This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

5292 

Vol. 76, No. 20 

Monday, January 31, 2011 

FEDERAL HOUSING FINANCE BOARD 

12 CFR Parts 932, 955, 956, and 966 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Parts 1269 and 1273 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

Office of Federal Housing Enterprise 

Oversight 

12 CFR Parts 1720 and 1750 

RIN 2590–AA40 

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 

AGENCIES: Federal Housing Finance 

Board; Federal Housing Finance 

Agency; and Office of Federal Housing 

Enterprise Oversight. 

ACTION: Advance notice of proposed 

rulemaking; request for comment. 

SUMMARY: A number of regulations 

applicable to the Federal National 

Mortgage Association and the Federal 

Home Loan Mortgage Corporation 

(collectively, the Enterprises), and the 

Federal Home Loan Banks (Banks), 

contain specific references to, or 

requirements based on, credit ratings 

issued by credit rating organizations 

registered with the Securities and 

Exchange Commission as nationally 

recognized statistical rating 

organizations (NRSROs). Section 939A 

of the recently enacted Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act) provides Federal 

agencies with one-year to review 

regulations that require the use of an 

assessment of the credit-worthiness of a 

security or money market instrument 

and any references to, or requirements 

in, such regulations regarding credit 

ratings, and to remove such references 

or requirements. In this advance notice 

of proposed rulemaking (ANPR), the 

Federal Housing Finance Agency 

(FHFA) describes the relevant 

regulations affected by this provision of 

the Dodd-Frank Act and requests 

comments on potential alternatives to 

the use of credit ratings in these 

regulations. 

DATES: Comments on the proposed rule 

must be received on or before March 17, 

2011. 

ADDRESSES: You may submit your 

comments on the proposed rule, 

identified by regulatory information 

number (RIN) 2590–AA40 by any of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comments to the 

Federal eRulemaking Portal, please also 

send it by e-mail to FHFA at 

RegComments@FHFA.gov to ensure 

timely receipt by the agency. Please 

include ‘‘RIN 2590–AA40’’ in the subject 

line of the message. 

• E-mail: Comments to Alfred M. 

Pollard, General Counsel may be sent by 

e-mail to RegComments@FHFA.gov. 

Please include ‘‘RIN 2590–AA40’’ in the 

subject line of the message. 

• Hand Delivery/Courier: The hand 

delivery address is: Alfred M. Pollard, 

General Counsel, Attention: Comments/ 

RIN 2590–AA40, Federal Housing 

Finance Agency, Fourth Floor, 1700 G 

Street, NW., Washington, DC 20552. The 

package should be logged at the Guard 

Desk, First Floor, on business days 

between 9 a.m. and 5 p.m. 

• U.S. Mail, United Parcel Service, 

Federal Express, or Other Mail Service: 

The mailing address for comments is: 

Alfred M. Pollard, General Counsel, 

Attention: Comments/RIN 2590–AA40, 

Federal Housing Finance Agency, 

Fourth Floor, 1700 G Street, NW., 

Washington, DC 20552. 

FOR FURTHER INFORMATION CONTACT: 

Scott Smith, Associate Director, Office 

of Capital Supervision, 202–414–8922, 

Federal Housing Finance Agency; 

Thomas E. Joseph, Senior AttorneyAdvisor, 202–414–3095; or Jamie 

Schwing, Associate General Counsel, 

202–414–3787, Office of General 

Counsel, Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552; or Amy 

Bogdon, Associate Director for 

Regulatory Policy and Programs, 

Division of Federal Home Loan Bank 

Regulation, 202–408–2546 (these are not 

toll-free numbers), Federal Housing 

Finance Agency, 1625 Eye Street, NW., 

Washington, DC 20006. The telephone 

number for the Telecommunications 

Device for the Deaf is 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Comments 

FHFA invites comments on all aspects 

of the ANPR, and will develop proposed 

regulations after taking all comments 

into consideration. Copies of all 

comments will be posted on the internet 

Web site at https://www.fhfa.gov. In 

addition, copies of all comments 

received will be available for 

examination by the public on business 

days between the hours of 10 a.m. and 

3 p.m., at the Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552. To make 

an appointment to inspect comments, 

please call the Office of General Counsel 

at 202–414–6924. 

