5308 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

1See 12 U.S.C. 1423, 1432(a). 

2See 12 U.S.C. 1426(a)(4), 1430(a), 1430b. 

3See 12 U.S.C. 1427. 

4Public Law 106–102, 113 Stat. 1338 (Nov. 12, 

1999). 

5See 12 U.S.C. 1426; 12 CFR part 1277. 

6See 12 U.S.C. 1426(a). In 2008, the Housing and 

Economic Recovery Act of 2008 (HERA) amended 

the risk-based capital provisions in the Bank Act to 

allow FHFA greater flexibility in establishing these 

requirements. Public Law 110–289, 122 Stat. 2654, 

2676 (July 30, 2008) (amending 12 U.S.C. 

1426(a)(3)(A)). 

7See Capital Requirements for Federal Home 

Loan Banks, 66 FR 8262 (Jan. 30, 2001) (‘‘Final 

Finance Board Capital Rule’’); and Amendments to 

Capital Requirements for Federal Home Loan 

Banks, 66 FR 54097 (Oct. 26, 2001). The Finance 

Board regulations are found at 12 CFR part 932. 

8See Final Finance Board Capital Rule, 66 FR 

8262; Amendments to Capital Requirements for 

Federal Home Loan Banks, 66 FR 54097. See also 

Final Rule: Unsecured Credit Limits for Federal 

Home Loan Banks, 66 FR 66718 (Dec. 27, 2001) 

(amending 12 CFR 932.9). 

9See 12 U.S.C. 1426(a)(5). 

10 Id. Neither the Finance Board nor FHFA has 

approved including within a Bank’s total capital 

any other amounts that are available to absorb 

losses, and no Bank has any such general 

allowances for losses as part of its capital. 

FEDERAL HOUSING FINANCE BOARD 

12 CFR Parts 930 and 932 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1277 

RIN 2590–AA70 

Federal Home Loan Bank Capital 

Requirements 

AGENCY: Federal Housing Finance 

Board; Federal Housing Finance 

Agency. 

ACTION: Final rule. 

SUMMARY: The Federal Housing Finance 

Agency (FHFA) is issuing this final rule 

to adopt as its own portions of the 

regulations of the Federal Housing 

Finance Board (Finance Board) 

pertaining to the capital requirements 

for the Federal Home Loan Banks 

(Banks). The final rule carries over most 

of the existing Finance Board 

regulations without material change, but 

substantively revises the credit risk 

component of the risk-based capital 

requirement, as well as the limitations 

on extensions of unsecured credit. The 

principal revisions to those provisions 

remove requirements that the Banks 

calculate credit risk capital charges and 

unsecured credit limits based on ratings 

issued by a Nationally Recognized 

Statistical Rating Organization 

(NRSRO), and instead require that the 

Banks use their own internal rating 

methodology. The final rule also revises 

the percentages used in the tables to 

calculate the credit risk capital charges 

for advances and non-mortgage assets. 

FHFA retains the percentages used in 

the existing table to calculate the capital 

charges for mortgage-related assets, but 

revises the approach to identify the 

appropriate percentage within the table. 

FHFA also has revised the table 

numbers in the final rule to align with 

the Federal Register’s new formatting 

standards, which were revised after 

publication of the proposed rule. 

DATES: This rule is effective on January 

1, 2020. 

FOR FURTHER INFORMATION CONTACT: 

Scott Smith, Associate Director, 

Division of Bank Regulation, 

Scott.Smith@FHFA.gov, 202–649–3193; 

Julie Paller, Principal Financial Analyst, 

Division of Bank Regulation, 

Julie.Paller@FHFA.gov, 202–649–3201; 

Neil R. Crowley, Deputy General 

Counsel, Neil.Crowley@FHFA.gov, 202– 

649–3055; or Vickie R. Olafson, 

Assistant General Counsel, 

Vickie.Olafson@FHFA.gov, 202–649– 

3025 (these are not toll-free numbers), 

Federal Housing Finance Agency, 400 

Seventh Street SW, Washington, DC 

20219. The telephone number for the 

Telecommunications Device for the 

Hearing Impaired is 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. The Bank System 

The eleven Banks are wholesale 

financial institutions organized under 

the Federal Home Loan Bank Act (Bank 

Act).1 The Banks are cooperatives. Only 

members of a Bank may purchase the 

capital stock of a Bank, and only 

members or certain eligible housing 

associates (such as state housing finance 

agencies) may obtain access to secured 

loans, known as advances, or other 

products provided by a Bank.2 Each 

Bank is managed by its own board of 

directors and serves the public interest 

by enhancing the availability of 

residential mortgage and community 

lending credit through its member 

institutions.3

B. Federal Home Loan Bank Capital and 

Capital Requirements 

In 1999, the Gramm-Leach-Bliley Act 

(GLB Act) 4 amended the Bank Act to 

replace the subscription capital 

structure of the Bank System. It required 

the Banks to replace their existing 

capital stock with new classes of capital 

stock that would have different terms 

from the stock then held by Bank 

System members. Specifically, the GLB 

Act authorized the Banks to issue new 

Class A stock, which is redeemable on 

six months’ notice, and Class B stock, 

which is redeemable on five years’ 

notice. The GLB Act allowed Banks to 

issue Class A and Class B stock in any 

combination and to establish terms and 

preferences for each class or subclass of 

stock issued, consistent with the Bank 

Act and regulations adopted by the 

Finance Board.5 The classes of stock to 

be issued, as well as the terms, rights, 

and preferences associated with each 

class of Bank stock are governed by a 

capital structure plan, which is 

established by each Bank’s board of 

directors and approved by FHFA. 

The GLB Act also amended the Bank 

Act to impose on the Banks new total, 

leverage, and risk-based capital 

requirements similar to those applicable 

to depository institutions and other 

housing government sponsored 

enterprises (GSEs), and directed the 

Finance Board to adopt regulations 

prescribing uniform capital standards 

for the Banks.6 The Finance Board 

carried out that statutory directive in 

2001 when it published a final capital 

rule, and later adopted amendments to 

that rule.7 In addition to addressing 

minimum capital requirements, the 

rules established minimum liquidity 

requirements for each Bank and set 

limits on a Bank’s unsecured credit 

exposure to individual counterparties 

and groups of affiliated counterparties.8

These Finance Board regulations remain 

in effect and have not been 

substantively amended since 2001. 

The GLB Act amendments to the Bank 

Act also defined the types of capital that 

the Banks must hold—specifically 

permanent and total capital. Permanent 

capital consists of amounts paid by 

members for Class B stock plus the 

Bank’s retained earnings, as determined 

in accordance with generally accepted 

accounting principles (GAAP).9 Total 

capital is made up of permanent capital 

plus the amounts paid by members for 

Class A stock, any general allowances 

for losses held by a Bank under GAAP 

(but not allowances or reserves held 

against specific assets or specific classes 

of assets), and any other amounts from 

sources available to absorb losses that 

are determined by regulation to be 

appropriate to include in total capital.10

As a matter of practice, however, each 

Bank’s total capital consists of its 

permanent capital plus the amounts, if 

any, paid by its members for Class A 

stock. 

The Bank Act requires each Bank to 

hold total capital equal to at least 4 

percent of its total assets. The statute 

separately requires each Bank to meet a 

leverage requirement of total capital to 

total assets equal to 5 percent, but 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5309 

11See 12 U.S.C. 1426(a)(2). See also 12 CFR 

932.2. 

12See 12 U.S.C. 1426(a)(3)(A); 12 CFR 932.3 

(Finance Board implementing regulation). In 2008, 

HERA amended this provision to require that FHFA 

establish risk-based capital regulations that ensure 

that each Bank operates in a safe and sound 

manner, with sufficient permanent capital and 

reserves to support the risks that arise from its 

operations and management. 

13See 12 CFR 932.4. The capital charges for 

advances and certain other ‘‘unrated assets’’ are not 

based on actual or imputed NRSRO credit ratings. 

14See 12 CFR 932.5. 

15See 12 CFR 932.6. 

16See section 939A, Public Law 111–203, 124 

Stat. 1887 (July 21, 2010) (15 U.S.C. 78o–7 note). 

17See Advance Notice of Proposed Rulemaking: 

Alternatives to Use of Credit Ratings in Regulations 

Governing the Federal National Mortgage 

Association, the Federal Home Loan Mortgage 

Corporation, and the Federal Home Loan Banks, 76 

FR 5292, 5294 (Jan. 31, 2011). 

18See Proposed Federal Home Loan Bank Capital 

Requirements, 82 FR 30776 (July 3, 2017). FHFA 

previously repealed the Finance Board regulations 

governing the classes of capital stock that the Banks 

may issue and the requirements for their capital 

structure plans, and incorporated the substance of 

those provisions, with certain amendments, into its 

own regulations, at 12 CFR part 1277, subparts C 

and D. See Final Rule on Federal Home Loan Bank 

Capital Stock and Capital Plans, 80 FR 12753 (Mar. 

11, 2015). 

19See 12 CFR 932.2 (total capital), 932.3 (riskbased capital), 932.5 (market risk), 932.6 

(operational risk), 932.7 (reporting requirements). 

20Since the date of the proposed rule, FHFA has 

issued an advisory bulletin addressing Bank 

liquidity management, AB 2018–07 (Aug. 27, 2018), 

and does not currently intend to pursue a separate 

rulemaking on that topic. The advisory bulletin is 

available at: https://www.fhfa.gov/Supervision

Regulation/AdvisoryBulletins/Pages/Federal-HomeLoan-Bank-Liquidity-Guidance.aspx. The advisory 

bulletin also rescinds prior supervisory guidance 

that FHFA had issued in March 2009 on the topic 

of liquidity management. As proposed, the final 

rule rescinds the contingency liquidity provision 

currently located at 12 CFR 932.8 of the Finance 

Board regulations. 

provides that in determining 

compliance with this leverage 

requirement, a Bank must calculate its 

total capital by multiplying the amount 

of its permanent capital by 1.5 and 

adding to this product any other 

component of total capital.11

The GLB Act also required each Bank 

to meet a risk-based capital requirement 

by maintaining permanent capital in an 

amount at least equal to the sum of its 

credit risk and market risk, and the 

Finance Board further required each 

Bank to maintain permanent capital to 

support its operations risk.12 Under the 

Finance Board’s implementing 

regulations, a Bank must calculate a 

credit risk capital charge for each of its 

assets, off-balance sheet items, and 

derivative contracts to determine its 

risk-based capital requirement. The 

basic charge is based on the book value 

of an asset, or other amount calculated 

under the rule, multiplied by a credit 

risk percentage requirement (CRPR) for 

that particular asset or item, which is 

derived from one of the tables set forth 

in the rule. Generally, the CRPR varies 

based on the rating assigned to the asset 

by an NRSRO and the maturity of the 

asset.13 The market risk capital charge is 

calculated separately, as the maximum 

loss in the Bank’s portfolio under 

various stress scenarios, estimated by an 

approved internal model, such that the 

probability of a loss greater than that 

estimated by the model is not more than 

one percent.14 The operational risk 

capital charge equals 30 percent of the 

combined credit and market risk charges 

for the Bank, although the regulations 

allow a Bank to demonstrate that a 

lower charge should apply, provided 

that FHFA approves its alternative 

approach and other conditions are 

met.15

C. The Dodd-Frank Act and Bank 

Capital Rules 

Section 939A of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act) requires federal 

agencies to: (i) Review regulations that 

require the use of an assessment of the 

credit-worthiness of a security or money 

market instrument; and (ii) to the extent 

those regulations contain any references 

to, or requirements based on, NRSRO 

credit ratings, remove such references or 

requirements.16 In place of such NRSRO 

rating-based requirements, agencies are 

instructed to substitute appropriate 

standards for determining 

creditworthiness. The Dodd-Frank Act 

further provides that, to the extent 

feasible, an agency should adopt a 

uniform standard of creditworthiness 

for use in its regulations, taking into 

account the entities regulated by it and 

the purposes for which such regulated 

entities would rely on the 

creditworthiness standard. 

Several provisions of the Finance 

Board capital regulations include 

requirements that are based on NRSRO 

credit ratings, and thus must be revised 

to comply with the Dodd-Frank Act 

provisions related to use of NRSRO 

ratings.17 Specifically, as already noted, 

the credit risk capital charges for certain 

Bank assets are calculated in large part 

based on the credit ratings assigned by 

NRSROs to a particular counterparty or 

specific financial instrument. In 

addition, the rule related to the 

operational risk capital charge allows a 

Bank to calculate an alternative capital 

charge if the Bank obtains insurance to 

cover operational risk from an insurer 

with an NRSRO credit rating of no lower 

than the second highest investment 

grade rating. Finally, the capital rules 

addressed by this rulemaking also 

establish unsecured credit limits for the 

Banks based on NRSRO credit ratings of 

their counterparties. The final rule 

brings each of these provisions into 

compliance with the Dodd-Frank Act by 

removing the references to NRSRO 

credit ratings and replacing them with 

the provisions described below. 

D. The Proposed Rule 

Neither the Finance Board nor FHFA 

has amended the capital regulations 

since their adoption in 2001. FHFA 

issued the proposed rule principally to 

remove the references to NRSRO credit 

ratings, relocate the Finance Board’s 

capital regulations to the FHFA chapter 

of the regulations, and make certain 

other amendments to the risk-based 

capital provisions of the regulations.18

FHFA proposed to adopt most of the 

provisions of the Finance Board 

regulations as its own without 

substantive change. Thus, the proposed 

rule would have carried over the 

Finance Board regulations addressing a 

Bank’s total capital requirement and 

risk-based capital requirement without 

change, and would have made only 

modest revisions to the Finance Board 

regulations addressing market risk, 

operational risk, and reporting 

requirements.19 FHFA proposed to 

rescind as moot § 932.1 of the Finance 

Board regulations, which required 

agency approval of the Banks’ initial 

market risk models, and to rescind 

§ 932.8, which established a 

contingency liquidity requirement for 

the Banks, because FHFA intended to 

address liquidity requirements as part of 

a separate rulemaking.20 The proposed 

rule would have made significant 

substantive revisions to only two 

provisions of the Finance Board 

regulations: § 932.4, regarding the 

determination of a Bank’s credit risk 

capital requirement; and § 932.9, 

regarding limits on unsecured credit 

exposures. In both cases, the proposed 

rule would have replaced requirements 

based on NRSRO credit ratings with 

requirements based on a Bank’s own 

internal credit rating methodologies, 

and also would have added new 

provisions in response to developments 

in the marketplace relating to derivative 

contracts, specifically, the Dodd-Frank 

Act mandate for clearing certain 

derivative transactions. With respect to 

the credit risk capital charges, the 

proposed rule also would have revised 

the CRPRs used in the current 

regulation’s tables to calculate the credit 

risk capital charges for advances and for 

non-mortgage assets, off-balance sheet 

items, and derivative contracts. With 

respect to the unsecured credit limits, 

5310 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

the proposed rule also would have 

codified the substance of certain FHFA 

regulatory interpretations that have 

addressed the application of the 

unsecured credit limits in particular 

situations. The proposed rule would not 

have changed the basic percentage 

limits used to calculate the amount of 

unsecured credit a Bank can extend to 

a single counterparty or group of 

affiliated counterparties. 

E. Overview of Comments on the 

Proposed Rule 

The proposed rule provided a 

comment period of 60 days, which 

closed on September 1, 2017. FHFA 

received only one comment letter on the 

proposed rule, which was a joint letter 

from the eleven Banks. The paragraphs 

immediately below provide brief 

descriptions of the principal issues 

addressed by the Banks’ comment letter. 

Those issues are discussed in greater 

detail within the relevant provisions of 

the section-by-section discussion of the 

final rule, set out at Section II, below. 

Office of the Federal Register standards 

now require tables be numbered 

consecutively within the section. 

Accordingly, FHFA has also revised the 

tables to § 1277.4 that were labelled 1.1, 

1.2, 1.3, 1.4, and 2 in the proposed rule 

to Tables 1, 2, 3, 4, and 5, respectively, 

in the final rule, and will be referenced 

as such in the preamble. 

Capital charges. The Banks contended 

that the proposed rule would have set 

capital charges for certain categories of 

assets higher than they should be, given 

the historical performance of those asset 

types. With respect to advances, the 

Banks questioned the proposed 

increases in capital charges, which 

would have increased modestly for all 

maturities over those in the current rule. 

The Banks asserted that FHFA should 

instead reduce the capital charges for 

advances in light of their historical 

performance and the Banks’ priority 

security interest in collateral pledged to 

secure the advances. With respect to 

derivative contracts between a Bank and 

its members, the Banks asked that FHFA 

retain the current capital provision for 

those contracts, under which the capital 

charge is the same as that for an advance 

with the same maturity. The proposed 

rule would have treated derivative 

contracts with Bank members in the 

same manner as derivative contracts 

with other counterparties, which carry 

higher capital charges. The Banks 

reasoned that retaining the current 

capital treatment for derivative contracts 

with their members was appropriate, 

given that all such derivative contracts 

are fully secured in the same manner as 

their advances, and that the Banks are 

exposed to less credit risk on such 

transactions than is the case with 

derivative contracts with dealer 

counterparties. The proposed rule had 

included a zero percent capital charge 

for obligations issued by the Enterprises 

while those obligations are backed by 

the direct financial support of the 

United States Treasury Department. The 

Banks asked that FHFA extend that 

provision to all other GSEs, regardless of 

whether they received such federal 

support. 

The Banks also questioned the 

proposed CRPRs for collateralized 

mortgage obligations (CMOs), most of 

which would be higher than the CRPRs 

for mortgage-backed securities 

structured as pass-through instruments. 

The Banks contended that the current 

market value and historical performance 

of the senior tranches of CMOs support 

a capital requirement similar to that 

imposed on pass-through securities. The 

Banks requested, therefore, that the final 

rule treat all categories of CMOs the 

same as the corresponding categories of 

pass-through securities, unless a 

particular CMO exhibits the 

characteristics of a subordinated tranche 

and the performance of an unsecured 

investment. In a similar fashion, the 

Banks disagreed with the proposed 

rule’s treatment of multifamily mortgage 

backed securities (MBS) and 

commercial mortgage backed securities 

(CMBS), notwithstanding that the 

proposed rule would not have changed 

the capital charges for those instruments 

from the charges imposed by the current 

regulations. The Banks contended that 

multifamily MBS perform more like 

single family residential mortgage 

securities and should, therefore, be 

subject to similar capital charges. As an 

alternative, the Banks suggested that 

FHFA create separate CRPR tables for 

both multifamily MBS and for CMBS, 

noting that both of these security types 

have performed better than unsecured 

or subordinated debt instruments. 

The Banks also requested that FHFA 

revise the operational risk capital 

requirement, which requires each Bank 

to maintain permanent capital equal to 

30 percent of the sum of its credit and 

market risk requirements, and which 

can be reduced to no less than 10 

percent of that amount if FHFA 

approves a Bank’s alternative 

methodology for quantifying operational 

risk. The Banks asked that FHFA 

remove the 10 percent lower bound for 

approved alternative methodologies, 

reasoning that a fixed minimum is not 

necessary if FHFA has approved a Bankdeveloped methodology. The Banks 

further asked that FHFA provide 

analytical support for the 30 percent 

and 10 percent thresholds, which FHFA 

had proposed to carry over from the 

Finance Board regulations without 

change. 

Unsecured extensions of credit. The 

Banks raised three issues relating to the 

proposed limits for unsecured 

extensions of credit. The first issue 

relates to FHFA’s proposal to eliminate 

the special treatment currently afforded 

to extensions of unsecured credit to 

GSEs. The current rule allows a Bank to 

extend unsecured credit to a GSE in an 

amount equal to 100 percent of the 

lesser of the total capital of the Bank or 

the GSE counterparty. The proposed 

rule would have reduced the general 

limit for all GSEs (other than those 

operating with explicit financial support 

of the United States) by treating them in 

the same manner as any other 

counterparty, meaning that the 

maximum limit for extensions of 

unsecured credit to a GSE could not 

exceed 15 percent of the lesser of the 

total capital of the Bank or the GSE, or 

30 percent when including overnight 

exposures. The Banks asked that FHFA 

retain a special unsecured limit for all 

GSEs, and not just for those operating 

with direct government support. The 

second issue sought clarification of an 

exception within § 1277.7(g)(2) of the 

proposed rule, which would have 

excluded cleared derivative transactions 

from being subject to the unsecured 

credit limits, by extending it to include 

as well any posted collateral associated 

with the cleared derivative transactions. 

The third issue pertained to the 

reporting period for total secured and 

unsecured extensions of credit, which 

the Banks asked be changed from 

monthly to quarterly to be consistent 

with the change in the reporting periods 

that FHFA proposed for both the market 

and credit risk-based capital 

requirements. 

Derivatives and collateral. A number 

of the Banks’ comments focused on the 

proposed capital treatment of cleared 

derivatives, as well as of the collateral 

relating to a derivative contract that is 

either held or posted by the Banks. 

These comments requested that FHFA 

clarify that, for purposes of determining 

the current credit exposure on a cleared 

derivative contract under 

§ 1277.4(i)(1)(i) of the final rule, the 

mark-to-market value of the contract be 

characterized as a de minimis amount. 

The Banks also requested that FHFA 

modify § 1277.4(i)(2) of the proposed 

rule, which specified alternative means 

for determining the potential future 

credit exposure on a derivative contract, 

to allow the use of the initial margin 

models used by Derivatives Clearing 

Organizations (DCOs). The Banks also 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5311 

21 12 U.S.C. 1426(a)(2). 

22FHFA believes that this approach remains 

consistent with the amendments made by HERA to 

the risk-based capital requirements in the Bank Act. 

