor'' would permit System 
institutions to make loans to ineligible persons, businesses, agencies, 
or corporations under their investment authorities. Our investment 
regulations cannot confer authority on System institutions that exceed 
their powers under the Act. The Act separates the System's lending 
authorities from its investment authorities. Therefore, our investment 
regulations cannot authorize System institutions to make loans to 
ineligible borrowers disguised as investments. We adopt this definition 
as proposed.
    We proposed to define a collateralized debt obligation (CDO) as a 
debt security collateralized by mortgage-backed securities (MBS) or 
asset-backed securities (ABS, or trust-preferred securities). Farmer 
Mac claimed that this definition was inconsistent with how the security 
markets defined CDOs. FCA agrees with the commenter. We addressed this 
concern by deleting the term ``collateralized debt obligation'' in 
final Sec.  615.5131, and adding the term ``resecuritization.'' Section 
628.2 already defines ``resecuritization'' to mean ``a securitization 
which has more than one underlying exposure and in which one or more of 
the underlying exposures is a securitization exposure.'' We will 
further discuss in greater detail why resecuritizations are ineligible 
investments for System banks below.
    We proposed to delete the definition of ``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)'' in Sec.  615.5131. We received no comments on these revisions. 
Accordingly, the final rule deletes these definitions for the reasons 
explained in the preamble to the proposed rule.
    The proposal added definitions of ``asset-backed securities 
(ABS)'', ``Country risk classification (CRC)'', ``Diversified 
investment fund (DIF)'', ``Government-sponsored enterprise (GSE)'', 
``Mortgage-backed securities (MBS)'', ``sponsor'', and ``United States 
(U.S.) Government agency.'' We received no comments on these new 
definitions, and we incorporate them into final Sec.  615.5131 without 
revision. However, we made a technical, non-substantive revision by 
replacing the definition of ``Country risk classification (CRC)'' in 
final Sec.  615.5131 with a cross-reference to the identical definition 
in our Capital Adequacy regulations, Sec.  628.2. The preamble to the 
proposed rule explains our reasoning for adopting these definitions.

B. Section 615.5132--Investments Purposes

    Under the existing rule, System banks may continue to buy and hold 
eligible investments to fulfill liquidity requirements, manage short-
term funds, and manage interest rate risk, under Sec.  615.5132(a). A 
System trade association and a Farm Credit Bank interpret our 
regulations as requiring each System bank to designate a specific 
purpose under Sec.  615.5132(a) for every investment it purchases and 
holds. The commenter claims that this is inconsistent with the approach 
that FCA proposed for System associations, and the approach that the 
Federal Banking Regulatory Agencies (FBRAs) \11\

[[Page 27488]]

followed in their liquidity coverage ratio regulation, which recognized 
that securities often serve multiple purposes.\12\ Accordingly, the 
commenter asserted that FCA should not require FCS banks to hold an 
investment for only one of the purposes identified in Sec.  
615.5132(a). The commenter urged FCA to grant System banks greater 
flexibility to decide the authorized purposes and allow them to change 
the designated purpose as circumstances warrant.
---------------------------------------------------------------------------

    \11\ The FBRAs are the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, and the 
Federal Deposit Insurance Corporation.
    \12\ See 79 FR 61440, October 10, 2014.
---------------------------------------------------------------------------

    FCA responds to this comment even though we proposed no change to 
Sec.  615.5132. We note that Sec.  615.5132(a) does not restrict System 
banks to holding each investment for only one purpose. In fact, Sec.  
615.5140(a)(1)(i) states that eligible investments may be held for one 
or more of the investment purposes authorized in Sec.  615.5132(a). 
However, the preamble to the proposed rule notes that certain 
investments, such as private placements, are not suitable for liquidity 
and, therefore, a System bank would need to document the specific 
purpose or reason for holding such investments. FCA finds no reason to 
revise either Sec.  615.5132(a) or Sec.  615.5140(a)(1) to address the 
commenters concerns.

C. Section 615.5133--Investment Management

    Section 615.5133 governs investment management practices at Farm 
Credit banks, associations, and service corporations. System 
institutions hold investments for different purposes and, therefore, 
investment practices will vary. This regulation requires the boards of 
directors of System institutions to adopt an internal control framework 
that protects their institutions from potential losses. Under this 
regulation, the policies must establish risk tolerance parameters that 
address credit, market, liquidity and operational risks. Additionally, 
this regulation requires the institution to set up delegations of 
authority, internal controls, portfolio diversification requirements, 
obligor limits, due diligence requirements, and to report regularly to 
the board of directors.
    Except for a few minor stylistic changes, we proposed no 
substantive changes to Sec.  615.5133(a), (b), (d), and (e), which 
respectively addresses the responsibilities of the boards of directors, 
general requirements for investment policies, delegation of authority, 
and internal controls. We received no comments on these provisions, 
which we now adopt as a final rule. We proposed to redesignate Sec.  
615.5133(f), which addresses due diligence, and Sec.  615.5133(g), 
which address reports to the board, as Sec.  615.5133(h) and (i), 
respectively. We proposed to enhance the portfolio diversification and 
the counterparty (i.e., obligor) limits for Farm Credit banks, which 
were previously in Sec.  615.5133(c)(1)(i), and establish them as free-
standing provisions in redesignated Sec.  615.5133(f) and (g), 
respectively. We received comments about risk tolerance requirements in 
Sec.  615.5133(c), portfolio diversification in redesignated Sec.  
615.5133(f), and the obligor limits in redesignated Sec.  615.5133(g), 
which we will now address.
1. Risk Tolerance
    Proposed Sec.  615.5133(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 proposed to add 
sponsors and unsecured investments to this regulatory provision because 
we believe undue concentration in a sponsor or unsecured investments 
could present excessive risk. Concentration limits should be 
commensurate with the types and complexity of investments that an 
institution holds.
    We received a comment about proposed Sec.  615.5133(c)(1)(ii) from 
a bank trade association. This commenter opined that FCA should 
establish a specific concentration limit by regulation, rather than 
allowing FCS institutions to set their own concentration limits. Both 
FCA and the FBRAs no longer prescribe concentration limits by 
regulation because each financial institution has its own business 
model and risk appetite. Financial institution regulators examine each 
regulated institution for robust risk management practices. The 
commenter has not identified any compelling reasons FCS institutions 
should not be subject to the same supervisory framework as banks.
2. Liquidity Risk
    FCA proposed to revise Sec.  615.5133(c)(3), which governs how 
System institutions manage the liquidity characteristics of investments 
they hold. Specifically, we proposed to separately address the 
different liquidity needs of System banks and associations. Proposed 
Sec.  615.5133(c)(3)(i) would address liquidity in the investment 
policies of Farm Credit banks, while proposed Sec.  615.5133(c)(3)(ii) 
would address the liquid characteristics of investments that 
associations hold. We proposed this revision because of the differences 
in how Farm Credit banks and associations manage liquidity. Farm Credit 
banks hold liquidity reserves to manage funding and liquidity risks for 
themselves, their affiliated associations, and certain service 
corporations. In contrast, System associations have more limited 
funding and liquidity risk exposure because their only substantial 
liability is their debt obligation to their funding bank. We received 
no comments on proposed Sec.  615.5133(c)(3), and we now adopt it as a 
final rule with minor stylistic changes.
3. Farm Credit Bank Portfolio Diversification
    As discussed above, proposed Sec.  615.5133(f) emphasized the 
importance of a well-diversified investment portfolio. This provision 
would require System banks to adopt policies that prevent their 
investment portfolios from posing significant risk of loss due to 
excessive concentrations in asset classes, maturities, industries, 
geographic areas, and obligors. The proposed rule retained the 
provisions of the previous regulations that imposed no concentration 
limits on securities issued or guaranteed by the U.S. government and 
its agencies, and kept a 50-percent cap on MBS securities issued or 
guaranteed by a Government-sponsored enterprise (GSE). In 2014, we 
proposed a 15-percent portfolio cap on all other eligible asset 
classes. Under our proposal, no Farm Credit bank could invest more than 
10 percent of total capital in a single obligor, and the securities of 
a single obligor could not exceed 3 percent of the bank's total 
outstanding investments.
    System commenters asked us to remove the portfolio limit on money 
market funds. The commenters stressed that money market funds are 
diversified in nature and they are an effective vehicle for liquidity 
risk management, and the short-term maturities make these investments 
self-liquidating, which provide the banks with a reliable source of 
liquidity during periods of market stress. We are persuaded by this 
logic and, therefore, we omit the portfolio limit on money market funds 
in final Sec.  615.5133(f)(3)(iii).
    System commenters also claimed that the limit of 3 percent in the 
overall investment portfolio for each obligor is unnecessary because 
the proposed rule reduced the regulatory obligor limit from 20 percent 
to 10 percent of total capital. According to the commenters,

[[Page 27489]]

obligor exposure limits based on capital provides sufficient protection 
for System banks, and the proposed, additional 3-percent obligor limit 
on the overall investment portfolio does not add meaningful protection 
from a risk management perspective. We agree with the commenters, and 
therefore, we have deleted this limit from the final regulation.

D. Section 615.5134--Liquidity Reserve

    We proposed technical, non-substantive revisions to the terms 
``Government-sponsored enterprise (GSE)'' and ``U.S. Government 
agency'' in our liquidity reserve regulation in Sec.  615.5134. These 
changes conform to the definitions in Sec.  615.5131. We received no 
comments about this change. This change is consistent with recent 
changes to FCA's capital regulations as well as guidance from the 
FBRAs. For these reasons, we adopt the proposed provision as a final 
rule without change.
    We proposed to clarify that MBS fully guaranteed by a U.S. 
Government agency qualify for Level 2 liquidity and MBS fully 
guaranteed by a GSE qualify for Level 3 liquidity. A System commenter 
requested that we treat the MBS of a GSE in conservatorship as full 
faith and credit obligations of the United States and, therefore, 
qualifying for Level 2 of the Liquidity Reserve. FCA declined this 
request. Our approach is consistent with FCA's capital regulations and 
that of the FBRAs, which points to the uncertainty of the future 
government support of GSEs in conservatorship.
    We made a clarifying change to the table ``to omit two lines: In 
Level 2 ``Additional Levels 1 investments'', and in Level 3 
``Additional Level 1 or 2 investments'' as well as the accompanying 
discount factors. We determined these two provisions are confusing and 
difficult to follow and are redundant given the preceding section of 
the regulation dealing with day counts.

E. Section 615.5140(a)--Eligible Investments for Farm Credit Banks

    Proposed Sec.  615.5140(a)(2) sets forth the types of eligible 
investments that Farm Credit banks may purchase and hold. The intent of 
this provision is to ensure that System banks invest only in high-
quality investments. We received comments on each investment type, 
which we now discuss.\13\
---------------------------------------------------------------------------

    \13\ Revised Sec.  615.5140(a) would apply to Farm Credit banks 
only. As discussed below, all association eligibility requirements 
would be in revised Sec.  615.5140(b).
---------------------------------------------------------------------------

1. Non-Convertible Senior Debt Securities
    The proposed rule would continue to authorize FCS banks to invest 
in non-convertible senior debt securities. A bank trade association 
questioned whether System institutions should have authority to invest 
in corporate bonds. The commenter claims that corporate bonds are not 
as high quality as government bonds, and expose investors to greater 
interest rate risk. The commenter's concern is that a corporate bond 
could allow System banks to become the only, or the majority, investor, 
which the commenter believes could enable the System to exceed the 
lending constraints in the Act.
    FCA is not willing to ban investments in all corporate bonds, as 
the commenter requests. Our regulations have allowed FCS institutions 
to invest in high-quality corporate bonds since 1993. System 
institutions use these high-quality corporate bonds to build and 
diversify their liquidity portfolios. This regulatory provision imposes 
high credit quality standards, portfolio and obligor limits, and 
purpose restrictions on non-convertible senior debt securities. These 
restrictions mean that the FCS may purchase and hold only publicly 
traded debt securities. Under proposed Sec.  615.5140(a)(2)(i), which 
is redesignated as final Sec.  615.5140(a)(1)(ii)(A), investments in 
corporate debt securities fall under an institution's investment 
authority and, therefore, they do not violate the lending restrictions 
of the Act. Accordingly, final Sec.  615.5140(a)(1)(ii)(A) will allow 
FCS banks to buy and hold a non-convertible, senior debt security, 
which includes corporate bonds.
    Under proposed Sec.  615.5140(a)(2)(i), System banks could not 
invest in senior debt securities that can convert into another debt or 
equity security.\14\ FCA received no comments on non-convertible senior 
debt securities, and it adopts this provision as final and redesignate 
it as Sec.  615.5140(a)(1)(ii)(A) without substantive change.
---------------------------------------------------------------------------

    \14\ As noted in the preamble to the proposed rule, non-
convertible senior debt includes: (1) U.S. Government and U.S. 
Government agencies debt securities, (2) Government-sponsored 
enterprises debt securities, (3) municipal (debt) securities, (4) 
corporate debt securities, and (4) other senior debt securities. 
Senior debt securities may be secured by a specific pool of 
collateral or may be unsecured with priority of claims over junior 
types of debt or equity securities. To be eligible under this 
criterion, a senior debt security must not be convertible into a 
non-senior debt security or an equity security. See 79 FR 43301, 
43304, July 25, 2014. Since 1993, FCA has stated it is generally 
inappropriate for System institutions to maintain an ownership 
interest in commercial enterprises by holding equity securities. See 
58 FR 63059, 63049-50, November 30, 1993.
---------------------------------------------------------------------------

2. Money Market Instruments
    As under our previous rule, investments in money market instruments 
would be eligible under the proposed rule. Money market instruments 
include short-term instruments such as (1) Federal funds, (2) 
negotiable certificates of deposit, (3) bankers' acceptances, (4) 
commercial paper, (5) non-callable term Federal funds (6) Eurodollar 
time deposits, (7) master notes, and (8) repurchase agreements 
collateralized by eligible investments as money market instruments. A 
money market instrument is an eligible security if it matures in 1 year 
or less.
    Two System commenters asked that we remove the asset class limit 
for money market instruments because their short-term maturities make 
them self-liquidating. FCA agrees with the commenters that money market 
instruments are liquid due to their short maturities and, therefore, no 
longer warrant a portfolio limit. However, the 10-percent obligor limit 
would still apply for these investments. Accordingly, FCA has removed 
the 15-percent portfolio diversification requirement for money market 
instruments in final Sec.  615.5133(f)(3)(iii).
3. Mortgage-Backed Securities and Asset-Backed Securities Guaranteed by 
the U.S. Government and U.S. Government Agencies
    Under proposed Sec.  615.5140(a)(2)(iii), MBS and ABS that are 
fully guaranteed as to the timely payment of principal and interest by 
a U.S. Government agency would remain eligible securities because of 
their high credit quality. As we explained in the preamble to the 
proposed rule, securities labeled ``government guaranteed'' satisfy 
this criterion only if they are fully guaranteed as to the timely 
payment of principal and interest.\15\ We received no comments on 
proposed Sec.  615.5140(a)(2)(iii) and, therefore, we adopt this 
provision as final and redesignated Sec.  615.5140(a)(1)(ii)(C) without 
substantive change.
---------------------------------------------------------------------------

    \15\ See 79 FR 43301, 43304, July 25, 2014.
---------------------------------------------------------------------------

4. 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

[[Page 27490]]

remain eligible investments.\16\ Section 615.5174 authorize Farmer Mac 
AMBSs. As already noted in the liquidity reserve preamble discussion, a 
System commenter asked that the final rule treat securities of GSEs 
under conservatorship in the same fashion as though they were full 
faith and credit obligations of the U.S. Government. For the reasons 
explained earlier, we do not agree with the commenter, and we do not 
change this provision of the final rule.
---------------------------------------------------------------------------

    \16\ 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.
---------------------------------------------------------------------------

5. Senior-most Positions of Non-Agency Mortgage-Backed Securities and 
Asset-Backed Securities
    Previous Sec.  615.5140(a)(5) and (6) classified non-agency 
mortgage-backed securities (including non-agency commercial mortgage-
backed securities), and asset-backed securities as eligible 
investments. In 2014, FCA proposed restricting that provision by only 
allowing an institution to buy the senior-most position of a tranched 
non-agency MBS or ABS as an eligible security.\17\ A non-agency MBS or 
ABS, which is not tranched, and which payments are made on a pro-rata 
basis would be eligible securities under the proposed rule. Under 
proposed Sec.  615.5140(a)(2)(v), an eligible MBS must satisfy the 
definition of ``mortgage related security'' in 15 U.S.C. 78c(a)(41). 
Non-agency commercial MBS (CMBS) that meet these requirements are 
eligible investments for System banks under this regulatory provision. 
Non-agency MBSs and CMBS must also meet the criteria in the Secondary 
Market Mortgage Enhancement Act of 1984 (SMMEA). We received no 
comments on the eligibility of the senior-most position of non-agency 
securities and, therefore, we adopt this provision as final and 
redesignate it as Sec.  615.5140(a)(1)(i)(E).
---------------------------------------------------------------------------

    \17\ In 2011, we originally proposed that one of the criteria 
for senior-most MBSs was that no other remaining position in the 
securitization had a higher priority claim to any contractual 
cashflows. 76 FR 51289, August 18, 2011. In response to System 
comment letters, we deleted this criterion in our 2014 proposed 
rule.
---------------------------------------------------------------------------

6. Private Placement Securities
    During this rulemaking, FCA used the term ``private placement'' 
securities when referring to privately placed bonds or debt securities. 
Private placement refers to the sale of securities to a few 
sophisticated investors without registration with the Securities and 
Exchange Commission, and often without a prospectus. As a result, a 
private placement security normally is not a liquid security and not 
held for liquidity purposes; however, they may be appropriate for risk 
management. A bank trade association opined that FCA should not 
authorize any System institution to purchase private placement 
securities. This comment letter, however, focused on FCA approval of 
private placement securities on a case-by case basis. Since private 
placements are not liquid, they need to be approved by FCA on a case-
by-case basis under Sec.  615.5140(e). We discuss this issue in greater 
detail below.
7. International and Multilateral Development Bank Obligations
    Proposed Sec.  615.5140(a)(2)(vi) retained the previous authority 
of Farm Credit banks to invest in obligations of international and 
multilateral development banks, if the United States is a voting 
shareholder. We received no comment on this provision and, therefore, 
we adopt this provision as final and redesignate it as Sec.  
615.5140(a)(1)(i)(F).
8. Shares of a Diversified Investment Fund
    For many years, these regulations have authorized System banks to 
invest in several types of money market funds offered by investment 
companies registered under section 8 of the Investment Company Act of 
1940, 15 U.S.C. 80a-1 et seq. The proposed rule retained this original 
authority, although FCA updated and modified some of the terminology. 
Under proposed Sec.  615.5140(a)(2)(vii), shares of a diversified 
investment fund (DIF) would remain an eligible investment if the DIF's 
portfolio consists solely of eligible investments under any other 
paragraph of proposed Sec.  615.5140(a)(2), or Sec.  615.5174. The 
investment company's risk and return objectives and use of derivatives 
must be consistent with the investment policies of the Farm Credit 
bank. FCA proposed, however, more restrictive portfolio diversification 
limits on DIF investments than those that now exist.
    FCA received no comments about what constitutes a DIF. However, we 
wish to clarify that a diversified investment fund consists of any of 
three categories of investment funds, which are mutual funds,\18\ 
closed-end funds or unit investment trusts registered under the 
Investment Company Act of 1940. A diversified investment fund also 
includes exchanged-traded funds \19\ and money market funds.\20\ 
Exchange-Traded Funds (ETFs) while considered mutual funds or unit 
investment trusts, differ from traditional mutual funds and unit 
investment trusts (UITs). An investor's investment consists of 
purchased shares in these investment funds. All these investment funds 
meet the criteria of this regulation provision, which we redesignate as 
Sec.  615.5140(a)(1)(i)(G).
---------------------------------------------------------------------------

    \18\ The Investment Company Act of 1940 does not define the term 
``mutual fund'' but SEC literature uses it interchangeably with an 
open-end fund, which that statute defines.
    \19\ Exchange-traded funds are investment funds that are legally 
classified as open-end funds or unit investment trusts under the 
Investment Company Act of 1940.
    \20\ A money market fund is a special type of mutual fund under 
the Investment Company Act of 1940 and 17 CFR 270.2a-7--Money market 
funds.
---------------------------------------------------------------------------

    A bank trade association objected to DIFs as eligible investments 
for FCS institutions. The commenter claimed that the proposed rule did 
not limit the scope of investments in DIFs, so this authority could be 
very broad and exceed the lending constraints of the Act. FCA disagrees 
and points out that both Sec. Sec.  615.5134 and 615.5140 impose very 
stringent criteria for investments in DIFs. Furthermore, our 
regulations have allowed investments in DIFs for over 20 years, and the 
proposed rule did not expand this authority, or permit System banks to 
invest in DIFs for purposes that are beyond managing liquidity, short-
term surplus funds, or interest rate risks. Additionally, this 
regulation still requires the portfolio of any eligible DIF to be 
comprised solely of investments authorized by Sec. Sec.  615.5140 and 
615.5174. System banks can only invest in DIFs by buying shares of 
investment companies registered under section 8 of the Investment 
Company Act of 1940. Contrary to the commenter's claim, DIFs are 
eligible only if System banks exclusively hold the liquid, low-risk 
assets found in final and redesignated Sec.  615.5140(a)(1)(ii)(G). 
Because DIFs are investments, they do not enable the FCS to exceed the 
lending constraints of the Act.
9. Obligors' Creditworthiness Standard
    Previous Sec.  615.5140 relied on NRSRO credit ratings to determine 
the eligibility of investments in many asset classes, including 
municipal securities, certain money market instruments, non-agency 
mortgage-backed securities, asset-backed securities, and corporate debt 
securities.\21\ As noted earlier, section 939A of the DFA requires each 
Federal

[[Page 27491]]

agency to revise all 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. FCA proposed Sec.  615.5140(a)(3) to 
implement section 939A of the DFA by addressing the creditworthiness of 
the obligor of securities that System banks buy and hold as 
investments.
---------------------------------------------------------------------------

    \21\ Our regulation has not imposed credit rating requirements 
on investments in obligations of United States. U.S. Government 
agencies, GSEs, and international and multilateral development 
banks, and in DIFs and certain money market instruments.
---------------------------------------------------------------------------

    Our proposed rule would have required at least one obligor of the 
investment to have ``very strong capacity'' to meet its financial 
commitment for the expected life of the investment. If a Farm Credit 
bank is relying upon an obligor located outside of the United States to 
meet its financial commitment, the proposal required:

    That obligor's sovereign host country to have the highest or 
second-highest consensus Country Risk Classification (CRC) (a 0 or a 
1) as published by the Organization of Economic Cooperation 
Development (OECD or must be an OECD member that is unrated; or the 
investment must be fully guaranteed as to the timely payment of 
principle and interest.\22\
---------------------------------------------------------------------------

    \22\ http://www.oecd.org/trade/xcred/crc.htm.

    A System trade association, an FCS association, and Farmer Mac 
commented that the proposed creditworthiness standard for obligors was 
too stringent. These commenters suggested that the final rule should 
require at least one obligor to have a ``strong'' capacity to meet its 
financial commitment for the expected life of the investment, rather 
than the ``very strong'' capacity referred to in the proposed rule. One 
of these commenters asked FCA to provide further clarification about 
how ``very strong capacity to meet its financial commitments'' is 
related to a ``very low probability of default.'' These commenters also 
urged FCA to adopt the FBRA's creditworthiness standard of ``investment 
grade.''
    FCA declined the commenters' request to relax the creditworthiness 
standard for obligors. FCA believes a security with ``low credit risk'' 
is one where the Farm Credit bank determines the issuer has a ``very 
strong'' capacity to meet all financial commitments under the 
security's projected life even under adverse economic conditions. 
Securities that exhibit these characteristics are liquid and 
marketable. Farm Credit banks primarily hold securities for liquidity 
purposes and, therefore, the creditworthiness standards for these 
securities ensure that they are marketable and readily convertible into 
cash in a crisis at minimum costs.
    We recognize our regulations governing margin and capital 
requirements for covered swap entities, and capital adequacy for all 
System institutions use the ``investment grade'' standard. However, we 
determine that ``investment grade'' is not appropriate for these 
investment regulations. FCA believes not all securities that meet the 
``investment grade'' requirements would be of suitable high credit 
quality and marketable for liquidity purposes. Therefore, FCA declines 
to lower its proposed investment creditworthiness standard.
    We now respond to the comment requesting clarification about the 
relationship between ``very strong capacity to meet its financial 
commitments'' and a ``very low probability of default.'' In evaluating 
the creditworthiness of a security, a Farm Credit bank should consider 
any of the following factors as well as any additional factors it deems 
appropriate:
     Credit spreads (i.e., whether it is possible to 
demonstrate that a security is subject to an amount of credit risk 
based on the spread between the security's yield and the yield of 
Treasury or other securities);
     Securities-related research (i.e., whether providers of 
securities-related research believe the issuer of the security will be 
able to meet its financial commitments, generally or specifically, with 
respect to the securities held by the Farm Credit bank);
     Internal or external credit risk assessments;
     Default statistics (i.e., whether providers of credit 
information relating to securities express a view that specific 
securities have a probability of default consistent with other 
securities with an amount of credit risk);
     Inclusion on an index (i.e., whether a security, or issuer 
of the security, is included as a component of a recognized index of 
instruments that are subject to a specific amount of credit risk);
     Priorities and enhancements (i.e., the extent to which 
credit enhancements, such as overcollateralization and reserve accounts 
cover a security)
     Price, yield, and volume (i.e., whether the price and 
yield of a security are consistent with other securities that the 
institution has determined are subject to an amount of credit risk and 
whether the price resulted from active trading); and
     Asset class-specific factors (e.g., in the case of 
structured finance products, the quality of the underlying assets).
10. Credit and Other Risk in the Investment
    In addition to imposing creditworthiness standards on obligors, we 
also proposed that an eligible investment must exhibit low credit risk 
and other risk characteristics consistent with the purposes for which 
it is held, such as interest rate risk. Institutions must consider 
other risks but are not limited to just those listed in Sec.  
615.5133(c). FCA received a System comment that proposed Sec.  
615.5140(a)(4) limits the ability of System banks to use an investment 
for more than one investment purpose. We already responded to that 
comment above in the preamble discussion of final Sec.  615.5132. In 
addition, our discussion in the preamble about the creditworthiness of 
the obligor explains our position of credit quality, and this provision 
requires no revision. Therefore, we adopt this provision as final and 
redesignate it as Sec.  615.5140(a)(1)(iv).
11. Currency Denomination
    Since 1993, Sec.  615.5140(a) has required all investments at 
System institutions to be denominated in U.S. dollars. We proposed no 
change to this requirement, and we received no comments about it. 
Accordingly, we retain this requirement in the final rule without 
revision, but redesignate it as Sec.  615.5140(a)(v).
12. Ineligible Investments
    The proposed rule, Sec.  615.5140(c), would have prohibited Farm 
Credit banks from purchasing collateralized debt obligations (CDOs), as 
originally defined in Sec.  615.5131. As discussed in the preamble to 
the definitions section above, Farmer Mac objected to our definition of 
``CDO,'' and we responded by substituting the term ``resecuritization'' 
for ``CDO.''
    However, the final rule would prohibit System banks from purchasing 
and holding resecuritizations as we originally proposed. During the 
financial crisis of 2008-2009, many risky securitization exposures were 
resecuritized into new complex securities where not all buyers fully 
understood the risks in the different tranches of these new 
resecuritization exposures. These securities, which were sometimes 
known as CDO-squared, CDO-cubed, or reperformers, exposed investors to 
higher risk than the basic securitization structure. Basel III and the 
FBRAs recognized the higher risk posed by resecuritizations, and 
assigned a higher risk weight to them than basic

[[Page 27492]]

securitization exposure.\23\ FCA strongly believes the complex nature 
of the risks within these resecuritization exposures are inappropriate 
investments for System banks. Therefore, we consider these 
resecuritization exposures to be ineligible investments for the 
purposes authorized in Sec.  615.5132. FCA also believes certain pools 
of previously delinquent or reperforming loans that were once part of a 
different securitization exposure exhibit similar risks as a 
resecuritization exposure. The final rule prohibits System banks from 
purchasing resecuritizations without FCA's approval under final Sec.  
615.5140(e), except when both principal and interest are fully and 
explicitly guaranteed by the U.S. Government or a GSE.
---------------------------------------------------------------------------

    \23\ See Sec.  628.43(b)(5)--A supervisory calibration 
parameter, p, is equal to 0.5 for securitization exposures that are 
not resecuritization exposures and equal to 1.5 for resecuritization 
exposures.
---------------------------------------------------------------------------

13. Reservation of Authority
    Proposed Sec.  615.5140(d) would have made explicit our authority, 
on a case-by-case basis, to determine that an investment poses 
inappropriate risk, notwithstanding that it satisfies the investment 
eligibility criteria. The proposal also provides that FCA would notify 
a Farm Credit bank as to the proper treatment of any such investment. 
We received no comment on this provision. We retain this provision to 
safeguard the safety and soundness of banks, and we redesignate it as 
Sec.  615.5140(c).

F. Association Investments

    FCA proposed to substantially revise Sec.  615.5142, which governed 
association investments. Previously, Sec.  615.5142 did not impose a 
portfolio limit on the total amount of association investments. 
Additionally, our former regulation permitted 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 (interest 
rate) risks as their funding banks. Previously, Sec.  615.5142 
authorized 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 regulation also required each Farm Credit bank to review annually 
the investment portfolio of every association it funds.
    The proposed rule would limit association investments to securities 
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) Investment and risk 
management practices at System associations; (2) funding bank 
supervision of association investments; (3) requests by associations to 
FCA to hold other investments; and (4) transition requirements for 
System associations to come into compliance with the new rule.
    We proposed these changes because most System associations have 
increased in size and complexity over the past two decades, offering a 
diversity of products and services to adapt to 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 remain 
concentrated in agriculture and have limited ability to manage 
concentration risk. Although the previous regulation allowed the 
associations to use investments for managing surplus short-term funds 
and reducing interest rate risk, they could not use investments to 
manage concentration risk. For these reasons, we designed the proposed 
rule to strike a balance by granting associations greater flexibility 
in the purposes for which they may hold investments, while placing new 
limits on the amounts and types of investments they may hold. Under the 
proposed rule, associations would have the flexibility to manage 
concentration risks with securities that are issued or fully guaranteed 
or insured as to the timely payment of principal and interest by the 
U.S. Government or its agencies. The 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 
FCA.\24\
---------------------------------------------------------------------------

    \24\ 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.
---------------------------------------------------------------------------

    Before we address the substantive comments that we have received, 
we notify the public that we have consolidated all the provisions 
governing eligible investments for all System institutions into a 
single regulation, Sec.  615.5140. Accordingly, FCA has removed Sec.  
615.5142 concerning association investments, and redesignated it as 
final Sec.  615.5140(b). Proposed Sec.  615.5142(d) would have 
redesignated, but not substantively changed, Sec.  615.5140(e) 
concerning other association investments approved by FCA. The final 
rule restores case-by case approvals for both banks and associations to 
Sec.  615.5140(e). Although we received, no comments about 
restructuring final Sec.  615.5140, we consolidated the two sections 
for greater uniformity in the rule. Addressing eligible investments in 
a single regulation will make it easier for both FCA examiners and 
System institutions to use and apply this rule.
1. Association Investment Purposes
    The proposed rule would remove the requirements in the previous 
regulation that authorize associations to hold investments for the 
purposes of reducing interest rate risk and managing surplus short-term 
funds. The preamble to the proposed rule explained that these 
requirements may be too restrictive and too inflexible for associations 
to effectively manage their risks in today's environment. For many 
associations, a limited portfolio of high-quality investments could 
help diversify risks they experience as lenders that primarily lend to 
a single-industry agriculture.
    We invited comments about whether this rule should identify 
specific purposes for associations to purchase and hold investments, 
and we asked the commenters to expressly identify any specific purposes 
that the final regulation should retain or require, and why. Two bank 
trade associations stated that the final rule should identify specific 
risk management purposes for associations to purchase and hold 
investments. One commenter asked if associations are no longer required 
to manage surplus short-term funds and reduce interest rate risks, what 
is the reason for these investments?
    FCA responded that System institutions face four broad types of 
risks: (1) Credit; (2) market (interest rate); (3) liquidity; and (4) 
operational. Although the previous regulation allowed associations to 
hold investments only for managing surplus short-term funds 
(liquidity), and reducing interest rate risk (market risk), the 
associations remain exposed to broader risk both in individual 
investments and in their overall portfolios. Additionally, the prior 
regulation permitted associations to hold the same investments as FCS 
banks, which exposed them to the same four risks. For this reason, 
Sec.  615.5133 requires all FCS banks and association to address these 
four risks in their

[[Page 27493]]

investment policies. The investment policies must be commensurate with 
the size and complexity of the institution's investment portfolio. As 
discussed in greater detail below, this final rule retains and 
strengthens the investment management requirements in Sec.  615.5133. 
Additionally, new limits on the amount and types of investments in our 
proposal would counterbalance the greater flexibility in investment 
purposes.
    As stated above, FCA seeks to grant associations greater 
flexibility in investment purposes, while placing more restrictions on 
the types and amount of investments they may hold. Contrary to claims 
in banker comment letters, this rule restricts, rather than expands the 
types of investments that associations may purchase and hold. This rule 
no longer authorizes associations to hold the same investments as FCS 
banks, such as money market instruments, corporate bonds, and certain 
asset-backed securities.
    In contrast, a System association asked FCA to retain the 
investment list in the previous regulation, which it claims 
associations need to manage ``prepayment [extension or contraction] 
risk, credit risk, liquidity risk and yield risk.'' However, FCA 
determines that the new regulation provides sufficient risk management 
tools for associations, and their need for investments is different 
from their funding banks. By only authorizing associations to hold 
securities issued or unconditionally guaranteed by the U.S. Government 
and its agencies, the regulation eliminates most credit risk associated 
with such assets, and helps mitigate risk in their overall portfolios. 
Securities issued or unconditionally guaranteed by the U.S Government 
and its agencies still present market (interest rate), liquidity, and 
operational risks to associations. As discussed elsewhere in this 
preamble, placing a 10-percent portfolio cap on associations for the 
first time, and limiting the types of investments that associations may 
hold, result in a conservative and risk-adverse regulatory approach. 
The low credit risk in these investments offer the opportunity to 
diversify the balance sheet credit risks for those associations that 
choose to exercise their investment authorities.
2. Eligible Association Investments
    Proposed Sec.  615.5142(a) would authorize System associations to 
invest solely in obligations that the United States Government and its 
agencies issue, fully guarantee, or insure as to the timely payment of 
principal and interest. Sections 2.2(11) and 2.2(17) expressly 
authorize System associations to invest in such obligations of the 
United States and its agencies. Such obligations are usually liquid and 
marketable. Although MBS issued by the U.S. Government and its agencies 
pose almost no credit risk to investors, they potentially expose 
investors to other risks, especially market (interest rate and 
prepayment risk). We find that these investments are suitable for 
managing risk at associations because they have no credit risk and they 
enable associations to diversify their portfolios. Additionally, all 
System institutions may hold Farmer Mac AMBS as eligible 
investments.\25\
---------------------------------------------------------------------------

    \25\ Investments in Farmer Mac AMBS are covered by Sec.  
615.5174. Investments in Farmer Mac AMBS cannot exceed the total 
amount of outstanding loans of a System bank or association.
---------------------------------------------------------------------------

    Bankers and their trade associations commented that this provision 
would allow System associations to buy ineligible loans that are 
guaranteed by the United States and its agencies in contravention of 
the Act. FCA revised this provision to address these concerns. FCA has 
addressed the commenters' concerns by changing the term ``obligations'' 
to ``securities'' in the third sentence of the final rule. If an 
association purchases the government-guaranteed portions of individual 
loans, such purchases do not meet the criteria for an investment 
security under the final rule.\26\ FCA has added rule text to clarify 
that only securities that the U.S. Government and its agencies 
unconditionally guarantee are eligible investments for associations. 
Under the final regulation, only investments defined and booked as 
securities under GAAP qualify as authorized investments under the final 
rule.
---------------------------------------------------------------------------

    \26\ For Generally Accepted Accounting Principles' (GAAP) 
purposes, the association should treat the purchase of an individual 
loan as purchase of an interest in an assignment in a loan 
participation. System institutions, when purchasing the guaranteed 
portion of an individual loan, also must comply with the lending 
eligibility and loan purpose of parts 613 and 614, as if they 
originated the loan.
---------------------------------------------------------------------------

    For further clarification, FCA notes that pool assemblers purchase 
guaranteed portions of loans in the secondary market, and securitize 
these assets. In this context, not all these securitizations will be 
eligible investments for associations. We anticipate that System 
associations most likely will purchase and hold either securities 
guaranteed by SBA or issued by Farmer Mac.\27\ The SBA and Farmer Mac 
guarantee the timely payment of principal and interest to 
investors.\28\ Under GAAP, such assets are reported as investments. 
System banks and associations purchase Farmer Mac 2 AMBSs under Sec.  
615.5174, not under Sec.  615.5140. Farmer Mac 2 AMBSs and guaranteed 
SBA securities are eligible investments for associations under the 
final regulation. We have redesignated proposed Sec.  615.5142(a) as 
final Sec.  615.5140(b)(1).
---------------------------------------------------------------------------

    \27\ The SBA issues a ``SBA Guaranteed Pool Certificate'' to 
those securitizations created by third-party issuers. In effect, the 
SBA unconditionally guarantees the security. Farmer Mac issues 
Farmer Mac 2 AMBSs whose underlying assets consist of the guaranteed 
portions of USDA loans.
    \28\ SBA is a Government agency while Farmer Mac is a GSE.
---------------------------------------------------------------------------

3. Association Portfolio Limits
    Proposed Sec.  615.5142(a) limits association investments to 10 
percent of total outstanding loans. This portfolio limit ensures that 
loans to eligible borrowers always comprise most of the assets of FCS 
associations, which is consistent with the System's mission. 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 but a few 
affiliated associations; and (2) associations borrow almost exclusively 
from their funding banks.
    The proposed 10-percent portfolio limit on investments should be 
sufficient to enable associations to develop robust strategies to 
manage risks if association investment policies, management practices 
and procedures, and appropriate internal controls support those 
investment activities. Furthermore, the proposed 10-percent limit 
should help associations manage their concentration risk as single-
industry lenders. 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 lending to farmers and 
other eligible borrowers.
    We received comments about the proposed portfolio limits from both 
System and non-System commenters. The principal concerns raised by the 
commenters focused on: (1) How FCA would apply the 10-percent limit; 
(2) which investments the portfolio limit covered, and (3) whether the 
10-percent limit is prudent.
    System commenters raised three primary issues about the proposed 
portfolio limit for association investments. Several System commenters 
inquired whether the 10-percent limit on investments applies to

[[Page 27494]]

both investments authorized under Sec.  615.5142(a) and those approved 
by FCA on a case-by-case basis. Additionally, some System commenters 
opined that the 10-percent limit was too restrictive, and that FCA 
should increase it to 15-percent. Others suggested that a limit based 
on ``total outstanding loans'' would be too restrictive. These 
commenters suggested that the final rule tie the portfolio cap to a 
broader array of assets including; ``earning assets,'' ``loans plus 
mission-related investments plus UBEs plus RBICs plus [Farmer Mac] 
MBS'' or ``total assets.''
    Bankers and their trade associations commenters opposed the 
proposed portfolio limit on association investments for other reasons. 
First, these commenters wanted FCA to base the portfolio limit on 
association capital levels, not total outstanding loans. One of the 
bank trade association commenters misinterpreted the proposed portfolio 
limit for associations by assuming that it established two separate 10-
percent limits; one for U.S. Government-guaranteed investments, and one 
for ``all other association investments.'' This commenter requested 
that FCA limit eligible investments to 10 percent of capital (5 percent 
for guaranteed investments and 5 percent for non-guaranteed 
investments), which would include 1 percent of capital for ``other 
investments'' which are ``for purposes that are [consistent] with the 
Act's lending constraints.'' Second, these commenters claim that the 
proposed portfolio limit was too high because investments at most 
associations would rarely equal or exceed 10 percent of total 
outstanding loans. Third, bank commenters claimed that if loan volume 
declines at an association, it should then liquidate investments to 
comply with the portfolio limit, which would expose it to losses on 
their required sale due to their presumed illiquidity.
    We now respond to requests that we either increase or decrease the 
portfolio limit for investments. As stated above, System commenters 
claimed that a 10-percent limit was too restrictive, and they request 
that we increase it to 15 percent. System commenters have not convinced 
us that the 10-percent limit is too restrictive. FCA notes that the 
policies at some System associations with active investment programs 
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. In contrast, bank trade 
associations commenters asked us to significantly lower the proposed 
10-percent limit. However, a lower limit would not provide meaningful 
risk diversification, or the necessary economies of scale for 
associations to justify the added costs of establishing and maintaining 
the infrastructure and internal controls for holding and managing an 
investment portfolio of securities unconditionally guaranteed by the 
United States Government and its agencies. Reducing the portfolio limit 
below 10 percent could hamper associations from holding such 
investments, thereby denying them more diversified and better quality 
asset portfolios. For this reason, we decline both requests.
    We now address requests from bank commenters that FCA change the 
denominator for the portfolio limit calculation from total outstanding 
loans to capital. These commenters stated that all FRBAs impose 
investment limits that are based on references to capital, rather than 
loans or other assets. Additionally, these commenters assert that a 
limit tied to capital would more effectively reduce the risk exposure 
to System associations. FCA responds that the purpose of the portfolio 
limit is to ensure that most association assets are loans to eligible 
agricultural and aquatic producers while promoting portfolio diversity. 
Under the final rule, associations may hold only securities that are 
unconditionally guaranteed by the U.S. Government and its agencies for 
risk management purposes, which effectively eliminates the credit risk 
exposure that the commenters fear. Furthermore, Sec.  615.5182 requires 
associations to manage interest rate risk associated with such 
Government-guaranteed investments. For these reasons, a portfolio limit 
based on a reference to capital is unnecessary. In this context, the 
statutory framework for the FCS is different than that for banks. FBRAs 
do not tie investments at banks to loans or other assets because their 
statutes do not limit their lending activity to a single economic 
sector.
    As noted earlier, a bank trade association asked that the final 
rule limit non-guaranteed investments to 5 percent of capital, and 
``other investments'' to 1 percent of capital. The commenter also 
suggested that the final rule prohibit associations from holding non-
guaranteed and ``other investments'' for purposes that are inconsistent 
with the Act's lending constraints. FCA already addressed the comment 
about using capital as the reference for a portfolio limit. More 
importantly, the final rule does not allow associations to disguise 
ineligible loans as investments in violation of the Act, and as 
explained elsewhere in this preamble, we amended the final rule to 
address this specific concern.
    We now respond to System commenters who asked us to change the 
portfolio limit from ``total outstanding loans'' to either ``earning 
assets,'' or ``total assets.'' We decline this request because ``total 
outstanding loans'' is a standard that provides associations with a 
sufficient level of investments to manage their risks prudently and 
economically. Our investment regulations use the same standard for 
calculating the limit for Farm Credit banks, which play a far greater 
role in managing liquidity and market risk for the entire System than 
associations. Under the circumstances, FCA finds no compelling reason 
for enacting a permissive standard for System associations, and a more 
stringent one for Farm Credit banks. Separately, FCA has consistently 
held that the principal statutory mission of the System is lending to 
agricultural and aquatic producers, and their cooperatives. A portfolio 
limit tied to loans ensures that agricultural credits remain the 
primary assets of all System banks and associations. A portfolio limit 
based on either ``earning'' or ``total'' assets could permit 
associations to hold a greater amount of assets that are unrelated to 
agriculture.
    Several System commenters asked that the portfolio limit 
calculation exclude equity investments in Rural Business Investment 
Companies (RBICs), an Unincorporated Business Entities (UBEs), or 
Farmer Mac Class B stock (held only by System investors) from its 
numerator. FCA agrees with System commenters, and the final rule 
excludes both debt and equity investments in these three entities from 
the calculation of the 10-percent limit. The amount that System 
institutions, either alone or together, may invest in RBICs are limited 
by statute.\29\ Investments in UBEs are subject to limits in Sec.  
611.1153(h). FCA does not intend to place any limitations on either the 
purchase of Farmer Mac Class B equity or Farmer Mac issued Agricultural 
Mortgage Backed Securities (AMBS) because it would discourage System 
institutions from using Farmer Mac in its risk management strategies. A 
System bank or association may purchase Farmer Mac Class B equity under 
Sec.  615.5173 and Farmer Mac AMBSs under Sec.  615.5174.
---------------------------------------------------------------------------

    \29\ See section 384J of the Consolidated Farm and Rural 
Development Act, 7 U.S.C. 2009cc-9.
---------------------------------------------------------------------------

    Several System institutions suggested that the calculation for the 
portfolio limit revealed a potential conflict because the numerator 
would use a 30-

[[Page 27495]]

day average while the denominator would use a 90-day average. These 
commenters requested that the final regulation set a 90-day average 
daily balance for both the numerator and denominator. FCA disagrees 
with the commenter that a 10-percent limit calculation should use a 90-
day average balance for both the numerator and the denominator. FCA 
believes that the commenter's approach could favorably influence the 
association's calculation of the numerator of the 90-day average, and 
thus periodically exceed the 10-percent portfolio limit. After 
considering various alternatives, FCA decides that using a date-
specific total investment amount for the numerator best achieves our 
objective that each association never exceeds the 10-percent portfolio 
limit. This approach simplifies the calculation by removing one of the 
two averages proposed. FCA will keep the denominator calculation at a 
90-day average because FCA's capital regulations and call report 
instructions already require FCS institutions to calculate 90-day 
average daily balances for loans outstanding.
    The final rule requires System associations to compute the 10-
percent limit based upon a total amount for investments on a specific 
date in the numerator, divided by a 90-day average daily balance of 
loans outstanding in the denominator. This calculation values 
investments at amortized cost. Loans, as defined in Sec.  615.5131, 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 this calculation, loans would include accrued interest, 
but would not include allowances for loan loss adjustments.
    FCA changes the 30-day average daily balance in proposed Sec.  
615.5142(a) to a date specific amount in final and redesignated Sec.  
615.5140(b)(3). FCA has made a conforming change to the final rule, 
which requires associations to compute the limit using for the 
numerator, the date-specific amount of investments divided by the 
denominator, using the amount of the 90-day average balance reported in 
the most recent call report. Unless otherwise directed by FCA, 
associations should calculate this limit quarterly.
    A bank trade association asserted that if loan volume declines at 
an association, the association should liquidate investments to stay 
within the 10-percent limitation. FCA notes that proposed Sec.  
615.5142(e)(2) expressly stated that an association would not need to 
divest of investments that were eligible when purchased even if a 
decline in total outstanding loans causes it to exceed the 10-percent 
portfolio limit. However, the rule would prohibit associations from 
purchasing additional investments until their total amount is equal to 
or less than the 10-percent limit. FCA retains this approach in the 
final rule and redesignate it as Sec.  615.5140(b)(5). Requiring 
liquidation of investments when total outstanding loans decline could 
expose associations to unnecessary losses due to fluctuations in 
investment prices and associated transaction costs.\30\ The commenter 
also claimed that it is unclear whether association investments 
authorized by the proposed rule would be liquid, and this could 
increase risk to an association in the event it had to liquidate 
eligible investments. Given that this regulation limits association 
investments for risk management purposes to securities that are issued, 
or unconditionally guaranteed or insured by the U.S. Government or its 
agencies, the commenter's concern lacks merit.
---------------------------------------------------------------------------

    \30\ Although we received no similar comment about the bank 
investment portfolio limit, we note that the same rationale applies. 
A System bank would not need to divest of investments that were 
eligible when purchased even if a decline in total outstanding loans 
causes it to exceed the 35-percent portfolio limit. However, System 
banks could not purchase additional investments.
---------------------------------------------------------------------------

    After reviewing all the comments, FCA has decided to retain the 
proposed portfolio limit of 10 percent of total outstanding loans, 
although the final rule contains some minor adjustments, which we 
explained earlier. This new regulation imposes a portfolio limit on 
association investments, whereas the former regulation had none. As we 
explained in the preamble to the proposed rule, the 10-percent limit on 
investments ensures that loans to agricultural producers and other 
eligible borrowers constitute most of association assets. In this 
context, the primary purpose of the portfolio limit is to ensure that 
System associations adhere to their statutory mission as a GSE to 
finance agriculture. Additionally, the 10-percent portfolio limit 
strikes an appropriate balance that enables associations to effectively 
manage and diversify risks while staying within the boundaries of the 
Act. Since associations may hold only investments issued, guaranteed or 
insured by the United States Government and its agencies, and 
investments approved by FCA on a case-by-case basis, a portfolio limit 
that does not exceed 10 percent of loans allows an appropriate economy 
of scale based on expected overhead costs and compliance with 
investment management requirements in Sec.  615.5133.
    Both System institutions and bank commenters asked whether the 10-
percent limit applied to investments that FCA approves on a case-by-
case basis. FCA confirms that the final regulation will apply an 
aggregate limit of 10 percent to investments authorized in Sec.  
615.5140.
4. Association Risk Management Requirements
    The proposed rule addressed risk management practices that 
associations must follow if they select, purchase, and hold 
investments. We designed these provisions to ensure that System 
associations comply with prudent investment management practices. The 
proposed rule would have required each association to evaluate its 
investment management policies, and determine and document how its 
investment activities adhere to prudent risk management processes and 
procedures. Under the proposed rule, each association must comply with 
proposed Sec.  615.5133(a), (b), (c), (d), (e), (h), and (i), which 
govern investment management practices at all System institutions.\31\ 
From FCA's perspective, 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. 
Additionally, each association's investment management must be 
appropriate for the size, risk characteristics, and complexity of the 
association and its investment portfolio. Investment management must 
consider the association's unique circumstances, risk tolerances, and 
objectives.
---------------------------------------------------------------------------

    \31\ 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. 
Proposed Sec.  615.5142(b) has been redesignated as final Sec.  
615.5140(b)(2)(i). FCA did not redesignate Sec.  615.5133(f) and 
(g).
---------------------------------------------------------------------------

    We asked for comments on whether these new requirements would 
impose undue regulatory burden on System associations and their funding 
banks. FCA received no comments about risk management practices at 
associations. Since these risk management practices enhance safety and 
soundness at System associations, we adopt the proposed regulatory 
requirements without substantive revision.
    The rule requires each association to assess how investments that 
they purchase and hold impact the association's credit risk profile, 
and affect its risk-bearing capacity. Such factors that associations 
should consider and evaluate include, but are not limited to, its 
management experience

[[Page 27496]]

and capability to understand and manage complex structures and unique 
risks in the investments it purchases and holds. Associations may 
purchase and hold investments in final Sec.  615.5140(b)(1) only for 
managing risks. Although 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 on the balance sheet. Other risks that associations should 
consider and evaluate include prepayment (extension and contraction) 
risks and interest rate cap risks and how these risks potentially 
impact earnings.
5. 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 under FCA regulations. Proposed Sec.  615.5142(c) 
sets forth the requirements for funding banks to review, approve, and 
oversee 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. FCA 
structured the proposed rule to provide flexibility so that funding 
banks could approve types or classes of investments, rather than each 
individual investment. However, the proposed rule, would require 
funding banks to review and approve prospective association 
investments, prior to submission to FCA for case-by-case approval. The 
FCA Board continues to be the final authority for approving all 
association case-by-case investments. The proposed rule would require 
each bank to explain in writing its reasons for approving or denying 
the association's investment requests.
    Once an association has established a satisfactory investment 
management program that its funding bank has approved, the association 
could purchase and hold investments that the Act and this regulation 
authorize. The intent of this provision is to balance the association 
investment activities with the funding and oversight role of the bank. 
As part of the approval, 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 proposed 
Sec.  615.5142(b). Any prior System association investment management 
program that the funding bank previously approved would need to be 
reviewed and re-approved once proposed Sec.  615.5142 becomes final and 
effective. 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.
    Finally, the proposed rule would keep the previous requirement that 
each System bank annually review the investment portfolio of every 
affiliated association.\32\ 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.
---------------------------------------------------------------------------

    \32\ FCA notes that the General Financing Agreement (including 
any attached, referenced, or related documents) can be a useful tool 
for funding banks to review and monitor the investment activities of 
their affiliated associations. See Sec.  614.4125.
---------------------------------------------------------------------------

    FCA received comments from System institutions and commercial banks 
about funding bank approval of investments on a program rather than 
individual basis. We have already addressed this issue in a preceding 
section. Commercial bank trade associations claimed that FCA was 
abdicating its responsibilities by authorizing the funding banks to 
approve classes of association investments. We respond that sections 
2.2(10) and 2.12(18) of the Act authorize associations to hold 
investments as may be approved by their funding bank under the 
regulations of FCA. This regulation meets this statutory requirement. 
Additionally, the final regulation only allows associations to invest 
in obligations issued, guaranteed, or insured by the U.S. Government 
and its agencies. As stated above, case-by-case investments must be 
approved by FCA. For these reasons, we adopt proposed Sec.  
615.5142(c)(1) as final and redesignate it as Sec.  615.5140(b)(4).
6. Transition Issues From Previous to New Investment Regulations
    Proposed Sec.  615.5142(e)(1), would not require an association to 
divest of any investments held before the effective date of this rule 
provided we previously authorized the investment under former Sec.  
615.5140 or by official written Agency action. As we explained in the 
preamble to the proposed rule, this transition rule would allow an 
association to continue to hold previous investments that would no 
longer be authorized by the final rule. After this final rule is 
effective, institutions may not extend or renew investments past their 
maturity unless they are authorized by regulation or FCA approval.
    Proposed Sec.  615.5142(e)(3) would apply to all investments that 
an association acquires after the new regulation becomes effective. 
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 managing and 
divesting of ineligible investments.
    A bank trade association opposed this provision because it believes 
that FCA should not permit associations to hold investments that the 
final rule no longer authorizes. The commenter claimed that FCA should 
require immediate divestiture of these readily marketable investments. 
FCA responds that these investments were eligible when purchased under 
regulations and a pilot program that were then in effect. It is 
customary and accepted practice among financial institution regulators 
to allow institutions to retain investments until maturity, if prior 
regulations or agency action authorized their purchase unless a statute 
requires immediate divestiture or there is a compelling safety and 
soundness reason. As noted above, institutions cannot renew or extend 
such investments after they mature. Accordingly, we adopt proposed 
Sec.  615.5142(e)(1) as final and redesignate it as Sec.  
615.5140(b)(5).
G. Other Investments Approved by FCA
    Since 1999, our investment regulations have allowed all System 
institutions to purchase and hold other investments (not listed in our 
regulation) that FCA approves. The regulation requires that all 
requests for our approval must explain the risk characteristics of the 
investment and the institution's purpose and objectives for making the 
investment. We proposed no changes to this provision of our regulation, 
which still can be found at Sec.  615.5140(e), and the final rule 
retains this authority without revision. Case-by case approvals enable 
System institutions to purchase and hold other investments that are 
consistent with their statutory authorities and the objectives of the 
Act. Currently, FCA requires System institutions to submit information 
and analysis with each approval request that demonstrates that

[[Page 27497]]

the asset is accounted for as an investment under GAAP,\33\ and not a 
loan to an ineligible borrower.
---------------------------------------------------------------------------

    \33\ See Information Memorandum of September 4, 2014, (Appendix 
B, requirement 15).
---------------------------------------------------------------------------

    The bankers and their trade associations opposed the case-by-case 
approval authority. These commenters claim that the case-by-case 
approval authority in the regulation goes beyond the investment 
provisions in the Act and Congressional intent. They further claimed 
that this regulatory provision enables FCA to approve ``illegal'' loans 
to ineligible borrowers and classify them as investments. Specifically, 
these commenters claim that the proposed rule and guidance provided by 
the Informational Memorandum dated September 4, 2014, would permit FCS 
institutions to evade lending restrictions by buying instruments that 
are improperly labeled as ``debt securities,'' ``obligations,'' or 
``bonds.'' The commenters state that the proposed rule and the 
Information Memorandum dated September 4, 2014, does not state that 
``investments'' explicitly exclude commercial business loans. A related 
complaint was that the proposed rule did not identify specific criteria 
that FCA would use to distinguish loans from investments and that the 
approval of private placements would further blur this distinction. 
According to the commenters, such approvals would enable System 
institutions to impermissibly compete with tax-paying banks. Another 
concern of banks and their trade associations is that the case-by-case 
approvals lack transparency.
    FCA proposed no changes to the regulation governing case-by-case 
approvals of investments by System banks and associations. Accordingly, 
this final rule makes no changes to this existing regulatory provision. 
Therefore, FCA is not required to respond to the issues raised above by 
commercial bankers because they are not relevant to this rulemaking. 
However, FCA will address each of these issues to be responsive to the 
bankers and their trade associations, and transparent to the public.
    Several provisions of the Farm Credit Act allow FCA to approve new 
investments at the request of System institutions. Sections 1.5(15), 
2.2(10), 2.12(18), and 3.0(13)(A) expressly authorize Farm Credit banks 
and associations to make other investments as may be authorized under 
FCA regulations.\34\ Additionally, section 5.17(a)(5) authorizes FCA to 
``grant approvals provided for under this Act either on a case-by-case 
basis or through regulations that confer approval on actions of System 
institutions.'' Pursuant to these statutory provisions, FCA regulations 
have for many years permitted System institutions to request Agency 
approval of new investments that are not specifically covered in our 
regulations. This regulatory approach provides flexibility so System 
institutions can adapt to changing market conditions within their 
statutory authority. Financial markets often respond to economic and 
financial changes by creating new types of investments. By approving 
new investments under this case-by-case authority, FCA enables the 
System to react to evolving conditions in the marketplace.
---------------------------------------------------------------------------

    \34\ More specifically, the Act expressly allows Farm Credit 
banks and associations, ``to buy and sell obligations of, or insured 
by, the United States or any agency thereof, or securities backed by 
the full faith and credit of any such agency, and make other 
investments as may be authorized under regulations issued by the 
Farm Credit Administration.''
---------------------------------------------------------------------------

    In exercising its explicit statutory authority to approve System 
investments, FCA remains within the Act. The statute grants System 
institutions both lending and investment authorities, although it does 
not always establish specific criteria that distinguish loans from 
investments. As the Agency charged with interpreting, administering, 
and implementing the Act, FCA must look to caselaw, other statutes, 
accounting conventions, and guidance from the FBRAs to properly 
distinguish loans from investments. FCA does not have authority to 
approve, nor does it approve, ``illegal'' loans to ineligible borrowers 
and classify them as investments, as the commenters allege. As stated 
earlier, FCA, pursuant to the Informational Memorandum of September 4, 
2014, only approves obligations that qualify as investments under GAAP. 
Additionally, FCA will also analyze whether a proposed investment meets 
the necessary criteria under Federal Securities statutes, such as the 
Securities Act of 1933, the Securities Exchange Act of 1934, and the 
Investment Company Act of 1940. As part of its analysis, FCA will also 
consider relevant Federal caselaw such as Reves v. Ernest & Young,\35\ 
and SEC v. W.J. Howey Co.\36\ Finally, FCA uses the Federal Financial 
Institution Examination Council's call report instructions on 
investments and loans as additional guidance.
---------------------------------------------------------------------------

    \35\ 494 U.S. 56 (1990).
    \36\ 328 U.S. 293 (1946).
---------------------------------------------------------------------------

    In response to bank concerns about whether private placements are 
investments or loans, FCA notes that the same logic also applies to 
case-by-case approval of private placements. We observe that private 
placements are not liquid, but they are often suitable for other risk 
management purposes. Private placement securities may be appropriate in 
limited circumstances for interest rate risk management purposes. Bank 
commenters point out that private placements are not widely sold to 
public investors. FCA responds that it has authority to approve such 
private placement securities on a limited basis under specific 
conditions provided they meet the criteria of an investment. FCA 
intends to look at all relevant facts when it determines whether a 
private placement is an investment, not a loan to an ineligible 
borrower.
    A bank trade association raised concerns that investments approved 
on a case-by-case basis would be subject to a favorable tax treatment, 
which would enable System banks and associations to earn additional 
income. The arguments of the bankers and their trade associations have 
not persuaded us that case-by-case approval of investments allows 
System institutions to ``unfairly'' compete with tax-paying banks. We 
note that many community banks, which submitted comments, may organize 
as Subchapter S corporations. The tax treatment for System institutions 
under the Internal Revenue Code for subchapter T \37\ is similar to the 
tax treatment of small banks, with less than or equal to 100 investors, 
that file under subchapter S.
---------------------------------------------------------------------------

    \37\ Some System institutions may not elect to follow subchapter 
T in the Internal Revenue Code. Such institutions would pay taxes on 
retained net income.
---------------------------------------------------------------------------

    FCS debt usually trades close to Treasuries. We note that 
commercial banks may pay the same costs for funds as the System by 
funding or discounting their agricultural loans through two GSEs--
Farmer Mac or the Federal Home Loan Banks. Also, System banks must hold 
large liquidity portfolios consisting of cash and high-quality 
investments. Although System banks may deposit cash at a Federal 
Reserve bank, they do not earn interest on their deposits in contrast 
to Federal Reserve member banks. In addition, most Treasuries are 
``negative carry-trades'' for System institutions because they funded 
these investments at a debt price slightly above Treasury rates.
    Commercial bankers also claimed that case-by-case approvals lack 
transparency. The FCA Board must decide whether to approve any 
investments that are not expressly authorized by regulation. All 
resolutions that the FCA Board votes on are public

[[Page 27498]]

documents, and FCA publishes summaries of Board actions on its website. 
Thus, the public can easily find out information about investments that 
FCA has approved on a case-by-case basis. Such information includes the 
investment type, investment amount, the System institution(s) making 
the investment, general obligor characteristics, and the investment 
location. Usually, institutions withdraw requests for approval if 
during the review process, FCA staff indicates that the proposed 
transaction does not qualify as an investment, or otherwise is not 
within the applicants' investment authority.
    Commercial bank commenters requested that FCA publish a list of the 
potential investments it would approve on a case-by-case basis under 
the final rule. We believe that the bankers' approach would deny FCA 
and the System the flexibility to respond to changing market 
circumstances. As discussed earlier, sections 1.5(15), 2.2(11), 
2.12(18), 3.1(13)(A), and 5.17(a)(5) expressly authorize System banks 
and associations to hold other investments that FCA approves by 
regulation. FCA exercises its express statutory authority in a manner 
that is consistent with law, and safety and soundness.
    Commercial bank commenters noted that proposed Sec.  615.5142(a) 
stated that associations may hold investments only for risk management 
purposes. They disputed that investments approved by FCA on a case-by-
case purposes are for risk management. Under existing Sec.  
615.5140(e), case-by-case approvals have not been subject to the 
existing purpose requirements for association investments. This will 
continue unchanged in this final rule because FCA proposed no changes, 
and has made no changes to the case-by-case authority. We note, 
however, that the purposes for the investments and the risk 
characteristics of the investment are part of what FCA evaluates in its 
approval process.

H. Management of Ineligible Investments and Reservation of Authority To 
Require Divestiture

    Our divestiture regulations have long required System institutions 
to: (1) Quickly divest of investments that were ineligible when 
purchased; and (2) effectively mitigate the risk associated with 
investments that became ineligible when their credit quality 
deteriorated. FCA expects that System institutions will rarely find 
themselves holding ineligible investments in their portfolio except 
potentially in times of a widespread financial crisis. Under our 
regulatory framework, institutions must report investments that are 
ineligible when purchased immediately to FCA and divest within 60 
calendar days or pursuant to a divestiture plan approved by FCA. If an 
eligible investment later deteriorates and poses additional risk to the 
institution, the focus of the institution becomes risk mitigation. FCA 
reserves authority to require divestiture in specific circumstances.
    The proposed rule would retain most of the substantive divestiture 
requirements in previous Sec.  615.5143. However, the proposed rule 
identified which divestiture requirements apply to banks, and which 
ones apply to associations. More specifically, final and redesignated 
Sec.  615.5140(b)(5) addresses how the new 10-percent portfolio limit 
for associations pertains to these divestiture requirements.
    A bank trade association commented that FCA should not allow System 
institutions to hold any investment that becomes ineligible. This 
commenter asked FCA to require System institutions to divest of such 
investments within 6 months. FCA finds this suggestion to be unduly 
inflexible. Requiring automatic divestiture within 6 months seems 
punitive because it may not allow FCA to consider the least costly 
remedy for the institution. The commenter's suggestion that the final 
regulation should require institutions to divest of investments that 
later became ineligible due to a credit downgrade does not consider 
that some of these investments may later experience a credit upgrade. 
In these cases, mandatory divestiture within 6 months may expose the 
System institution to unnecessary losses.
    A comment from a bank trade association asked whether FCA is 
requiring FCS institutions to divest of investments approved under the 
Investment in Rural America--Pilot Programs after discontinuing those 
programs. The commenter also questioned why FCA would allow a System 
institution to continue to hold any investment approved under the pilot 
program after the program ended. Investments held under the Pilot 
Programs were designated as rural community investments that furthered 
the System's mission to increase the flow of funds into rural areas. In 
response to the commenter's question, we cite the FCA News Release NR 
13-15(11-14-13) which states:

    `` . . . [T]he Farm Credit Administration Board voted to 
conclude effective December 31, 2014, each pilot program approved 
after 2004 as part of the investments in Rural America program. The 
Board's action permits each Farm Credit System (System) institution 
that is participating in a pilot program to continue to hold its 
investments through the maturity dates for the investments, provided 
the institution continues to meet all conditions.''

As stated above, the FCA Board permitted System institutions to hold 
these investments until maturity, and this approach mitigated potential 
losses to institutions that held these investments.
    For these reasons, FCA adopts proposed Sec.  615.5143 as a final 
regulation without substantive change. However, we made some minor 
stylistic changes which primarily included revising cross references to 
association investments which are now in final Sec.  615.5140 instead 
of Sec.  615.5142.

H. Miscellaneous

1. Appropriate Use of Derivatives
    Derivatives can be appropriate and useful for hedging and risk 
management. While our regulations do not prohibit a System bank from 
using derivatives to build an investment portfolio, use of these 
derivatives must be consistent with an authorized investment purpose 
and not used for speculative purposes. We note that most cleared 
derivative contracts are very liquid, while many non-cleared derivative 
contracts are less liquid.
2. Conforming Changes to Other Regulation Sections
    We received no comments about provisions in the proposed rule that 
made conforming changes to references in Sec. Sec.  611.1153, 611.1155, 
615.5174, and 615.5180. Accordingly, we will incorporate these changes 
into the final rule.

IV. Effective Date

    We recognize that Farm Credit banks may require time to bring their 
policies and procedures into compliance with the new requirements of 
the final rule. A passage in the preamble to the proposed rule stated 
that we were contemplating whether the compliance date of the final 
rule for Farm Credit banks should be 6 months after its effective date. 
We invited comments as to whether this delayed compliance timeframe 
would be appropriate. We also asked for comments on whether a delayed 
compliance date would be appropriate for associations.
    An FCS bank claimed that System institutions would need 12 months 
to make the necessary changes to come into compliance with the final 
rule. We believe that the changes in this rule for both banks and 
associations are not so extensive that System institutions need a full 
12 months to come into

[[Page 27499]]

compliance. We also believe that a more prolonged delay would be 
detrimental to the safe and sound operations of System institutions. 
For these reasons, we believe that 6 months is sufficient time for all 
System institutions to bring their policies, procedures, and internal 
controls into compliance with the final rule. Accordingly, the final 
rule will become effective on January 1, 2019.

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 the final 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 more than 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 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 Pub. L. 92-
181, 85 Stat. 583 (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).


0
5. Section 615.5131 is amended by:
0
a. In the definition of ``Asset-backed securities (ABS)'', removing the 
words ``mortgage securities'' and adding in their place the words 
``mortgage-backed securities'';
0
b. Adding in alphabetical order definitions for ``Asset class'', 
``Country risk classification (CRC)'', and ``Diversified investment 
fund (DIF)'';
0
c. Removing the definitions for ``Eurodollar time deposit'', ``Final 
maturity'', ``General obligations'', ``Government agency'', and 
``Government-sponsored agency'';
0
d. Adding in alphabetical order a definition for ``Government-sponsored 
enterprise (GSE)'';
0
e. Removing the definition for ``Liquid investments'' and ``Mortgage 
securities'';
0
f. Adding in alphabetical order a definition for ``Mortgage-backed 
securities (MBS)'';
0
g. Removing the definition for ``Nationally Recognized Statistical 
Rating Organization (NRSRO)'';
0
h. Adding in alphabetical order definitions for ``Obligor'' and 
``Resecuritization'';
0
i. Removing the definition for ``Revenue bond'';
0
j. Adding in alphabetical order definitions for ``Sponsor'' and 
``United States (U.S.) Government agency''; and
0
k. Removing the definitions for ``Weighted average life (WAL)''.
    The additions 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, and any other asset 
class as determined by FCA.
    Country risk classification (CRC) as defined in Sec.  628.2 of this 
chapter.
    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 MBSs.
    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.
    Resecuritization as defined in Sec.  628.2 of this chapter.
    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. The board of directors 
must adopt written policies for managing the institution's investment 
activities. The board must also ensure that management complies with 
these policies and that appropriate internal controls are in place to 
prevent loss. At

[[Page 27500]]

least annually, the board, or a designated committee of the board, must 
review the sufficiency of these investment policies.
    (b) Investment policies--general requirements. Investment policies 
must address the purposes and objectives of investments; risk 
tolerance; delegations of authority; internal controls; due diligence; 
and reporting requirements. The investment policies must fully address 
the extent of pre-purchase analysis that management must perform for 
various classes of investments. The investment policies must also 
address the means for reporting, and approvals needed for, exceptions 
to established policies. A Farm Credit banks investment policy 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 its investments.
    (c) Investment policies--risk tolerance. Investment policies must 
establish risk limits for eligible investments and for the entire 
investment portfolio. The 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 
the institution's 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. Investment policies 
must identify the types and quantity of investments that the 
institution will hold to achieve its 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, asset classes or obligations with 
similar characteristics.
    (iii) Criteria for selecting brokers and, dealers. Each institution 
must buy and sell eligible investments with more than one securities 
firm. The institution must define its criteria for selecting brokers 
and dealers used in buying and selling investments.
    (iv) Collateral margin requirements on repurchase agreements. To 
the extent the institution engages in repurchase agreements, it must 
regularly mark the collateral to fair market value 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 risk--(i) Liquidity at Farm Credit banks. Investment 
policies must describe the liquidity characteristics of eligible 
investments that the bank will hold to meet its liquidity needs and 
other institutional objectives.
    (ii) Liquidity at associations. Investment policies must describe 
the liquid characteristics of eligible investments that the association 
will hold.
    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls under 
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. Each institution 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 the institution's 
investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, the investment management practices including internal 
controls, reporting processes, and compliance with FCA regulations. 
This annual review's scope 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)(3) of this section, each Farm Credit bank must maintain a well-
diversified investment portfolio as set forth in paragraph (f)(2) of 
this section.
    (2) 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 the Farm Credit bank holds 
within a DIF. In addition, except as exempted by paragraph (f)(3) of 
this section, 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. Measurement of this diversification 
requirement must be based on the portfolio valued at amortized cost.
    (3) Exemptions from investment portfolio diversification 
requirements. The following investments are not subject to the 15-
percent investment portfolio diversification requirement specified in 
paragraph (f)(2) of this section:
    (i) Investments that are fully guaranteed as to the timely payment 
of principal and interest by a U.S. Government agency;
    (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; and
    (iii) Money market instruments identified in Sec.  615.5131.
    (g) Farm Credit bank obligor limit. No more than 10 percent of a 
Farm Credit bank's total capital (Tier 1 and Tier 2) as defined by 
Sec.  628.2 of this chapter may be invested in 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 purchasing an investment, 
the institution must conduct sufficient due diligence to determine 
whether the investment is eligible under Sec.  615.5140 and complies 
with its board's investment policies. The institution

[[Page 27501]]

must document its assessment and retain any supporting information used 
in that assessment. The institution may hold an investment that does 
not comply with its investment policies only with the prior approval of 
its board.
    (ii) Valuation. Prior to purchase, the institution must verify the 
fair market 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. At purchase, the institution must at a 
minimum include an evaluation of the credit risk (including country 
risk when applicable), liquidity risk, market risk, interest rate risk, 
and underlying collateral of the investment, as applicable. This 
assessment must be commensurate with the complexity and type of the 
investment. The institution must also perform stress testing on any 
structured investment that has uncertain cash flows, including all MBS 
and ABS, before purchase. The stress test must be commensurate with the 
type and complexity of the investment and must enable the institution 
to determine that the investment does not expose its capital, earnings, 
or liquidity if applicable, to risks that are greater than those 
specified in its investment policies. The stress testing must comply 
with the requirements in paragraph (h)(4)(ii) of this section. The 
institution must document and retain its risk assessment and stress 
tests conducted on investments purchased.
    (2) Ongoing value determination. At least monthly, the institution 
must determine the fair market value of each investment in its 
portfolio and the fair market value of its whole investment portfolio.
    (3) Ongoing analysis of credit risk. The institution must establish 
and maintain processes to monitor and evaluate changes in the credit 
quality of each investment in its portfolio and in its whole investment 
portfolio on an ongoing basis.
    (4) Quarterly stress testing. (i) The institution must stress test 
its entire investment portfolio, including stress tests of each 
investment individually and the whole portfolio, at the end of each 
quarter. The stress tests must enable the institution to determine that 
its investment securities, both individually and on a portfolio-wide 
basis, do not expose its capital, earnings, or liquidity if applicable, 
to risks that exceed the risk tolerance specified in its investment 
policies. If the institution's portfolio risk exceeds its investment 
policy limits, the institution must develop a plan to comply with those 
limits.
    (ii) The institution's stress tests must be defined in a board-
approved policy and must include defined parameters for the security 
types purchased. The stress tests must be comprehensive and appropriate 
for the institution's risk profile. At a minimum, the stress tests must 
be able to measure the price sensitivity of investments over a range of 
possible interest rates and yield curve scenarios. The stress test 
methodology must be appropriate for the complexity, structure, and cash 
flows of the investments in the institution's portfolio. The 
institution must rely to the maximum extent practicable on verifiable 
information to support all its stress test assumptions, including 
prepayment and interest rate volatility assumptions. The institution 
must document the basis for all assumptions used to evaluate the 
security and its underlying collateral. The institution must also 
document all subsequent changes in its assumptions.
    (5) Presale value verification. Before the institution sells an 
investment, it must verify its fair market value with an independent 
source not connected with the sale transaction.
    (i) Reports to the board of directors. At least quarterly, the 
institution's management must report on the following to its 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 the institution 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 its investment holdings;
    (6) How investments affect its 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 the 
institution's investment policies; including the expected effect of 
these investments on its 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 level                                      Instruments           Discount (multiply by)
----------------------------------------------------------------------------------------------------------------
Level 1.................................  ..............   Cash, including    100 percent
                                                           cash due from traded but
                                                           not yet settled debt.
                                                           Overnight money    100 percent
                                                           market investment.
                                                           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.
Level 2.................................  ..............   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.

[[Page 27502]]

 
Level 3.................................  ..............   GSE senior debt    93 percent for all Level 3
                                                           securities with             instruments
                                                           maturities exceeding 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.
----------------------------------------------------------------------------------------------------------------

* * * * *

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


Sec.  615.5140   Eligible investments.

    (a) Farm Credit banks--(1) Investment eligibility criteria. A Farm 
Credit bank may purchase an investment only if it satisfies the 
following investment eligibility criteria:
    (i) The investment must be purchased and held for one or more 
investment purposes authorized in Sec.  615.5132.
    (ii) The investment must be one of the following:
    (A) A non-convertible senior debt security;
    (B) A money market instrument with a maturity of 1 year or less;
    (C) 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;
    (D) 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;
    (E) The senior-most position of an MBS or ABS that a U.S. 
Government agency does not fully guarantee as to the timely payment of 
principal and interest or a GSE does not fully and explicitly guarantee 
as to the timely payment of principal and interest, provided that the 
MBS satisfies the definition of ``mortgage related security'' in 15 
U.S.C. 78c(a)(41);
    (F) An obligation of an international or multilateral development 
bank in which the U.S. is a voting member; or
    (G) Shares of a diversified investment fund registered under the 
Investment Company Act of 1940, if its portfolio consists solely of 
securities that satisfy paragraph (a)(1)(ii)(A), (B), (C), (D), (E), or 
(F) of this section, or 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.
    (iii) 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:
    (A) 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
    (B) The investment must be fully guaranteed as to the timely 
payment of principal and interest by a U.S. Government agency.
    (iv) The investment must exhibit low credit risk and other risk 
characteristics consistent with the purpose or purposes for which it is 
held.
    (v) The investment must be denominated in U.S. dollars.
    (2) Resecuritizations. Notwithstanding any other provision of this 
section, System banks may not purchase resecuritizations (except when 
both principal and interest are fully and explicitly guaranteed by the 
U.S. Government or a GSE) without approval under paragraph (e) of this 
section.
    (b) Farm Credit associations--(1) Risk management investments. Each 
Farm Credit System association, with the approval of its funding bank, 
may purchase and hold investments to manage risks. Each association 
must identify and evaluate how the investments that it purchases 
contributes to management of its risks. Only securities that are issued 
by, or are unconditionally guaranteed or insured as to the timely 
payment of principal and interest by, the United States Government or 
its agencies are investments that associations may acquire for risk 
management purposes under this paragraph (b).
    (2) Secondary market Government-guaranteed loans. Loans purchased 
in the secondary market that are unconditionally guaranteed or insured 
by the U.S. Government or its agencies as to principal and interest are 
not eligible risk management investments under this paragraph (b).
    (3) Risk management requirements. Each association that purchases 
investments for risk management must document how its investment 
activities contribute to managing risks as required by paragraph (b)(1) 
of this section. Such documentation must address and evidence that the 
association:
    (i) Complies with Sec.  615.5133(a), (b), (c), (d), and (e). These 
investment management processes must be appropriate for the size, risk 
and complexity of the association's investment portfolio.
    (ii) Complies with Sec.  615.5182 for investments that exhibit 
interest rate risk that could lead to significant declines in net 
income or in the market value of capital.
    (iii) Assesses how these investments impact the association's 
overall credit risk profile and how these investment purchases aid in 
diversifying, hedging, or mitigating overall credit risk.
    (iv) Considers and evaluates any other relevant factors unique to 
the association or to the nature of the investments that could affect 
the association's overall risk-bearing capacity, including but not 
limited to management experience and capability to understand and 
manage unique risks in investments purchased.
    (4) Association investment portfolio limit. The total amount of 
investments purchased and held under this section must not exceed 10 
percent of the association's total outstanding loans. In computing this 
limit:
    (i) Include in the numerator the daily (point-in-time) balance of 
all investments purchased and held under this section. Unless otherwise 
directed by FCA, associations must use the investment balance on the 
last business day of the quarter when calculating the numerator of the 
portfolio limit under this paragraph. For this calculation, value 
investments at amortized cost and accrued interest.
    (ii) Include in the denominator the 90-day average daily balance of 
total outstanding loans as defined in Sec.  615.5132. For this 
calculation, value loans at amortized cost and include accrued 
interest. The denominator does not include any allowance for loan loss 
adjustments.
    (iii) Exclude from the numerator the following:

[[Page 27503]]

    (A) Equity investments in unincorporated business entities 
authorized in Sec.  611.1150 of this chapter;
    (B) Equity investments in Rural Business Investment Companies 
organized under 7 U.S.C. 2009cc et seq.;
    (C) Equity investments in Class B Farmer Mac stock authorized in 
Sec.  615.5173; and
    (D) Farmer Mac agricultural mortgage-backed securities under Sec.  
615.5174.
    (5) Funding bank supervision of association investments. (i) The 
association must not purchase and hold investments without the funding 
bank's prior approval. The bank must review the association's prior 
approval requests and explain in writing its reasons for approving or 
denying the request. The prior approval is required before the 
association engages in investment activities and with any significant 
change(s) in investment strategy.
    (ii) In deciding whether to approve an association's request to 
purchase and hold investments, the bank must evaluate and document that 
the association:
    (A) Has adequate policies, procedures, and controls, in place for 
its investment accounting and reporting;
    (B) Has capable staff with the necessary expertise to manage the 
risks in investments; and
    (C) Complies with paragraph (b)(3) of this section.
    (iii) The bank must review annually the investment portfolio of 
every association that it funds. This annual review must evaluate 
whether the association's investments manage risks over time, and the 
continued adequacy of the associations' risk management practices.
    (6) Transition for association investments. (i) An association is 
not required to divest of any investment held on January 1, 2019 that 
was authorized under Sec.  615.5140 as contained in 12 CFR part 615 
revised as of January 1, 2018 or otherwise by official written FCA 
action that allowed the association to continue to hold such 
investment. Once such investment matures, the association must not 
renew it unless the investment is authorized pursuant to this section.
    (ii) No association is required to divest of investments if a 
decline in total outstanding loans causes it to exceed the portfolio 
limit in paragraph (b)(3) of this section. However, the institution 
must not purchase new investments unless, after they are purchased, the 
total amount of investments held falls within the portfolio limit.
    (c) Reservation of authority. FCA may, on a case-by-case basis, 
determine that a particular investment you are holding poses 
inappropriate risk, notwithstanding that it satisfies the investment 
eligibility criteria. If so, we will notify you as to the proper 
treatment of the investment.
    (d) [Reserved]
    (e) Other investments approved by FCA. You may purchase and hold 
investments that we approve. Your request for our approval must explain 
the risk characteristics of the investment and your purpose and 
objectives for making the investment.


Sec.  615.5142   [Removed and reserved]

0
9. Section 615.5142 is removed and reserved.

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 (b) 
or investments FCA had not approved under Sec.  615.5140(e), as 
applicable, at the time of purchase are ineligible. System institutions 
must not purchase ineligible investments. If the institution determines 
that it has purchased an ineligible investment, it must notify FCA 
within 15 calendar days after the determination. The institution must 
divest of the investment no later than 60 calendar days after 
determining that the investment is ineligible unless FCA approves, in 
writing, a plan that authorizes the institution to divest the 
investment over a longer period. Until the institution divests of the 
ineligible investment:
    (1) A Farm Credit bank must not use the ineligible investment to 
satisfy its liquidity requirement(s) under Sec.  615.5134;
    (2) The institution must include the ineligible investment in the 
portfolio limit calculation defined in Sec.  615.5132 or Sec.  
615.5140(b)(3), as applicable; and
    (3) A Farm Credit bank must exclude the ineligible investment as 
collateral under Sec.  615.5050.
    (b) Investments that no longer satisfy investment eligibility 
criteria. If the institution determines that an investment (that 
satisfied the eligibility criteria set forth in Sec.  615.5140(a) or 
(b), as applicable, when purchased) no longer satisfies the criteria, 
or that an investment that FCA approved pursuant to Sec.  615.5140(e), 
no longer satisfies the conditions of approval, the institution may 
continue to hold the investment, subject to the following requirements:
    (1) The institution must notify FCA within 15 calendar days after 
such determination;
    (2) A Farm Credit bank must not use the ineligible investment to 
satisfy its liquidity requirement(s) under Sec.  615.5134;
    (3) The institution must include the ineligible investment in the 
portfolio limit calculation defined in Sec.  615.5132 or Sec.  
615.5140(b)(3), as applicable;
    (4) A Farm Credit bank may continue to include the investment as 
collateral under Sec.  615.5050 at the lower of cost or market value; 
and
    (5) The institution must develop a plan to reduce the investment's 
risk to the institution.
    (c) Reservation of authority. FCA retains the authority to require 
the institution to divest of any investment at any time for failure to 
comply with Sec.  615.5132(a) or Sec.  615.5140(a), (b), or (e), 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 the institution's financial condition and performance.


Sec.  615.5174  [Amended]

0
11. In Sec.  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 (h)(4)''.


Sec.  615.5180  [Amended]

0
12. In Sec.  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: June 5, 2018.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-12366 Filed 6-11-18; 8:45 am]
 BILLING CODE 6705-01-P