II. Background 

A. Creation of the Federal Housing 

Finance Agency and Recent Legislation 

Effective July 30, 2008, the Housing 

and Economic Recovery Act of 2008 

(HERA), Public Law 110–289, 122 Stat. 

2654, created FHFA as a new 

independent agency of the Federal 

Government, and transferred to FHFA 

the supervisory and oversight 

responsibilities of the Office of Federal 

Housing Enterprise Oversight (OFHEO) 

over the Enterprises, the supervisory 

and oversight responsibilities of the 

Federal Housing Finance Board 

(Finance Board) over the Banks and the 

Office of Finance (OF) (which acts as 

the Banks’ fiscal agent) and certain 

functions of the Department of Housing 

and Urban Development. See id. at 

section 1101, 122 Stat. 2661–62. FHFA 

is responsible for ensuring that the 

Enterprises and the Banks operate in a 

safe and sound manner, including that 

they maintain adequate capital and 

internal controls, that their activities 

foster liquid, efficient, competitive and 

resilient national housing finance 

markets, and that they carry out their 

public policy missions through 

authorized activities. See id. at section 

1102, 122 Stat. 2663–64. The 

Enterprises, the Banks, and the OF 

continue to operate under regulations 


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1Each Bank is generally referred to by the name 

of the city in which it is located. The twelve Banks 

are located in: Boston, New York, Pittsburgh, 

Atlanta, Cincinnati, Indianapolis, Chicago, Des 

Moines, Dallas, Topeka, San Francisco, and Seattle. 

The twelve Banks and the OF are collectively 

referred to as, and considered to make up, the Bank 

System. 

promulgated by OFHEO and the 

Finance Board until such regulations are 

superseded by regulations issued by 

FHFA. See id. at sections 1302, 1312, 

122 Stat. 2795, 2798. 

B. The Enterprises 

The Enterprises are chartered by 

Congress for the purpose of establishing 

secondary market facilities for 

residential mortgages. See 12 U.S.C. 

1716 et seq.; 12 U.S.C. 1451 et seq. 

Congress established the Enterprises to 

provide stability in the secondary 

mortgage market for residential 

mortgages, to respond appropriately to 

the private capital market, to provide 

ongoing assistance to the secondary 

market for residential mortgages, and to 

promote access to mortgage credit 

throughout the nation. Id. 

On September 6, 2008, the Director of 

FHFA appointed FHFA as conservator 

of the Enterprises in accordance with 

the Safety and Soundness Act, as 

amended by HERA. The Enterprises 

remain under conservatorship at this 

time. Although the Enterprises’ 

substantial market presence has been 

important to restoring market stability, 

neither company would be capable of 

serving the mortgage market today 

without the ongoing financial support 

provided by the United States 

Department of Treasury. The 

Administration has announced its 

intention to develop and present to 

Congress a proposal for the future of the 

nation’s housing finance system that 

will include a proposal for the ultimate 

resolution of the Enterprises in 

conservatorship. While reliance on the 

Treasury Department’s backing will 

continue until legislation produces a 

final resolution to the Enterprises’ 

future, FHFA is monitoring the 

activities of the Enterprises to: (a) limit 

their risk and exposure by avoiding new 

lines of business; (b) ensure profitability 

in their new books of business without 

deterring market participation or 

hindering market recovery; and (c) 

minimize losses on the mortgages 

already on their books. 

C. The Bank System 

The twelve Banks are 

instrumentalities of the United States 

organized under the Federal Home Loan 

Bank Act (Bank Act).1 See 12 U.S.C. 

1423, 1432(a). 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. See 12 U.S.C. 1426(a)(4), 

1430(a), 1430(b). Each Bank is managed 

by its own board of directors and serves 

the public interest by enhancing the 

availability of residential credit through 

its member institutions. See 12 U.S.C. 