As amended, the Bank Act provides the Director 

with broad authority to establish by regulation riskbased capital standards for the Banks that ensure 

the Banks operate in a safe and sound manner with 

sufficient permanent capital and reserves to support 

the risks arising from their operations. See 12 U.S.C. 

1426(a)(3)(A). 

asked that FHFA not assess any capital 

charge against the amount of the 

collateral posted by a Bank to a DCO 

that exceeds the Bank’s current credit 

exposure to the DCO, reasoning that the 

credit risk capital charge should include 

only the potential future credit 

exposure, and not also the initial margin 

required and held by the DCO as 

collateral. The Banks also asked that the 

final rule clarify that the collateral 

posted by a Bank should be valued 

without reduction for any discounts or 

haircuts imposed by agreement or 

regulation, and that FHFA retain the 

proposed provision that would require 

that collateral held by a Bank be valued 

after such discounts. The Banks further 

requested that the final rule provide that 

the capital charge on collateral pledged 

by a Bank only reflect the incremental 

CRPR attributable to the risk of the 

collateral custodian because the pledged 

collateral would already be subject to its 

own capital charge by virtue of being an 

asset on the Bank’s balance sheet. The 

Banks raised one other issue relating to 

the credit risk capital requirement for 

uncleared derivative contracts, asking 

that the final rule exclude any capital 

charge applicable to collateral held by 

the Bank that is used to reduce the 

current, and possibly also the potential 

future, exposures. 

Other Comments. Most of the other 

comments addressed lesser issues or 

were more technical in nature. With 

respect to the capital treatment for 

private label MBS, the Banks requested 

that FHFA clarify that their internal 

credit ratings for such assets should be 

based on potential future losses to the 

amortized cost of the asset. The Banks 

also requested that FHFA modify the 

proposed language to require that a 

Bank address any deficiencies in its 

methodology identified by FHFA, rather 

than allowing FHFA, on a case-by-case 

basis, to direct a Bank to change the 

calculated credit risk charge on 

particular assets. Another Bank 

comment suggested that FHFA be 

consistent in its treatment of guarantors 

under both the capital and unsecured 

credit provisions, some of which 

mandate that a Bank use the 

creditworthiness of the guarantor in 

applying a regulation and others of 

which are permissive and allow a Bank 

to use creditworthiness of the 

counterparty or the guarantor in 

applying other regulations. Specifically, 

the Banks asked that FHFA amend the 

unsecured credit limits to allow the 

Banks to choose either the counterparty 

or its third-party guarantor when 

determining its maximum unsecured 

credit exposure to the counterparty. The 

Banks also requested that FHFA clarify 

that the term ‘‘remaining maturity’’ 

contained in Table 2 means the 

‘‘weighted average life of the asset.’’ The 

Banks also asked that FHFA shorten the 

historical observation period that the 

Banks must use when running their 

internal market risk models. Section 

1277.5(b)(4)(ii) of the proposed 

regulation carried over the substance of 

the Finance Board regulation, which 

requires that the observation period 

begin in 1978, and the Banks asked that 

FHFA allow them to commence the 

period in 1992, to be consistent with 

other FHFA guidance. 

II. Section-by-Section Analysis of the 

Final Rule 

A. Definitions—§ 1277.1 

The proposed rule included 

definitions for seven new terms, which 

are: ‘‘collateralized mortgage 

obligation,’’ ‘‘derivatives clearing 

organization,’’ ‘‘eligible master netting 

agreement,’’ ‘‘non-mortgage asset,’’ 

‘‘non-rated asset,’’ ‘‘residential 

mortgage,’’ and ‘‘residential mortgage 

security.’’ FHFA received no comments 

on these definitions and is adopting 

them as proposed. The Banks’ comment 

letter asked that the final rule also 

define the terms ‘‘internal market-risk 

model’’ and ‘‘internal cash-flow model.’’ 

Both terms are used, but not defined, in 

12 CFR 932.5 of the Finance Board 

regulations (the market risk capital 

requirement) and were carried forward 

into the corresponding provisions of the 

proposed rule. FHFA agrees that 

defining these terms would add clarity 

to the regulation by describing the time 

dimension of the analysis that is to be 

done with each of the two model 

approaches under the market risk 

provisions of the regulation. FHFA has 

defined ‘‘internal market-risk model’’ as 

a model that is used to assess the effect 

on portfolio value from an 

instantaneous shock to interest rates, 

volatilities, and option adjusted spreads, 

and has defined ‘‘internal cash-flow 

model’’ as a model that is used to assess 

the evolution in portfolio value and 

cash-flows over a time-path of such 

shocks that could extend out for a 

period of years. 

In response to another comment 

questioning the need for the Banks to 

hold capital against any excess 

collateral that a Bank has posted to a 

DCO, FHFA has added the term 

‘‘bankruptcy remote’’ to 

§ 1277.4(e)(5)(ii)(C) and also has defined 

that term. As defined, ‘‘bankruptcy 

remote’’ describes collateral that a Bank 

has pledged to a DCO counterparty but 

that would not be included in that 

counterparty’s estate under any 

insolvency or similar proceedings. If 

any excess collateral pledged to a DCO 

is held in a manner that is bankruptcy 

remote a Bank need not hold capital 

against that amount. If the excess 

collateral pledged to a DCO is held in 

a manner that is not bankruptcy remote, 

the Bank would have to hold capital 

against it, as provided by 

§ 1277.4(e)(5)(ii)(C). The final rule also 

includes a new definition of ‘‘residential 

mortgage asset,’’ which includes 

individual one-to-four family residential 

mortgage loans, pools of such loans, and 

residential mortgage pass-through 

securities. FHFA has added that 

definition to distinguish between the 

types of mortgage-related assets for 

which CRPRs are derived from 

categories in the top half of Table 4 and 

CMOs, for which CRPRs are derived 

from the categories in the lower half of 

Table 4. 

B. Total Capital and Risk-Based Capital 

Requirements—§§ 1277.2 and 1277.3 

FHFA is adopting proposed §§ 1277.2 

and 1277.3, each of which is identical 

in substance to the corresponding 

provision in the Finance Board 

regulations, as final without change. 

Section 1277.2 sets forth the minimum 

total capital and leverage ratios that 

each Bank must maintain under section 

6(a)(2) of the Bank Act.21 Section 1277.3 

sets forth a Bank’s risk-based capital 

requirement and requires each Bank to 

hold at all times an amount of 

permanent capital that is equal to or 

greater than the sum of its credit risk, 

market risk, and operational risk capital 

requirements.22 In turn, §§ 1277.4, 

1277.5, and 1277.6 establish, 

respectively, the requirements for 

calculating a Bank’s credit risk, market 

risk, and operational risk capital 

charges, as described below. 

C. Credit Risk Capital Requirements— 

§ 1277.4 

1. Overview of Proposed § 1277.4 

The principal revisions to the current 

credit risk capital requirements 

included in proposed § 1277.4 would 

have changed how a Bank determines 

the CRPRs used to calculate capital 

charges for its non-mortgage assets, 

5312 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

23Section 1277.5(e) of the proposed rule also 

would have required the Banks to calculate their 

market risk capital charge quarterly, rather than 

monthly, and the final rule adopts that provision. 

24The final rule includes a similar provision, at 

12 CFR 1277.4(g)(1), which pertains to the 

calculation of capital charges related to residential 

mortgage assets and collateralized mortgage 

obligations. 

25See Final Rule on Margin and Capital 

Requirements for Covered Swap Entities, 80 FR 

74840 (Nov. 30, 2015), as amended, 83 FR 50805 

(Oct. 10, 2018). 

derivative contracts, and off-balance 

sheet items (Table 2 in the final rule), 

and for its residential mortgage assets 

(Table 4 in the final rule). In both cases, 

the proposed rule would have required 

a Bank to determine the capital charge 

based on a credit rating that the Bank 

calculates internally, rather than on an 

NRSRO credit rating, as had been the 

case under the Finance Board 

regulations. In addition, the proposed 

rule would have updated the individual 

CRPRs in Tables 1 and 2, which are 

used to calculate the applicable capital 

charges for advances and non-mortgage 

assets, respectively. The proposed rule 

also would have changed the frequency 

of a Bank’s calculation of its credit risk 

capital charges from monthly to 

quarterly.23 FHFA received no 

comments on the structure of proposed 

§ 1277.4, which addresses all aspects of 

the credit risk capital requirement, and 

is adopting that structure without 

change. As discussed below, FHFA 

received a number of comments 

suggesting modifications to certain 

aspects of proposed § 1277.4. 

2. Credit Risk Capital Requirements: 

General Requirement—§ 1277.4(a); 

Credit Risk Capital Charge for 

Residential Mortgage Assets and 

Collateralized Mortgage Obligations— 

§ 1277.4(b); Credit Risk Capital Charge 

for Advances, Non-Mortgage Assets, and 

Non-Rated Assets—§ 1277.4(c) 

FHFA received no comments on 

paragraphs (a) through (c) of proposed 

§ 1277.4 and is adopting them as final 

without change. The general 

requirement under § 1277.4(a) provides 

that a Bank’s credit risk capital 

requirement shall equal the sum of the 

individual credit risk capital charges for 

its advances, residential mortgage 

assets, non-mortgage assets, off-balance 

sheet items, derivative contracts, and 

non-rated assets. Section 1277.4(b) 

directs the Banks to determine capital 

charges for residential mortgages, 

residential mortgage pools, residential 

mortgage securities, and collateralized 

mortgage obligations in accordance with 

§ 1277.4(g). Section 1277.4(c) directs the 

Banks to determine capital charges for 

advances, non-mortgage assets, and nonrated assets pursuant to § 1277.4(f), and 

to use the amortized cost of the asset in 

doing so, i.e., a Bank determines the 

capital charges for those assets by 

multiplying the amortized cost of the 

asset by the CRPR assigned to the asset 

under the appropriate table. Section 

1277.4(c) also includes an exception for 

any asset that a Bank carries at fair value 

and for which the Bank recognizes 

changes in that asset’s fair value in 

income. For these assets, the Bank 

would multiply the fair value of the 

asset by the applicable CRPR to 

determine its capital charge. As 

explained in the proposed rule, FHFA is 

requiring Banks to use the amortized 

cost or fair value (rather than the book 

value as required in the current Finance 

Board regulation) because those are the 

current financial instrument recognition 

and measurement attributes used in 

relevant accounting guidance.24

3. Credit Risk Capital Charge for OffBalance Sheet Items—§ 1277.4(d) 

Section 1277.4(d) addresses capital 

charges for off-balance sheet items and 

is identical in substance to the current 

Finance Board regulation. FHFA 

received no comments on paragraph (d) 

of proposed § 1277.4 and is adopting it 

as final without change. Under this 

provision, the capital charge for such 

items will continue to be equal to the 

credit equivalent amount of the item 

multiplied by the appropriate CRPR 

assigned to the item by Table 2 of 

§ 1277.4, except for standby letters of 

credit, for which the CRPR will be the 

same as the CRPR established under 

Table 1 for an advance with the same 

maturity. Section 1277.4(d) further 

directs the Banks to determine the credit 

equivalent amount for all off-balance 

sheet items in accordance with 

§ 1277.4(h), which also is identical in 

substance to the corresponding Finance 

Board regulation. Thus, a Bank may 

continue to calculate the credit 

equivalent amount for an off-balance 

sheet item by using either an FHFAapproved model or the credit 

conversion factors set forth in Table 5 to 

§ 1277.4. Section 1277.4(h) also carries 

over the provision of the current 

regulation that allows the Banks to use 

a credit conversion factor of zero for any 

off-balance sheet commitments that are 

unconditionally cancelable or 

effectively provide for cancellation 

upon deterioration in the borrowers’ 

creditworthiness. 

4. Credit Risk Capital Requirements for 

Derivative Contracts—§ 1277.4(e) 

Section 1277.4(e) of the final rule 

establishes the general requirements for 

calculating credit risk capital charges for 

derivative contracts. The proposed rule 

included a number of changes to the 

current Finance Board regulation’s 

capital treatment of derivatives. These 

changes reflect developments in 

derivatives regulations brought about by 

the Dodd-Frank Act, including the 

clearing requirement for many 

standardized over-the-counter (OTC) 

derivative contracts and the adoption by 

FHFA, jointly with other federal 

regulators, of the Final Rule on Margin 

and Capital Requirements for covered 

Swap Entities, which established 

margin and capital requirements for 

uncleared swap contracts.25 FHFA 

received comments relating to several 

provisions of § 1277.4(e) in the 

proposed rule relating to derivative 

contracts and has revised the final rule 

in certain respects to address those 

comments, as described below. Overall, 

however, the derivatives provisions of 

the final rule are in most respects 

substantively the same as the proposed 

rule. Section 1277.4(e)(1), (2), and (3), 

which address the method of calculating 

the capital charge, the use of collateral 

to reduce the capital charge, and the 

requirements for using such collateral, 

respectively, are in substance the same 

as the corresponding provisions of the 

proposed rule. FHFA revised the 

language of paragraph (e)(1)(i), relating 

to the calculation of the current credit 

exposure, to state more directly that the 

Banks should use the column within 

Table 2 for items with maturities of one 

year or less when determining the CRPR 

for a derivative contract; the proposed 

rule had been phrased in terms of 

deeming the contract to have a maturity 

of one year or less. FHFA also revised 

paragraph (e)(1)(iii) to refer to the 

‘‘undiscounted amount’’ of excess 

collateral posted by a Bank on a 

contract, in response to a comment from 

the Banks. FHFA has revised the 

language of paragraph (e)(2) of the final 

rule with the intent of describing with 

more clarity the manner in which the 

Banks may use collateral provided by 

their counterparties to reduce the 

capital charge on a derivative contract. 

Section 1277.4(e)(3), which describes 

conditions that must be satisfied in 

order for such collateral to be eligible to 

reduce the capital charge, is unchanged 

from the proposed rule. FHFA has 

added a new paragraph (e)(4) to § 1277.4 

of the final rule in response to 

comments received from the Banks. 

This provision now deals with 

derivative contracts between a Bank and 

its members and effectively reinstates a 

provision that is in the current Finance 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5313 

26The current Finance Board regulations do not 

impose any capital charge on cleared derivative 

contracts. When the Finance Board adopted those 

regulations, the only type of cleared derivative 

contracts that the Banks used were exchange-traded 

futures contracts, which the Banks did not use to 

a significant degree. The Banks, however, have long 

used OTC derivative contracts in connection with 

their business, principally for hedging purposes. 

Given the Dodd-Frank Act clearing requirements, 

Banks will now be required to clear a significant 

percentage of their OTC derivative contracts. For 

that reason, FHFA determined that it was prudent 

to apply a capital charge to the Banks’ exposure 

under such contracts. Because a futures contract is 

a type of cleared derivative contract, such contracts 

will be subject to the new capital charges. 

27See discussion infra section II.C.4.iii, 

addressing the requirements under § 1277.4(e)(2). 

28This capital charge for cleared derivative 

contracts is consistent with the minimum total 

capital charge that would be applicable to cleared 

derivative contracts under the standardized 

approach in the capital rules adopted by federal 

banking regulators. For example, the risk weight 

applied to a cleared derivative contract under the 

FDIC regulations is two percent of the trade 

exposure amount. See 12 CFR 324.35(b)(3)(i)(A), 

(c)(3). The total capital ratio required under the 

FDIC regulations is eight percent of the riskweighted asset. See 12 CFR 324.10(a)(3). Thus, the 

required capital for a cleared contract would be 

eight percent of the contract’s risk weight, which 

would be two percent of its exposure amount, or 

0.16 percent of the exposure amount. FHFA, 

however has not adjusted the charge to account for 

any additional capital amounts needed to comply 

with the capital conservation buffer under the 

federal banking regulators’ rules. 

29Section 1277.4(e)(5)(ii)(A) provides that the 

current credit exposure for a cleared derivative 

contract is to be calculated in accordance with 

§ 1277.4(i)(1)(i), which sets forth the method to 

calculate current credit exposures for a single 

derivative contract. As noted in the proposed rule, 

given that most clearing organizations effectively 

settle a cleared derivative contract at the end of the 

day, the current credit exposure for any such 

contract often would be zero or a small amount, 

depending on the timing of the daily settlement. 

30 Generally, this amount should equal the initial 

margin that a Bank would post under its derivative 

contracts with a particular counterparty. 

Board regulations. Paragraph (e)(5) of 

the final rule, which sets the capital 

charges for certain foreign exchange rate 

contracts and for cleared derivatives 

contracts, is the same as paragraph (e)(4) 

of the proposed rule, with one revision. 

Under that revision, a Bank would have 

to hold capital against any excess 

collateral that it has posted to a DCO 

only if the DCO holds the collateral in 

a manner that is ‘‘not bankruptcy 

remote.’’ The final rule also added a 

definition of ‘‘bankruptcy remote,’’ as 

described previously. The discussion 

below provides a more detailed 

description of the various provisions of 

the final rule addressing derivative 

contracts. 

i. General Credit Risk Capital Charge 

Calculations for Derivative Contracts 

Uncleared Derivative Contracts 

Section 1277.4(e)(1) of the final rule 

establishes credit risk capital charges for 

uncleared derivative contracts to which 

a Bank is party.26 The initial credit risk 

capital charge for an uncleared 

derivative contract equals the sum of: (i) 

The current credit exposure on the 

contract multiplied by the appropriate 

CRPR; (ii) the potential future credit 

exposure multiplied by the appropriate 

CRPR; and (iii) the undiscounted 

amount of any collateral posted by the 

Bank with respect to the contract that 

exceeds its payment obligation, 

multiplied by the CRPR assigned to the 

entity holding the collateral. A Bank 

must calculate its current and potential 

future credit exposures on a derivative 

contract in accordance with 

§ 1277.4(i)(1)(ii) and (i)(2), respectively. 

A Bank may reduce that capital charge 

if it holds certain collateral against its 

counterparty’s payment obligations, as 

provided in § 1277.4(e)(2), which is 

described below.27

Cleared Derivative Contracts and 

Foreign Exchange Rate Contracts 

Section 1277.4(e)(5)(ii) of the final 

rule includes a separate provision for 

determining the credit risk capital 

charge for a cleared derivative contract. 

While the credit risk capital charge for 

an uncleared derivative contract is 

based on the applicable CRPR and 

deemed maturity from Table 2 under 

§ 1277.4, the credit risk capital charge 

for all cleared derivative contracts is set 

at a fixed percentage of the sum of the 

three elements listed in 

§ 1277.4(e)(5)(ii)(A) through (C) of the 

final rule. Section 1277.4(e)(5)(ii) 

provides that the credit risk capital 

charge for a cleared derivative contract 

will be equal to 0.16 percent times the 

sum of a Bank’s current credit exposure 

on the contract,28 plus its potential 

future credit exposure on the contract, 

plus the amount of any excess collateral 

posted by the Bank and held by the 

clearing organization in a manner that is 

not ‘‘bankruptcy remote.’’ 29 Section 

1277.4(e)(5)(ii)(A) and (B) further 

provide that a Bank must calculate its 

current and potential future credit 

exposures on a cleared derivative in 

accordance with § 1277.4(i)(1)(i) and 

(i)(2), respectively. FHFA has made one 

clarifying revision to 

§ 1277.4(e)(5)(ii)(A) by replacing a crossreference to ‘‘paragraph (i)(1)’’ with a 

reference to ‘‘paragraph (i)(1)(i).’’ The 

original text had included provisions 

related to single derivative contracts— 

which could include both cleared and 

uncleared transactions—as well as to 

multiple contracts with one 

counterparty that were subject to an 

eligible master netting agreement— 

which category would include only 

uncleared derivative contracts. The 

revision makes clear that the provisions 

of § 1277.4(i)(1)(ii) regarding contracts 

subject to netting agreements do not 

apply when determining the current 

credit exposure for a cleared derivative 

contract. Section 1277.4(e)(5)(i) also 

includes a separate provision that 

carries over from the Finance Board 

regulations an exception for certain 

foreign exchange rate contracts. That 

provision establishes a zero percent 

capital charge for foreign exchange rate 

contracts (excluding gold contracts), 

that have an original maturity of 14 

calendar days or less, and explicitly 

excludes gold contracts from this 

provision. 

Derivative Contracts With a Member 

As noted previously, § 1277.4(e)(4) of 

the final rule reinstates a provision from 

the Finance Board regulations that 

establishes a different means of 

determining the credit risk capital 

charge for a derivative contract between 

a Bank and one of its members. Under 

this provision, a Bank will calculate the 

capital charge for such transactions in 

accordance with § 1277.4(e)(1), which 

applies to uncleared derivative 

contracts, but will obtain the CRPRs 

from Table 1 of the final rule (which 

applies to advances), rather than from 

Table 2, which otherwise would apply 

and which has somewhat higher CRPRs. 

ii. Collateral Valuation for Derivative 

Contracts 

Collateral Valuation—Uncleared 

Derivative Contracts 

FHFA proposed the requirement 

relating to a Bank’s excess pledged 

collateral under § 1277.4(e)(1)(iii) in 

order to address a credit risk exposure 

that is not addressed by the current 

Finance Board regulations. Specifically, 

this provision of the final rule takes into 

account the credit exposure that arises 

from the amount of collateral that a 

Bank posts in excess of the Bank’s 

current, marked-to-market obligation to 

its counterparty under a particular 

derivative contract.30 In most instances, 

the value of the Bank’s posted collateral 

will exceed the Bank’s current 

obligation under the derivative contract. 

That amount of excess collateral 

constitutes a credit exposure for the 

Bank because of the possibility that the 

party holding the collateral may fail and 

the Bank may not be able to recover its 

excess collateral. Under 

§ 1277.4(e)(1)(iii), a Bank will calculate 

the specific charge for the posted excess 

collateral based on a CRPR obtained 

from Table 2, using the Bank’s internal 

rating for the counterparty or custodian 

5314 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

31 In this rule, FHFA has not required that the 

Banks adjust the capital charge to account for any 

additional capital amounts needed to comply with 

the capital conservation buffer, as is the case under 

the federal banking regulators’ rules. 

