[Federal Register Volume 83, Number 213 (Friday, November 2, 2018)]
[Rules and Regulations]
[Pages 55093-55099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24045]

Rules and Regulations
                                                Federal Register

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 


Federal Register / Vol. 83, No. 213 / Friday, November 2, 2018 / 
Rules and Regulations

[[Page 55093]]


12 CFR Parts 652

RIN 3052-AC86

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

AGENCY: Farm Credit Administration.

ACTION: Final rule.


SUMMARY: The Farm Credit Administration (FCA, we, or our) finalizes 
amendments to our regulations governing the eligibility of non-program 
investments held by the Federal Agricultural Mortgage Corporation 
(Farmer Mac). We are revising these regulations in compliance with 
section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act or DFA) by removing references to, and 
requirements relating to, credit ratings.

    Effective Date: This regulation shall become effective no earlier 
than 30 days after publication in the Federal Register during which 
either or both Houses of Congress are in session. The FCA will publish 
a notice of the effective date in the Federal Register.
    Compliance Date: All provisions of this regulation require 
compliance by January 1, 2019 or the effective date, whichever is 

FOR FURTHER INFORMATION CONTACT: Joseph Connor, Associate Director for 
Policy and Analysis, Office of Secondary Market Oversight, (703) 883-
4364, TTY (703) 883-4056, [email protected]; or Laura McFarland, Senior 
Counsel, Office of General Counsel, (703) 883-4020, TTY (703) 883-4056, 
[email protected].


I. Objective

    The purpose of this final rule is to replace references to credit 
rating agencies with other appropriate standards used to determine the 
creditworthiness of investments and to revise obligor limits in our 
existing investment regulations applicable to Farmer Mac.

II. Background

    Farmer Mac is a federally chartered instrumentality that is an 
institution of the Farm Credit System (System) and a Government-
sponsored enterprise (GSE). Farmer Mac was established and chartered by 
Congress to create a secondary market for agricultural real estate 
mortgage loans, rural housing mortgage loans, rural utility cooperative 
loans, and the United States Department of Agriculture (USDA) 
guaranteed portions of farm and rural development loans. Title VIII of 
the Farm Credit Act of 1971, as amended, (Act) \1\ governs Farmer Mac. 
Farmer Mac is regulated by FCA through its Office of Secondary Market 
Oversight (OSMO).

    \1\ Public Law 92-181, 85 Stat. 583, 12 U.S.C. 2001 et seq.

    On July 21, 2010, the Dodd-Frank Act was enacted, and section 939A 
of the Dodd-Frank Act requires Federal agencies to review all 
regulatory references to nationally recognized statistical ratings 
organizations (NRSRO or credit rating agency) and replace those 
references with other appropriate standards for determining 
creditworthiness.\2\ The Dodd-Frank Act further provides that, to the 
extent feasible, agencies should adopt a uniform standard of 
creditworthiness for use in regulations, taking into account the 
entities regulated and the purposes for which such regulated entities 
would rely on the creditworthiness standard.

    \2\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21, 

    The existing rules on non-program investments for Farmer Mac are 
contained in part 652, subpart A, and rely, in part, on NRSRO credit 
ratings to characterize relative credit quality of various instruments. 
On June 16, 2011, we issued an Advance Notice of Proposed Rulemaking 
(ANPRM) soliciting comments on suitable alternatives to NRSRO credit 
ratings.\3\ On November 18, 2011, as part of another rulemaking, we 
again requested comment on potential sources of market-derived 
information that could be used to replace NRSRO credit ratings in part 
652 of our rules.\4\ In compliance with provisions in the Dodd-Frank 
Act directing agencies, to the extent feasible, to adopt a uniform 
standard of creditworthiness among regulated entities, we also 
considered the creditworthiness standards FCA proposed in a separate 
rulemaking for Farm Credit banks and associations.\5\ Using perspective 
gained through these processes, on February 23, 2016, we issued a 
proposed rule, whose comment period ended April 25, 2016.\6\ The only 
comments received were from the Farm Credit Council (Council) on behalf 
of its membership and Farmer Mac. Their comments are discussed herein 
at the relevant sections below.

    \3\ 76 FR 35138, June 16, 2011.
    \4\ Refer to Proposed rule, ``Federal Agricultural Mortgage 
Corporation Funding and Fiscal Affairs; Farmer Mac Investments and 
Liquidity Management'' (76 FR 71798, Nov. 18, 2011).
    \5\ 79 FR 43301, July 25, 2014.
    \6\ 81 FR 8860, Feb. 23, 2016.

III. Section-by-Section Discussion

    The final rule revises portfolio diversification requirements and 
the credit quality standards for eligible non-program investments that 
Farmer Mac may hold by replacing the reliance on NRSRO credit ratings 
and clarifying terminology. All changes are finalized as proposed 
unless otherwise indicated.

A. Definitions [Existing Sec.  652.5]

1. Removed Terms
    In Sec.  652.5, we finalize proposed removal of the following terms 
and their related definitions because they are either obsolete or do 
not require a separate definition:
     Contingency Funding Plan (CFP),
     Eurodollar time deposit,
     Final maturity,
     General obligations,
     Liability Maturity Management Plan (LMMP),
     Liquid investments,
     Liquidity reserve,
     Nationally Recognized Statistical Rating Organization 
     Revenue bond, and
     Weighted average life (WAL).
    We also remove these terms from where they appear in Sec.  652.20.
2. New and Changed Terms
    We finalize proposed changes to three existing terms and their 
definitions. First, the term ``Government-sponsored

[[Page 55094]]

agency'' is replaced with ``Government-sponsored enterprise (GSE)'', 
defining a GSE as an entity established or chartered by the U.S. 
Government to serve public purposes specified by the U.S. Congress but 
whose debt obligations are not explicitly guaranteed by the full faith 
and credit of the U.S. Government. Second, the term ``Government 
agency'' is replaced with ``U.S. Government agency,'' defined as an 
instrumentality of the United States Government whose obligations are 
fully guaranteed as to the timely payment of principal and interest by 
the full faith and credit of the U.S. Government. Finally, the term 
``mortgage securities'' is replaced with ``mortgage-backed securities 
(MBS),'' but uses the existing definition for ``mortgage securities.'' 
We finalize a conforming change to the definition of ``asset-backed 
securities'' to substitute the term ``mortgage securities'' for 
``mortgage-backed securities (MBS)'' within the definition of ``asset-
backed securities''.
    We finalize as proposed adding a new term to Sec.  652.5: 
``Diversified investment fund''. The final rule defines a ``diversified 
investment fund'' (DIF) as an investment company registered under 
section 8 of the Investment Company Act of 1940, 15 U.S.C. 80a-8. We 
had proposed, but are not finalizing, adding a definition for 
``obligor'' and explain why in the following section.
3. Defining ``Obligor''
    We proposed adding a new definition for ``obligor'', defining it as 
an issuer, guarantor, or other person or entity who has an obligation 
to pay a debt, including interest due, by a specified date or when 
payment is demanded. The existing regulation does not contain a 
definition for ``obligor'', although the term is used in part 652. We 
proposed a definition to remove any questions on the terminology, but 
upon further consideration have determined the proposed definition adds 
little value as it reflects the commonly understood meaning of 
``obligor''. As such, we are not adding it to our rules.

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

    We add a new paragraph (c)(5) to Sec.  652.10, addressing 
diversification and investment concentration limits. As discussed 
below, we make changes to what was proposed when discussing obligor 
1. Concentration Limit [Existing Sec.  652.20(d)(1); New Sec.  
    We finalize as proposed moving the investment concentration limit 
provisions from Sec.  652.20(d)(1) to new Sec.  652.10(c)(5).
a. Obligor Limit Level
    We final as proposed reducing the obligor limit from 25 percent to 
10 percent. We place a 10-percent regulatory capital limit on Farmer 
Mac's investment exposure to investments issued by any single entity, 
issuer, or obligor as we believe this limit enhances Farmer Mac's long-
term safety and soundness by ensuring that if any single entity, 
issuer, or obligor were to default, only a modest portion of capital 
would be at risk.
    The Council requested FCA consider lowering the proposed obligor 
limit to 5 percent. The Council commented that a 10-percent limit would 
be appropriate for well-capitalized financial institutions meeting 
Basel III capital requirements, but contends that Farmer Mac's 
capitalization is based on an internal economic capital model which the 
Council believes may not be consistent with Basel III requirements. 
Farmer Mac measures capital adequacy using an approach that is 
consistent with broadly accepted banking practices and standards. 
Further, OSMO conducts comprehensive oversight of all aspects of Farmer 
Mac's operations, including capital adequacy, utilizing detailed and 
robust information, a variety of metrics, and under stress testing. 
Therefore, we do not share the Council's views on Farmer Mac's 
capitalization, which views may be based on a more limited perspective.
    Farmer Mac requested the obligor limit remain at 25 percent, 
remarking that the limit alone would not necessarily enhance Farmer 
Mac's long-term safety and soundness due to its internal risk 
management procedures and board-established guidelines. Farmer Mac 
contended that the limit could instead unintentionally impede 
management's ability to manage the portfolio under certain market 
conditions. We are finalizing a 10-percent single obligor limit as we 
believe the lower limit adds a level of safety against both credit loss 
as well as variation in liquidity specifically tied to a single issuer 
or obligor. In deciding where to set the investment concentration 
threshold, we considered, among other things, the historical 
relationship between Farmer Mac's capital surplus over the statutory 
minimum and the dollar amount that equates to 10 percent of regulatory 
b. Obligor Limit Applicability
    Farmer Mac requested that inclusion of guarantors in the definition 
of ``obligor'' be made only to the extent that Farmer Mac's investment 
decision was based on the ability of the guarantor to fulfill its 
obligation under the guarantee. Farmer Mac offered as an example its 
purchases of municipal bonds where its analysis of credit quality might 
ignore a third-party guarantee in some cases. We understand that when 
making an investment decision, the weight given a guarantee backing the 
issuance will vary, but that does not alter the guarantor's financial 
obligations for the issuance and we believe all credit enhancement 
features of an investment should be considered.
    The existing obligor limit explains that it applies to ``. . . 
eligible investments issued by any single entity, issuer, or obligor.'' 
We proposed clarifying this phrase by revising it to read ``. . . 
allowable investments in any one obligor . . .''. In offering this 
change, we did not intend to change the meaning of whom is covered by 
the obligor limit. After reviewing comments made, we believe the 
proposed language for new Sec.  652.10(c)(5)(i), if finalized, may be 
misread as altering the applicability of the obligor limit. As such, we 
finalize the first sentence of new Sec.  652.10(c)(5)(i) using existing 
rule text, so it reads ``You may not invest more than 10 percent of 
your Regulatory Capital in allowable investments issued by any single 
entity, issuer, or obligor.''
    We remind Farmer Mac that existing Sec.  652.10(b) requires its 
investment policies to address how Farmer Mac will manage the potential 
risk of one guarantor having financial commitments to several issuers. 
Concentration limits are directed at placing safeguards around the risk 
incurred from having too many investments tied to the same financial 
source, including situations where several issuers share the same 
guarantor. Under existing Sec.  652.10(b), Farmer Mac is required to 
include limits on counterparty risks and risk diversification standards 
within its investment policies. As such, Farmer Mac's investment 
policies are expected to address the concentration risk that arises 
when a single guarantor is tied to too many issuers in whom Farmer Mac 
2. Asset Class Limits: GSE-Issued Mortgage-Backed Securities Limit 
[Existing Sec.  652.20(a)(6); New Sec.  652.10(c)(5)]
    We proposed removing asset class limits for all but one of the 
existing nine named asset classes: The 50-percent exposure limit for 
GSE-issued investments. Farmer Mac asked us to eliminate all asset 
class limits, including the one for GSE securities.

[[Page 55095]]

Farmer Mac suggested we allow it to set all its own concentration 
limits for all asset classes. In response to this comment, we remove 
the 50-percent exposure limit provision for GSE-issued investments from 
new Sec.  652.10(c)(5). As a result, the final rule removes all nine of 
the regulatory asset class limits currently in existing Sec.  
652.20(a)(1) through (a)(9), as well as removes the related investment 
table at existing Sec.  652.20(a). We believe the combined effect of 
our regulations governing investment management (Sec.  652.10), 
liquidity (Sec.  652.40), and those governing the overall regulatory 
limit on non-program investments (Sec.  652.15) create a strong and 
appropriate regulatory structure that incentivizes Farmer Mac to create 
a well-diversified and liquid investment portfolio comprised primarily 
of investments in either Government-backed or, to a lesser extent, GSE 
debt instruments.
    Section 652.10 governing investment management outlines the 
responsibilities of the Farmer Mac board of directors for establishing 
appropriate policies and internal controls to prevent loss, and 
establishes a substantial set of requirements to foster appropriate 
investment purchase analysis, risk diversification and investment 
management. Further, as one commenter pointed out, existing Sec.  
652.10(c)(1)(i) already requires Farmer Mac to establish within its 
investment policy concentration limits for ``asset classes or 
obligations with similar characteristics.'' This requirement includes 
concentrations in GSE-issued mortgage-backed securities. We expect 
Farmer Mac to at least annually review its investment strategy, 
objectives and policy limits, making adjustments based on market 
conditions and its current risk profile and risk-bearing capacity.

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

    All proposed changes to Sec. Sec.  652.20, 620.23, and 652.25 are 
finalized as proposed except one technical correction. In Sec.  
652.20(a)(7) we mistakenly included a cross-citation to Sec.  
652.20(b)(4), when paragraph (b) only has three paragraphs. We are 
correcting the cross citation to only reference paragraphs (b)(1), 
(b)(2), and (b)(3).
    We discuss the comments received on eligible non-program 
investments here.
1. Criteria of Eligible Non-Program Investments [Sec.  652.20(a)]
    We finalize replacing the ``non-program investment eligibility 
criteria table'' in Sec.  652.20(a) with general categories of eligible 
non-program investments to eliminate references to NRSRO credit ratings 
within Sec.  620.20.
    The Council asked that the rule specifically exclude from Sec.  
652.20(a) those Farmer Mac program securities backed by USDA 
guarantees. The Council referenced paragraphs (a)(4) and (a)(5) on GSE-
issued ABS and MBS, asking that Farmer Mac securities be excluded. This 
rule provision identifies GSE, ABS, and MBS securities as eligible non-
program investments. Securitizing USDA-guaranteed loans is among Farmer 
Mac's statutory authorities and we believe the assets are generally of 
high-credit quality and marketable to a sufficient degree to justify 
their inclusion in Level 3. As such, we make no change as requested by 
the commenter, but will take this suggestion into consideration in 
future rulemakings.
    Farmer Mac commented upon preamble discussion in the proposed rule 
regarding the liquid nature of private placements, explaining its 
belief that private placements offer similar liquidity as securities 
acquired in the public markets. Farmer Mac asked that we allow using 
privately placed securities for liquidity purposes. In Section III.1.a. 
of the preamble to the proposed rule discussing Sec.  652.20(a), we 
explained that ``eligible non-program investments'' may include private 
placements and therefore those private placements could be used for 
liquidity and other purposes to the extent allowed in Sec.  652.15.\7\ 
In the preamble discussion of that section we noted that we did not 
consider private placements to be very liquid. Farmer Mac objected to 
this remark, considering it to be a prohibition against using any 
private placements for liquidity purposes. The rule does not prohibit 
the use of private placements for liquidity purposes, nor does it 
specifically authorize them for such. If a private placement satisfies 
all non-program eligibility requirements under Sec.  652.20, then it 
may be used for liquidity to the same extent as other eligible non-
program investments, once approved. This means when seeking FCA 
approval under new Sec.  652.23 for ``other'' non-program investments, 
Farmer Mac will need to specify if it intends on using the private 
placement investment for liquidity reserve purposes. If so, the 
investment request should include documentation that Farmer Mac has 
conducted a due diligence review and concluded the security meets the 
standard for marketability found at Sec.  652.40(b), including the 
requirement that it can be easily sold (or converted to cash through 
repurchase agreements) in active and sizable markets. Thereafter, new 
Sec.  652.23(c) provides that approved ``other'' non-program 
investments are treated under subpart A of part 652 the same as 
eligible non-program investments, unless our conditions of approval 
state otherwise.

    \7\ See 81 FR 8860, 8864 (Feb. 23, 2016).

    Farmer Mac also commented that any higher liquidity premium built 
in the yield of a privately placed security should offset its lower 
liquidity when traded. It is our view that a higher liquidity premium 
does not substantially increase the liquidity of an instrument, but 
rather serves to compensate the investor for accepting the instrument's 
lower level of liquidity. Thus, a higher liquidity premium alone would 
not be enough to satisfy requirements for using the investment to fund 
the liquidity reserve.
2. Quality of Eligible Non-Program Investments [Sec.  652.20(b)]
    We proposed in Sec.  652.20(b) a Farmer Mac investment standard 
where the investment obligors would have to have a ``strong capacity'' 
to meet financial commitments and the risk of default was ``very low.'' 
We are finalizing the rule to require that at least one obligor of an 
investment have ``very strong capacity'' to meet financial commitments, 
with a ``very low'' risk of default.
    Both comments to our proposed rule effectively asked us to reassess 
whether the provision on the quality of eligible investments was 
similar in its expectations to that of other regulators. Farmer Mac 
commented that the creditworthiness standards in proposed Sec.  
652.20(b) appeared to be stricter than those implemented by the Office 
of the Comptroller of the Currency (OCC) and the Federal Deposit 
Insurance Corporation (FDIC). Farmer Mac explained that the OCC and the 
FDIC refer to the ``adequate capacity'' of the issuer to meet its 
financial commitments and ``low'' risk of default by the obligor. 
Farmer Mac requested that we reconsider using a ``strong capacity'' to 
meet financial commitments and replace it with ``adequate capacity''. 
The FCC made a general remark that our Farmer Mac investment 
regulations should be no less stringent than those imposed on Farm 
Credit banks and associations.
    In both the proposed rule and this final rulemaking, we considered 
the approaches used by OCC, FDIC, Federal Housing Finance Agency 
(FHFA), Federal Reserve Board (FRB), and the National Credit Union 

[[Page 55096]]

(NCUA).\8\ We gave particular attention to the OCC, FDIC and FRB joint 
agreement \9\ revising the definition of ``investment grade.'' These 
regulators agreed to replace their use of NRSRO ratings with a standard 
that considers an issuer's creditworthiness and risk of default. This 
involved defining investment grade securities as follows:

    \8\ See, for example, OCC final rulemaking at 77 FR 35253 (June 
13, 2012) and NCUA final rulemaking at 77 FR 74103 (Dec. 13, 2012).
    \9\ ``Uniform Agreement on the Classification and appraisal of 
Securities held by Depository Institutions (Agreement)'', dated Oct. 
29, 2013.

    A security is investment grade if the issuer of the security has 
an adequate capacity to meet financial commitments for the life of 
the asset. An issuer has adequate capacity to meet its financial 
commitments if the risk of default is low, and the full and timely 
repayment of principal and interest is expected.

As a result, the definition of ``investment grade'' effectively sets an 
issuer's financial capacity (and risk of default) as the uniform 
replacement standard for NRSRO ratings at commercial banks.
    Dodd-Frank instructed each financial regulatory agency to establish 
uniform standards of creditworthiness to the extent feasible and to 
consider both the regulated entities covered by the new standards and 
the purposes for which the creditworthiness standards will be used. In 
compliance with this requirement, FCA proposed adopting the standard 
used by other regulators (i.e., an issuer's financial capacity and the 
risk of default), but adapted the financial capacity and default risk 
levels to reflect Farmer Mac's secondary market activities and its 
status as a GSE. As a GSE with a specific Congressional mandate, we 
believe Farmer Mac should maintain investments in its liquidity 
portfolio that are of a higher grade than required at commercial banks 
with the goal of mitigating default risks. Therefore, FCA declines to 
set the regulatory investment creditworthiness standard for Farmer Mac 
to an ``adequate'' level.
    However, we recognize that FCA recently issued a final rule 
governing the investment activities of Farm Credit banks and 
associations \10\ whereby, FCA determined eligible investments were 
those where at least one of the obligors has ``very strong capacity'' 
to meet financial commitments. Although the investment authority of 
Farm Credit banks differs from Farmer Mac's investment authority, both 
authorities are primarily used for liquidity. Further, we recognize the 
subjective challenges involved in differentiating on examination 
between an issuer with a ``strong'' or ``very strong'' capacity to meet 
financial commitments. To avoid confusion, as well as to recognize the 
shared primary liquidity purpose of investment authorities at both the 
Farm Credit banks and Farmer Mac, we have adapted the financial 
capacity level to reflect those used by Farm Credit banks. Thus, we 
finalize a requirement that at least one of the investment obligors 
possess a ``very strong capacity'' to meet financial commitments.

    \10\ 83 FR 27486, June 12, 2018.

    We note that this modification also agrees in part with Farmer 
Mac's request for closer alignment with the other FRBs standard (in 
that we are only requiring a ``very strong capacity'' of at least one 
of the investment obligors, whereas in the proposed rule we required 
all obligors to meet the ``strong capacity'' standard). Also, we 
emphasize this language is not intended to change the quality or range 
of investments Farmer Mac is currently authorized to purchase and hold. 
Our intent is only to remove references to NRSRO ratings and reduce 
potential over reliance on NRSRO ratings in assessing an investment's 
creditworthiness and suitability for inclusion in investment portfolio. 
Meaning, Farmer Mac will continue to perform due diligence on its 
investments, adapting those reviews to the new risk assessment and 
classification standards. As noted in the investment management section 
of this subpart, Sec.  652.10, and its associated preamble explanation, 
the depth of due diligence should be a function of the security's 
credit quality, the complexity of the structure, and the size of the 
investment.\11\ The evaluation of the structure's complexity should 
include the contraction risk associated with investments purchased at a 
premium to par. We expect Farmer Mac to perform credit reviews both 
pre- and post-purchase as appropriate for each investment. These 
reviews should monitor performance at the portfolio and sector level 
and be periodically updated. In addition, we expect Farmer Mac to 
evaluate the issuer's capacity to meet financial commitments for the 
projected life of the asset or exposure. In doing so, we expect Farmer 
Mac to understand each security's structure and how the security may 
perform under adverse economic conditions.

    \11\ 77 FR 66375, Nov. 5, 2012.

    As a technical change, we finalize a correction to Sec.  652.20(b), 
whereby proposed (b)(1) language was inadvertently repeated in proposed 
(b)(2). We consolidate the repetitive language into (b)(1), removing it 
from paragraph (b)(2). In making this clarification, we make no change 
in the meaning of Sec.  652.20(b)(2).
3. Other Non-Program Investments [New Sec.  652.23]
    We finalize moving from Sec.  652.20(e) to new Sec.  652.23 the 
provisions on seeking FCA approval for those non-program investments 
not identified in the rule. We also finalize as proposed the amendments 
to this provision. We received no comments on these changes.
4. Ineligible Non-Program Investments [Sec.  652.25]
    We finalize as proposed the amendments to Sec.  652.25, which 
address ineligible investment activities. We received no comments on 
these changes. As part of the changes, we will no longer require the 
separate quarterly report on investments that lose their eligibility 
after purchase. We make this reporting change to alleviate redundancy 
as Farmer Mac already provides OSMO routine quarterly reports on the 
performance and risk on all of its liquidity investment portfolio, 
which we consider a sound practice. We believe the investment activity 
report covering all investment activities is the more valuable of the 
two reports for our oversight and should be continued.

D. Reservation of FCA Authority [New Sec.  652.27]

    We received no comments on the proposed new Sec.  652.27. We 
finalize moving from Sec.  652.25(d) to new Sec.  652.27 provisions 
addressing FCA-required investment divestitures.

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

    We finalize the proposed changes to the Table at Sec.  652.40(c), 
including incorporating new terminology and clarifying certain MBS 
    The Council asked us to explain why the Table at Sec.  652.40(c) 
includes GSE-issued senior debt with maturities less than 60 days as a 
Level 1 asset and greater than 60 days as a Level 3 asset but 
specifically excludes the debt of System banks and associations. The 
Council commented that treating the debt of Farm Credit banks and 
associations differently from that of Farmer Mac has no stated policy 
basis and asked that all Farmer Mac program securities held on balance 
sheet be excluded from the Level 1 category. At a minimum, the Table at 
Sec.  652.40(c) should be clear that Farmer Mac securities are separate 
from the debt of Farm Credit banks and associations.
    Debt issued by Farmer Mac does not share liability with the debt of 

[[Page 55097]]

Credit banks and associations.\12\ Farmer Mac is organized as an 
investor-owned corporation, not a member-owned cooperative, and the 
Farm Credit System Insurance Corporation only insures the debt of Farm 
Credit banks. As to the Table at Sec.  652.40(c), debt issued by Farm 
Credit banks is excluded because we believe it is likely to be highly 
correlated with Farmer Mac program securities. Meaning, adverse 
economic and financial conditions affecting Farm Credit banks and 
associations will likely affect Farmer Mac securities at the same time. 
Therefore, limiting Farmer Mac's ability to amplify agricultural 
banking risk through its liquidity portfolio is an appropriate safety 
and soundness measure.

    \12\ Farm Credit banks have joint and several liability with 
each other, but not with Farmer Mac. 12 U.S.C. 2155.

    The Council also commented that the rule permits Farmer Mac to 
count repurchase agreements backed by Level 1 assets of the liquidity 
reserve, stating it believes these items would be more appropriate at 
Level 3. The Council added that these items may not be as liquid as 
necessary for Level 1 since significant time is required to convert 
these assets. The Council added that, for consistency, if repurchase 
agreements are included as Level 1 assets for Farmer Mac, FCA should 
modify its regulations for the Farm Credit banks and associations to 
classify the assets at the same level as Farmer Mac.
    We decline the requests of the Council. Repurchase agreements are 
justifiably classified as Level 1 liquidity instruments because their 
overnight maturity, combined with their Level 1 collateral, make the 
risk of loss exceedingly small under adverse market conditions. 
Moreover, FCA regulations for Farm Credit banks and associations 
currently include overnight repurchase agreements in the category of 
money market instruments.\13\ Meaning, Farm Credit banks and 
associations have the same ability to include such investments in Level 
1 under the existing regulations.

    \13\ 12 CFR 615.5134(b).

IV. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 652

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

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


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

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

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

Sec.  652.5  Definitions.

* * * * *
    Asset-backed securities (ABS) * * * For the purpose of this 
subpart, ABS exclude mortgage-backed securities that are defined below.
* * * * *
    Diversified investment fund (DIF) means an investment company 
registered under section 8 of the Investment Company Act of 1940.
* * * * *
    Government-sponsored enterprise (GSE) means an entity established 
or chartered by the United States Government to serve public purposes 
specified by the United States Congress but whose debt obligations are 
not explicitly guaranteed by the full faith and credit of the United 
States Government.
* * * * *
    Mortgage-backed securities (MBS) means securities that are either:
    (1) Pass-through securities or participation certificates that 
represent ownership of a fractional undivided interest in a specified 
pool of residential (excluding home equity loans), multifamily or 
commercial mortgages, or
    (2) A multiclass security (including collateralized mortgage 
obligations and real estate mortgage investment conduits) that is 
backed by a pool of residential, multifamily or commercial real estate 
mortgages, pass through MBS, or other multiclass MBS.
    (3) This definition does not include agricultural mortgage-backed 
securities guaranteed by Farmer Mac itself.
* * * * *
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully guaranteed as to the payment of 
principal and interest by the full faith and credit of the U.S. 

3. Amend Sec.  652.10 by:
a. Removing the word ``four'' in the last sentence of the paragraph (c) 
introductory text;
b. Removing the phrase ``geographical areas'' in paragraph (c)(1)(i); 
c. Adding paragraph (c)(5) to read as follows:

Sec.  652.10  Investment management.

* * * * *
    (c) * * *
    (5) Concentration risk. Your investment policies must set risk 
diversification standards. Diversification parameters must be based on 
the carrying value of investments. You may not invest more than 10 
percent of your Regulatory Capital in allowable investments issued by 
any single entity, issuer, or obligor. Only investments in obligations 
backed by U.S. Government agencies or GSEs may exceed the 10-percent 
* * * * *

4. Section 652.20 is revised to read as follows:

Sec.  652.20  Eligible non-program investments.

    (a) Eligible investments consist of:
    (1) A non-convertible senior debt security.
    (2) A money market instrument with a maturity of 1 year or less.
    (3) A portion of an ABS or MBS that is fully guaranteed by a U.S. 
Government agency.
    (4) A portion of an ABS or MBS that is fully and explicitly 
guaranteed as to

[[Page 55098]]

the timely payment of principal and interest by a GSE.
    (5) The senior-most position of an ABS or MBS that is not fully 
guaranteed by a U.S. Government agency or fully and explicitly 
guaranteed as to the timely payment of principal and interest by a GSE, 
provided that the MBS satisfies the definition of ``mortgage related 
security'' in 15 U.S.C. 78c(a)(41).
    (6) An obligation of an international or multilateral development 
bank in which the U.S. is a voting member.
    (7) Shares of a diversified investment fund, if its portfolio 
consists solely of securities that satisfy investments listed in 
paragraphs (b)(1) through (b)(3) of this section.
    (b) Farmer Mac may only purchase those eligible investments 
satisfying all of the following:
    (1) At a minimum, at least one obligor of the investment has a very 
strong capacity to meet financial commitments for the life of the 
investment, even under severely adverse or stressful conditions, and 
generally presents a very low risk of default. Investments whose 
obligors are located outside the U.S., and whose obligor capacity to 
meet financial commitments is being relied upon to satisfy this 
requirement, must also be fully guaranteed by a U.S. Government agency.
    (2) The investment must exhibit low credit risk and other risk 
characteristics consistent with the purpose or purposes for which it is 
    (3) The investment must be denominated in U.S. dollars.

5. Add Sec.  652.23 to read as follows:

Sec.  652.23  Other non-program investments.

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

6. Section 652.25 is revised to read as follows:

Sec.  652.25  Ineligible investments.

    (a) Investments ineligible when purchased. Non-program investments 
that do not satisfy the eligibility criteria set forth in Sec.  
652.20(a) or have not been approved by the FCA pursuant to Sec.  652.23 
at the time of purchase are ineligible. You must not purchase 
ineligible investments. If you determine that you have purchased an 
ineligible investment, you must notify us within 15 calendar days after 
such determination. You must divest of the investment no later than 60 
calendar days after you determine that the investment is ineligible 
unless we approve, in writing, a plan that authorizes you to divest the 
investment over a longer period of time. Until you divest of the 
investment, it may not be used to satisfy your liquidity requirement(s) 
under Sec.  652.40, but must continue to be included in the Sec.  
652.15(b) investment portfolio limit calculation.
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that a non-program investment no longer satisfies the 
criteria set forth in Sec.  652.20 or no longer satisfies the 
conditions of approval issued under Sec.  652.23, you must notify us 
within 15 calendar days after such determination. If approved by the 
FCA in writing, you may continue to hold the investment, subject to the 
following and any other conditions we impose:
    (1) You may not use the investment to satisfy your Sec.  652.40 
liquidity requirement(s);
    (2) The investment must continue to be included in your Sec.  
652.15 investment portfolio limit calculation; and
    (3) You must develop a plan to reduce the investment's risk to you.

7. Add Sec.  652.27 to read as follows:

Sec.  652.27  Reservation of authority for investment activities.

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

8. Amend Sec.  652.40 by revising the table in paragraph (c) to read as 

Sec.  652.40  Liquidity reserve requirement and supplemental liquidity.

* * * * *
    (c) * * *

                        Table to Sec.   652.40(c)
        Liquidity level               Instruments       (multiply market
                                                            value by)
Level 1.......................  Cash, including cash    100 percent.
                                 due from traded but
                                 not yet settled debt.
                                Overnight money market  100 percent.
                                 including repurchase
                                 agreements secured
                                 exclusively by Level
                                 1 investments.
                                Obligations of U.S.     97 percent.
                                 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
                                Diversified investment  95 percent.
                                 funds comprised
                                 exclusively of Level
                                 1 instruments.
Level 2.......................  Additional Level 1      Discount for
                                 investments.            each Level 1
                                Obligations of U.S.     97 percent.
                                 Government agencies
                                 with a final
                                 remaining maturity of
                                 more than 3 years.
                                MBS that are fully      95 percent.
                                 guaranteed by a U.S.
                                 Government agency.
                                Diversified investment  95 percent.
                                 funds comprised
                                 exclusively of Level
                                 1 and 2 instruments.

[[Page 55099]]

Level 3.......................  Additional Level 1 or   Discount for
                                 Level 2 investments.    each Level 1 or
                                                         Level 2
                                GSE senior debt         93 percent for
                                 securities with         all instruments
                                 maturities exceeding    in Level 3.
                                 60 days, excluding
                                 senior debt
                                 securities of the
                                 Farm Credit System.
                                MBS that are fully
                                 guaranteed by a GSE
                                 as to the timely
                                 repayment of
                                 principal and
                                Money market
                                 instruments maturing
                                 within 90 days.
                                Diversified investment
                                 funds comprised
                                 exclusively of Levels
                                 1, 2, and 3
                                Qualifying securities
                                 backed by Farmer Mac
                                 program assets
                                 (loans) guaranteed by
                                 the United States
                                 Department of
                                 (excluding the
                                 portion that would be
                                 necessary to satisfy
                                 obligations to
                                 creditors and equity
                                 holders in Farmer Mac
                                 II LLC).
Supplemental Liquidity........  Eligible investments    90 percent
                                 under Sec.   652.20     except
                                 and those approved      discounts for
                                 under Sec.   652.23.    Level 1, 2 or 3
                                                         apply to such
                                                         held as

    Dated: October 30, 2018.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-24045 Filed 11-1-18; 8:45 am]