1427. Any eligible institution (generally 

a federally insured depository 

institution or state-regulated insurance 

company) may become a member of a 

Bank if it satisfies certain criteria and 

purchases a specified amount of the 

Bank’s capital stock. See 12 U.S.C. 1424; 

12 CFR part 1263. 

As government-sponsored enterprises, 

the Banks are granted certain privileges 

under federal law. In light of those 

privileges, the Banks typically can 

borrow funds at spreads over the rates 

on U.S. Treasury securities of 

comparable maturity lower than most 

other entities. The Banks pass along a 

portion of their funding advantage to 

their members—and ultimately to 

consumers—by providing advances and 

other financial services at rates that 

would not otherwise be available to 

their members. Consolidated obligations 

(COs), consisting of bonds and discount 

notes, are the principal funding source 

for the Banks. The OF issues all COs on 

behalf of the twelve Banks. Although 

each Bank is primarily liable for the 

portion of COs corresponding to the 

proceeds received by that Bank, each 

Bank is also jointly and severally liable 

with the other eleven Banks for the 

payment of principal and interest on all 

COs. 12 CFR 966.9. 

D. Dodd-Frank Act Provisions 

Section 939A of the recently enacted 

Dodd-Frank Act requires Federal 

agencies within one-year 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 regarding credit ratings, 

remove such references or requirements. 

See section 939A, Public Law 111–203, 

124 Stat. 1887 (July 21, 2010). In place 

of such credit-rating based 

requirements, agencies are instructed to 

substitute appropriate standards for 

determining credit-worthiness. The new 

law further provides that, to the extent 

feasible, an agency should adopt a 

uniform standard of credit-worthiness 

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. At the conclusion 

of the review, each agency is required to 

transmit a report to Congress describing 

the modifications to its regulations that 

were made. 

A number of regulations applicable to 

the Enterprises or the Bank System 

(which were previously adopted by 

OFHEO or the Finance Board, but 

remain in effect, or more recently 

adopted by FHFA) contain specific 

references to credit ratings issued by 

NRSROs for purposes of assigning 

capital requirements or setting 

investment or counterparty exposure 

limits. FHFA is issuing this ANPR to 

help it assess how it can change these 

regulations and to identify standards 

that may be appropriate as replacements 

for credit ratings issued by NRSROs. 

Federal banking agencies have also 

issued ANPRs as part of their process to 

address similar issues with regard to 

references to credit ratings in their 

capital regulations and prudential 

standards. See 75 FR 49423 (Aug. 13, 

2010), and 75 FR 52283 (Aug. 25, 2010). 

The specific FHFA regulations at issue 

are discussed more fully below. 

E. Considerations of Differences 

Between the Banks and the Enterprises 

Section 1201 of HERA requires the 

Director, when promulgating regulations 

relating to the Banks, to consider the 

following differences between the Banks 

and the Enterprises: cooperative 

ownership structure; mission of 

providing liquidity to members; 

affordable housing and community 

development mission; capital structure; 

and joint and several liability. See 

section 1201 Public Law 110–289, 122 

Stat. 2782–83 (amending 12 U.S.C. 

4513). The Director also may consider 

any other differences that are deemed 

appropriate. While the Dodd-Frank Act 

mandates that each agency try, to the 

extent feasible, to develop uniform 

standards of credit-worthiness for use in 

its regulations in preparing any 

proposed rules, FHFA also will consider 

the differences between the Banks and 

the Enterprises as they relate to the 

above factors and how such factors may 

lead to differences between any 

standards ultimately adopted. To aid it 

in developing proposed regulations, 

FHFA requests comments from the 

public about whether or how differences 

related to these factors should be 

reflected in any possible regulations. 