32See, e.g., 12 CFR 217.35(b)(2)(i)(B) (Federal 

Reserve System); 12 CFR 324.35(b)(2)(i)(B) (FDIC). 

33Collateral held by a third-party custodian must 

be held pursuant to a custody agreement that 

satisfies the requirements of 12 CFR 1221.7(c), (d) 

of FHFA’s regulations, regarding margin and capital 

requirements for covered swap entities. The 

collateral discount also must be at least equal to the 

minimum discount required under appendix B to 

part 1221 of the FHFA regulations. 

holding such collateral, with the rating 

determined in accordance with 

§ 1277.4(f)(1)(ii), and using the column 

in Table 2 for items with a maturity of 

one year or less. The Banks asked that 

FHFA clarify the final rule by stating 

that they need not discount the value of 

the collateral they have posted when 

applying this provision. FHFA agrees 

that they need not do so and has revised 

§ 1277.4(e)(1)(iii) to refer to ‘‘the 

undiscounted amount of collateral 

posted by the Bank.’’ 

The Banks also questioned the 

appropriateness of applying a capital 

charge to the excess collateral they post 

on a derivative contract, contending that 

any such collateral would equal the 

initial margin, which they suggested 

performs a similar risk mitigation and 

protection function as potential future 

exposure. The Banks reasoned that 

assessing a capital charge for both the 

potential future exposure under the 

contract and for any collateral posted to 

cover initial margin would be 

duplicative, and that FHFA should 

remove the capital charge on the excess 

collateral from the rule. FHFA does not 

agree that these risk exposures are the 

same and therefore has made no change 

to § 1277.4(e)(1) of the final rule in 

response to this comment. The potential 

future exposure component of the rule 

addresses the risk to the Bank that the 

counterparty will not make payment on 

its obligations under the derivative 

contract, whereas the provision 

addressing the excess collateral posted 

by the Bank is intended to address the 

risk to the Bank that the entity holding 

its collateral will not return it to the 

Bank. Imposing a capital charge on both 

of these credit exposures also is 

consistent with actions taken by the 

federal banking regulators in the context 

of cleared derivatives contracts, where 

the minimum total capital charge that 

applies to those contracts under the 

standardized approach in those capital 

rules includes such a provision.31

Collateral Valuation—Cleared 

Derivative Contracts 

The credit risk capital charge related 

to the excess collateral that a Bank 

pledges to its counterparty for a cleared 

derivative has been revised from the 

proposed rule in response to Bank 

comments on a related issue, and now 

differs from the corresponding charge 

for an uncleared derivative. The Banks 

had questioned the provision of the 

proposed rule that addressed excess 

collateral, noting that collateral posted 

to a DCO to cover initial margin must 

be held by the DCO under strict legal 

requirements, including segregation, 

control, and investment limitations, all 

of which protect the initial margin from 

loss and largely eliminate credit risk 

arising from the pledging of the 

collateral. FHFA agrees with that 

assessment and therefore has amended 

§ 1277.4(e)(5)(ii)(C) of the final rule so 

that it now imposes a capital charge on 

excess collateral posted for a cleared 

derivative only if the collateral is held 

by the custodian in a manner that is not 

‘‘bankruptcy remote.’’ If the excess 

collateral is held in a manner that is 

bankruptcy remote, then the final rule 

does not impose any capital charge on 

that collateral, i.e., the final rule 

effectively assigns a zero capital charge 

to any such excess collateral held by a 

custodian in a manner that is 

bankruptcy remote. This provision also 

is consistent with the regulations of the 

other federal banking regulators, which 

recognize this risk and have instituted 

similar capital charges for excess 

collateral posted to their institutions’ 

DCO derivative counterparties that is 

not held in a manner that is bankruptcy 

remote.32

iii. Reduction of Credit Risk Capital 

Charge Calculated Under § 1277.4(e)(2) 

Section 1277.4(e)(2) of the final rule 

also includes two provisions that would 

allow a Bank to reduce the capital 

charge on an uncleared derivative 

contract if its counterparty has provided 

collateral to support its payment 

obligation or has obtained a third-party 

guarantee for its payment obligations. 

First, under § 1277.4(e)(2)(i) a Bank may 

reduce its credit risk capital charge for 

the current and potential future 

exposures of its derivative contracts 

based on the discounted value of 

collateral posted by the counterparty. As 

noted previously, the substance of this 

provision is the same as the proposed 

rule, but the language has been revised 

to provide greater clarity. This provision 

specifies the manner in which the Bank 

may apply the counterparty’s 

collateral—first, to reduce the current 

credit exposure, and second, to reduce 

the potential future exposure. In such 

cases, the capital charge for the 

derivative contract will equal the 

amount of the initial capital charge that 

remains after having been reduced by 

the value of the pledged collateral. The 

final rule requires that a Bank also must 

hold capital against that portion of the 

discounted collateral that the Bank has 

applied to reduce its exposure. The 

Banks’ comment letter suggested that 

the language describing the calculation 

of the capital charge for the collateral 

was ambiguous with respect to whether 

the collateral must be multiplied by the 

applicable CRPR before or after it is 

applied to reduce the exposures. FHFA 

intended that the capital charge for the 

pledged collateral would be assessed 

only after the full amount of the 

discounted collateral had been applied 

to reduce the credit exposures, and has 

amended § 1277.4(e)(2)(i) of the final 

rule to clarify that intent. 

Second, under § 1277.4(e)(2)(ii) a 

Bank may adjust the otherwise 

applicable capital charge for any 

derivative contract for which the 

counterparty’s payment obligation is 

unconditionally guaranteed by a third 

party. This provision is permissive, not 

mandatory, and allows the Banks the 

option of using either the CRPR 

associated with the derivative 

counterparty or that associated with the 

guarantor, whichever results in the 

lower capital charge. 

iv. Collateral Eligibility Requirements— 

Derivative Contracts 

With respect to collateral pledged by 

a counterparty, § 1277.4(e)(2)(i) provides 

that the collateral must satisfy the 

eligibility requirements set out in 

§ 1277.4(e)(3) before it may be used to 

reduce the otherwise applicable capital 

charge on the derivative contract. As 

discussed previously, the eligibility 

provisions of § 1277.4(e)(3) of the final 

rule are unchanged from the proposed 

rule. That section generally requires that 

the collateral must be held by the Bank 

or its custodian, be legally available to 

absorb losses, be of a readily 

determinable value at which it can be 

liquidated, and be subject to an 

appropriate discount.33 These 

provisions of the final rule are intended 

to ensure that any collateral pledged by 

a counterparty must meet certain 

minimum standards before a Bank may 

use it to reduce the otherwise applicable 

credit risk capital charge for its 

derivative contracts. These standards 

are slightly more stringent than the 

collateral standards in the current 

Finance Board regulation, but they are 

consistent with the stricter requirements 

for derivative contracts that have 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5315 

34For any derivative transactions with swap 

dealers or major swap participants, the Bank would 

already have to meet these higher collateral 

standards under applicable uncleared swaps margin 

and capital rules. Thus, FHFA does not anticipate 

that the proposed change would affect transactions 

with these types of counterparties. 

35See 12 CFR 1221.6. Under the final rule, a Bank 

must apply at least the minimum discount listed in 

appendix B of the margin and capital rule for 

uncleared swaps to any collateral listed in that 

appendix or it could apply a suitable discount 

determined by the Bank based on appropriate 

assumptions about price risk and liquidation costs 

to collateral not listed in appendix B. 

36See Proposed Federal Home Loan Bank Capital 

Requirements, 82 FR 30776, 30781 n.30 (July 3, 

2017); supra note 28. 

37See 12 CFR 1221.2. The ‘‘eligible master netting 

agreement’’ definition under § 1221.2 was amended 

effective November 9, 2018. See Margin and Capital 

Requirements for Covered Swap Entities; Final 

Rule, 83 FR 50805, 50813 (Oct. 10, 2018). 

38See 12 CFR 1221.8; 12 CFR part 1221, appendix 

A. As no Bank is currently a swap dealer or major 

swap participant that otherwise needs to develop an 

initial margin model, FHFA expects the Banks 

would generally rely on the calculations done by a 

counterparty using its approved model or using 

appendix A to the part 1221 rules. 

39See 12 CFR 1221.9. 

40See Final Rule on Margin and Capital 

Requirements for Covered Swap Entities, 80 FR 

74840, 74881–882 (Nov. 30, 2015), as amended, 83 

FR 50805 (Oct. 10, 2018). 

evolved subsequent to the recent 

financial crisis.34

The final rule does not limit the 

collateral that a Bank may accept to 

those items that satisfy the eligibility 

requirements for collateral under the 

uncleared derivatives rule, because not 

all Bank derivative counterparties are 

subject to these requirements.35 This is 

a change from the current Finance 

Board regulation, which allows Banks to 

take account of collateral held against 

derivatives exposures only if a member 

or affiliate of the member holds the 

collateral. The current rule also does not 

impose specific minimum discounts on 

any type of collateral but allows a Bank 

to determine a suitable discount. 

v. Calculation of Current and Potential 

Future Credit Exposures on Derivative 

Contracts 

Calculation of Current Exposure on 

Derivative Contracts 

A separate provision of the final rule, 

§ 1277.4(i), addresses the method for 

calculating a Bank’s current and 

potential future credit exposures under 

a derivative contract. This paragraph of 

the final rule is identical to the 

proposed rule except for the addition of 

a new provision that allows the Banks 

to use an initial margin model that is 

employed by a derivatives clearing 

organization as one option for 

calculating the potential future credit 

exposure on their derivative contracts. 

As proposed, the final rule carries over 

the same approach for calculating the 

current credit exposure as under the 

Finance Board regulations. Specifically, 

§ 1277.4(i)(1)(i) provides that the current 

credit exposure for a single derivative 

contract that is not subject to an eligible 

master netting agreement equals the 

marked-to-market value of the contract 

if that value is positive or zero if that 

marked-to-market value is zero or 

negative. The Banks’ comment letter 

requested that § 1277.4(i)(1)(i) be 

revised ‘‘to specify that the mark-tomarket value for cleared derivative 

contracts is de minimis.’’ FHFA has not 

made that requested revision. To the 

extent the Banks asked that there be no 

capital charge for this credit exposure or 

that they not be required to perform the 

calculation for these contracts given the 

small amounts involved, FHFA notes 

that no other financial regulator 

excludes a capital charge on the current 

credit exposure because it might be de 

minimis. Moreover, FHFA previously 

acknowledged in the proposed rule and 

reiterated in the discussion of 

§ 1277.4(e)(5)(ii) above that the current 

credit exposure of a cleared derivative 

contract would often be zero or a small 

amount.36

Section 1277.4(i)(1)(ii) of the final 

rule allows a Bank to calculate on a net 

basis the current credit exposure for all 

derivative contracts that are executed 

with a single counterparty and that are 

subject to an ‘‘eligible master netting 

agreement.’’ FHFA has aligned the 

§ 1277.1 definition of ‘‘eligible master 

netting agreement’’ with that of § 1221.2 

in the FHFA regulations pertaining to 

margin and capital for uncleared swaps 

by stating that the term ‘‘has the same 

meaning as set forth in § 1221.2.’’ 37

Calculation of Potential Future Credit 

Exposure on Derivative Contracts 

Section 1277.4(i)(2) of the proposed 

rule would have provided a Bank three 

options for calculating the potential 

future credit exposure on a derivative 

contract. A Bank could use an initial 

margin model approved by FHFA under 

§ 1221.8 of the margin and capital rules 

for uncleared swaps, or a model that has 

been approved by another regulator for 

use by the Bank’s counterparty under 

standards that are similar to those in 

§ 1221.8, or by using the standard 

calculation set forth in appendix A to 

part 1221 of the FHFA regulations.38

The final rule retains each of these 

options. FHFA received one comment 

on this provision, which asked that 

FHFA allow the Banks the additional 

option of calculating the potential future 

credit exposure by using an initial 

margin model that is employed by a 

DCO. FHFA agrees that such DCO 

models would not have fit within any of 

the three options allowed under the 

proposed rule, and that they should be 

acceptable because they are market 

tested and are subject to periodic review 

and validation under CFTC rules. 

Accordingly, FHFA has added a new 

provision, at § 1277.4(i)(2)(iii) of the 

final rule, that allows a Bank to use such 

models for calculating the potential 

future credit exposures. Thus, in 

addition to that new provision, the final 

rule allows a Bank to rely on the initial 

margin calculation done by a swap 

dealer or other counterparty that uses a 

model approved by the CFTC, other 

federal banking regulator, or a foreign 

regulator whose model rules have been 

found to be comparable to the United 

States rules.39 If neither party to the 

derivative contract uses an approved 

model, or if the Bank otherwise chooses, 

the Bank can calculate its potential 

future exposure using the method set 

forth in appendix A to part 1221.40

5. Determination of Credit Risk 

Percentage Requirements 

Sections 1277.4(f) and (g) of the final 

rule set forth the method and criteria by 

which a Bank will identify the CRPRs to 

use when calculating the credit risk 

capital charges for its assets, off-balance 

sheet items, and derivative contracts. 

Section 1277.4(f) addresses the capital 

charges for a Bank’s advances, nonmortgage assets, off-balance sheet items, 

derivative contracts, and non-rated 

assets. Section 1277.4(g) addresses the 

capital charges for a Bank’s residential 

mortgage assets. The applicable CRPRs 

are set forth in four separate tables 

within those two sections. Table 1 

includes the CRPRs for advances. Table 

2 includes the CRPRs for internally 

rated non-mortgage assets, derivative 

contracts, and off-balance sheet items. 

Table 3 includes the CRPRs non-rated 

assets, which are cash, premises, plant 

and equipment, and certain specific 

investments. Table 4 includes the 

CRPRs for residential mortgage loans, 

residential mortgage securities, and 

collateralized mortgage obligations. 

Section 1277.4(f). Each of the 

provisions of § 1277.4(f) of the final rule 

is the same as in the proposed rule, with 

the exceptions noted below. Section 

1277.4(f) generally directs the Banks to 

use the tables included within that 

section to obtain the CRPRs for their 

advances, non-mortgage assets, offbalance sheet items, derivative contract, 

and non-rated assets, and includes 

certain exceptions to the otherwise 

applicable CRPRs. 

5316 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

41Proposed Federal Home Loan Bank Capital 

Requirements, 82 FR 30776, 30782–30783 (July 3, 

2017) (discussing in detail the new methodology to 

derive the CRPRs for Table 1.1 in the proposed rule, 

which is Table 1 in the final rule). 

42See Proposed Federal Home Loan Bank Capital 

Requirements, 82 FR 30776, 30786 (July 3, 2017) 

(setting forth the methodology used to derive 

proposed Table 2). 

CRPRs for Advances: Table 1. The 

proposed rule included a version of 

Table 1 that was much the same as the 

corresponding table in the current 

Finance Board regulations, except that it 

included modestly higher CRPRs for 

advances than those in the current 

regulation. The Banks’ comment letter 

asked that FHFA either reinstate the 

CRPRs from the current Finance Board 

regulation or lower them to levels below 

those in the current regulation. The 

Banks reasoned that lower capital 

charges for advances were warranted 

because no Bank has ever suffered a 

credit loss on an advance to a member, 

but the Banks did not propose a new 

methodology that FHFA could use for 

deriving reduced CRPRs for their 

advances. The final rule retains in Table 

1 the CRPRs that were included in the 

proposed rule. As FHFA explained in 

the proposed rule, advances, which 

represent approximately two-thirds of 

the Banks’ assets, do present some 

degree of credit risk, and thus should be 

included within the risk-based capital 

requirements. That degree of credit risk 

is difficult to measure precisely because 

there is no comparable loss history for 

advances as there is, for example, for 

corporate debt instruments. The Finance 

Board determined that the capital 

charge for advances should be greater 

than zero but less than the capital 

charge for other assets rated at the 

highest investment grade. Accordingly, 

it developed a methodology for setting 

the CRPRs for advances within that 

range based on the estimated default 

rate of investment grade corporate debt 

securities and a specific loss-givendefault rate, as described in the 

proposed rule. FHFA believes that the 

original methodology remains a 

reasonable approach for estimating 

credit risk associated with advances, 

and thus has retained that approach in 

Table 1 of the final rule. In determining 

the CRPRs for advances, FHFA had the 

benefit of default data that was more 

recent than what had been available to 

the Finance Board, as well as a more 

standardized methodology.41 The fact 

that the CRPRs in the final rule are 

modestly higher than the current CRPRs 

is solely a result of employing the 

updated methodology. Moreover, the 

amount of risk-based capital that a Bank 

must hold against its advances remains 

modest, in keeping with the very low 

risk posed by advances. 

CRPRs for Internally Rated Assets: 

Table 2. Under the existing Finance 

Board regulations, the CRPRs used to 

calculate the capital charges for nonmortgage assets, off-balance sheet items, 

and derivative contracts are determined 

based on a table that delineates the 

CRPRs by NRSRO rating and maturity 

range. The proposed rule would have 

made two revisions to that table. First, 

as required by the Dodd-Frank Act, the 

proposal would have replaced the 

NRSRO rating categories with FHFA 

Credit Ratings categories, to which the 

Banks would have to assign the 

instruments covered by the table based 

on their own internal credit ratings. 

Second, FHFA included revised 

percentages for most of the CRPRs 

within Table 2 because FHFA had 

updated both the data and the 

methodology that the Finance Board 

had used to develop the original CRPRs. 

As a result of those updates, the CRPR 

percentages for most of the line items in 

proposed Table 2 were higher than 

those in the current Finance Board 

regulation. As explained in the 

proposed rule, FHFA derived the CRPRs 

in proposed Table 2 using a modified 

version of the Basel II internal ratingsbased credit risk model. FHFA received 

no comments on the methodology used 

to derive the CRPRs in proposed Table 

2 or on the requirement for the Banks 

to use their internal credit ratings, and 

therefore is adopting Table 2 as 

proposed.42 The Banks’ comment letter 

asked that FHFA clarify that the 

language in the column heading that 

refers to an instrument’s ‘‘remaining 

maturity’’ means the ‘‘weighted average 

life of the asset,’’ rather than its 

contractual maturity. FHFA based the 

table on bond credit losses over a 

specific time horizon, and not the 

weighted average life of those assets, 

and therefore believes that the 

remaining contractual maturity is the 

appropriate measure. In the final rule 

FHFA has revised the heading of Table 

2 to state that the ratings are ‘‘Based on 

Remaining Contractual Maturity’’ to 

make that point clear. 

The FHFA Credit Rating categories in 

Table 2 are intended to achieve the 

same purpose previously served by the 

NRSRO credit ratings, which is to create 

a hierarchy of credit risk exposure 

categories, to which a Bank would 

assign each instrument covered by Table 

2. FHFA has established the individual 

FHFA Credit Rating categories, and the 

CRPR for each category, based on 

historical loss experience. In this 

respect, the categories of FHFA Credit 

Ratings are comparable to the NRSRO 

ratings categories, which also are based 

on historical loss experience. Because of 

that common foundation, and because 

Table 2 of the final rule has the same 

number of categories as the 

corresponding table in the current 

Finance Board regulation, there should 

be a high correlation between the 

categories of the new and old tables. For 

example, the historical loss experience 

for the ‘‘highest investment grade’’ 

category used in the current Finance 

Board regulation should correspond 

closely to the historical loss experience 

that FHFA determined for the FHFA 1 

Credit Rating category in Table 2 of the 

final rule, and the same should be true 

for the remaining categories. 

The final rule differs from the current 

Finance Board regulation by requiring 

that each Bank determine the 

appropriate FHFA Credit Rating 

category for each instrument covered by 

Table 2. The Bank would do so by first 

calculating its own internal credit rating 

for each instrument, as required by 

§ 1277.4(f)(1)(ii), rather than by 

determining the instrument’s NRSRO 

rating, as is the case under the current 

regulation. Each Bank then would need 

to map its various internal credit ratings 

to one of the FHFA Credit Rating 

categories in Table 2. Given the 

similarity in structure and basis 

between Table 2 of the final rule and the 

corresponding table in the current 

Finance Board regulations, as well as 

the historical data connection of both 

tables to historical loss rates reflected in 

NRSRO ratings, the Banks should be 

able to map their internal credit ratings 

to the appropriate FHFA Credit Rating 

categories in Table 2 of the final rule in 

a straightforward manner. Because the 

final rule relies on a Bank’s internal 

credit ratings and the manner in which 

it maps those internal ratings to the 

appropriate FHFA Credit Rating 

category, it is possible that the CRPR for 

a particular instrument or counterparty 

determined under the final rule would 

differ from the CRPR that is assigned 

under the current regulations. Because 

the internal ratings methodologies may 

differ from Bank to Bank, it also is 

possible that one Bank may rate a 

particular instrument differently from 

another Bank. 

The final rule does not require a Bank 

to obtain FHFA approval of either its 

method of calculating the internal credit 

rating or its mapping of such ratings to 

the FHFA Credit Ratings categories. 

Instead, § 1277.4(f)(1)(ii) of the final rule 

provides that a Bank’s rating method 

must involve an evaluation of 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5317 

43 In the Finance Board regulations, the 

corresponding table is designated as ‘‘Table 1.4’’ but 

the assets and CRPRs included within that table are 

the same as those of Table 3 of this final rule. 

44See Final Finance Board Capital Rule, 66 FR 

8262, 8292–94 (Jan. 30, 2001). 

45See https://www.fhfa.gov/Conservatorship/ 

Pages/Senior-Preferred-Stock-PurchaseAgreements.aspx (containing links to the PSPAs 

and to the First, Second, and Third Amendments 

to them, as well as to the Letter Agreement of 

December 21, 2017, on capital reserves). 

