[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]
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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.
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Federal Register / Vol. 83, No. 213 / Friday, November 2, 2018 /
Rules and Regulations
[[Page 55093]]
FARM CREDIT ADMINISTRATION
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.
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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.
DATES:
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
later.
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].
SUPPLEMENTARY INFORMATION:
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).
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\1\ Public Law 92-181, 85 Stat. 583, 12 U.S.C. 2001 et seq.
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On July 21, 2010, the Dodd-Frank Act was enacted, and section 939A
of the Dodd-Frank Act requires Federal agencies to review all
regulatory references to nationally recognized statistical ratings
organizations (NRSRO or credit rating agency) and replace those
references with other appropriate standards for determining
creditworthiness.\2\ The Dodd-Frank Act further provides that, to the
extent feasible, agencies should adopt a uniform standard of
creditworthiness for use in regulations, taking into account the
entities regulated and the purposes for which such regulated entities
would rely on the creditworthiness standard.
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\2\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21,
2010.
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The existing rules on non-program investments for Farmer Mac are
contained in 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.
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\3\ 76 FR 35138, June 16, 2011.
\4\ Refer to Proposed rule, ``Federal Agricultural Mortgage
Corporation Funding and Fiscal Affairs; Farmer Mac Investments and
Liquidity Management'' (76 FR 71798, Nov. 18, 2011).
\5\ 79 FR 43301, July 25, 2014.
\6\ 81 FR 8860, Feb. 23, 2016.
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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
(NRSRO),
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
limits.
1. Concentration Limit [Existing Sec. 652.20(d)(1); New Sec.
652.10(c)(5)]
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
capital.
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
invests.
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.
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\7\ See 81 FR 8860, 8864 (Feb. 23, 2016).
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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
Administration
[[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:
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\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
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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.
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\10\ 83 FR 27486, June 12, 2018.
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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.
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\11\ 77 FR 66375, Nov. 5, 2012.
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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
requirements.
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
Farm
[[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.
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\12\ Farm Credit banks have joint and several liability with
each other, but not with Farmer Mac. 12 U.S.C. 2155.
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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.
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\13\ 12 CFR 615.5134(b).
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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:
PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND
FISCAL AFFAIRS
0
1. The authority citation for part 652 is revised to read as follows:
Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34,
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243,
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4,
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat.
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168; sec. 939A of Pub.
L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note) (July 21,
2010).
0
2. Amend Sec. 652.5 by:
0
a. Removing the definitions for ``Contingency Funding Plan (CFP)'',
``Eurodollar time deposit'', ``Final maturity'', ``General
obligations'', ``Government agency'', ``Government-sponsored agency'',
``Liability Maturity Management Plan (LMMP)'', ``Liquid investments'',
``Liquidity reserve'', ``Mortgage securities'', ``Nationally recognized
statistical rating organization (NRSRO)'', ``Revenue bond'', and
``Weighted average life (WAL)'';
0
b. Revising the last sentence of the definition for ``Asset-backed
securities (ABS)''; and
0
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.
Government.
0
3. Amend Sec. 652.10 by:
0
a. Removing the word ``four'' in the last sentence of the paragraph (c)
introductory text;
0
b. Removing the phrase ``geographical areas'' in paragraph (c)(1)(i);
and
0
c. Adding 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
limit.
* * * * *
0
4. Section 652.20 is revised to read as follows:
Sec. 652.20 Eligible non-program investments.
(a) Eligible investments consist of:
(1) A non-convertible senior debt security.
(2) A money market instrument with a maturity of 1 year or less.
(3) A portion of an ABS or MBS that is fully guaranteed by a U.S.
Government agency.
(4) A portion of an ABS or MBS that is fully and explicitly
guaranteed as to
[[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
held.
(3) The investment must be denominated in U.S. dollars.
0
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;
and
(3) Discuss the risk characteristics of the investment, including
an analysis of the investment's impact to capital.
(b) We may impose written conditions in conjunction with our
approval of your request to invest in other non-program investments.
(c) For purposes of applying the provisions of this subpart, except
Sec. 652.20, investments approved under this section are treated the
same as eligible non-program investments unless our conditions of
approval state otherwise.
0
6. Section 652.25 is revised to read as follows:
Sec. 652.25 Ineligible investments.
(a) Investments ineligible when purchased. Non-program investments
that do not satisfy the eligibility criteria set forth in Sec.
652.20(a) or have not been approved by the FCA pursuant to Sec. 652.23
at the time of purchase are ineligible. You must not purchase
ineligible investments. If you determine that you have purchased an
ineligible investment, you must notify us within 15 calendar days after
such determination. You must divest of the investment no later than 60
calendar days after you determine that the investment is ineligible
unless we approve, in writing, a plan that authorizes you to divest the
investment over a longer period of time. Until you divest of the
investment, it may not be used to satisfy your liquidity requirement(s)
under Sec. 652.40, but must continue to be included in the Sec.
652.15(b) investment portfolio limit calculation.
(b) Investments that no longer satisfy eligibility criteria. If you
determine that a non-program investment no longer satisfies the
criteria set forth in Sec. 652.20 or no longer satisfies the
conditions of approval issued under Sec. 652.23, you must notify us
within 15 calendar days after such determination. If approved by the
FCA in writing, you may continue to hold the investment, subject to the
following and any other conditions we impose:
(1) You may not use the investment to satisfy your Sec. 652.40
liquidity requirement(s);
(2) The investment must continue to be included in your Sec.
652.15 investment portfolio limit calculation; and
(3) You must develop a plan to reduce the investment's risk to you.
0
7. Add 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.
0
8. Amend Sec. 652.40 by revising the table in paragraph (c) to read as
follows:
Sec. 652.40 Liquidity reserve requirement and supplemental liquidity.
* * * * *
(c) * * *
Table to Sec. 652.40(c)
------------------------------------------------------------------------
Discount
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.
instruments,
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
System.
Diversified investment 95 percent.
funds comprised
exclusively of Level
1 instruments.
Level 2....................... Additional Level 1 Discount for
investments. each Level 1
investment
applies.
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
investment
applies.
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
interest.
Money market
instruments maturing
within 90 days.
Diversified investment
funds comprised
exclusively of Levels
1, 2, and 3
instruments.
Qualifying securities
backed by Farmer Mac
program assets
(loans) guaranteed by
the United States
Department of
Agriculture
(excluding the
portion that would be
necessary to satisfy
obligations to
creditors and equity
holders in Farmer Mac
II LLC).
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
investments
apply to such
investments
held as
supplemental
liquidity.
------------------------------------------------------------------------
Dated: October 30, 2018.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-24045 Filed 11-1-18; 8:45 am]
BILLING CODE 6705-01-P