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2 In addition, regulations require that, before first 

implementing the capital structure plan required by 

the Gramm-Leach-Bliley Act (GLB Act), Public Law 

106–102, 113 Stat. 1338 (1999), each Bank was to 

obtain a review from an NRSRO to determine 

whether implementation of the plan would affect 

the credit rating of the Bank. 12 CFR 933.3. Because 

eleven of the twelve Banks have implemented their 

capital structure plans, only one Bank remains 

subject to this provision. More importantly, this 

regulation implements a Bank Act provision that 

specifically requires this review, and therefore 

cannot be altered without a change to the statute, 

which the Dodd-Frank Act did not amend. 12 

U.S.C. 1426(c)(6)(B). 

III. Request for Comments 

A. Description of Applicable 

Regulations 

The regulations in question can be 

divided into two broad categories. The 

first category contains regulations that 

relate to capital requirements and apply 

specific capital charges based on 

NRSRO ratings of financial instruments 

or counterparties. The second category 

involves prudential standards and limits 

that may be applied to a regulated entity 

or on a regulated entity’s investment or 

other business activities that reference 

or are otherwise based on credit ratings 

issued by NRSROs. 

1. Risk-Based Capital Requirements 

a. Enterprises 

The risk-based capital requirements 

applicable to the Enterprises apply 

capital charges in part based on 

reference to credit ratings issued by 

NRSROs. Soon after placing the 

Enterprises in conservatorship, FHFA 

announced that, although it would 

closely monitor Enterprise capital 

levels, existing statutory and FHFAdirected regulatory capital requirements 

would not be binding on the Enterprises 

during the conservatorship. Even 

though not currently binding, the 

regulations for the Enterprises described 

below are still in effect, and FHFA 

might need to adopt new risk-based 

requirements for the Enterprises or their 

successors in a post-conservatorship 

environment. Thus, the question of 

credit-worthiness in applying a riskbased credit charge is relevant in 

considering risk-based capital 

requirements. 

The current Enterprise risk-based 

capital regulations set forth detailed 

criteria for a stress test that is used to 

estimate losses for an Enterprise over a 

specific period. Under the requirements, 

an Enterprise’s total capital must be 

sufficient so that it would remain 

positive during the entire stress period. 

See 12 CFR 1750.13. One component of 

the test, the Counterparty Default 

component, accounts for the risk of 

default by credit enhancement and 

derivative contract counterparties, and 

by corporate, municipal and mortgagerelated securities. 12 CFR part 1750, 

subpart B, Appendix A, section 3.5. In 

calculating the Counterparty Default 

component, the regulations establish 

five rating categories, and slot 

counterparties and securities into these 

categories by reference to ratings issued 

by an NRSRO for the counterparty or 

security. The regulations, in turn, 

specify the maximum reduction in cash 

flows during the stress period to reflect 

the risk of default by a counterparty or 

for a specific security based in part on 

the assigned ratings category. Id. The 

reduced cash flows decrease earnings, 

or increase losses, which then translate 

to lower equity during the stress test. 

The difference between equity during 

the binding month of the stress test and 

starting equity forms the basis of an 

Enterprise’s risk-based capital 

requirement. 

b. Banks 

Similarly, the risk-based capital 

requirements applicable to the Banks 

require the Banks to hold risk-based 

capital sufficient to meet the credit risk 

capital requirement for all assets, offbalance sheet items, and derivative 

contracts. See 12 CFR 932.4. The credit 

risk capital requirement is calculated in 

large part based on the credit ratings 

assigned by the NRSROs to a particular 

counterparty or to a specific financial 

instrument, and on maturity. Id. 

2. Prudential Requirements 

The other area of FHFA regulations 

that may reference or otherwise be 

based on credit ratings issued by 

NRSROs involves prudential standards 

or limits that may be applied to a 

regulated entity or to its investment 

activity. This is especially true for the 

Banks, for which a number of 

regulations reference such ratings. 