46Although multifamily MBS and CMBS are 

backed by loans that are secured by a mortgage on 

real estate, they are treated as ‘‘non-mortgage 

assets’’ for regulatory capital purposes because their 

underlying loans are not ‘‘residential mortgage 

loans,’’ which term includes only loans that are 

Continued 

counterparty or asset risk factors, which 

may incorporate, but not rely solely 

upon, credit ratings available from an 

NRSRO or other credit rating entities. 

An evaluation of a risk factors may 

include measures of the counterparty’s 

scale, earnings, liquidity, asset quality, 

or capital adequacy, among other things. 

FHFA intends to rely on the 

examination process to review the 

Banks’ internal rating methodologies 

and mapping processes, which is 

appropriate because the Banks have 

been using internal rating 

methodologies for some time, and any 

adjustments to those methodologies that 

may be required for supervisory reasons 

would not likely have a material effect 

on a Bank’s overall credit risk capital 

requirement. FHFA also has revised a 

related provision of the final rule, 

§ 1277.4(f)(4), which now requires a 

Bank to provide to FHFA, upon request, 

the methodology, model, and analyses 

used to assign these instruments to their 

FHFA Credit Rating categories. That 

provision also authorizes FHFA to 

direct any Bank to revise its 

methodology or model to remedy any 

deficiencies identified by FHFA. The 

proposed rule would have allowed 

FHFA, on a case-by-case basis, to direct 

a Bank to change the calculated credit 

risk capital charge for particular 

instruments, as necessary to remedy any 

deficiency that FHFA identified with 

respect to a Bank’s internal credit rating 

methodology for those instruments. 

FHFA revised this provision in response 

to the Banks’ comment letter, which 

suggested that it would be more 

appropriate for FHFA to require a Bank 

to revise its methodology and model 

than for FHFA to direct a Bank to revise 

capital charges for individual 

instruments on a case-by-case basis. 

FHFA agrees with the Banks’ suggestion 

and has revised both § 1277.4(f)(4), 

which pertains to Table 2, and 

§ 1277.4(g)(2)(iii), which pertains to 

Table 4, for mortgage assets, in the 

manner described above. 

CRPRs for Non-Rated Assets: Table 3. 

The proposed rule included a version of 

Table 3 that was identical to the 

corresponding table in the current 

Finance Board regulation.43 FHFA 

received no comments on this table and 

is adopting it as proposed. Table 3 sets 

forth the CRPRs for Non-Rated Assets, 

which are defined as cash, premises, 

plant and equipment, and investments 

authorized under 12 CFR 1265.3(e) and 

(f). 

Reduced Charges for non-mortgage 

assets. Section 1277.4(f)(2) of the final 

rule provides for two exceptions to the 

process described above for determining 

the capital charges for non-mortgage 

assets that are secured by certain 

collateral or are subject to an 

unconditional guarantee from a thirdparty. This provision is unchanged from 

the proposed rule and carries over 

provisions from the current Finance 

Board regulations. Under those 

provisions, a Bank may substitute the 

CRPR associated with the guarantor or 

the collateral for the charge associated 

with the portion of the non-mortgage 

asset that is subject to the guarantee or 

collateral. Section 1277.4(f)(2)(ii) 

describes the conditions that must be 

satisfied in order for the collateral to be 

deemed to ‘‘secure’’ the non-mortgage 

asset. The final rule also includes a 

separate but similar provision, located 

at § 1277.4(j), that allows the Banks the 

option of using credit derivatives that 

meet the requirements of that section to 

reduce or eliminate the otherwise 

applicable capital charges on their nonmortgage assets. Section 1277.4(j) is the 

same as the proposed rule, apart from 

two instances in which FHFA has 

replaced the term ‘‘book value’’ with 

‘‘amortized cost, or fair value’’ when 

referring to the calculation of the capital 

charge for hedged non-mortgage assets. 

The substance of this provision also is 

the same as the current Finance Board 

regulation. The final rule does not alter 

the substance of the current Finance 

Board regulations as to the criteria that 

a Bank must meet for this special 

provision to apply or the method of 

calculating the capital charges. 

Generally, under this provision, a Bank 

would be able to substitute the capital 

charge associated with the credit 

derivatives (as calculated under 

§ 1277.4(e)) for all or a portion of the 

capital charge calculated for the nonmortgage assets, if the hedging 

relationships meet the criteria in the 

proposed provision.44

Charge for Obligations Issued by the 

Enterprises. Section 1277.4(f)(3) of the 

proposed rule would have applied a 

capital charge of zero to any nonmortgage debt instrument issued by 

either of the Enterprises, recognizing 

that they are currently operating with 

the financial support of the United 

States and thus present no credit risk. 

The final rule retains this provision 

with only one revision, which clarifies 

that the zero capital charge may 

continue only for so long as the 

Enterprises’ debt obligations actually are 

supported by the United States. When 

the capital support provided by the U.S. 

Government ceases, the capital charges 

for Enterprise debt instruments will be 

determined by using the appropriate 

CRPR in Table 2 in the same manner as 

would be the case for any debt 

instruments issued by other entities, i.e., 

based on the Bank’s internal credit 

rating for the issuing Enterprise and the 

maturity of the instrument. At present, 

the financial support provided by the 

U.S. Department of the Treasury under 

the Senior Preferred Stock Purchase 

Agreements (PSPA) 45 ensures that the 

Enterprises will repay these obligations, 

which effectively eliminates the credit 

exposure otherwise associated with 

these instruments and warrants a capital 

charge of zero while the instruments 

continue to have the financial support 

of the United States. The Banks’ 

comment letter asked that the final rule 

also apply a zero percent capital charge 

to the non-mortgage debt instruments 

issued by other GSEs. The Banks made 

the same request with respect to 

§ 1277.4(g)(2)(i), which assigns a zero 

percent capital charge for mortgagerelated obligations issued by the 

Enterprises. The Banks reasoned that 

the obligations of all GSEs should be 

treated equally for risk-based capital 

purposes. FHFA has not included those 

requested changes in the final rule. 

FHFA has assigned a zero percent 

capital charge to those Enterprise 

obligations because of the explicit 

financial support provided by the 

United States through the PSPAs. The 

obligations of other GSEs are not 

similarly backed by the United States, 

and therefore a zero percent capital 

charge is not warranted. 

Credit Risk Capital Charge for 

Multifamily MBS and CMBS. Under the 

proposed rule both multifamily MBS 

and CMBS would constitute ‘‘nonmortgage assets’’ and Banks would 

determine their capital charges by 

reference to Table 2. This approach is 

the same as under the current Finance 

Board regulations and is retained in the 

final rule without change.46 The Banks’ 

5318 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

secured by a mortgage on a residential structure that 

contains a one-to-four family dwelling unit. 

comment letter asked that FHFA either 

apply the capital charges for single 

family MBS (which are set out in Table 

4) to multifamily MBS or develop a 

separate table for capital charges for 

multifamily MBS that would be based 

on their loss histories. The Banks also 

asked that FHFA develop a separate 

table of capital charges for CMBS based 

on their loss history. The Banks did not, 

however, provide any supporting data 

on loss histories for those instruments 

from which FHFA might conceivably 

develop separate capital charges for 

those assets. 

FHFA has not incorporated either of 

those suggestions into the final rule. 

With respect to multifamily MBS, FHFA 

notes that the final rule allows the 

Banks to apply a zero capital charge to 

any Fannie Mae or Freddie Mac 

multifamily securities they own if they 

are covered by the financial support 

currently provided by the U.S. 

Department of the Treasury under the 

PSPAs. Currently, the vast majority of 

the multifamily MBS owned by the 

Banks are issued by Fannie Mae and 

Freddie Mac. Accordingly, those 

instruments likely would qualify for a 

zero capital charge under § 1277.4(f)(3). 

FHFA also notes that the Banks 

typically do not own any CMBS. 

Consequently, FHFA does not consider 

it necessary to develop separate tables 

or to employ an alternative 

methodology. Furthermore, in the event 

a multifamily MBS or CMBS security 

does not qualify for a zero capital charge 

under § 1277.4(f)(3), the final rule 

requires the Banks to determine the 

capital charge based principally on their 

own internal credit rating of the 

instrument, which would allow them an 

opportunity to more closely align their 

capital charge to their assessment of the 

associated credit risk, provided the 

Banks have developed adequate support 

for their ratings of particular 

instruments. 

Credit Risk Capital Charge for 

Residential Mortgage Assets. Section 

1277.4(g)(1) of the proposed rule would 

have established the capital charges for 

residential mortgage assets that would 

be equal to the amortized cost, or fair 

value, of the asset multiplied by the 

CRPR assigned to the asset under Table 

4 of proposed § 1277.4(g). The principal 

difference between the proposed rule 

and the current Finance Board 

regulations was that the proposal would 

have replaced the current NRSRO 

ratings-based approach for determining 

the capital charge for a mortgage asset 

with one based on each Bank’s internal 

rating of the individual asset. To do 

that, the proposed rule would have 

required each Bank to develop a 

methodology to assign an internal credit 

risk rating to each mortgage asset, then 

to align each of its internal ratings to the 

appropriate category of the table of 

capital charge percentages set out in the 

proposed rule. After aligning its internal 

ratings to the FHFA table, each Bank 

would have been required to assign each 

mortgage asset to the appropriate 

category of the table, based on its 

internal credit risk rating for that asset. 

The proposed rule also would have 

required the Banks to align their 

internal credit ratings to the categories 

in Table 4 with reference to the terms 

‘‘AMA Investment Grade’’ and 

‘‘Investment Quality,’’ i.e., by ensuring 

that any internal ratings that a Bank 

mapped to one of the four highest 

categories in that table could include 

only assets that would qualify as either 

‘‘AMA Investment Grade’’ or 

‘‘Investment Quality,’’ as those terms are 

defined in 12 CFR 1268.1 and 1267.1 for 

mortgage loans and investment 

securities, respectively. The proposal 

also would have required that a Bank’s 

internal ratings categories, like the 

categories in Table 4, be ranked based 

on their respective credit quality, i.e., 

that the credit risk associated with each 

category would increase progressively, 

when viewing the categories from top to 

bottom. Additionally, § 1277.4(g)(1) of 

the proposed rule included two 

exceptions to the capital charges set out 

in Table 4, which would allow the 

Banks to assign a zero capital charge to 

any mortgage assets that are guaranteed 

or insured by the full faith and credit of 

the United States, or that have been 

guaranteed by one of the Enterprises 

while it was receiving financial support 

from the United States. Lastly, the 

proposal included a provision allowing 

FHFA to direct a Bank to adjust the 

capital charges for individual mortgage 

assets, as necessary to account for any 

deficiencies that FHFA may find in its 

internal credit rating methodology. 

The Banks’ comment letter addressed 

several issues relating to these 

provisions. The Banks first questioned 

the capital charges for CMOs under 

Table 4, contending that they were 

disproportionately high when compared 

to the credit risk associated with the 

securities that the Banks typically 

acquire. The Banks asked that the final 

rule revise the capital charges for CMOs 

in categories 3 through 7 of Table 4 by 

making them the same as those for 

similarly rated mortgage-backed 

securities structured as pass-through 

instruments. The Banks also asked that 

FHFA revise § 1277.4(g)(1)(iii), which 

requires each Bank to align each of its 

internal ratings to a category in Table 2, 

so that it would require the Banks to 

consider the potential future losses on a 

particular mortgage asset when making 

that alignment. The Banks reasoned that 

the amount of risk-based capital 

required for a particular mortgage asset 

should be equal to the amount of capital 

needed to protect against future 

potential losses under the 99.9 percent 

confidence level stress scenario 

assumed by FHFA. Lastly, the Banks 

asked that FHFA revise 

§ 1277.4(g)(2)(iii), which would allow 

FHFA to require a Bank to change the 

capital charge for particular assets if 

FHFA determined the Bank’s 

methodology to be deficient, so that it 

would instead authorize FHFA to 

require changes to a Bank’s 

methodology, rather than to the capital 

charges for individual assets. 

With respect to the capital charges for 

CMOs, FHFA had explained in the 

proposed rule that the use of the term 

‘‘subordinated classes’’ within the table 

in the Finance Board regulation created 

an ambiguity regarding the application 

of the capital charges within that table. 

The Finance Board table has two 

separate sets of capital charges—those 

in the top half of the table appear under 

the heading of ‘‘type of residential 

mortgage asset,’’ while those in the 

bottom half appear under the heading 

‘‘subordinated classes of mortgage 

assets.’’ Each half of that table has seven 

categories, each of which corresponds to 

a particular NRSRO credit rating. The 

capital charges for each of top two 

categories in each half of the Finance 

Board table—which correspond to 

instruments with NRSRO ratings of 

AAA or AA—are identical, meaning, for 

example, that a pass-through MBS with 

an NRSRO rating of AA would carry the 

same capital charge as a CMO with the 

same rating. For the remaining five 

categories in each half of the table, 

however, the capital charges in the 

bottom portion of the table are higher 

than those in the top portion of the 

table. It is FHFA’s belief that the 

Finance Board intended that all of the 

categories in the top half of the table 

were to be applied only to whole 

mortgage loans and to mortgage passthrough securities, and that all of the 

categories in the bottom half of the table 

were to apply to ‘‘structured’’ mortgagerelated securities, such as CMOs. The 

fact that the Finance Board assigned 

identical capital charges for the top two 

categories of pass-through securities and 

the top two categories of structured 

securities is consistent with reading the 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5319 

table in that manner. That said, FHFA 

also recognizes that the Banks may have 

construed the term ‘‘subordinated 

classes,’’ as used in the bottom half of 

the table, as meaning that those capital 

charges were to apply only to the 

subordinated tranches of a CMO, i.e., 

any tranches other than the most senior 

tranche, and that the capital charge for 

the most senior tranche of any CMO 

should be determined based on the 

CRPRs in the top half of the table. In 

proposing to revise the table headings 

FHFA intended to give effect to the 

Finance Board’s original intent for this 

table. Thus, the proposed rule would 

have revised the subheading for the 

bottom half of the table by replacing 

‘‘subordinated classes of mortgage 

assets’’ with ‘‘categories for 

collateralized mortgage obligations’’ to 

make that point clear. The principal 

effect of the proposed revision would be 

that Banks would determine the capital 

charge for the most senior tranche of 

their CMO investments based on the 

percentages set out in the bottom half of 

Table 4, rather than those from the top 

half of the table. As the Banks noted in 

their comment letter, they typically 

invest only in highly rated CMOs. 

Under the current Finance Board 

regulation, a CMO tranche with an 

NRSRO rating of AAA or AA would 

carry the same capital charge regardless 

of whether a Bank used the CRPRs in 

the top or bottom half of the table, but 

in the event an NRSRO were to 

downgrade that instrument, the capital 

charges calculated under the bottom 

half of the table would be higher than 

those calculated under the top half. In 

a similar fashion, if a Bank were to 

lower its internal rating of an existing 

CMO investment to below the top two 

FHFA Rating Categories, then the 

proposed rule would have required it to 

use the higher CRPR from the bottom 

half of the table. The proposed rule 

would not have affected the capital 

charges for the Banks’ investments in 

any subordinated CMO tranches 

because the Banks already use the 

CRPRs in the bottom half of the table to 

determine the capital charges for those 

instruments. 

FHFA has not incorporated the Banks’ 

request to reduce the capital charges for 

the lower rated categories of CMOs to 

equal those for pass-through MBS into 

the final rule. As noted above, FHFA’s 

sole objective in revising the headings to 

Table 4 was to eliminate an ambiguity 

from the existing table of capital 

charges, with the intent of giving effect 

to the Finance Board’s original intent 

regarding capital charges for all CMOs. 

Moreover, because FHFA, based on its 

experience with the mortgage markets 

and the Banks’ role in them, saw no 

need to alter any of the CRPRs for 

mortgage loans and mortgage-related 

assets, it had not developed any 

analytical data that could support 

revisions to the CRPRs for CMOs in the 

final rule. The Banks’ comment letter 

also did not provide any data on which 

FHFA might reasonably rely to reduce 

the capital charges for the lower-rated 

categories of CMOs. In the absence of 

such information, FHFA cannot 

introduce such revised CRPRs into the 

final rule. The final rule, however, does 

include other provisions that should 

address the Banks’ concern about the 

capital charges for the lower-rated 

categories of CMOs being 

disproportionate to their credit risk. 

First, § 1277.4(g)(1)(i) of the final rule 

will require that the Banks apply the 

CRPR for a particular mortgage asset 

only to the asset’s amortized cost (or fair 

value), not to its book value as is 

currently the case. The use of amortized 

cost should result in lower capital 

charges for lower-rated CMOs, even if 

the CRPR for the asset remains the same, 

because the amortized cost will 

generally be lower than book value, 

such as when the Bank has recognized 

a loss on an asset through a charge for 

an other-than-temporary impairment. 

Second, as described in more detail 

below, FHFA has incorporated into 

§ 1277.4(g)(1)(iii) of the final rule new 

language, derived from one of the 

Banks’ comments, regarding the use of 

potential future losses as a measure of 

the capital charge for a particular 

mortgage asset. That revision should 

address the Banks’ concern about the 

CRPRs for the lower-rated categories of 

CMOs being disproportionate to their 

credit risk because the amount of riskbased capital that a Bank would have to 

hold for any mortgage-related asset 

would be based principally on the 

amount of the potential future loss from 

the current amortized cost that a Bank 

estimates for such asset. 

As noted above, the Banks’ comment 

letter asked that the final rule clarify 

that the measure of risk-based capital 

should be the amount needed to cover 

the potential future losses under a stress 

scenario assumed by FHFA, and that the 

potential future losses should be 

measured from the amortized cost, or 

fair value, of the asset. FHFA agrees 

with the comment regarding the use of 

potential future losses and has revised 

§ 1277.4(g)(1)(iii) of the final rule 

accordingly. The Banks appear to have 

been principally concerned that the 

proposed rule could be read as requiring 

them to calculate the risk-based capital 

requirement for a CMO based on its face 

or par value, regardless of whether the 

Bank had previously recorded as a loss 

through income that portion of the 

CMO’s par value that the Bank had 

determined to be other-thantemporarily-impaired. Although the 

proposed rule explicitly stated that the 

capital charge for any mortgage asset is 

to be the product of the appropriate 

CRPR and the amortized cost of the 

asset, FHFA has revised the final rule to 

clarify the relationship between 

amortized cost and potential future 

losses. The proposed rule implied, but 

did not state explicitly, that the 

appropriate FHFA credit rating category 

should be determined by assessing the 

risk that the Bank may incur further loss 

or charge-off to the remaining amortized 

cost value of the CMO and other 

mortgage-related securities. For 

example, for a Bank that owns a CMO 

for which it has previously charged off 

40 percent of the par value, FHFA had 

intended that the proposed rule would 

have required the Bank to then assess 

the likelihood of incurring additional 

losses to the remaining 60 percent of the 

par value (or current amortized cost 

value) of the CMO to determine how 

much risk-based capital is required. 

Under the proposed rule, if a Bank were 

to determine that the likelihood of 

additional loss to its amortized cost 

value is near zero, it could assign to the 

CMO a very high internal rating, which 

would have allowed the Bank to assign 

the CMO to one of the higher FHFA 

credit rating categories in Table 4, 

resulting in a low capital charge. That 

would be true even if the CMO carried 

a significantly lower NRSRO rating, 

because an NRSRO rating does not take 

into account the extent to which a 

particular investor may have charged off 

a portion of the security. To make that 

process more clear, FHFA has revised 

§ 1277.4(g)(1)(iii) of the final rule to 

state explicitly that the Banks must 

estimate the potential future losses that 

may yet occur on their mortgage assets 

from their current amortized cost (or fair 

value). 

The Banks’ request to add language 

about potential future losses into the 

regulation also prompted FHFA to 

revise another aspect of the rule relating 

to the methodology to be used in 

assigning individual mortgage assets to 

the particular categories in Table 4 of 

the final rule. The proposed rule would 

have required the Banks to develop a 

methodology to assign an internal credit 

rating to each mortgage-related asset, 

and then align their internal ratings to 

the FHFA credit rating categories set 

forth in Table 4, in order to determine 

5320 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

47FHFA recently issued new guidance on the 

Banks’ use of models and methodologies for 

assessing mortgage-asset credit risk arising from 

AMA programs and investments. See Advisory 

Bulletin AB 2018–02 (April 25, 2018). That 

guidance encourages Banks to assess the credit risk 

by using a loan-level mortgage-asset credit risk 

model to estimate the potential future losses of the 

asset under a stress scenario acceptable to FHFA. 

Although that bulletin did not specifically address 

the assessment of credit risk in the context of the 

risk-based capital requirements for mortgage assets, 

the degree of credit risk associated with a particular 

investment is the same regardless of the regulatory 

context in which it is being measured. The bulletin 

states that the potential future stress-loss estimate 

on a mortgage-related asset can be used as an 

appropriate measure of the economic capital that 

the Banks can consider when conducting their due 

diligence prior to purchasing a mortgage-related 

asset. 

48For example, early in the second calendar-year 

quarter, a Bank would need to calculate its credit 

risk capital charge based on assets, off-balance sheet 

items and derivative contracts held as of the last 

business day of the first calendar year quarter. 

the credit risk-based capital requirement 

for each asset. The Banks asked that 

FHFA revise the final rule to state 

explicitly that the internal ratings 

‘‘should at least in part be related to [a 

Bank’s] potential future losses.’’ The 

Banks reasoned that the required 

amount of risk-based capital should be 

the amount needed to protect against 

potential future losses determined 

under a stress scenario. In considering 

that comment, FHFA determined that 

using potential future losses as the 

method for assigning mortgage assets to 

the categories in Table 4 was a superior 

approach to that described in the 

proposed rule.47 FHFA also agrees that 

the most appropriate method of 

estimating potential future losses is 

through use of a mortgage asset stress 

test. Using the potential future stressloss estimates as the basis for assigning 

a mortgage asset to the appropriate 

category of Table 4 also would be a 

simpler and more direct means for the 

Banks to determine the capital charge 

than under the proposed rule, which as 

a practical matter would have required 

a Bank to determine a potential future 

stress-loss estimate for each mortgage 

asset, then convert that estimate into an 

internal rating, and then map each 

internal rating to a corresponding FHFA 

credit rating category in Table 4. 