a. Enterprises 

With regard to the Enterprises, the 

references to credit ratings are found in 

guidance on non-mortgage liquidity 

investments set forth in Appendix B to 

part 1720. 12 CFR part 1720, Appendix 

B. Specifically, the guidance states that, 

as a safety and soundness matter, the 

Enterprises should establish minimum 

credit standards for any security eligible 

for purchase, and if such standards 

involve or cite credit ratings, NRSRO 

ratings should be used. Id. at section 

C(3)(c)(i). The policy also provides that 

sound risk management practices 

include disclosure about the risk of nonmortgage liquidity investments, 

including disclosure concerning credit 

quality or ratings of investments. Id. at 

section D(1). These provisions, however, 

unlike many of the requirements that 

apply to the Banks, do not necessarily 

require the Enterprises to take or refrain 

from specific actions based on NRSRO 

ratings or to use NRSRO ratings for 

specific purposes and therefore may be 

outside the scope of section 939A of the 

Dodd-Frank Act. 

b. Banks 

There are currently six regulations 

that apply to the Banks which contain 

various provisions that reference credit 

ratings or impose limitations or other 

requirements on the Banks based on 

ratings issued by NRSROs. A brief 

description of these regulations follows. 

Bank Capital, 12 CFR part 932. In 

addition to the specific credit risk 

capital charge provisions discussed 

above, other prudential provisions in 

the part 932 capital regulations 

reference NRSRO ratings and establish 

limits on Bank activity based on such 

ratings. First, a Bank, with the 

permission of FHFA, is allowed to 

reduce the operations risk component of 

its risk-based capital charge if the Bank 

obtains insurance to cover operations 

risk from an insurer with a credit rating 

no lower than the second highest 

investment grade rating from an 

NRSRO. 12 CFR 932.6(b)(2). To date, 

however, no Bank has ever relied on 

this provision or sought the regulator’s 

approval to reduce its operations risk 

capital charge by obtaining insurance. 

The capital provisions also impose 

limits on a Bank’s unsecured credit 

exposure to a single counterparty and 

group of affiliated counterparties, and 

set those limits based on credit ratings 

issued by an NRSRO. 12 CFR 932.9. The 

limits become more restrictive as the 

credit rating declines.2

Acquired Member Assets, 12 CFR part 

955. The acquired member asset 

regulations authorize Banks to purchase 

certain mortgage loans from their 

members, subject to a number of 

conditions. Among these conditions, is 

one that requires pools of loans to be 

credit enhanced by the member to the 

equivalent of an instrument having at 

least the fourth highest credit rating 

from an NRSRO, or such higher rating 

as the Bank may require. 12 CFR 

955.3(a) and (b). The Bank rating must 

be determined using a methodology that 

is comparable to one used by an 

NRSRO, and the Bank must obtain 

written confirmation from the NRSRO 

that its methodology is equivalent. Id.; 

12 CFR 955.3(b)(4) and (c). In addition, 

the regulation requires that, to the 

extent a Bank allows supplemental loanlevel mortgage insurance as part of its 

AMA credit enhancement, such 


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Federal Register / Vol. 76, No. 20 / Monday, January 31, 2011 / Proposed Rules 5295 

3 In addition to these provisions, the AMA 

regulation also contains a capital provision which 

is applicable only to Banks that have not converted 

to the GLB Act capital structure. This provision sets 

capital charges on AMA pools whose credit risk is 

estimated by the Bank to be greater than that of an 

instrument receiving the second highest investment 

grade rating from an NRSRO. 12 CFR 955.6. Because 

eleven of the twelve Banks have converted to the 

GLB Act capital structure, only one Bank remains 

subject to this provision. 

4 In May 2010, FHFA proposed re-organizing the 

investment regulations in part 956 and transferring 

the regulations to 12 CFR part 1267. 75 FR 23631 

(May 4, 2010). 

5 In addition to these provisions, the investment 

regulation also contains a capital provision which 

is applicable only to Banks that have not converted 

to the GLB Act capital structure. This provision sets 

capital charges on investments that have a putative 

rating below the second highest investment grade 

or are not rated by an NRSRO. 12 CFR 956.4. 

Because eleven of the twelve Banks have converted 

to the GLB Act capital structure, only one Bank 

remains subject to this provision. 

6The Letters of credit regulations were 

transferred from 12 CFR part 960 to 12 CFR part 

1269, effective March 26, 2010. 75 FR 8239 (Feb. 

24, 2010). 

7The regulations governing the OF were 

transferred from 12 CFR part 985 to 12 CFR part 

1273, effective June 2, 2010. 75 FR 23152 (May 3, 

2010). 

insurance must be from an insurer rated 

no lower than the second highest credit 

rating category by an NRSRO. 12 CFR 

955.3(b)(1)(ii)(A). These provisions are 

all meant to assure that the Banks only 

buy pools of high quality mortgages and 

to limit the Banks’ exposure to credit 

losses from these pools.3

Investments, 12 CFR part 956.4 A 

number of provisions in the investment 

regulation limit Bank investments by 

reference to the rating issued by an 

NRSRO for a particular instrument. 

First, the Banks are prohibited from 

investing in any debt instrument that is 

rated below investment grade by an 

NRSRO at the time the investment is 

made. 12 CFR 956.3(a)(3). Another 

provision, which sets forth exceptions 

to a general prohibition on a Bank’s 

investment in mortgages or other whole 

loans, specifically allows for investment 

in marketable direct obligations of state, 

local, or tribal government units or 

agencies, having at least the second 

highest credit rating from an NRSRO 

where the purchase would generate 

customized terms, necessary liquidity, 

or favorable pricing for the issuer’s 

funding of housing or community 

lending. 12 CFR 956.3(a)(4)(iii). As with 

other prudential requirements, these 

regulatory provisions are intended to 

limit a Bank’s exposure to credit and 

other risks, arising from its investment 

activities.5

Consolidated Obligations, 12 CFR part 

966. The regulations in part 966 

governing COs contain a number of 

references to and requirements based on 

NRSRO ratings. FHFA already has 

identified these provisions and sought 

comment both on potential creditworthiness standards that could be 

applied to replace these provisions and 

on other action FHFA could take with 

regard to them, when it proposed 

amending and transferring the 

regulations in part 966 in conjunction 

with the recent proposed rule on Bank 

liabilities. See Proposed Rule: Federal 

Home Loan Bank Liabilities, 75 FR 

68534, 68536–37 (Nov. 8, 2010). FHFA 

will consider the relevant comments 

received on the proposed Bank liability 

rule, along with the comments on this 

ANPR. 

Letters of Credit, 12 CFR part 1269.6

The regulation provides that a standby 

letter of credit issued or confirmed by a 

Bank on behalf of a member to assist the 

member in facilitating residential 

housing finance or community lending 

may be collateralized by obligations of 

a state or local government unit or 

agency, if the obligation is rated 

investment grade by an NRSRO. 12 CFR 

1269.2(c)(2). 

Office of Finance, 12 CFR part 1273.7

The regulation assigns to OF the 

responsibility to manage the Bank 

System’s relationship with NRSROs 

with regard to NRSRO ratings for COs. 

Because this provision does not impose 

a substantive requirement based on 

credit ratings issued by an NRSRO, but 

instead only assigns to OF the 

responsibility to manage the Bank 

System’s relationship with NRSROs in 

connection with the rating of COs, the 

provision may be outside the scope of 

the Dodd-Frank Act. 

B. Questions on Potential Changes to 

Credit-Worthiness Standards 

1. Principles for a New Approach 

Using NRSRO ratings in the 

regulations provided a supposedly 

objective, and neutral, third-party 

assessment of the credit risk of 

particular instruments and 

counterparties. The ratings also were 

transparent in that they were readily 

available to regulators, the regulated 

entities and the public at large, and 

information about changes in ratings 

was quickly made available. The use of 

NRSRO ratings also helped assure 

consistency in credit risk capital charges 

across regulated entities that were 

subject to the same rules with regard to 

a particular counterparty or financial 

instrument. The NRSRO ratings 

approach was also fairly straightforward 

to apply and did not create an undue 

burden on the regulated entities. Ideally, 

these general principles would carry 

over to any new approach, but now such 

principles must be achieved without 

reference to a third-party ratings system 

such as those developed by the 

NRSROs. 