Accordingly, FHFA has revised 

§ 1277.4(g)(1)(iii) of the final rule to 

require that each Bank develop a 

methodology to estimate the potential 

future stress losses on each mortgagerelated asset that may yet occur from its 

current amortized cost. The Banks must 

then convert the estimate for each asset 

into a stress loss percentage, which is to 

be expressed as a percentage of the 

amortized cost (or fair value) of the 

mortgage asset. The Banks would then 

use that percentage to determine the 

appropriate category in Table 4 to be 

used for determining the CRPR for each 

mortgage asset, with the charges for 

AMA and mortgage pass-through 

securities being taken from the top half 

of the table and the charges for all CMOs 

and other structured mortgage assets 

being taken from the bottom half of the 

table. To do so, the Banks would assign 

each mortgage asset to the FHFA credit 

rating category from Table 4 whose 

CRPR equals the asset’s stress loss 

percentage or, if those two amounts are 

not equal, to the FHFA category with 

the next highest percentage. For 

example, the CRPR for a mortgagebacked pass-through security assigned 

to the FHFA RMA rating category of ‘‘2’’ 

under the final rule is 0.60 percent of 

the security’s amortized cost. If a Bank 

were to determine that such a security 

had a potential future loss estimate of 

0.55 percent of the remaining amortized 

cost value, it would assign that security 

to the FHFA 2 category, and would 

apply the 0.60 percent CRPR. If a Bank 

were to determine, however, that the 

security had a potential future loss 

estimate of 0.61 of its amortized cost, 

then it must assign the security to the 

FHFA RMA rating category of ‘‘3’’ and 

apply the 0.86 CRPR required for 

instruments in that category. Under this 

approach, the regulatory capital charge 

will exceed the loss estimate by some 

amount whenever the loss estimate falls 

between the CRPRs specified for two 

adjacent categories of Table 4. That also 

would have been the case under the 

proposed rule, given that Table 4 uses 

categories of CRPRs, rather than the 

exact amount of the loss estimate. 

Because of the revised approach 

described above, the final rule does not 

include the language from 

§ 1277.4(g)(1)(iii) of the proposed rule 

that would have required the Banks to 

develop their own methodologies to 

assign internal ratings to all mortgage 

assets and then map those internal 

ratings to the appropriate categories in 

Table 4. FHFA also has not carried over 

the provisions of the proposed rule that 

would have directed the Banks to 

establish a hierarchy of relative 

creditworthiness for each of their 

internal ratings categories and ensure 

that any asset assigned to the top four 

FHFA ratings categories have a credit 

quality at least equal to ‘‘AMA 

Investment Grade’’ (for AMA) or 

‘‘Investment Quality’’ (for mortgagerelated securities). 

As described previously, 

§ 1277.4(g)(2)(i) and (iii) of the proposed 

rule included two exceptions that 

provided for a capital charge of zero for 

mortgage assets that are guaranteed by 

either of the Enterprises while they are 

receiving capital support from the 

federal government, or that are subject 

to a guarantee or insurance provided by 

a federal department or agency that 

carries the full faith and credit of the 

United States. The final rule revises the 

first exception slightly by adding 

language clarifying that the zero capital 

charge for Enterprise instruments will 

continue ‘‘only for so long as’’ the 

Enterprises’ instruments are receiving 

capital support or other form of direct 

financial assistance from the United 

States government that enables them to 

repay their obligations. The financial 

support currently provided by the 

United States Department of the 

Treasury under the PSPAs qualifies 

under this provision. This exception is 

identical in substance to § 1277.4(f)(3), 

which allows the Banks to apply a zero 

capital charge to any non-mortgagerelated debt instruments issued by the 

Enterprises. The intent of these 

revisions is to make clear that the zero 

capital charge for Enterprise obligations 

will terminate when the capital support 

provided by the United States ceases. 

The final rule adopts without change 

the other exception under 

§ 1277.4(g)(2)(ii) for instruments backed 

by the full faith and credit of the United 

States. As also noted previously in the 

discussion of § 1277.4(f)(4), FHFA has 

revised § 1277.4(g)(2)(iii) of the final 

rule in response to the Banks’ comment 

letter. As revised, this provision 

requires a Bank to provide its 

methodology for estimating future stress 

losses and related documents to FHFA 

upon request, and authorizes FHFA to 

require a Bank to revise its 

methodologies to address any 

deficiencies identified by FHFA. The 

new provision replaces language in the 

proposed rule that would have 

authorized FHFA to direct a Bank to 

revise capital charges for individual 

assets on a case-by-case basis to remedy 

any deficiencies in the methodology. 

Frequency of Calculation. Section 

1277.4(k) of the proposed rule would 

have reduced the frequency with which 

a Bank would be required to calculate 

its credit risk capital charges from 

monthly to at least quarterly, unless 

directed otherwise by FHFA. The final 

rule adopts this provision without 

change, apart from the addition of a 

reference to mortgage pools to the list of 

assets described. The amounts of the 

assets and other items on which the 

risk-based capital requirement is 

calculated would be determined as of 

the last business day of the immediately 

preceding calendar quarter.48

Notwithstanding that quarterly 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5321 

49See Revised Technical Guidance for 

Calculation of Market Risk Capital Requirements 

(Apr. 25, 2013). 50See Advisory Bulletin AB 2018–01 (Feb. 7, 

2018). 

calculation requirement, § 1277.3 

separately requires that each Bank at all 

times maintain permanent capital in an 

amount at least equal to its risk-based 

capital requirement. FHFA construes 

these two provisions as requiring that 

each Bank will monitor how their 

business activities and associated risks 

evolve during a calendar quarter such 

that a Bank can ensure maintenance of 

sufficient risk-based capital throughout 

the quarter as well as when the 

requirement is recalculated at the end of 

the quarter. Section 1277.4(k) also 

explicitly reserves FHFA’s right to 

require a Bank to conduct its risk-based 

capital calculations more frequently 

than quarterly, which FHFA may 

require if it determines that 

circumstances warrant such change. In 

prior years, the Banks’ total risk-based 

capital requirements have not varied 

significantly from quarter to quarter. 

Because of that, FHFA has determined 

that the reduced frequency of the 

required calculations should not raise 

any safety or soundness concerns that 

cannot be addressed through FHFA’s 

normal supervisory and examination 

functions. FHFA anticipates that the 

reduction in the frequency of the 

required risk-based capital calculations 

will reduce the operational burdens on 

the Banks. 

D. Market Risk Capital Requirements 

Section 1277.5 of the proposed rule 

would have carried over nearly all of the 

Finance Board regulation addressing the 

market risk capital requirement, with 

the exceptions noted below. The 

proposed rule would have repealed the 

existing requirement that market risk 

capital must include an amount equal to 

the extent to which the current market 

value of the Bank’s total capital is less 

than 85 percent of the book value of its 

total capital. The proposed rule also 

would have revised the language 

regarding independent validations of a 

Bank’s internal market risk to require 

that they be performed periodically, 

commensurate with their risk, rather 

than annually, as is the case currently. 

In addition, the proposal would have 

reduced the number of times that each 

Bank would be required to conduct the 

market risk calculations from monthly 

to quarterly. The proposed rule 

included a grandfather provision, the 

effect of which was to make clear that 

any internal market risk models that 

FHFA or its predecessor had previously 

approved would be deemed to satisfy 

the approval requirement under the new 

FHFA regulation. The Banks did not 

comment on those proposed revisions, 

all of which have been included in 

§ 1277.5 of the final rule. The change 

regarding the required frequency of a 

Bank’s calculation of its market risk 

capital requirement under the proposed 

rule from monthly to quarterly was done 

so that it would correspond to the 

frequency of calculation for the Bank’s 

credit risk capital requirement. Thus, 

under the final rule each Bank will be 

required to calculate its market risk 

capital requirement at least quarterly 

under § 1277.5(e), based on assets held 

as of the last business day of the 

immediately preceding calendar quarter, 

unless otherwise instructed by FHFA. 

The Bank would be expected to meet 

the calculated capital charges 

throughout the quarter. 

The Banks’ comment letter asked that 

FHFA revise § 1277.5(b)(4)(ii) by 

changing the starting date for the 

historical observation period required 

under that provision from ‘‘1978’’ to 

‘‘1992.’’ The Banks reasoned that doing 

so would align the regulation with 

guidance that FHFA had issued on that 

topic.49 During the period following 

receipt of the comment, FHFA 

undertook empirical testing to consider 

whether using a 1998 start date would 

diminish the severity of the scenarios 

that the Banks currently include in the 

stress test. That testing showed that the 

Banks could use an historical 

observation period that commenced in 

1998 without compromising the severity 

of the stress scenarios used by the 

Banks. Accordingly, FHFA issued 

revised guidance addressing the 

scenarios to be used by the Banks’ 

market risk models, which allowed the 

use of an observation period 

commencing in 1998.50 In light of that 

development, FHFA has revised 

§ 1277.5(b)(4)(ii) of the final rule so that 

it too provides that the starting date for 

the historical observation period must 

go back to the beginning on 1998. 

E. Operational Risk Capital 

Requirement 

The current Finance Board 

regulations set the operational risk 

capital requirement at 30 percent of the 

sum of the credit risk and market risk 

capital requirements, but allow a Bank 

to reduce that requirement to as low as 

10 percent of the sum of those two 

amounts by obtaining FHFA’s approval 

for an alternative methodology for 

quantifying operations risk or by 

obtaining insurance from a company 

with an NRSRO credit rating of AA or 

better. Section 1277.6 of the proposed 

rule would have carried over the current 

approach, but would have replaced the 

NRSRO credit rating provision with 

language requiring that the insurer be 

acceptable to FHFA. The Banks’ 

comment letter asked that FHFA 

eliminate the 10 percent threshold, 

reasoning that it was not necessary if 

FHFA were to approve an alternative 

methodology, and that FHFA provide 

analytical support for the 10 and 30 

percent provisions described above. 

FHFA has decided to retain the 10 

percent floor in § 1277.6 of the final 

rule, believing that there are prudential 

reasons for doing so. Although this 

provision has been in the Finance Board 

regulations since they were first 

adopted, no Bank has ever developed an 

alternative methodology for measuring 

operational risk for which it has sought 

the agency’s approval. Thus, FHFA has 

had no prior opportunity to evaluate 

alternative methods for measuring 

operational risk or to determine whether 

any such Bank-developed alternatives 

would provide sufficient capital to 

cover a Bank’s actual operational risks. 

Although there are challenges to 

quantifying operational risk at any 

financial institution, operational risks at 

the Banks do exist and should be 

supported by adequate capital. Even if 

a Bank were to develop an alternative 

methodology for measuring operational 

risk, however, FHFA has no reason to 

believe that the alternative methodology 

would necessarily be so precise as to 

capture fully all potential operational 

loss risks to which a Bank would be 

exposed. Given those uncertainties, 

FHFA believes that retaining the 10 

percent floor provides some reasonable 

assurance that the amount of risk-based 

capital required by the operational risk 

capital provision would be sufficient if 

FHFA ever were to allow a Bank to use 

an alternative methodology for 

measuring those risks. 

With respect to the Banks’ second 

request, regarding the analytical support 

for the 10 and 30 percent requirements, 

FHFA has not undertaken any 

additional analyses to support those two 

provisions, both of which FHFA 

proposed to carry over unchanged from 

the Finance Board regulations. 

However, the Banks’ letter did not 

provide any empirical data or other 

materials demonstrating that the amount 

of capital required by the current 

regulation is excessive or what other 

levels would be more appropriate 

measures for the operational risk capital 

requirement. As noted above, there are 

challenges to developing a methodology 

for measuring operational risk, and the 

financial institution regulatory agencies 

have yet to achieve consensus on how 

best to do so. In the absence of any 

5322 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

51 If the counterparty is not subject to a Tier 1 

capital requirement, a Bank may use the 

counterparty’s total capital or some similar 

comparable measure identified by the Bank. The 

terms ‘‘total capital’’ and ‘‘Tier 1 capital’’ are to be 

as defined by the counterparty’s principal regulator. 

52The Finance Board explained its reasons for 

setting these maximum capital exposure limits 

when it proposed the current unsecured credit rule. 

See Proposed Rule on Unsecured Credit Limits for 

Federal Home Loan Banks, 66 FR 41474, 41478–80 

(Aug. 8, 2001). The Finance Board also explained 

its reasons for limiting sales of overnight federal 

funds when it adopted the current unsecured credit 

widely accepted standards for 

determining the amount of capital 

needed to support the operational risks 

associated with a Bank’s operations, 

which might provide a basis for 

displacing the Finance Board’s 

judgment, FHFA believes that the 

existing 30 percent operational risk 

charge continues to provide a 

reasonable measure of capital to protect 

against those risks, and has not proven 

to be burdensome to the Banks over the 

years that it has been in effect. FHFA 

recognizes that assessing a Bank’s 

operational risk exposure is challenging 

and therefore intends to continue 

monitoring developments in the 

industry in pursuit of an improved 

approach. 

F. Limits on Unsecured Extensions of 

Credit 

Section 1277.7 of the proposed rule 

generally would have carried over the 

Finance Board unsecured credit limits 

with only one significant revision, 

which was to remove all references to 

NRSRO credit ratings, on which the 

Finance Board limits were based. In 

their place, the proposed rule would 

have required a Bank to assign each 

counterparty an internal credit rating 

and use that rating to place the 

counterparty into one of the five FHFA 

credit rating categories in Table 1 to 

§ 1277.7. The proposed rule also would 

have revised the existing limit for 

unsecured credit exposures to GSEs. 

The Finance Board regulations set that 

limit at the lesser of the Bank’s total 

capital or the GSE’s total capital, which 

was considerably higher than the limit 

for the most highly rated non-GSE 

counterparties, which was 15 percent 

(or 30 percent when including overnight 

federal funds transactions) of the lesser 

of those amounts. The proposed rule 

would have subjected all GSEs to the 

same unsecured credit limits as any 

other non-GSE counterparty, with the 

exception of any GSEs operating with 

direct financial assistance from the 

United States, for which the limit would 

be equal to the Bank’s total capital. 

The Banks’ comment letter addressed 

several of these provisions under 

proposed § 1277.7, asking that the final 

rule apply the same unsecured credit 

limit to all GSEs, regardless of whether 

they are operating with the financial 

support of the United States. Further, 

the Banks asked that FHFA reinstate the 

existing 100 percent of capital limit as 

the unsecured credit limit for all GSEs, 

rather than treat GSEs the same as other 

non-GSE counterparties, and that it 

clarify how the limits will apply after a 

GSE operating with federal financial 

support loses that support. The Banks 

also asked that FHFA change the 

frequency of credit reporting to FHFA 

from monthly to quarterly, and revise 

the provision regarding debt that is 

guaranteed by a third party so that it 

allows, rather than mandates, that the 

Banks consider the guarantor to be the 

counterparty for regulatory purposes. 

With respect to reporting frequency, 

FHFA is retaining the existing monthly 

reporting requirements in § 1277.7(e), 

which require a Bank to report to FHFA 

any unsecured exposures that exceed 5 

percent of the lesser of its capital or the 

counterparty’s capital, as well as the 

amount of any secured and unsecured 

exposures that exceed 5 percent of the 

Bank’s total assets. FHFA believes that 

receiving monthly reports of each 

Bank’s secured and unsecured credit 

exposures above those thresholds is 

important to its supervisory 

responsibilities and thus has not 

accepted that suggestion. With respect 

to guarantors, FHFA agrees with the 

comment and has revised § 1277.7(a) so 

that Banks may, but are not required to, 

treat a third-party guarantor as if it were 

the counterparty for purposes of the 

unsecured credit limit. With the 

exception of that revision and those 

described below, the final rule is the 

same as the proposed rule. 

FHFA Credit Ratings. The principal 

substantive revision made by the final 

rule is that, as in the proposed rule, a 

Bank will determine the unsecured 

credit limits for a particular 

counterparty based on its internal credit 

rating for that counterparty, rather than 

on an NRSRO credit rating. Section 

1277.7(a)(4) of the final rule directs a 

Bank to use its internal credit rating to 

assign a counterparty to the appropriate 

FHFA Credit Rating category in Table 1 

to § 1277.7, and further provides that 

the credit rating category assigned for 

unsecured credit purposes shall be the 

same as the FHFA category that the 

Bank would use under Table 2 of 

§ 1277.4 if it were determining the riskbased capital charge for an obligation 

issued by that counterparty. The 

substance of that requirement had been 

located in § 1277.7(a)(5) of the proposed 

rule, which also would have required a 

Bank to align its internal credit ratings 

to the FHFA Rating Categories in Table 

1 of § 1277.7 ‘‘using the same 

methodology’’ that it uses for the riskbased capital categories. FHFA has 

deleted the reference to the 

methodology from the final rule and 

relocated into § 1277.7(a)(4) the 

sentence requiring the FHFA credit 

rating categories to be the same for both 

capital and unsecured credit purposes. 

The final rule also removes all 

distinctions between short- and longterm ratings. The Finance Board 

regulations distinguished between those 

ratings because the NRSRO ratings on 

which the regulations were based 

included those distinctions. Under the 

final rule, a Bank would determine a 

single rating for a specific counterparty 

or obligation when applying the 

unsecured credit limits, regardless of 

the term of the underlying unsecured 

credit obligations. 

Limits on Exposure to a Single 

Counterparty. The final rule retains 

most of the structure and operational 

aspects of the current Finance Board 

regulation on unsecured credit 

exposures. Thus, § 1277.7(a)(1) of the 

final rule sets a general limit on 

unsecured credit exposures to a single 

counterparty that includes all 

extensions of unsecured credit to that 

counterparty, other than unsecured 

exposures arising from sales of federal 

funds that have a maturity of one day 

or less or that are subject to a continuing 

contract. Section 1277.7(a)(2) of the 

final rule sets a separate additional 

overall limit that includes all unsecured 

extensions of credit to that counterparty, 

including all sales of federal funds. The 

overall limit for a single counterparty is 

set at twice the amount of the general 

limit. A Bank determines the limit for a 

particular counterparty by obtaining the 

appropriate maximum capital exposure 

limit (which is expressed as a 

percentage) for that counterparty from 

Table 1 to § 1277.7 and then multiplying 

the lesser of the Bank’s total capital or 

the counterparty’s Tier 1 capital by that 

percentage.51 As described previously, a 

Bank will obtain the appropriate 

maximum capital exposure limit for a 

particular counterparty from Table 1, 

based on its internal credit rating of that 

counterparty. The numerical limits for 

each of the five categories within Table 

1 of the final rule are the same as those 

in the current rule. The only difference 

between Table 1 of the final rule and the 

corresponding table in the Finance 

Board regulations is that the categories 

in the final rule are labeled as ‘‘FHFA 

Credit Rating’’ categories, rather than as 

categories based on NRSRO ratings.52

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5323 

regulation, stating that Banks have financial 

incentives to lend into the federal funds markets, 

i.e., the GSE funding advantage and a limited range 

of permissible investments, and that permitting 

such lending without limits would be imprudent. 

See Final Rule on Unsecured Credit Limits for 

Federal Home Loan Banks, 66 FR 66718, 66720–21 

(Dec. 27, 2001) (Finance Board Final Unsecured 

Credit Rule). 

53See Finance Board Final Unsecured Credit 

Rule, 66 FR at 66723–24 (Dec. 27, 2001). 

Section 1277.7(d) of the final rule 

addresses how the unsecured credit 

limit for a particular counterparty will 

be affected if a Bank revises its internal 

rating for that counterparty. This is 

similar to a provision of the current 

Finance Board regulations, which is 

based on NRSRO rating downgrades of 

a counterparty or obligation. The final 

rule provides that if a Bank revises its 

internal credit rating for a particular 

counterparty or obligation, it shall 

thereafter assign the counterparty or 

obligation to the appropriate FHFA 

Credit Rating category in Table 1 based 

on that revised internal rating. The final 

rule further provides that if the revised 

rating results in a lower FHFA Credit 

Rating category, then any subsequent 

extension of unsecured credit must 

comply with the new limit calculated 

using the lower internal credit rating. 

The final rule makes clear, however, 

that a Bank need not unwind any 

existing unsecured credit exposures as a 

result of the lower limit, provided they 

were originated in compliance with the 

unsecured credit limits in effect at that 

time. The final rule continues to 

consider any renewal of an existing 

unsecured extension of credit, including 

a decision not to terminate a sale of 

federal funds subject to a continuing 

contract, as a new transaction, which 

would be subject to the recalculated 

limit. 

Affiliated Counterparties. Section 

1277.7(b) of the final rule would readopt 

without substantive change the current 

provision of the Finance Board 

regulation limiting a Bank’s aggregate 

unsecured credit exposure to groups of 

affiliated counterparties. Thus, in 

addition to being subject to the limits on 

individual counterparties, a Bank’s 

unsecured credit exposure from all 

sources, including federal funds 

transactions, to all affiliated 

counterparties under the final rule 

could not exceed thirty percent of the 

Bank’s total capital. The final rule 

would also readopt the current 

definition of affiliated counterparty. 

State, Local or Tribal Government 

Obligations. Section 1277.7(a)(3) of the 

final rule also carries over without 

substantive change from the Finance 

Board regulations the special provision 

applicable to calculating limits for 

certain unsecured obligations issued by 

state, local or tribal governmental 

agencies. This provision allows a Bank 

to calculate the limit for these covered 

obligations based on its total capital— 

rather than on the lesser of the Bank or 

counterparty’s capital—and the internal 

credit rating assigned to the particular 

obligation. As under the current rule, all 

obligations from the same issuer and 

having the same assigned rating may not 

exceed the limit associated with that 

rating, and the exposure from all 

obligations from that issuer cannot 

exceed the limit calculated for the 

highest rated obligation that a Bank 

actually has purchased. As explained by 

the Finance Board when it adopted the 

current rule, this special provision 

reflected the fact that the state, local or 

tribal agencies at issue often had low 

capital, their obligations had some 

backing from collateral but were not 

always fully secured in the traditional 

sense, and the Banks’ purchase of these 

obligations had a mission nexus.53

GSE Provision. Section 1277.7(c) of 

the final rule carries over without 

change from the proposed rule the 

special limit that applies to a GSE 

counterparty that is operating with 

capital support or other form of direct 

financial assistance from the United 

States government that enables it to 

repay its obligations. In such cases, the 

limit for all unsecured credit exposures, 

including all federal funds transactions, 

equals 100 percent of the Bank’s total 

capital. That limit currently applies to 

the Banks’ exposures to the Enterprises 

by virtue of FHFA Regulatory 

Interpretation 2010–RI–05 (Nov. 9, 

2010), which the final rule codifies. As 

noted above, the Banks requested that 

FHFA extend this same limit to other 

GSEs that are not operating with the 

direct financial support of the United 

States. FHFA declines to do so because 

the unsecured credit obligations of those 

other GSEs are not supported by the 

United States through means such as the 

PSPAs, as are the obligations of the 

Enterprises, and that distinction alone 

warrants having different unsecured 

credit limits. Thus, the unsecured 

extensions of credit to a single 

counterparty provisions under 

§ 1277.7(a) remain unchanged from the 

proposed rule and therefore are 

applicable to GSEs that are not backed 

by the capital support of the United 

States government. The Banks also 

asked FHFA to clarify that the special 

limit described above for GSEs 

operating with capital support from the 

United States would continue in effect 

through the maturity of the instruments, 

even after the capital support ceases. 

Because compliance with the unsecured 

credit limits is determined at the time 

that a Bank extends the unsecured 

credit, the loss of the financial support 

of the United States for a GSE at some 

point in the future will not cause any 

then-existing unsecured credit 

exposures made under the limits of this 

provision to violate the regulation. 

Thus, Banks with such exposures may 

allow them to mature in the normal 

course after the financial support ceases. 

Because the loss of the financial support 

of the United States will cause the 

unsecured credit limits for those GSEs 

to drop, however, from 100 percent of 

a Bank’s capital to a maximum of 15 

percent (or 30 percent when including 

overnight federal funds) of a Bank’s 

capital, the immediate effect of the loss 

of the federal financial support will be 

to prevent the Banks from making any 

new extensions of unsecured credit to 

those GSEs until after the amount of 

their then-existing unsecured credit has 

been reduced to below the new 

exposure limit. That new exposure limit 

will be determined for each GSE under 

Table 1 to § 1277.7 based on a Bank’s 

internal rating of the GSE at that time. 

Section 1277.7(d) of the final rule 

addresses the situation where a 

counterparty’s internal rating changes, 

and specifically provides that a Bank 

need not unwind any existing 

unsecured credit exposures, which 

would include those extended to GSEs, 

as a result of a new and lower limit 

being imposed, provided that the 

existing exposures were within the 

applicable limit when originated. FHFA 

has not included in the final rule the 

Banks’ request that FHFA retain the 

existing special unsecured credit limit 

for all GSEs, which allows unsecured 

credit exposures of up to 100 percent of 

the lesser of the Bank’s total capital or 

the counterparty’s total capital. As 

noted above, FHFA has preserved a 

special limit for GSEs, but only for those 

that are operating with the direct 

financial support of the United States. 

The proposed rule reflected FHFA’s 

policy judgment that unsecured credit 

limits for all counterparties, other than 

those explicitly backed by the United 

States, should be determined based on 

the Banks’ assessment of the credit risk 

posed by those counterparties. Tying the 

unsecured credit limit to an assessment 

of creditworthiness of the counterparty 

also introduces a degree of market 

discipline that is absent under the 

current Finance Board regulations. This 

approach is consistent with that taken 

by FHFA with respect to the treatment 

5324 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

54FHFA and other prudential regulators jointly 

issued a regulation addressing the margin and 

capital rules for uncleared swaps. In the margin and 

capital final rules, the agencies provide different 

treatment for collateral issued by a GSE that is 

operating with explicit United States government 

support from collateral that is issued by other GSEs. 

See Final Rule on Margin and Capital Requirements 

for Covered Swap Entities, 80 FR 74840, 74870–71 

(Nov. 30, 2015). 

55See 12 CFR 1221.7(c), (d). Thus, the amount of 

collateral that is posted by a Bank and is segregated 

with a third-party custodian consistent with the 

requirements of the swaps margin and capital rule 

would not be included in the Bank’s unsecured 

credit exposure arising from a particular derivative 

contract. 56See 12 U.S.C. 4513. 

of GSE collateral under the rule on 

uncleared derivative contracts.54

Measurement of Unsecured 

Extensions of Credit. Section 1277.7(f) 

of the final rule establishes the 

requirements for measuring a Bank’s 

unsecured credit exposures. FHFA 

received no comments on this provision 

and is adopting it without change from 

the proposed rule. For on-balance sheet 

transactions, other than for derivative 

transactions that have not been accepted 

for clearing by a derivatives clearing 

organization, § 1277.7(f)(1)(i) of the final 

rule provides that the unsecured 

extension of credit shall equal the 

amortized cost of the transaction plus 

net payments due the Bank. If a Bank 

carries an item at fair value where any 

change in fair value is recognized in 

income, the rule provides that the 

unsecured extension of credit shall 

equal the fair value of the item, rather 

than its amortized cost. This approach 

is similar to the approach applied under 

§ 1277.4 for calculating credit risk 

capital charges for non-mortgage assets. 

FHFA believes that this approach best 

captures the amount that a Bank has at 

risk should a counterparty default on 

any unsecured credit extended by the 

Bank. For an off-balance sheet item, 

§ 1277.7(f)(1)(ii) provides that the 

unsecured extension of credit shall 

equal the credit equivalent amount for 

that item, calculated in accordance with 

§ 1277.4(h). 

Section § 1277.7(f)(1)(iii) of the final 

rule addresses how to measure the 

unsecured credit exposure related to an 

uncleared derivative transaction. In that 

case, the amount of the unsecured 

extension of credit equals the sum of the 

Bank’s current and future potential 

credit exposures under the contract 

(which amount may be reduced by 

certain collateral held by the Bank, as 

described below), plus the amount of 

any collateral posted by the Bank that 

exceeds the amount the Bank owes to its 

counterparty and that is held by a 

person or entity other than a third-party 

custodian that is acting under a custody 

agreement that meets the requirements 

of FHFA’s margin and capital rule for 

uncleared swaps.55 With respect to a 

Bank’s use of collateral pledged by its 

counterparty to reduce the Bank’s 

current and future exposures on a 

derivative contract, § 1277.7(f)(1)(iii)(A) 

of the final rule requires that the 

collateral must meet the requirements of 

§ 1277.4(e)(2) and (3), which address the 

manner in which a Bank may use 

collateral to reduce the credit risk 

capital charge on a derivative contract, 

and the terms under which the 

collateral must be held in order to be 

eligible to reduce those charges, 

respectively. 

As with the current rule, § 1277.7(f)(2) 

provides that any debt obligation or debt 

security (other than a mortgage-backed 

security, other asset-backed security, or 

acquired member asset) shall be 

considered to be an unsecured 

extension of credit for purposes of the 

unsecured credit limits. The final rule 

carries over the existing exception from 

the Finance Board regulations that 

excludes from the unsecured credit 

limits any amount owed to the Bank 

under a debt obligation or debt security 

for which the Bank holds collateral 

consistent with the requirements of 

§ 1277.4(f)(2)(ii) or any other amount 

that FHFA determines on a case-by-case 

basis should not be considered to be an 

unsecured extension of credit. 

Exceptions to the unsecured credit 

limits. Section 1277.7(g) of the final rule 

provides four separate exceptions to the 

regulatory limits on extensions of 

unsecured credit. One of those 

exceptions provides that a derivative 

contract that is accepted for clearing by 

a derivatives clearing organization is not 

subject to the unsecured credit limits. 

FHFA proposed this exception to avoid 

any conflict with the Dodd-Frank Act, 

which mandated that parties clear 

certain standardized derivative 

transactions. When a Bank submits a 

derivative contract for clearing, the 

derivatives clearing organization 

becomes the Bank’s counterparty to the 

contract. There are only a limited 

number of derivatives clearing 

organizations that the Banks can use to 

clear their derivative contracts, and in 

some cases there may be only a single 

organization that clears specific classes 

of derivative contracts. Because of those 

factors, imposing the unsecured limits 

on cleared derivative contracts could 

make it difficult for the Banks to fulfill 

the legal requirement that they clear all 

of these contracts, which would 

frustrate the intent of the Dodd-Frank 

Act. In addition, because the derivatives 

clearing organizations are subject to 

comprehensive federal regulatory 

oversight, including regulations 

designed to protect the customers that 

use the clearing services, FHFA believes 

that the Banks will not be exposed to 

any undue risks as a result of this 

exception. Notwithstanding the 

exception, FHFA expects that the Banks 

will develop internal policies to address 

their unsecured credit exposures to 

specific clearing organizations that take 

account of the Bank’s specific 

derivatives activity and clearing 

options. 

The Banks’ comment letter viewed 

this provision as encompassing the 

collateral that a Bank may post with the 

derivatives clearing organization and 

asked that FHFA make this point clear 

in the preamble to the final rule. FHFA 

agrees with that suggestion, but has 

addressed the matter by revising the text 

of § 1277.7(g)(2) to include an explicit 

reference to such collateral. The three 

other exceptions to the unsecured credit 

limits, which pertain to obligations of or 

guaranteed by the United States, 

extensions of credit between Banks, and 

investments in certain bonds issued by 

state housing finance agencies, 

prompted no comments and are 

included in paragraphs (g)(1), (3), and 

(4) to the final rule without change from 

the proposed rule. 

III. Considerations of Differences 

Between the Banks and the Enterprises 

When promulgating regulations 

relating to the Banks, section 1313(f) of 

the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992 requires the Director of FHFA to 

consider the differences between the 

Banks and the Enterprises with respect 

to the Banks’ cooperative ownership 

structure; mission of providing liquidity 

to members; affordable housing and 

community development mission; 

capital structure; and joint and several 

liability.56 FHFA noted this requirement 

in the proposed rule and requested 

comments from the public on the extent 

to which any of those factors may be 

implicated by the proposed rule. FHFA 

did not receive any comments on this 

topic, and in preparing this final rule, 

has considered the differences between 

the Banks and the Enterprises as they 

relate to the above factors. 

IV. Paperwork Reduction Act 

The final rule amendments do not 

contain any collections of information 

pursuant to the Paperwork Reduction 

Act of 1995 (44 U.S.C. 3501 et seq.). 

Therefore, FHFA has not submitted any 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5325 

57 5 U.S.C. 601 et seq. 

58 5 U.S.C. 605(b). 

59See 5 U.S.C. 804(2). 

information to the Office of 

Management and Budget for review. 

V. Regulatory Flexibility Act 

The Regulatory Flexibility Act 57

requires that a regulation that has a 

significant economic impact on a 

substantial number of small entities, 

small businesses, or small organizations 

must include an initial regulatory 

flexibility analysis describing the 

regulation’s impact on small entities. 

Such an analysis need not be 

undertaken if the agency has certified 

that the regulation will not have a 

significant economic impact on a 

substantial number of small entities.58

FHFA has considered the impact of the 

final rule under the Regulatory 

Flexibility Act. The General Counsel of 

FHFA certifies that the final rule will 

not have a significant economic impact 

on a substantial number of small entities 

because the regulation applies only to 

the Banks, which are not small entities 

for purposes of the Regulatory 

Flexibility Act. 

VI. Congressional Review Act 

In accordance with the Congressional 

Review Act,59 FHFA has determined 

that this final rule is not a major rule 

and has verified this determination with 

the Office of Information and Regulatory 

Affairs of the Office of Management and 

Budget (OMB). 

List of Subjects 

12 CFR Parts 930 and 932 

Capital, Credit, Federal home loan 

banks, Investments, Reporting and 

recordkeeping requirements. 

12 CFR Part 1277 

Capital, Credit, Federal home loan 

banks, Investments, Reporting and 

recordkeeping requirements. 

Accordingly, for the reasons stated in 

the Preamble, and under the authority of 

12 U.S.C. 1426, 1436(a), 1440, 1443, 

1446, 4511, 4513, 4514, 4526, and 4612, 

FHFA amends subchapter E of chapter 

IX and subchapter D of chapter XII of 

title 12 of the Code of Federal 

Regulations as follows: 

CHAPTER IX—FEDERAL HOUSING 

FINANCE BOARD 

Subchapter E—[Removed and Reserved] 

■ 1. Subchapter E, consisting of parts 

930 and 932, is removed and reserved. 

CHAPTER XII—FEDERAL HOUSING 

FINANCE AGENCY 

Subchapter D—Federal Home Loan Banks 

PART 1277—FEDERAL HOME LOAN 

BANK CAPITAL REQUIREMENTS, 

CAPITAL STOCK AND CAPITAL 

PLANS 

■ 2. The authority citation for part 1277 

continues to read as follows: 

Authority: 12 U.S.C. 1426, 1436(a), 1440, 

1443, 1446, 4511, 4513, 4514, 4526, 4612. 

Subpart A—Definitions 

■ 3. Amend § 1277.1 by adding in 

alphabetical order definitions for 

‘‘Affiliated counterparty,’’ ‘‘Bankruptcy 

remote,’’ ‘‘Collateralized mortgage 

obligation,’’ ‘‘Commitment to make an 

advance or acquire a loan subject to 

certain drawdown,’’ ‘‘Credit derivative,’’ 

‘‘Credit risk,’’ ‘‘Derivatives clearing 

organization,’’ ‘‘Derivative contract,’’ 

‘‘Eligible master netting agreement,’’ 

‘‘Exchange rate contracts,’’ 

‘‘Government Sponsored Enterprise,’’ 

‘‘Internal cash-flow model,’’ ‘‘Internal 

market-risk model,’’ ‘‘Market risk,’’ 

‘‘Market value-at-risk,’’ ‘‘Non-mortgage 

asset,’’ ‘‘Non-rated asset,’’ ‘‘Operational 

risk,’’ ‘‘Residential mortgage,’’ 

‘‘Residential mortgage asset,’’ 

‘‘Residential mortgage security,’’ ‘‘Sales 

of federal funds subject to a continuing 

contract,’’ and ‘‘Total assets’’ to read as 

follows: 

§ 1277.1 Definitions. 

* * * * * 

Affiliated counterparty means a 

counterparty of a Bank that controls, is 

controlled by, or is under common 

control with another counterparty of the 

Bank. For the purposes of this definition 

only, direct or indirect ownership 

(including beneficial ownership) of 

more than 50 percent of the voting 

securities or voting interests of an entity 

constitutes control. 

Bankruptcy remote means, in the 

context of any asset that a Bank has 

posted as collateral to a counterparty, 

that the asset would be excluded from 

that counterparty’s estate in 

receivership, insolvency, liquidation, or 

similar proceeding. 

* * * * * 

Collateralized mortgage obligation, or 

CMO, means any instrument backed or 

collateralized by residential mortgages 

or residential mortgage securities, that 

includes two or more tranches or 

classes, or is otherwise structured in any 

manner other than as a pass-through 

security. 

Commitment to make an advance or 

acquire a loan subject to certain 

drawdown means a legally binding 

agreement that commits the Bank to 

make an advance or acquire a loan, at 

or by a specified future date. 

Credit derivative means a derivative 

contract that transfers credit risk. 

Credit risk means the risk that the 

market value, or estimated fair value if 

market value is not available, of an 

obligation will decline as a result of 

deterioration in the creditworthiness of 

the obligor. 

Derivatives clearing organization 

means an organization that clears 

derivative contracts and is registered 

with the Commodity Futures Trading 

Commission as a derivatives clearing 

organization pursuant to section 5b(a) of 

the Commodity Exchange Act (7 U.S.C. 

7a–1), or that the Commodity Futures 

Trading Commission has exempted from 

registration by rule or order pursuant to 

section 5b(h) of the Commodity 

Exchange Act (7 U.S.C. 7a–1(h)), or is 

registered with the Securities and 

Exchange Commission as a clearing 

agency pursuant to section 17A of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78q–1), or that the SEC has 

exempted from registration as a clearing 

agency under section 17A of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78q–1(k)). 

Derivative contract means generally a 

financial contract the value of which is 

derived from the values of one or more 

underlying assets, reference rates, or 

indices of asset values, or credit-related 

events. Derivative contracts include 

interest rate, foreign exchange rate, 

equity, precious metals, commodity, 

and credit derivative contracts, and any 

other instruments that pose similar 

counterparty credit risks. 

Eligible master netting agreement has 

the same meaning as set forth in 

§ 1221.2 of this chapter. 

Exchange rate contracts include 

cross-currency interest-rate swaps, 

forward foreign exchange rate contracts, 

currency options purchased, and any 

similar instruments that give rise to 

similar risks. 

* * * * * 

Government Sponsored Enterprise, or 

GSE, means a United States 

Government-sponsored agency or 

instrumentality established or chartered 

to serve public purposes specified by 

the United States Congress, but whose 

obligations are not obligations of the 

United States and are not guaranteed by 

the United States. 

Internal cash-flow model means a 

model developed and used by a Bank to 

estimate the potential evolving changes 

in the cash flows and market values of 

a portfolio for each month, extending 

5326 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

out for a period of years, subject to a 

variety of plausible time paths of 

changes in interest rates, volatilities, 

and option adjusted spreads, and that 

incorporates assumptions about new or 

revolving business, including the rolloff and possible replacement of assets 

and liabilities as required. 

Internal market-risk model means a 

model developed and used by a Bank to 

estimate the potential change in the 

market value of a portfolio subject to an 

instantaneous change in interest rates, 

volatilities, and option-adjusted 

spreads. 

Market risk means the risk that the 

market value, or estimated fair value if 

market value is not available, of a 

Bank’s portfolio will decline as a result 

of changes in interest rates, foreign 

exchange rates, or equity or commodity 

prices. 

Market value-at-risk is the loss in the 

market value of a Bank’s portfolio 

measured from a base line case, where 

the loss is estimated in accordance with 

§ 1277.5. 

* * * * * 

Non-mortgage asset means an asset 

held by a Bank other than an advance, 

a non-rated asset, a residential mortgage 

asset, a collateralized mortgage 

obligation, or a derivative contract. 

Non-rated asset means a Bank’s cash, 

premises, plant and equipment, and 

investments authorized pursuant to 

§ 1265.3(e) and (f) of this chapter. 

Operational risk means the risk of loss 

resulting from inadequate or failed 

internal processes, people and systems, 

or from external events. 

* * * * * 

Residential mortgage means a loan 

secured by a residential structure that 

contains one-to-four dwelling units, 

regardless of whether the structure is 

attached to real property. The term 

encompasses, among other things, loans 

secured by individual condominium or 

cooperative units and manufactured 

housing, whether or not the 

manufactured housing is considered 

real property under state law, and 

participation interests in such loans. 

Residential mortgage asset, or RMA, 

means any residential mortgage, 

residential mortgage pool, or residential 

mortgage security. 

Residential mortgage security means 

any instrument representing an 

undivided interest in a pool of 

residential mortgages. 

Sales of federal funds subject to a 

continuing contract means an overnight 

federal funds loan that is automatically 

renewed each day unless terminated by 

either the lender or the borrower. 

Total assets mean the total assets of a 

Bank, as determined in accordance with 

generally accepted accounting 

principles (GAAP). 

* * * * * 

■ 4. Add subpart B, consisting of 

§§ 1277.2 through 1277.8, to read as 

follows: 

Subpart B—Bank Capital 

Requirements 

Sec. 

1277.2 Total capital requirement. 

1277.3 Risk-based capital requirement. 

1277.4 Credit risk capital requirement. 

1277.5 Market risk capital requirement. 

1277.6 Operational risk capital 

requirement. 

1277.7 Limits on unsecured extensions of 

credit; reporting requirements. 

1277.8 Reporting requirements. 

§ 1277.2 Total capital requirement. 

Each Bank shall maintain at all times: 

(a) Total capital in an amount at least 

equal to 4.0 percent of the Bank’s total 

assets; and 

(b) A leverage ratio of total capital to 

total assets of at least 5.0 percent of the 

Bank’s total assets. For purposes of 

determining this leverage ratio, total 

capital shall be computed by 

multiplying the Bank’s permanent 

capital by 1.5 and adding to this product 

all other components of total capital. 

§ 1277.3 Risk-based capital requirement. 

Each Bank shall maintain at all times 

permanent capital in an amount at least 

equal to the sum of its credit risk capital 

requirement, its market risk capital 

requirement, and its operational risk 

capital requirement, calculated in 

accordance with §§ 1277.4, 1277.5, and 

1277.6, respectively. 

§ 1277.4 Credit risk capital requirement. 

(a) General requirement. Each Bank’s 

credit risk capital requirement shall 

equal the sum of the Bank’s individual 

credit risk capital charges for all 

advances, residential mortgage assets, 

CMOs, non-mortgage assets, non-rated 

assets, off-balance sheet items, and 

derivative contracts, as calculated in 

accordance with this section. 

(b) Credit risk capital charge for 

residential mortgage assets and 

collateralized mortgage obligations. The 

credit risk capital charge for residential 

mortgages, residential mortgage pools, 

residential mortgage securities, and 

collateralized mortgage obligations shall 

be determined as set forth in paragraph 

(g) of this section. 

(c) Credit risk capital charge for 

advances, non-mortgage assets, and 

non-rated assets. Except as provided in 

paragraph (j) of this section, each Bank’s 

credit risk capital charge for advances, 

non-mortgage assets, and non-rated 

assets shall be equal to the amortized 

cost of the asset multiplied by the credit 

risk percentage requirement assigned to 

that asset pursuant to paragraph (f)(1) or 

(2) of this section. For any such asset 

carried at fair value where any change 

in fair value is recognized in the Bank’s 

income, the Bank shall calculate the 

capital charge based on the fair value of 

the asset rather than its amortized cost. 

(d) Credit risk capital charge for offbalance sheet items. Each Bank’s credit 

risk capital charge for an off-balance 

sheet item shall be equal to the credit 

equivalent amount of such item, as 

determined pursuant to paragraph (h) of 

this section, multiplied by the credit 

risk percentage requirement assigned to 

that item pursuant to paragraph (f)(1) of 

this section and Table 2 to this section, 

except that the credit risk percentage 

requirement applied to the credit 

equivalent amount for a standby letter of 

credit shall be that for an advance with 

the same remaining maturity as that of 

the standby letter of credit, as specified 

in Table 1 to this section. 

(e) Derivative contracts. (1) Except as 

provided in paragraphs (e)(4) 

(transactions with members) and (5) 

(cleared transactions and foreign 

exchange rate contracts) of this section, 

the credit risk capital charge for a 

derivative contract entered into by a 

Bank shall equal, after any adjustment 

allowed under paragraph (e)(2) of this 

section, the sum of: 

(i) The current credit exposure for the 

derivative contract, calculated in 

accordance with paragraph (i)(1) of this 

section, multiplied by the credit risk 

percentage requirement assigned to that 

derivative contract pursuant to Table 2 

to this section, provided that a Bank 

shall use the credit risk percentages 

from the column for instruments with 

maturities of one year or less for all such 

derivative contracts; plus 

(ii) The potential future credit 

exposure for the derivative contract, 

calculated in accordance with paragraph 

(i)(2) of this section, multiplied by the 

credit risk percentage requirement 

assigned to that derivative contract 

pursuant to Table 2 to this section, 

where a Bank uses the actual remaining 

maturity of the derivative contract for 

the purpose of applying Table 2 to this 

section; plus 

(iii) A credit risk capital charge 

applicable to the undiscounted amount 

of collateral posted by the Bank with 

respect to a derivative contract that 

exceeds the Bank’s current payment 

obligation under that derivative 

contract, where the charge equals the 

amount of such excess collateral 

multiplied by the credit risk percentage 

requirement assigned under Table 2 to 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5327 

this section for the custodian or other 

party that holds the collateral, and 

where a Bank deems the exposure to 

have a remaining maturity of one year 

or less when applying Table 2 to this 

section. 

(2)(i) A Bank may reduce the credit 

risk capital charge calculated under 

paragraph (e)(1) of this section by the 

amount of the discounted value of any 

collateral that is held by or on behalf of 

the Bank against an exposure from the 

derivative contract, and that satisfies the 

requirements of paragraph (e)(3) of this 

section. If the total amount of the 

discounted value of the collateral is less 

than the credit risk capital charge 

calculated under paragraph (e)(1) of this 

section for a particular derivative 

contract, then the credit risk capital 

charge for the derivative contract shall 

equal the amount of the initial charge 

that remains after having been reduced 

by the collateral. A Bank that uses a 

counterparty’s pledged collateral to 

reduce the capital charge against a 

derivative contract under this provision, 

shall also apply a capital charge to the 

amount of the pledged collateral that it 

has used to reduce its credit exposure 

on the derivative contract. The amount 

of that capital charge shall be equal to 

the capital charge that would be 

required under paragraph (b) or (c) of 

this section, whichever applies to the 

type of collateral, as if the Bank were to 

own the collateral directly. In reducing 

the capital charge on a particular 

derivative contract, the Bank shall apply 

the discounted value of the collateral for 

that derivative contract in the following 

manner: 

(A) First, to reduce the current credit 

exposure of the derivative contract 

subject to the capital charge; and 

(B) Second, and only if the total 

discounted value of the collateral held 

exceeds the current credit exposure of 

the contract, any remaining amounts 

may be applied to reduce the amount of 

the potential future credit exposure of 

the derivative contract subject to the 

capital charge. 

(ii) If a counterparty’s payment 

obligations to a Bank under a derivative 

contract are unconditionally guaranteed 

by a third-party, then the credit risk 

percentage requirement applicable to 

the derivative contract may be that 

associated with the guarantor, rather 

than the Bank’s counterparty. 

(3) The credit risk capital charge may 

be reduced as described in paragraph 

(e)(2)(i) of this section for collateral held 

against the derivative contract exposure 

only if the collateral is: 

(i) Held by, or has been paid to, the 

Bank or held by an independent, thirdparty custodian on behalf of the Bank 

pursuant to a custody agreement that 

meets the requirements of § 1221.7(c) 

and (d) of this chapter; 

(ii) Legally available to absorb losses; 

(iii) Of a readily determinable value at 

which it can be liquidated by the Bank; 

and 

(iv) Subject to an appropriate discount 

to protect against price decline during 

the holding period and the costs likely 

to be incurred in the liquidation of the 

collateral, provided that such discount 

shall equal at least the minimum 

discount required under appendix B to 

part 1221 of this chapter for collateral 

listed in that appendix, or shall be 

estimated by the Bank based on 

appropriate assumptions about the price 

risks and liquidation costs for collateral 

not listed in appendix B to part 1221. 

(4) The credit risk capital charge for 

any derivative contracts entered into 

between a Bank and its members shall 

be calculated in accordance with 

paragraph (e)(1) of this section, except 

that the Bank shall use the credit risk 

percentage requirements from Table 1 to 

this section, which sets forth the credit 

risk percentage requirements for 

advances. 

(5) Notwithstanding any other 

provision in this paragraph (e), the 

credit risk capital charge for: 

(i) A foreign exchange rate contract 

(excluding gold contracts) with an 

original maturity of 14 calendar days or 

less shall be zero; and 

(ii) A derivative contract cleared by a 

derivatives clearing organization shall 

equal 0.16 percent times the sum of the 

following: 

(A) The current credit exposure for 

the derivative contract, calculated in 

accordance with paragraph (i)(1)(i) of 

this section; 

(B) The potential future credit 

exposure for the derivative contract 

calculated in accordance with paragraph 

(i)(2) of this section; and 

(C) The amount of collateral posted by 

the Bank and held by the derivatives 

clearing organization, clearing member, 

or custodian in a manner that is not 

bankruptcy remote, but only to the 

extent the amount exceeds the Bank’s 

current credit exposure to the 

derivatives clearing organization. 

(f) Determination of credit risk 

percentage requirements—(1) General. 

(i) Each Bank shall determine the credit 

risk percentage requirement applicable 

to each advance and each non-rated 

asset by identifying the appropriate 

category from Table 1 or 3 to this 

section, respectively, to which the 

advance or non-rated asset belongs. 

Except as provided in paragraphs (f)(2) 

and (3) of this section, each Bank shall 

determine the credit risk percentage 

requirement applicable to each nonmortgage asset, off-balance sheet item, 

and derivative contract by identifying 

the appropriate category set forth in 

Table 2 to this section to which the 

asset, item, or contract belongs as 

determined in accordance with 

paragraph (f)(1)(ii) of this section, and 

remaining maturity. Each Bank shall use 

the applicable credit risk percentage 

requirement to calculate the credit risk 

capital charge for each asset, item, or 

contract in accordance with paragraph 

(c), (d), or (e) of this section, 

respectively. The relevant categories 

and credit risk percentage requirements 

are provided in the following Tables 1 

through 3 to this section— 

TABLE 1 TO § 1277.4—REQUIREMENT

FOR ADVANCES

Maturity of advances 

Percentage 

applicable 

to advances 

Advances with: 

Remaining maturity <=4 

years .................................. 0.09 

Remaining maturity >4 years 

to 7 years .......................... 0.23 

Remaining maturity >7 years 

to 10 years ........................ 0.35 

Remaining maturity >10 

years .................................. 0.51 

TABLE 2 TO § 1277.4—REQUIREMENT FOR INTERNALLY RATED NON-MORTGAGE ASSETS, OFF-BALANCE SHEET ITEMS, 

AND DERIVATIVE CONTRACTS

[Based on remaining contractual maturity] 

FHFA Credit Rating 

Applicable percentage 

<=1 year >1 yr to 3 yrs >3 yrs to 7 yrs >7 yrs to 

10 yrs >10 yrs 

U.S. Government Securities ................................................ 0.00 0.00 0.00 0.00 0.00 

FHFA 1 ......................................................................... 0.20 0.59 1.37 2.28 3.32 

5328 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

TABLE 2 TO § 1277.4—REQUIREMENT FOR INTERNALLY RATED NON-MORTGAGE ASSETS, OFF-BALANCE SHEET ITEMS, 

AND DERIVATIVE CONTRACTS—Continued 

[Based on remaining contractual maturity] 

FHFA Credit Rating 

Applicable percentage 

<=1 year >1 yr to 3 yrs >3 yrs to 7 yrs >7 yrs to 

10 yrs >10 yrs 

FHFA 2 ......................................................................... 0.36 0.87 1.88 3.07 4.42 

FHFA 3 ......................................................................... 0.64 1.31 2.65 4.22 6.01 

FHFA 4 ......................................................................... 3.24 4.79 7.89 11.51 15.64 

FHFA 5 ......................................................................... 9.24 11.46 15.90 21.08 27.00 

FHFA 6 ......................................................................... 15.99 18.06 22.18 26.99 32.49 

FHFA 7 ......................................................................... 100.00 100.00 100.00 100.00 100.00 

TABLE 3 TO § 1277.4—REQUIREMENT

FOR NON-RATED ASSETS

Type of unrated asset Applicable 

percentage 

Cash ......................................... 0.00 

Premises, Plant and Equipment 8.00 

Investments Under 12 CFR 

1265.3(e) & (f) ....................... 8.00 

(ii) Each Bank shall develop a 

methodology to be used to assign an 

internal credit risk rating to each 

counterparty, asset, item, and contract 

that is subject to Table 2 to this section. 

The methodology shall involve an 

evaluation of counterparty or asset risk 

factors, and may incorporate, but must 

not rely solely on, credit ratings 

prepared by credit rating agencies. Each 

Bank shall align its various internal 

credit ratings to the appropriate 

categories of FHFA Credit Ratings 

included in Table 2 to this section. In 

doing so, FHFA Categories 7 through 1 

shall include assets of progressively 

higher credit quality. After aligning its 

internal credit ratings to the appropriate 

categories of Table 2 to this section, 

each Bank shall assign each 

counterparty, asset, item, and contract 

to the appropriate FHFA Credit Rating 

category based on the applicable 

internal credit rating. 

(2) Exception for assets subject to a 

guarantee or secured by collateral. (i) 

When determining the applicable credit 

risk percentage requirement from Table 

1 to this section for a non-mortgage asset 

that is subject to an unconditional 

guarantee by a third-party guarantor or 

is secured as set forth in paragraph 

(f)(2)(ii) of this section, the Bank may 

substitute the credit risk percentage 

requirement associated with the 

guarantor or the collateral, as 

appropriate, for the credit risk 

percentage requirement associated with 

that portion of the asset subject to the 

guarantee or covered by the collateral. 

(ii) For purposes of paragraph (f)(2)(i) 

of this section, a non-mortgage asset 

shall be considered to be secured if the 

collateral is: 

(A) Actually held by the Bank, or an 

independent third-party custodian on 

the Bank’s behalf, or, if posted by a 

Bank member and permitted under the 

Bank’s collateral agreement with that 

member, by the Bank’s member or an 

affiliate of that member where the term 

‘‘affiliate’’ has the same meaning as in 

§ 1266.1 of this chapter; 

(B) Legally available to absorb losses; 

(C) Of a readily determinable value at 

which it can be liquidated by the Bank; 

(D) Held in accordance with the 

provisions of the Bank’s member 

products policy established pursuant to 

§ 1239.30 of this chapter, if the 

collateral has been posted by a member 

or an affiliate of a member; and 

(E) Subject to an appropriate discount 

to protect against price decline during 

the holding period and the costs likely 

to be incurred in the liquidation of the 

collateral. 

(3) Exception for obligations of the 

Enterprises. A Bank may use a credit 

risk capital charge of zero for any debt 

instrument or obligation issued by an 

Enterprise, other than a residential 

mortgage security or a collateralized 

mortgage obligation, provided that, and 

only for so long as, the Enterprise 

receives capital support or other form of 

direct financial assistance from the 

United States government that enables 

the Enterprise to repay those 

obligations. 

(4) Methodology and model review. A 

Bank shall provide to FHFA upon 

request the methodology, model, and 

any analyses used by the Bank to assign 

any non-mortgage asset, off-balance 

sheet item, or derivative contract to an 

FHFA Credit Rating category. FHFA 

may direct a Bank to promptly revise its 

methodology or model to address any 

deficiencies identified by FHFA. 

(g) Credit risk capital charges for 

residential mortgage assets—(1) Bank 

determination of credit risk percentage. 

(i) Each Bank’s credit risk capital charge 

for a residential mortgage, residential 

mortgage pool, residential mortgage 

security, or collateralized mortgage 

obligation shall be equal to the asset’s 

amortized cost multiplied by the credit 

risk percentage requirement assigned to 

that asset pursuant to paragraph 

(g)(1)(ii) or (g)(2) of this section. For any 

such asset carried at fair value where 

any change in fair value is recognized in 

the Bank’s income, the Bank shall 

calculate the capital charge based on the 

fair value of the asset rather than its 

amortized cost. 

(ii) Each Bank shall determine the 

credit risk percentage requirement 

applicable to each residential mortgage, 

residential mortgage pool, and 

residential mortgage security by 

identifying the appropriate FHFA RMA 

category set forth in the following Table 

4 to this section to which the asset 

belongs, and shall determine the credit 

risk percentage requirement applicable 

to each collateralized mortgage 

obligation by identifying the appropriate 

FHFA CMO category set forth in Table 

4 to this section to which the asset 

belongs, with the appropriate categories 

being determined in accordance with 

paragraph (g)(1)(iii) of this section. 

(iii) Each Bank shall develop a 

methodology to estimate the potential 

future stress losses on its residential 

mortgages, residential mortgage pools, 

residential mortgage securities, and 

collateralized mortgage obligations, as 

may yet occur from the current 

amortized cost (or fair value) of those 

assets, and that converts those loss 

estimates into a stress loss percentage 

for each asset, expressed as a percentage 

of its amortized cost (or fair value). A 

Bank shall use the stress loss percentage 

for each asset to determine the 

appropriate FHFA RMA or CMO ratings 

category for that asset, as set forth in 

Table 4 to this section. A Bank shall do 

so by assigning each such asset to the 

category whose credit risk percentage 

requirement equals the asset’s stress loss 

percentage, or to the category with the 

next highest credit risk percentage 

requirement. For residential mortgages 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5329 

and residential mortgage pools, the 

methodology shall involve an 

evaluation of the residential mortgages 

and residential mortgage pools and any 

credit enhancements or guarantees, 

including an assessment of the 

creditworthiness of the providers of 

such enhancements or guarantees. In the 

case of a residential mortgage security or 

collateralized mortgage obligation, the 

methodology shall involve an 

evaluation of the underlying mortgage 

collateral, the structure of the security, 

and any credit enhancements or 

guarantees, including an assessment of 

the creditworthiness of the providers of 

such enhancements or guarantees. 

TABLE 4 TO § 1277.4—REQUIREMENT

FOR RESIDENTIAL MORTGAGE ASSETS AND CMOS

Credit risk 

percentage 

Categories for residential mortgage assets: 

FHFA RMA 1 ........................ 0.37 

FHFA RMA 2 ........................ 0.60 

FHFA RMA 3 ........................ 0.86 

FHFA RMA 4 ........................ 1.20 

FHFA RMA 5 ........................ 2.40 

FHFA RMA 6 ........................ 4.80 

TABLE 4 TO § 1277.4—REQUIREMENT

FOR RESIDENTIAL MORTGAGE ASSETS AND CMOS—Continued 

Credit risk 

percentage 

FHFA RMA 7 ........................ 34.00 

Categories for Collateralized 

Mortgage Obligations: 

FHFA CMO 1 ........................ 0.37 

FHFA CMO 2 ........................ 0.60 

FHFA CMO 3 ........................ 1.60 

FHFA CMO 4 ........................ 4.45 

FHFA CMO 5 ........................ 13.00 

FHFA CMO 6 ........................ 34.00 

FHFA CMO 7 ........................ 100.00 

(2) Exceptions. (i) A Bank may use a 

credit risk capital charge of zero for any 

residential mortgage asset or 

collateralized mortgage obligation, or 

portion thereof, guaranteed by an 

Enterprise as to payment of principal 

and interest, provided that, and only for 

so long as, the Enterprise receives 

capital support or other form of direct 

financial assistance from the United 

States government that enables the 

Enterprise to repay those obligations; 

(ii) A Bank may use a credit risk 

capital charge of zero for any residential 

mortgage asset or collateralized 

mortgage obligation, or any portion 

thereof, guaranteed or insured as to 

payment of principal and interest by a 

department or agency of the United 

States government that is backed by the 

full faith and credit of the United States; 

and 

(iii) A Bank shall provide to FHFA 

upon request the methodology, model, 

and any analyses used to estimate the 

potential future stress losses on its 

residential mortgages, residential 

mortgage pools, residential mortgage 

securities, and collateralized mortgage 

obligations, and to determine a stress 

loss percentage for each such asset. 

FHFA may direct a Bank to promptly 

revise its methodology or model to 

address any deficiencies identified by 

FHFA. 

(h) Calculation of credit equivalent 

amount for off-balance sheet items—(1) 

General requirement. The credit 

equivalent amount for an off-balance 

sheet item shall be determined by an 

FHFA-approved model or shall be equal 

to the face amount of the instrument 

multiplied by the credit conversion 

factor assigned to such risk category of 

instruments by the following Table 5 to 

this section, subject to the exceptions in 

paragraph (h)(2) of this section. 

TABLE 5 TO § 1277.4—CREDIT CONVERSION FACTORS FOR OFF-BALANCE SHEET ITEMS

Instrument 

Credit 

conversion 

factor 

(in percent) 

Asset sales with recourse where the credit risk remains with the Bank ............................................................................................ 100 

Commitments to make advances subject to certain drawdown. 

Commitments to acquire loans subject to certain drawdown. 

Standby letters of credit ....................................................................................................................................................................... 50 

Other commitments with original maturity of over one year. 

Other commitments with original maturity of one year or less ........................................................................................................... 20 

(2) Exceptions. The credit conversion 

factor shall be zero for ‘‘Other 

Commitments With Original Maturity of 

Over One Year’’ and ‘‘Other 

Commitments With Original Maturity of 

One Year or Less’’ for which Table 5 to 

this section would otherwise apply 

credit conversion factors of 50 percent 

or 20 percent, respectively, if the 

commitments are unconditionally 

cancelable, or effectively provide for 

automatic cancellation due to the 

deterioration in a borrower’s 

creditworthiness, at any time by the 

Bank without prior notice. 

(i) Calculation of credit exposures for 

derivative contracts—(1) Current credit 

exposure—(i) Single derivative contract. 

The current credit exposure for 

derivative contracts that are not subject 

to an eligible master netting agreement 

shall be: 

(A) If the mark-to-market value of the 

contract is positive, the mark-to-market 

value of the contract; or 

(B) If the mark-to-market value of the 

contract is zero or negative, zero. 

(ii) Derivative contracts subject to an 

eligible master netting agreement. The 

current credit exposure for multiple 

uncleared derivative contracts executed 

with a single counterparty and subject 

to an eligible master netting agreement 

shall be calculated on a net basis and 

shall equal: 

(A) The net sum of all positive and 

negative mark-to-market values of the 

individual derivative contracts subject 

to the eligible master netting agreement, 

if the net sum of the mark-to-market 

values is positive; or 

(B) Zero, if the net sum of the markto-market values is zero or negative. 

(2) Potential future credit exposure. 

The potential future credit exposure for 

derivative contracts, including 

derivative contracts with a negative 

mark-to-market value, shall be 

calculated: 

(i) Using an internal initial margin 

model that meets the requirements of 

§ 1221.8 of this chapter and is approved 

by FHFA for use by the Bank, or using 

an initial margin model that has been 

approved under regulations similar to 

§ 1221.8 of this chapter for use by the 

Bank’s counterparty to calculate initial 

margin for those derivative contracts for 

which the calculation is being done; or 

(ii) By applying the standardized 

approach in appendix A to part 1221 of 

this chapter; or 

5330 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

(iii) Using an initial margin model 

that is employed by a derivatives 

clearing organization. 

(j) Credit risk capital charge for nonmortgage assets hedged with credit 

derivatives—(1) Credit derivatives with 

a remaining maturity of one year or 

more. The credit risk capital charge for 

a non-mortgage asset that is hedged with 

a credit derivative that has a remaining 

maturity of one year or more may be 

reduced only in accordance with 

paragraph (j)(3) or (4) of this section and 

only if the credit derivative provides 

substantial protection against credit 

losses. 

(2) Credit derivatives with a remaining 

maturity of less than one year. The 

credit risk capital charge for a nonmortgage asset that is hedged with a 

credit derivative that has a remaining 

maturity of less than one year may be 

reduced only in accordance with 

paragraph (j)(3) of this section and only 

if the remaining maturity on the credit 

derivative is identical to or exceeds the 

remaining maturity of the hedged nonmortgage asset and the credit derivative 

provides substantial protection against 

credit losses. 

(3) Credit risk capital charge reduced 

to zero. The credit risk capital charge for 

a non-mortgage asset shall be zero if a 

credit derivative is used to hedge the 

credit risk on that asset in accordance 

with paragraph (j)(1) or (2) of this 

section, provided that: 

(i) The remaining maturity for the 

credit derivative used for the hedge is 

identical to or exceeds the remaining 

maturity for the hedged non-mortgage 

asset, and either: 

(A) The non-mortgage asset referenced 

in the credit derivative is identical to 

the hedged non-mortgage asset; or 

(B) The non-mortgage asset referenced 

in the credit derivative is different from 

the hedged non-mortgage asset, but only 

if the asset referenced in the credit 

derivative and the hedged non-mortgage 

asset have been issued by the same 

obligor, the asset referenced in the 

credit derivative ranks pari passu to, or 

more junior than, the hedged nonmortgage asset and has the same 

maturity as the hedged non-mortgage 

asset, and cross-default clauses apply; 

and 

(ii) The credit risk capital charge for 

the credit derivative contract calculated 

pursuant to paragraph (e) of this section 

is still applied. 

(4) Capital charge reduction in certain 

other cases. The credit risk capital 

charge for a non-mortgage asset hedged 

with a credit derivative in accordance 

with paragraph (j)(1) of this section shall 

equal the sum of the credit risk capital 

charges for the hedged and unhedged 

portion of the non-mortgage asset 

provided that: 

(i) The remaining maturity for the 

credit derivative is less than the 

remaining maturity for the hedged nonmortgage asset and either: 

(A) The non-mortgage asset referenced 

in the credit derivative is identical to 

the hedged non-mortgage asset; or 

(B) The non-mortgage asset referenced 

in the credit derivative is different from 

the hedged non-mortgage asset, but only 

if the asset referenced in the credit 

derivative and the hedged non-mortgage 

asset have been issued by the same 

obligor, the asset referenced in the 

credit derivative ranks pari passu to, or 

more junior than, the hedged nonmortgage asset and has the same 

maturity as the hedged non-mortgage 

asset, and cross-default clauses apply; 

and 

(ii) The credit risk capital charge for 

the unhedged portion of the nonmortgage asset equals: 

(A) The credit risk capital charge for 

the non-mortgage asset, calculated as 

the amortized cost, or fair value, of the 

non-mortgage asset multiplied by that 

asset’s credit risk percentage 

requirement assigned pursuant to 

paragraph (f)(1) of this section where the 

appropriate credit rating is that for the 

non-mortgage asset and the appropriate 

maturity is the remaining maturity of 

the non-mortgage asset; minus 

(B) The credit risk capital charge for 

the non-mortgage asset, calculated as 

the amortized cost, or fair value, of the 

non-mortgage asset multiplied by that 

asset’s credit risk percentage 

requirement assigned pursuant to 

paragraph (f)(1) of this section where the 

appropriate credit rating is that for the 

non-mortgage asset but the appropriate 

maturity is deemed to be the remaining 

maturity of the credit derivative; and 

(iii) The credit risk capital charge for 

the hedged portion of the non-mortgage 

asset is equal to the credit risk capital 

charge for the credit derivative, 

calculated in accordance with paragraph 

(e) of this section. 

(k) Frequency of calculations. Each 

Bank shall perform all calculations 

required by this section at least 

quarterly, unless otherwise directed by 

FHFA, using the advances, residential 

mortgages, residential mortgage pools, 

residential mortgage securities, 

collateralized mortgage obligations, nonrated assets, non-mortgage assets, offbalance sheet items, and derivative 

contracts held by the Bank, and, if 

applicable, the values of, or FHFA 

Credit Ratings categories for, such 

assets, off-balance sheet items, or 

derivative contracts as of the close of 

business of the last business day of the 

calendar period for which the credit risk 

capital charge is being calculated. 

§ 1277.5 Market risk capital requirement. 

(a) General requirement. (1) Each 

Bank’s market risk capital requirement 

shall equal the market value of the 

Bank’s portfolio at risk from movements 

in interest rates, foreign exchange rates, 

commodity prices, and equity prices 

that could occur during periods of 

market stress, where the market value of 

the Bank’s portfolio at risk is 

determined using an internal marketrisk model that fulfills the requirements 

of paragraph (b) of this section and that 

has been approved by FHFA. 

(2) A Bank may substitute an internal 

cash-flow model to derive a market risk 

capital requirement in place of that 

calculated using an internal market-risk 

model under paragraph (a)(1) of this 

section, provided that: 

(i) The Bank obtains FHFA approval 

of the internal cash-flow model and of 

the assumptions to be applied to the 

model; and 

(ii) The Bank demonstrates to FHFA 

that the internal cash-flow model 

subjects the Bank’s assets and liabilities, 

off-balance sheet items, and derivative 

contracts, including related options, to a 

comparable degree of stress for such 

factors as will be required for an 

internal market-risk model. 

(b) Measurement of market value-atrisk under a Bank’s internal market-risk 

model. (1) Except as provided under 

paragraph (a)(2) of this section, each 

Bank shall use an internal market-risk 

model that estimates the market value of 

the Bank’s assets and liabilities, offbalance sheet items, and derivative 

contracts, including any related options, 

and measures the market value of the 

Bank’s portfolio at risk of its assets and 

liabilities, off-balance sheet items, and 

derivative contracts, including related 

options, from all sources of the Bank’s 

market risks, except that the Bank’s 

model need only incorporate those risks 

that are material. 

(2) The Bank’s internal market-risk 

model may use any generally accepted 

measurement technique, such as 

variance-covariance models, historical 

simulations, or Monte Carlo 

simulations, for estimating the market 

value of the Bank’s portfolio at risk, 

provided that any measurement 

technique used must cover the Bank’s 

material risks. 

(3) The measures of the market value 

of the Bank’s portfolio at risk shall 

include the risks arising from the nonlinear price characteristics of options 

and the sensitivity of the market value 

of options to changes in the volatility of 

the options’ underlying rates or prices. 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5331 

(4) The Bank’s internal market-risk 

model shall use interest rate and market 

price scenarios for estimating the market 

value of the Bank’s portfolio at risk, but 

at a minimum: 

(i) The Bank’s internal market-risk 

model shall provide an estimate of the 

market value of the Bank’s portfolio at 

risk such that the probability of a loss 

greater than that estimated shall be no 

more than one percent; 

(ii) The Bank’s internal market-risk 

model shall incorporate scenarios that 

reflect changes in interest rates, interest 

rate volatility, option-adjusted spreads, 

and shape of the yield curve, and 

changes in market prices, equivalent to 

those that have been observed over 120- 

business day periods of market stress. 

For interest rates, the relevant historical 

observations should be drawn from the 

period that starts at the end of the 

previous month and goes back to the 

beginning of 1998; 

(iii) The total number of, and specific 

historical observations identified by the 

Bank as, stress scenarios shall be: 

(A) Satisfactory to FHFA; 

(B) Representative of the periods of 

the greatest potential market stress given 

the Bank’s portfolio; and 

(C) Comprehensive given the 

modeling capabilities available to the 

Bank; and 

(iv) The measure of the market value 

of the Bank’s portfolio at risk may 

incorporate empirical correlations 

among interest rates. 

(5) For any consolidated obligations 

denominated in a currency other than 

U.S. Dollars or linked to equity or 

commodity prices, each Bank shall, in 

addition to fulfilling the criteria of 

paragraph (b)(4) of this section, 

calculate an estimate of the market 

value of its portfolio at risk resulting 

from material foreign exchange, equity 

price or commodity price risk, such 

that, at a minimum: 

(i) The probability of a loss greater 

than that estimated shall not exceed one 

percent; 

(ii) The scenarios reflect changes in 

foreign exchange, equity, or commodity 

market prices that have been observed 

over 120-business day periods of market 

stress, as determined using historical 

data that is from an appropriate period; 

(iii) The total number of, and specific 

historical observations identified by the 

Bank as, stress scenarios shall be: 

(A) Satisfactory to FHFA; 

(B) Representative of the periods of 

the greatest potential stress given the 

Bank’s portfolio; and 

(C) Comprehensive given the 

modeling capabilities available to the 

Bank; and 

(iv) The measure of the market value 

of the Bank’s portfolio at risk may 

incorporate empirical correlations 

within or among foreign exchange rates, 

equity prices, or commodity prices. 

(c) Independent validation of Bank 

internal market-risk model or internal 

cash-flow model. (1) Each Bank shall 

conduct an independent validation of 

its internal market-risk model or 

internal cash-flow model within the 

Bank that is carried out by personnel 

not reporting to the business line 

responsible for conducting business 

transactions for the Bank. Alternatively, 

the Bank may obtain independent 

validation by an outside party qualified 

to make such determinations. 

Validations shall be done periodically, 

commensurate with the risk associated 

with the use of the model, or as 

frequently as required by FHFA. 

(2) The results of such independent 

validations shall be reviewed by the 

Bank’s board of directors and provided 

promptly to FHFA. 

(d) FHFA approval of Bank internal 

market-risk model or internal cash-flow 

model. (1) Each Bank shall obtain FHFA 

approval of an internal market-risk 

model or an internal cash-flow model, 

including subsequent material 

adjustments to the model made by the 

Bank, prior to the use of any model. 

Each Bank shall make such adjustments 

to its model as may be directed by 

FHFA. 

(2) A model and any material 

adjustments to such model that were 

approved by FHFA or the Federal 

Housing Finance Board shall be deemed 

to meet the requirements of paragraph 

(d)(1) of this section, unless such 

approval is revoked or amended by 

FHFA. 

(e) Frequency of calculations. Each 

Bank shall perform any calculations or 

estimates required under this section at 

least quarterly, unless otherwise 

directed by FHFA, using the assets, 

liabilities, and off-balance sheet items 

(including derivative contracts and 

options) held by the Bank, and if 

applicable, the values of any such 

holdings, as of the close of business of 

the last business day of the calendar 

period for which the market risk capital 

requirement is being calculated. 

§ 1277.6 Operational risk capital 

requirement. 

(a) General requirement. Except as 

authorized under paragraph (b) of this 

section, each Bank’s operational risk 

capital requirement shall at all times 

equal 30 percent of the sum of the 

Bank’s credit risk capital requirement 

and market risk capital requirement. 

(b) Alternative requirements. With the 

approval of FHFA, each Bank may have 

an operational risk capital requirement 

equal to less than 30 percent but no less 

than 10 percent of the sum of the Bank’s 

credit risk capital requirement and 

market risk capital requirement if: 

(1) The Bank provides an alternative 

methodology for assessing and 

quantifying an operational risk capital 

requirement; or 

(2) The Bank obtains insurance to 

cover operational risk from an insurer 

acceptable to FHFA and on terms 

acceptable to FHFA. 

§ 1277.7 Limits on unsecured extensions 

of credit; reporting requirements. 

(a) Unsecured extensions of credit to 

a single counterparty. A Bank shall not 

extend unsecured credit to any single 

counterparty (other than a GSE 

described in and subject to the 

requirements of paragraph (c) of this 

section) in an amount that would 

exceed the limits of this paragraph (a). 

If a third-party provides an irrevocable, 

unconditional guarantee of repayment 

of a credit (or any part thereof), the 

third-party guarantor may be considered 

the counterparty for purposes of 

calculating and applying the unsecured 

credit limits of this section with respect 

to the guaranteed portion of the 

transaction. 

(1) General limits. All unsecured 

extensions of credit by a Bank to a 

single counterparty that arise from the 

Bank’s on- and off-balance sheet and 

derivative transactions (but excluding 

the amount of sales of federal funds 

with a maturity of one day or less and 

sales of federal funds subject to a 

continuing contract) shall not exceed 

the product of the maximum capital 

exposure limit applicable to such 

counterparty, as determined in 

accordance with the following Table 1 

to this section, multiplied by the lesser 

of: 

(i) The Bank’s total capital; or 

(ii) The counterparty’s Tier 1 capital, 

or if Tier 1 capital is not available, total 

capital (in each case as defined by the 

counterparty’s principal regulator) or 

some similar comparable measure 

identified by the Bank. 

(2) Overall limits including sales of 

overnight federal funds. All unsecured 

extensions of credit by a Bank to a 

single counterparty that arise from the 

Bank’s on- and off-balance sheet and 

derivative transactions, including the 

amounts of sales of federal funds with 

a maturity of one day or less and sales 

of federal funds subject to a continuing 

contract, shall not exceed twice the 

limit calculated pursuant to paragraph 

(a)(1) of this section. 

5332 Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 

(3) Limits for certain obligations 

issued by state, local, or tribal 

governmental agencies. The limit set 

forth in paragraph (a)(1) of this section, 

when applied to the marketable direct 

obligations of state, local, or tribal 

government units or agencies that are 

excluded from the prohibition against 

investments in whole mortgage loans or 

other types of whole loans, or interests 

in such loans, by § 1267.3(a)(4)(iii) of 

this chapter, shall be calculated based 

on the Bank’s total capital and the 

internal credit rating assigned to the 

particular obligation, as determined in 

accordance with paragraph (a)(4) of this 

section. If a Bank owns series or classes 

of obligations issued by a particular 

state, local, or tribal government unit or 

agency, or has extended other forms of 

unsecured credit to such entity falling 

into different rating categories, the total 

amount of unsecured credit extended by 

the Bank to that government unit or 

agency shall not exceed the limit 

associated with the highest-rated 

obligation issued by the entity and 

actually purchased by the Bank. 

(4) Bank determination of applicable 

maximum capital exposure limits. A 

Bank shall determine the maximum 

capital exposure limit for each 

counterparty by assigning the 

counterparty to the appropriate FHFA 

Credit Rating category of Table 1 to this 

section, based upon the Bank’s internal 

credit rating for that counterparty. In all 

cases, a Bank shall use the same FHFA 

Credit Rating category for a particular 

counterparty when determining its 

unsecured credit limit under this 

section as it would use under Table 2 to 

§ 1277.4 for determining the risk-based 

capital charge for obligations issued by 

that counterparty under § 1277.4(f). 

TABLE 1 TO § 1277.7—MAXIMUM LIMITS ON UNSECURED EXTENSIONS OF

CREDIT TO A SINGLE COUNTERPARTY BY FHFA CREDIT RATING

CATEGORY

FHFA Credit Rating 

Maximum capital 

exposure limit 

(in percent) 

FHFA 1 ........................... 15 

FHFA 2 ........................... 14 

FHFA 3 ........................... 9 

FHFA 4 ........................... 3 

FHFA 5 and Below ......... 1 

(b) Unsecured extensions of credit to 

affiliated counterparties—(1) In general. 

The total amount of unsecured 

extensions of credit by a Bank to a group 

of affiliated counterparties that arise 

from the Bank’s on- and off-balance 

sheet and derivative transactions, 

including sales of federal funds with a 

maturity of one day or less and sales of 

federal funds subject to a continuing 

contract, shall not exceed 30 percent of 

the Bank’s total capital. 

(2) Relation to individual limits. The 

aggregate limits calculated under 

paragraph (b)(1) of this section shall 

apply in addition to the limits on 

extensions of unsecured credit to a 

single counterparty imposed by 

paragraph (a) of this section. 

(c) Special limits for certain GSEs. 

Unsecured extensions of credit by a 

Bank that arise from the Bank’s on- and 

off-balance sheet and derivative 

transactions, including from the 

purchase of any debt or from any sales 

of federal funds with a maturity of one 

day or less and from sales of federal 

funds subject to a continuing contract, 

with a GSE that is operating with capital 

support or another form of direct 

financial assistance from the United 

States government that enables the GSE 

to repay those obligations, shall not 

exceed the Bank’s total capital. 

(d) Extensions of unsecured credit 

after reduced rating. If a Bank revises its 

internal credit rating for any 

counterparty or obligation, it shall 

assign the counterparty or obligation to 

the appropriate FHFA Credit Rating 

category based on the revised rating. If 

the revised internal rating results in a 

lower FHFA Credit Rating category, 

then any subsequent extensions of 

unsecured credit shall comply with the 

maximum capital exposure limit 

applicable to that lower rating category, 

but a Bank need not unwind or liquidate 

any existing transaction or position that 

complied with the limits of this section 

at the time it was entered. For purposes 

of this paragraph (d), the renewal of an 

existing unsecured extension of credit, 

including any decision not to terminate 

any sales of federal funds subject to a 

continuing contract, shall be considered 

a subsequent extension of unsecured 

credit that can be undertaken only in 

accordance with the lower limit. 

(e) Reporting requirements—(1) Total 

unsecured extensions of credit. Each 

Bank shall report monthly to FHFA the 

amount of the Bank’s total unsecured 

extensions of credit arising from on- and 

off-balance sheet and derivative 

transactions to any single counterparty 

or group of affiliated counterparties that 

exceeds 5 percent of: 

(i) The Bank’s total capital; or 

(ii) The counterparty’s, or affiliated 

counterparties’ combined, Tier 1 capital, 

or if Tier 1 capital is not available, total 

capital (in each case as defined by the 

counterparty’s principal regulator), or 

some similar comparable measure 

identified by the Bank. 

(2) Total secured and unsecured 

extensions of credit. Each Bank shall 

report monthly to FHFA the amount of 

the Bank’s total secured and unsecured 

extensions of credit arising from on- and 

off-balance sheet and derivative 

transactions to any single counterparty 

or group of affiliated counterparties that 

exceeds 5 percent of the Bank’s total 

assets. 

(3) Extensions of credit in excess of 

limits. A Bank shall report promptly to 

FHFA any extension of unsecured credit 

that exceeds any limit set forth in 

paragraph (a), (b), or (c) of this section. 

In making this report, a Bank shall 

provide the name of the counterparty or 

group of affiliated counterparties to 

which the excess unsecured credit has 

been extended, the dollar amount of the 

applicable limit which has been 

exceeded, the dollar amount by which 

the Bank’s extension of unsecured credit 

exceeds such limit, the dates for which 

the Bank was not in compliance with 

the limit, and a brief explanation of the 

circumstances that caused the limit to 

be exceeded. 

(f) Measurement of unsecured 

extensions of credit—(1) In general. For 

purposes of this section, unsecured 

extensions of credit will be measured as 

follows: 

(i) For on-balance sheet transactions 

(other than a derivative transaction 

addressed by paragraph (f)(1)(iii) of this 

section), an amount equal to the sum of 

the amortized cost of the item plus net 

payments due the Bank. For any such 

item carried at fair value where any 

change in fair value would be 

recognized in the Bank’s income, the 

Bank shall measure the unsecured 

extension of credit based on the fair 

value of the item, rather than its 

amortized cost; 

(ii) For off-balance sheet transactions, 

an amount equal to the credit equivalent 

amount of such item, calculated in 

accordance with § 1277.4(h); and 

(iii) For derivative transactions not 

cleared by a derivatives clearing 

organization, an amount equal to the 

sum of: 

(A) The Bank’s current and potential 

future credit exposures under the 

derivative contract, where those values 

are calculated in accordance with 

§ 1277.4(i)(1) and (2) respectively, 

reduced by the amount of any collateral 

held by or on behalf of the Bank against 

the credit exposure from the derivative 

contract, as allowed in accordance with 

the requirements of § 1277.4(e)(2) and 

(3); and 

(B) The value of any collateral posted 

by the Bank that exceeds the current 

amount owed by the Bank to its 

counterparty under the derivative 

Federal Register / Vol. 84, No. 34 / Wednesday, February 20, 2019 / Rules and Regulations 5333 

contract, where the collateral is held by 

a person or entity other than a thirdparty custodian that is acting under a 

custody agreement that meets the 

requirements of § 1221.7(c) and (d) of 

this chapter. 

(2) Status of debt obligations 

purchased by the Bank. Any debt 

obligation or debt security (other than 

mortgage-backed or other asset-backed 

securities or acquired member assets) 

purchased by a Bank shall be 

considered an unsecured extension of 

credit for the purposes of this section, 

except for: 

(i) Any amount owed the Bank against 

which the Bank holds collateral in 

accordance with § 1277.4(f)(2)(ii); or 

(ii) Any amount which FHFA has 

determined on a case-by-case basis shall 

not be considered an unsecured 

extension of credit. 

(g) Exceptions to unsecured credit 

limits. The following items are not 

subject to the limits of this section: 

(1) Obligations of, or guaranteed by, 

the United States; 

(2) A derivative transaction accepted 

for clearing by a derivatives clearing 

organization, including collateral posted 

by the Bank with the derivatives 

clearing organization associated with 

that derivative transaction; 

(3) Any extension of credit from one 

Bank to another Bank; and 

(4) A bond issued by a state housing 

finance agency, if the Bank documents 

that the obligation in question is: 

(i) Principally secured by high quality 

mortgage loans or high quality 

mortgage-backed securities (or funds 

derived from payments on such assets 

or from payments from any guarantees 

or insurance associated with such 

assets); 

(ii) The most senior class of 

obligation, if the bond has more than 

one class; and 

(iii) Determined by the Bank to be 

rated no lower than FHFA 2, in 

accordance with this section. 

§ 1277.8 Reporting requirements. 

Each Bank shall report information 

related to capital and other matters 

addressed by this part in accordance 

with instructions provided in the Data 

Reporting Manual issued by FHFA, as 

amended from time to time. 

Dated: December 18, 2018. 

Melvin L. Watt, 

Director, Federal Housing Finance Agency. 

[FR Doc. 2018–27918 Filed 2–19–19; 8:45 am] 

BILLING CODE 8070–01–P