Specifically, FHFA believes that any 

new standard of credit-worthiness 

should: (i) Distinguish between different 

levels of credit risk, in an accurate and 

meaningful manner; (ii) be a transparent 

approach; (iii) be able to be applied 

consistently across regulated entities to 

the extent that they are subject to the 

same regulatory requirements; (iv) be 

straightforward and not unduly 

burdensome to apply; and (v) not be 

readily subject to manipulation. FHFA 

recognizes that there may be trade-offs 

among these principles. For example, an 

approach that is fairly standard and easy 

to apply may not sufficiently capture 

differences between high and low risk 

exposure and thereby may create 

perverse investment incentives. On the 

other hand, an approach that attempts to 

differentiate levels of credit risk may be 

complex or burdensome to apply and 

may not be readily transparent. In 

consideration of the alternative 

standards for determining creditworthiness, we request comments on 

the following questions. 

Question 1: What core principles 

would be most important in FHFA’s 

development of new standards of creditworthiness? Which principles are least 

important to developing robust new 

standards? Are there principles in 

addition to those above that should be 

incorporated into new standards? Do 

differences in the business models, 

structures and core mission and 

activities of the Banks and the 

Enterprises justify or compel developing 

approaches that may emphasize 

different core principles depending on 

whether the rule applies to the Banks or 

the Enterprises? 

2. Alternative Approaches for RiskBased Capital Requirements 

In order for FHFA to eliminate the use 

of NRSRO ratings in calculating riskbased capital charges for regulated 

entities, it would need to develop an 

alternative basis on which it could 

assess credit risk capital charges. One 

approach would be to identify objective 

criteria that could be applied by each 

regulated entity in order to categorize 

credit exposures into different ‘‘buckets’’ 

and assess credit charges accordingly. 

The criteria could be broadly 

designated. For example, credit 

exposures could be divided into 

government and non-government, 

secured and un-secured, or other such 

categories, including maturity. Such a 

broad approach, however, may not be 

able to sufficiently and consistently 


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5296 Federal Register / Vol. 76, No. 20 / Monday, January 31, 2011 / Proposed Rules 

account for difference in riskiness 

among exposures that fall into the same 

category. 

FHFA could also consider adopting 

criteria that reference certain financial 

or other metrics related to the obligor or 

counterparty. To be meaningful, the 

criteria would need to account for or 

bear a reasonable correlation to the 

potential riskiness of default among 

different obligors or counterparties. Any 

criteria would also need to be readily 

obtainable by both FHFA and the 

regulated entities if this approach is to 

be workable. 

Question 2: What types of objective 

criteria could be used to differentiate 

credit exposures and apply meaningful 

credit risk capital charges? Should 

different criteria be used for different 

broad classes of investments or 

exposures? Could there be perverse 

incentives or other ‘‘downsides’’ to this 

approach? What might be the problems 

with this approach? 

Another approach could be to build 

on each regulated entity’s internal credit 

review process and allow an entity to 

assign exposure to various categories 

and assess risk charges based on 

qualitative and quantitative standards 

set by FHFA. For example, FHFA could 

assign limits or capital requirements 

based on regulated entities’ internal 

ratings or some modification of such, as 

reviewed or approved by FHFA. This 

approach would be more subjective than 

the alternative discussed above but 

could allow FHFA to leverage the data 

collection and analysis already 

performed by the regulated entities. 

Question 3: What qualitative and 

quantitative standards would FHFA 

need to set to implement an approach 

that relied on the regulated entities to 

generate internal estimates of credit risk 

exposures? What are the strengths and 

weaknesses of such an approach? What 

would be the strengths and weaknesses 

of having FHFA itself set credit risk 

capital charges based on its own 

estimates of risk? 

Question 4: In order to apply a 

meaningful risk-based capital charge, 

FHFA needs to set forth requirements 

for the regulated entities to estimate the 

credit risk of their various exposures. 

Could an approach be developed that 

estimates a meaningful risk-based 

capital charge that avoids requiring a 

specific credit risk charge or specifying 

criteria to estimate credit risk? What 

might such an approach be? 

3. Alternative Approaches to Prudential 

Regulations 

FHFA could follow various 

approaches in replacing the NRSROreferenced requirements in the 

regulations described above. One 

approach could be to require a regulated 

entity to analyze and document 

compliance with certain specific creditworthiness standards or metrics set 

forth by FHFA. These standards would 

need to assure that the investment or 

activity is not speculative in nature, and 

instead carries credit risk appropriate 

for the regulated entity’s risk profile and 

risk management practices. FHFA could 

also require the regulated entity to 

consider specific, broader investment 

criteria that go beyond credit-worthiness 

considerations in its analysis. 

FHFA could also rely on the regulated 

entity’s internal credit assessment 

process and let the regulated entities 

decide on what specific investments or 

exposures may be appropriate. Under 

this approach, FHFA would likely need 

to provide regulatory and policy 

guidance on how any internal credit 

assessment process is to be structured 

and to rely heavily on the supervisory 

process to make sure that the regulated 

entities are strictly following their own 

guidelines and are not assuming high 

levels of credit risk. 

Finally, some of the regulations 

described in this ANPR could be deleted 

without necessarily exposing the 

regulated entities to significant risks. At 

the same time, FHFA could consider 

other approaches, such as a prohibition 

on investment in broad categories of 

instruments or on assumption of 

particular types of exposures to replace 

the ratings based requirements. 

Question 5: What are the strengths 

and weaknesses of these various 

approaches? Are there any existing, 

objective tools or approaches that could 

readily replace references to ratings 

issued by NRSROs in the regulations 

discussed in this ANPR? Are there other 

approaches not discussed above that 

may be appropriate? 

Question 6: What specific creditworthiness or investment criteria should 

FHFA incorporate into a new regulation, 

if it decided to adopt such a regulation? 

For example, should FHFA limit 

investments by regulated entities to 

securities that would be eligible 

investments for money market funds, or 

to securities with original maturities of 

one-year or less, or based on other 

objective criteria? What principles 

would FHFA need to incorporate into 

any regulation or policy that was meant 

to govern a regulated entity’s internal 

credit assessment process? 

Question 7: Can any of the current 

prudential requirements that reference 

NRSROs or credit ratings be eliminated 

without compromising FHFA’s ability to 

monitor and promote the safe or sound 

operations of the regulated entities? 

Question 8: Is it important that 

FHFA’s approach to replacing 

requirements in its regulations that 

reference credit ratings issued by 

NRSROs be consistent with that of other 

financial regulators, especially federal 

banking agencies? 

Question 9: What are some other 

safeguards or requirements (not 

necessarily based on credit-worthiness 

standards) that might provide 

protections similar to those afforded 

under FHFA’s current regulations that 

reference ratings issued by NRSROs? 

Dated: January 25, 2011. 

Edward J. DeMarco, 

Acting Director, Federal Housing Finance 

Agency. 

[FR Doc. 2011–2041 Filed 1–28–11; 8:45 am] 

BILLING CODE 8070–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Parts 5 and 119 

[Docket No. FAA–2009–0671; Notice No. 10– 

15] 

RIN 2120–AJ86 

Safety Management System for Part 

121 Certificate Holders; Extension of 

Comment Period 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM); Extension of comment period. 

SUMMARY: This action extends the 

comment period for an NPRM that was 

published on November 5, 2010. In that 

document, the FAA proposed to require 

each certificate holder operating under 

14 CFR part 121 to develop and 

implement a safety management system 

(SMS) to improve its aviation related 

activities. Several trade and 

membership organizations representing 

various aviation industry segments have 

requested that the FAA extend the 

comment period closing date to allow 

time to adequately analyze the NPRM 

and prepare comments. 

DATES: The comment period for the 

NPRM published on November 5, 2010, 

closing on February 3, 2011, is extended 

until March 7, 2011. 

ADDRESSES: You may send comments 

identified by docket number FAA– 

2010–0997 using any of the following 

methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov and follow 

the online instructions for sending your 

comments electronically. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS