Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 51289 

based information tools, although DOE 

will also work collaboratively with the 

FTC to determine if changes to Energy 

Guide labeling requirements would be 

beneficial to consumers. 

DOE agrees with NEEA’s comment 

that the difference between primary 

energy use estimates and FFC energy 

use estimates is relatively small. (NEEA, 

Public Comment, EERE–2010–BT– 

NOA–0028–0021, p. 2) However, to 

date, consumers have not had ready 

access to information on either the 

primary or FFC energy and emission 

impacts of products. Making such 

information available in a manner that 

would enable consumers to make crossfuel and cross-class comparisons of 

comparable products could provide 

consumers with significant new 

information. 

The Consumer’s Union commented 

that the Energy Guide labels must 

increase consumer awareness of GHG 

emissions to effectively educate 

consumers and engage them in energy 

and climate change policy. Such labels 

should ‘‘address regional variation of 

electricity fuel mixes and provide 

consumers guidance on how to interpret 

the data given their region or particular 

utility.’’ (Consumers, Public Comment, 

EERE–2010–BT–NOA–0028–0028, p. 5) 

DOE agrees that consumers should be 

given ready access to better information 

on the energy resource and 

environmental impacts of their 

appliance choices and how to provide 

this information in a meaningful way 

will be a significant issue for DOE and 

the FTC to consider. 

Policy Statement: Subject to the 

availability of funds, DOE will work 

with other Federal agencies to make 

readily available to consumers 

improved information on the energy 

use, life-cycle cost and associated 

emissions of comparable products, even 

if those products use different forms of 

energy. Consumers should be able to 

easily identify the likely energy use, 

life-cycle costs and associated emissions 

of individual products (based on their 

local energy costs and utility system 

characteristics), but should also be able 

to compare those attributes to a range of 

other products providing similar utility. 

In developing betters ways of conveying 

such information to consumers, DOE 

will explore the possible role of 

common efficiency metrics for products 

using different fuels or energy, and will, 

as appropriate, solicit further public 

review and comment on the 

mechanisms developed to make 

available this information to consumers. 

Any updates to Energy Guide labels 

will be promulgated by the FTC, which 

has statutory authority over Energy 

Guide labels. 

IV. Procedural Issues and Regulatory 

Review 

A. Review Under the National 

Environmental Policy Act of 1969 

DOE has determined that this Policy 

Statement falls into a class of actions 

that are categorically excluded from 

review under the National 

Environmental Policy Act of 1969 (42 

U.S.C. 4321 et seq.) and DOE’s 

implementing regulations at 10 CFR part 

1021. Specifically, this Policy Statement 

describes methods for data analysis and 

how DOE plans to incorporate such data 

analysis into future energy conservation 

standards. For this reason, and because 

the Policy Statement does not establish 

an energy conservation standard or take 

any action that might have an impact on 

the environment, it is covered by the 

Categorical Exclusion A9 under 10 CFR 

part 1021, subpart D. Accordingly, 

neither an environmental assessment 

nor an environmental impact statement 

is required. 

B. Review Under the Information 

Quality Bulletin for Peer Review 

In consultation with the Office of 

Science and Technology Policy (OSTP), 

OMB issued on December 16, 2004, its 

‘‘Final Information Quality Bulletin for 

Peer Review’’ (the Bulletin). 70 FR 2664 

(Jan. 14, 2005). The Bulletin establishes 

that certain scientific information shall 

be peer reviewed by qualified specialists 

before it is disseminated by the Federal 

government, including influential 

scientific information related to agency 

regulatory actions. The purpose of the 

Bulletin is to enhance the quality and 

credibility of the government’s scientific 

information. Under the Bulletin, the 

Academy recommendations and GREET 

model are ‘‘influential scientific 

information,’’ which the Bulletin 

defines as ‘‘scientific information that 

the agency reasonably can determine 

will have or does have a clear and 

substantial impact on important public 

policies or private sector decisions.’’ 70 

FR 2664, 2667 (Jan. 14, 2005). The 

Academy recommendations have been 

peer reviewed pursuant to section II.2 of 

the Bulletin. The GREET model, which 

is in the public domain, has been 

reviewed through its development and 

applications over the past 16 years. 

V. Approval of the Office of the 

Assistant Secretary 

The Assistant Secretary of DOE’s 

Office of Energy Efficiency and 

Renewable Energy has approved 

publication of this final policy. 

Issued in Washington, DC, on August 10, 

2011. 

Roland J. Risser, 

Program Manager, Building Technologies 

Program, Energy Efficiency and Renewable 

Energy. 

[FR Doc. 2011–21078 Filed 8–17–11; 8:45 am] 

BILLING CODE 6450–01–P 

FARM CREDIT ADMINISTRATION 

12 CFR Part 615 

RIN 3052–AC50 

Funding and Fiscal Affairs, Loan 

Policies and Operations, and Funding 

Operations; Investment Management 

AGENCY: Farm Credit Administration. 

ACTION: Proposed rule. 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, us, our, 

or we) proposes to amend our 

regulations governing investments held 

by institutions of the Farm Credit 

System (FCS or System). We propose to 

strengthen our regulations governing 

investment management, interest rate 

risk management, and association 

investments; revise the list of eligible 

investments to ensure it is limited only 

to high-quality, liquid investments; 

reduce regulatory burden for 

investments that fail to meet eligibility 

criteria after purchase or are unsuitable; 

and make other changes that will 

enhance the safety and soundness of 

System institutions. In this proposal, we 

also seek comments on compliance with 

section 939A of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act or DFA), which 

requires us to remove all references to 

and requirements relating to credit 

ratings and to substitute other 

appropriate standards of 

creditworthiness. We also seek 

comment on other issues. 

DATES: You may send us comments by 

November 16, 2011. 

ADDRESSES: We offer a variety of 

methods for you to submit comments on 

this proposed rule. For accuracy and 

efficiency reasons, commenters are 

encouraged to submit comments by email or through the Agency’s Web site. 

As facsimiles (fax) are difficult for us to 

process and achieve compliance with 

section 508 of the Rehabilitation Act, we 

are no longer accepting comments 

submitted by fax. Regardless of the 

method you use, please do not submit 

your comment multiple times via 

different methods. You may submit 

comments by any of the following 

methods: 

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51290 Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 

1Section 619.9140 of FCA regulations defines 

Farm Credit bank to include Farm Credit Banks, 

agricultural credit banks, and banks for 

cooperatives. 

2Farm Credit banks use the Federal Farm Credit 

Banks Funding Corporation (Funding Corporation) 

to issue and market System-wide debt securities. 

The Funding Corporation is owned by the Farm 

Credit banks. 

3Section 615.5142 authorizes associations to hold 

eligible investments with the approval and 

oversight of their funding banks, for specified 

purposes. Associations that hold investments, as 

well as service corporations that hold investments, 

are subject to our investment management 

regulation at § 615.5133. 

4We expect to propose revisions to § 615.5134 in 

an upcoming rulemaking. 

5 § 615.5134(a). 

6FCA Bookletter BL–064, Farm Credit System 

Investment Asset Management (December 9, 2010). 

This Bookletter may be viewed at http:// 

www.fca.gov. Under Quick Links, click on 

Bookletters. 

• E-mail: Send us an e-mail at regcomm@fca.gov. 

• FCA Web site: http://www.fca.gov. 

Select ‘‘Public Commenters,’’ then 

‘‘Public Comments,’’ and follow the 

directions for ‘‘Submitting a Comment.’’ 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Gary K. Van Meter, Director, 

Office of Regulatory Policy, Farm Credit 

Administration, 1501 Farm Credit Drive, 

McLean, VA 22102–5090. 

You may review copies of all 

comments we receive at our office in 

McLean, Virginia, or on our Web site at 

http://www.fca.gov. Once you are in the 

Web site, select ‘‘Public Commenters,’’ 

then ‘‘Public Comments,’’ and follow 

the directions for ‘‘Reading Submitted 

Public Comments.’’ We will show your 

comments as submitted, but for 

technical reasons we may omit items 

such as logos and special characters. 

Identifying information that you 

provide, such as phone numbers and 

addresses, will be publicly available. 

However, we will attempt to remove 

e-mail addresses to help reduce Internet 

spam. 

FOR FURTHER INFORMATION CONTACT: 

Timothy T. Nerdahl, Senior Financial 

Analyst, Office of Regulatory Policy, 

Farm Credit Administration, McLean, 

VA 22102–5090, (952) 854–7151 

extension 5035, TTY (952) 854–2239; or 

Jennifer A. Cohn, Senior Counsel, Office 

of General Counsel, Farm Credit 

Administration, McLean, VA 22102– 

5090, (703) 883–4020, TTY (703) 883– 

4020. 

SUPPLEMENTARY INFORMATION: 

I. Objectives 

The objectives of this proposed rule 

are to: 

• Ensure that Farm Credit banks 1

hold sufficient high-quality, readily 

marketable investments to provide 

sufficient liquidity to continue 

operations and pay maturing obligations 

in the event of market disruption; 

• Strengthen the safety and 

soundness of System institutions; 

• Discuss the requirements of section 

939A of the Dodd-Frank Act; 

• Reduce regulatory burden with 

respect to investments that fail to meet 

eligibility criteria after purchase or are 

unsuitable; and 

• Enhance the ability of the System to 

supply credit to agriculture and aquatic 

producers by ensuring adequate 

availability to funds. 

II. Background 

Congress created the System as a 

Government-sponsored enterprise (GSE) 

to provide a permanent, stable, and 

reliable source of credit and related 

services to American agriculture and 

aquatic producers. Farm Credit banks 

obtain funds used by System banks and 

associations to provide credit and 

related services primarily through the 

issuance of System-wide debt 

securities.2 If access to the debt market 

becomes temporarily impeded, Farm 

Credit banks must have enough readily 

available funds to continue operations 

and pay maturing obligations. 

Subpart E of part 615 imposes 

comprehensive requirements regarding 

the investments of System institutions 

(primarily Farm Credit banks).3 Section 

615.5134(a) of FCA regulations requires 

each Farm Credit bank to maintain a 

specified liquidity reserve.4 This 

liquidity reserve may only be funded 

from cash and eligible investments.5

We adopted our last major revisions 

to our investment regulations in 1999 

and amended them in a more limited 

manner in 2005. Since 1999, the 

marketplace pertaining to investments 

has changed significantly. Innovations 

in investment products have led to their 

increasing complexity, and investors 

need to have greater expertise to fully 

understand them. In addition, the 

financial crisis that began in 2007 

resulted in numerous investment 

downgrades and the loss of billions of 

dollars by financial institutions. 

While System banks suffered 

considerably less stress during the crisis 

than many other financial institutions, 

they did experience numerous 

downgrades and some losses on 

individual investments. In 2010, we 

issued a bookletter that provides 

clarification and guidance regarding our 

regulations and expectations with 

respect to the key elements of a robust 

investment asset management 

framework that institutions should 

establish to prudently manage their 

investments in changing markets.6 The 

issuance of this bookletter was an 

interim measure towards strengthening 

our investment regulations. 

In July 2010, the President signed into 

law the Dodd-Frank Act to strengthen 

regulation of the financial industry in 

the wake of the financial crisis that 

unfolded in 2007 and 2008. As 

discussed in greater detail below, 

section 939A of the DFA requires each 

Federal agency to revise all of its 

regulations that refer to or require 

reliance on credit ratings to assess 

creditworthiness of an instrument to 

remove the reference or requirement 

and to substitute other appropriate 

creditworthiness standards. 

We now propose amendments that 

would strengthen our investment 

regulations. In addition, in certain areas, 

including compliance with section 

939A of the DFA, we seek comments but 

propose no specific regulatory revisions. 

In these areas, we will likely have to 

propose revisions before we will be able 

to adopt revisions as final. We will 

consider all comments received in this 

or future rulemakings, as appropriate. 

III. Section-by-Section Description of 

the Proposed Rule 

Following is a section-by-section 

description of the proposed revisions to 

our rules. 

A. Section 615.5131—Definitions 

We propose to amend § 615.5131 to 

add two new definitions to reflect 

clarifications we propose to make to 

§ 615.5140, as discussed below. We 

propose adding a definition for 

Government agency, which we would 

define as the United States Government 

or an agency, instrumentality, or 

corporation of the United States 

Government whose obligations are fully 

and explicitly insured or guaranteed as 

to the timely repayment of principal and 

interest by the full faith and credit of the 

United States Government. We also 

propose adding a definition for 

Government-sponsored agency. We 

would define this term as an agency, 

instrumentality, or corporation 

chartered or established to serve public 

purposes specified by the United States 

Congress but whose obligations are not 

explicitly insured or guaranteed by the 

full faith and credit of the United States 

Government. This definition would 

include GSEs such as the Federal 

National Mortgage Association (Fannie 

Mae) and the Federal Home Loan 

Mortgage Corporation (Freddie Mac), as 

well as Federal agencies, such as the 

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Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 51291 

7FCA has consistently taken this position. See, 

e.g., 70 FR 51587, August 31, 2005; 58 FR 63039, 

November 30, 1993. 

8Under § 615.5134(b), all investments that a bank 

holds for the purpose of meeting the liquidity 

reserve requirement must be free of lien. 

9A System workgroup has recommended the 

establishment of a minimum level of cash and/or 

investments in Treasury securities as part of the 

liquidity reserve requirement of Farm Credit banks. 

FCA expects to propose revisions to § 615.5134, 

governing this liquidity reserve requirement, in an 

upcoming rulemaking. 

10Cash, which is also held for liquidity, also has 

a negative carry, but it is not subject to the 35- 

percent investment limit, and so it does not pose 

the same challenge. 

11This rule would supersede the guidance 

contained in Bookletter BL–064. 

Tennessee Valley Authority, that issue 

obligations that are not explicitly 

guaranteed by the Government of the 

United States’ full faith and credit. 

B. Section 615.5132—Investment 

Purposes 

In 2005, we modified § 615.5132 to 

increase the permissible level of 

investments that Farm Credit banks may 

hold from 30 to 35 percent of total 

outstanding loans. The reason for the 

increase was to provide the banks with 

additional flexibility to meet their 

liquidity needs and accomplish their 

asset/liability management strategies in 

varying economic conditions. At this 

time, we continue to believe that the 

investment maximum of 35 percent of 

total outstanding loans provides the 

banks adequate flexibility to maintain 

their liquidity reserve at an appropriate 

amount. However, as discussed below, 

we solicit public comments on this 

issue. 

In this discussion, we emphasize the 

proper application of a provision of this 

regulation. We also discuss a proposed 

revision and an area where we 

specifically seek the views of 

commenters. 

1. Permissible Investment Purposes 

Section 615.5132 permits each Farm 

Credit bank to hold eligible investments 

for the purposes of maintaining a 

liquidity reserve, managing surplus 

short-term funds, and managing interest 

rate risk. These purposes do not 

authorize Farm Credit banks to 

accumulate investment portfolios for 

arbitrage activities or to engage in 

trading for speculative or primarily 

capital gains purposes.7 Realizing gains 

on sales before investments mature is 

not a regulatory violation as long as the 

profits are incidental to the specified 

permissible investment purposes. Farm 

Credit banks must ensure that their 

internal controls, required under 

§§ 615.5133(e) and 618.8430, ensure 

that eligible investments listed in 

§ 615.5140(a) are limited to those that 

are appropriate under § 615.5132. 

2. Excluding Investments Pledged To 

Meet Margin Requirements for 

Derivative Transactions 

Section 615.5132 permits Farm Credit 

banks to hold eligible investments, for 

specified purposes, in an amount not to 

exceed 35 percent of its total 

outstanding loans. We propose to permit 

banks to exclude investments pledged to 

meet margin requirements for derivative 

transactions (collateral) when 

calculating the 35-percent investment 

limit. We note that investments that are 

pledged as collateral do not count 

toward a Farm Credit bank’s compliance 

with its liquidity reserve requirement.8

Derivatives are used as a hedging tool 

against interest rate risk and liquidity 

risk. Farm Credit banks use derivative 

products as an integral part of their 

interest rate risk management activities 

and as a supplement to the issuance of 

debt securities in the capital markets. 

We recognize that banks are required to 

post collateral to counterparties 

resulting from entering into derivative 

transactions, and we believe banks 

should not be discouraged from 

implementing appropriate risk 

management practices. 

3. Treasury Securities and the 

35-Percent Investment Limit 

Historically, Farm Credit banks have 

invested in instruments that generate 

yield in excess of the cost of funds 

(positive carry). Since the recent 

financial crisis, however, the banks have 

experienced decreased liquidity with 

these instruments at times, and they 

have turned to United States Treasury 

securities because of their high 

liquidity.9 Treasury securities generally 

have yields that are lower than the cost 

of the underlying Farm Credit debt that 

would fund such securities, and this 

negative carry has an adverse impact on 

bank earnings. 

Under our existing 35-percent 

investment limit, holding Treasury 

securities reduces the maximum amount 

of investments that Farm Credit banks 

may hold in other eligible securities. 

Thus, the banks must choose between 

greater liquidity but a negative carry, or 

a positive carry but reduced liquidity.10

Banks would be able to avoid making 

this choice if they were permitted to 

exclude a portion of or all Treasuries or 

to apply a discount to Treasury 

securities when calculating the 35- 

percent limit. 

We currently believe that the 35- 

percent limit continues to provide 

sufficient flexibility for Farm Credit 

banks to maintain adequate liquidity. 

However, we have received a request 

from a System workgroup asking us to 

consider treating Treasury securities as 

cash for purposes of this provision. 

Consequently, we seek comment on 

whether and how to address the 

situation Farm Credit banks face in 

holding Treasury securities. Are Farm 

Credit banks able to purchase sufficient 

Treasury securities to enhance liquidity, 

while remaining within the constraint 

that total investments may not exceed 

35 percent of total outstanding loans? Or 

should the percentage be raised and, if 

so, to what level and why? Should 

Treasuries be excluded from total 

investments when calculating the 

percentage of total investments to total 

loans outstanding? Would it be 

appropriate to exclude a portion of 

Treasury securities from the 

calculation? Would it be appropriate to 

apply a discount to Treasuries? What 

would be the basis for such a 

calculation change? 

C. Section 615.5133—Investment 

Management 

Effective investment management 

requires financial institutions to 

establish policies that include risk 

limits, approved mechanisms for 

identifying, measuring, and reporting 

exposures, and strong corporate 

governance. The recent crisis and its 

lingering effects have re-emphasized the 

importance of sound investment 

management, and we believe that 

strengthened regulation would further 

ensure the safe and sound management 

of investments. Accordingly, we are 

proposing significant changes to 

§ 615.5133, which governs investment 

management.11

In addition, we propose minor 

technical, clarifying, and nonsubstantive language changes to this 

section that we do not specifically 

discuss in this preamble. 

1. Proposed § 615.5133(a)— 

Responsibilities of Board of Directors 

We propose enhancements to the 

responsibilities of each board of 

directors set forth in § 615.5133(a). The 

existing regulation requires the board to 

review its investment policies annually 

and to make any changes that are 

needed. We believe that depending on 

the situation, this review may need to 

occur more than once a year. We would 

continue to require a review at least 

annually but, to reduce unnecessary 

regulatory burden, we propose to permit 

a designated board committee to 

conduct this review and to validate the 

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51292 Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 

sufficiency of the investment policies, 

provided that the board must adopt any 

changes to the policies. 

2. Proposed § 615.5133(b)—Investment 

Policies—General Requirements 

Section 615.5133(b) lists the items 

that a board’s investment policy must 

address, but it currently does not 

include every requirement of 

§ 615.5133. For example, existing 

§ 615.5133(e) requires an institution to 

establish internal controls, and existing 

§ 615.5133(f) requires specified 

securities valuation, but existing 

§ 615.5133(b) does not require these 

items to be addressed in the investment 

policy. Our proposal would require that 

the investment policy address every 

requirement of § 615.5133. This revision 

would clarify our expectations as to the 

appropriate content of the board’s 

policies. 

We would also require that 

investment policies must address the 

means for reporting, and approvals 

needed for, exceptions to established 

policies. Because the investment 

policies are established by the board, we 

believe it is important for the board’s 

policies to address how exceptions to 

those policies will be handled. We 

believe exceptions to a policy should be 

rare, because frequent exceptions call 

into question the adequacy of the 

policy. 

In addition, we propose that 

institutions must document in their 

records or board minutes any analyses 

used in formulating policies or 

amendments to the policies. An 

accurate record of the analysis used to 

formulate investment policies 

documents appropriate governance. It 

also provides a trail for future directors 

and managers to review to fully 

understand how previous boards of 

directors arrived at their decisions and 

why they approved the policy in the 

form they did. 

3. Proposed § 615.5133(c)—Investment 

Policies—Risk Tolerance 

Our proposed changes are intended to 

make the investment policies’ risk 

tolerance discussion more robust. In 

addition to the existing requirements of 

this section, investment policies would 

have to establish concentration limits 

for the various types and sectors of 

eligible investments and for the entire 

investment portfolio. We propose to 

delete the requirement that investment 

policies must establish diversification 

requirements, because the new 

concentration limit requirement would 

necessarily lead to diversification. 

a. Proposed § 615.5133(c)(1)—Credit 

Risk 

Existing § 615.5133(c)(1)(i) provides 

that investment policies must establish 

credit quality standards, limits on 

counterparty risk, and risk 

diversification standards that limit 

concentrations based on a single or 

related counterparty(ies), a geographical 

area, industries, or obligations with 

similar characteristics. We propose to 

clarify that concentration limits be 

based on either a single or related 

counterparty(ies). Further, 

concentration limits must also be based 

on a geographical area, industries or 

sectors, asset classes, or obligations with 

similar characteristics. We believe this 

amendment would ensure that 

diversification is more thoroughly 

considered by System institutions. 

Existing § 615.5133(c)(1)(ii) requires 

investment policies to establish criteria 

for selecting securities firms. It requires 

the board annually to review the criteria 

for selecting securities firms and 

determine whether to continue existing 

relationships. To reduce unnecessary 

regulatory burden, we propose to permit 

a designated committee of the board to 

review the criteria and to determine 

whether to continue existing 

relationships, but the board must 

approve any changes to the criteria and 

any changes to the existing 

relationships. This change would permit 

a designated committee to use its 

technical expertise to assist the board in 

carrying out its responsibilities. 

Existing § 615.5133(c)(1)(iii) requires 

investment policies to establish 

collateral margin requirements on 

repurchase agreements. We propose to 

require institutions to regularly mark 

the collateral to market and ensure 

appropriate controls are maintained 

over collateral held. We believe it is 

prudent for institutions to manage 

potential counterparty risk and to 

establish appropriate counterparty 

margin requirements based on the 

quality of the collateral and the terms of 

the agreement. 

b. Proposed § 615.5133(c)(2)—Market 

Risk 

We propose changes to 

§ 615.5133(c)(2), which relates to market 

risk. Specifically, we propose to link 

this regulation to our stress-testing 

requirements contained in proposed 

§ 615.5133(f)(2), our interest rate risk 

requirements contained in § 615.5135, 

and other policies and guidance. These 

changes clarify our expectations that the 

board consider all aspects of market 

risk. 

4. Proposed § 615.5133(e)—Internal 

Controls 

We propose to modify our internal 

controls requirements in § 615.5133(e). 

In § 615.5133(e)(2), we propose adding 

additional personnel to the list of 

personnel whose duties and supervision 

should be separated from personnel 

who execute investment transactions. 

These additional personnel are those 

who post accounting entries, reconcile 

trade confirmations, and report 

compliance with investment policy. We 

believe this additional separation is a 

best practice that System institutions 

should have in place to ensure controls 

are sufficient and appropriate. 

We also propose a new 

§ 615.5133(e)(4). This provision would 

require each institution to implement an 

effective internal audit program to 

review, at least annually, investment 

controls, processes, and compliance 

with FCA regulations and other 

regulatory guidance. The internal audit 

program would specifically have to 

include a review of the processes used 

for ensuring all investments, at the time 

of purchase, are eligible and suitable for 

purchase under the board’s investment 

policies and for ensuring investments 

continue to meet all applicable 

generally accepted accounting 

principles even if they are no longer 

part of the liquidity portfolio. 

Existing § 618.8430 requires each 

institution’s board to adopt an internal 

control policy that provides direction to 

the institution in establishing effective 

control over, and accountability for, 

operations, programs, and resources. 

Our regulations do not, however, 

discuss the internal audit of the 

investment function specifically. 

However, FCA Bookletter BL–064 

provides guidance on FCA expectations 

in this area. We now propose to 

strengthen this guidance by adding it as 

a regulatory requirement in 

§ 615.5133(e)(4). 

As we stated in FCA Bookletter BL– 

064, under § 618.8430 an institution’s 

board is responsible for ensuring that 

sound systems and controls are in place 

to manage investment risks. Senior 

management is responsible for 

implementing an effective control 

environment to manage risk in an 

institution’s investment portfolio, as 

well as to ensure compliance with 

applicable laws and regulations. 

Internal audit is a critical function that 

ensures appropriate internal controls are 

in place. Accordingly, our proposal 

would require System institutions to 

establish internal controls to ensure that 

an independent review over investment 

practices and controls, including 

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Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 51293 

12See 64 FR 28893, May 28, 1999. 

13 Id. 

specifically the process for determining 

eligibility and suitability, is conducted. 

An institution’s audit plan must 

include a risk assessment, at least 

annually, of the investment function by 

the internal audit department or by an 

outside vendor if the expertise in-house 

does not exist. Moreover, an institution 

must conduct an internal audit of the 

investment function at least annually. 

As we stated in FCA Bookletter BL–064, 

the frequency and scope of review 

should be based on the complexity and 

size of the investment portfolio. In 

addition, auditors should be rotated to 

obtain alternate views of investment 

operations. Outside audits of the 

portfolio should be conducted 

periodically as necessary to ensure an 

objective evaluation of practices and 

controls by qualified auditors. 

5. Proposed § 615.5133(f)—Due 

Diligence To Determine Eligibility, 

Suitability, and Value of Investments 

We propose to add a new 

§ 615.5133(f). This provision would 

cover the due diligence institutions 

must perform to determine eligibility, 

suitability, and value of investments. 

This provision would combine in one 

location the requirements governing 

securities valuation and those governing 

stress testing that are now in existing 

§ 615.5133(f) and § 615.5141, 

respectively. Our proposed revisions 

would make these requirements more 

robust and less burdensome. 

a. Proposed § 615.5133(f)(1)—Eligibility 

and Suitability for Purchase 

In new § 615.5133(f)(1), we propose 

that before an institution purchases an 

investment, it must conduct sufficient 

due diligence to determine whether the 

investment is eligible under § 615.5140 

and suitable for purchase under the 

investment policies of the institution’s 

board. We propose to retain from 

existing § 615.5133(f)(1) the requirement 

that the institution must verify the value 

of the investment (unless it is a new 

issue) with a source that is independent 

of the broker, dealer, counterparty, or 

other intermediary to the transaction. 

We also propose to require that an 

institution’s investment policies must 

fully address the extent of pre-purchase 

analysis that management must perform 

for various classes of investments and 

that the institution must document its 

assessment of eligibility and suitability, 

including the information used in its 

assessment. The provision would permit 

the institution to use all available 

sources, including third party sources, 

to assess the investment. Finally, the 

provision would require that the 

institution’s assessment of each 

investment at the time of purchase must 

at a minimum include an evaluation of 

credit risk, liquidity risk, market risk, 

and interest rate risk, and an assessment 

of the cash flows and the underlying 

collateral of the investment. 

This proposed regulation builds on 

our expectations for institutions to 

conduct proper due diligence, which we 

conveyed in FCA Bookletter BL–064. 

System institutions must conduct due 

diligence prior to purchasing a security. 

The degree of due diligence that an 

institution conducts must be 

commensurate with the complexity of 

the security. The need to evaluate and 

make a decision on a transaction 

quickly does not obviate the due 

diligence requirement. FCA expects that 

institutions must thoroughly understand 

the risks and cash flow characteristics of 

their investments, particularly for 

products that have unusual, leveraged, 

or highly variable cash flows. System 

institutions must identify and measure 

risks prior to acquisition. In general, 

institutions should conduct and 

document due diligence analyses 

separately for each investment security. 

Modeling cash flows and assumptions at 

the time of purchase provides insight 

into the changing risks certain 

investments present. 

We believe that documentation of the 

analysis conducted is a critical 

component for assessing and verifying 

eligibility and suitability. Investment 

policies must require that an adequate 

level of analysis be conducted on the 

various classes of investments 

purchased. Under this proposed 

regulation, System institutions that 

engage in investment activity will need 

to strengthen their due diligence process 

and improve their documentation as to 

why the investment was purchased. 

We expect that institutions will 

evaluate each investment they purchase 

using various sources available to them, 

including third parties if warranted, to 

assess whether an investment meets the 

eligibility requirements. Institutions 

may not, however, rely exclusively on 

third parties to justify the purchase of a 

security. Institutions must always 

conduct their own due diligence, 

because management and the board are 

ultimately responsible for any decisions. 

Moreover, because of the particular 

concerns surrounding the accuracy of 

credit ratings, institutions must be 

especially cautious if they choose to 

consider them. 

b. Proposed § 615.5133(f)(2)—PrePurchase and Quarterly Stress Testing 

We propose moving our investment 

stress-testing requirements into 

§ 615.5133(f)(2), as part of our due 

diligence and security valuation 

requirements, and removing existing 

§ 615.5141 as a stand-alone, stresstesting regulation. We propose this 

change because stress-testing is a key 

component of due diligence. It is used 

to assess the risk presented by an 

investment and the changes in valuation 

that may be experienced from 

movements in interest rates. In addition, 

we propose changes to the substance of 

the stress-testing requirements. 

Existing § 615.5141 requires prepurchase and quarterly interest rate 

stress testing for mortgage securities. It 

provides that mortgage securities are not 

eligible investments unless they pass a 

stress test, and it requires divestiture of 

a mortgage security that no longer 

complies with the stress-testing 

requirements. 

In the preamble to the 1999 final rule, 

in which we adopted the existing stresstesting requirements, we stated that we 

believed stress-testing was an essential 

risk management practice because even 

highly rated mortgage securities may 

expose investors to significant interest 

rate risk.12 We therefore stated that 

‘‘each System institution needs to 

employ appropriate analytical 

techniques and methodologies to 

measure and evaluate interest rate risk 

inherent in mortgage securities. More 

specifically, prudent risk management 

practices require every System 

institution to examine the performance 

of each mortgage security under a wide 

array of possible interest rate 

scenarios.’’ 13

Because of the importance of stress 

testing and the increasing complexity of 

investments, we propose in a new 

§ 615.5133(f)(2) that all investments— 

not just mortgage securities, and 

including Treasury securities—must be 

stress tested before purchase and on a 

quarterly basis. This new requirement 

would enable System institutions to 

gain insight into the price movements of 

all securities they purchase. We 

understand that stress-testing for 

investments that have indexed rates that 

reprice at intervals of 12 months or less 

or have extremely short terms (such as 

Fed Funds and certain commercial 

paper) may be viewed as unnecessary. 

However, we believe that all 

investments must be stress tested to 

build a robust stress-testing 

environment that provides for a 

comprehensive and consistent 

analytical framework from which to 

evaluate the risks in the investment 

portfolio. It is also an important part of 

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51294 Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 

due diligence and the ongoing 

evaluation process. 

Existing § 615.5141 provides two 

stress-testing options. In the first option, 

we set forth a standardized, threepronged stress test that includes an 

average life test, an average life 

sensitivity test, and a price sensitivity 

test. In the second prong, we permit 

institutions to use alternative stress-test 

criteria and methodologies to evaluate 

the price sensitivity of mortgage 

securities. 

We now propose to eliminate the 

standardized stress test. Since we first 

allowed the alternative stress test, we 

believe that every Farm Credit bank that 

invests in mortgage securities has 

moved to the alternative test and that 

none continue to use the standardized 

test. We discuss new stress-testing 

requirements, set forth in 

§ 615.5133(f)(2)(iii), below. 

To reduce regulatory burden, we 

propose in new § 615.5133(f)(2)(i) that 

an institution may purchase, with board 

approval, an investment that exceeds 

the stress-test parameters defined in its 

board’s policies. We believe this 

flexibility is necessary because the 

financial markets continue to be very 

dynamic and a particular investment 

may not meet a board’s parameters but 

may nevertheless provide additional 

liquidity or interest risk protection. 

We propose in new § 615.5133(f)(2)(ii) 

that at the end of each quarter, each 

institution must stress test its entire 

investment portfolio, including a stress 

test of each individual investment, in 

accordance with paragraph (f)(2)(iii), as 

defined in its board policy. An 

investment that exceeds the boarddefined stress parameters would not 

become ineligible and would not need 

to be divested. Rather, the board policy 

defining the stress tests would have to 

specify what actions the institution 

would take if its portfolio (but not an 

individual investment) exceeded the 

quarter-end, stress-test parameters 

defined in the policy, including the 

development of a plan to bring the 

portfolio back into compliance with 

those parameters. 

We believe that stress testing the 

entire investment portfolio at each 

quarter-end will provide significant 

insight into the risks associated with the 

investment portfolio. We also believe 

that requiring the stress testing of 

individual investments on a quarterly 

basis is just a component of 

understanding how each individual 

investment affects the entire portfolio. 

Should an institution’s entire portfolio 

exceed its board’s stress-testing policy 

parameters it would have to develop a 

plan to bring the portfolio back into 

compliance. This plan should specify 

how the institution would bring the 

portfolio back into compliance and what 

timeframes are involved. 

As discussed below, in 

§ 615.5133(g)(2) we propose to require 

an institution to provide immediate 

notification to the board or a designated 

board committee if its stress test for the 

entire portfolio exceeds its board’s 

policy parameters. We believe that a 

portfolio stress test that exceeds board 

parameters discloses a serious situation 

that could threaten the safety and 

soundness of the institution and that 

directors should be notified and a plan 

developed to reduce portfolio risk. 

Proposed § 615.5133(f)(2)(iii) sets 

forth the requirements for pre-purchase 

and quarter-end stress tests. These 

requirements are for the most part 

unchanged from our existing 

requirements in § 615.5141 governing 

the alternative stress test. We discuss 

the differences below. 

Proposed § 615.5133(f)(2)(iii) would 

require that the pre-purchase and 

quarter-end stress tests be defined in a 

board approved policy and include 

defined parameters for the types of 

securities an institution purchases. The 

stress tests would have to be 

comprehensive and appropriate for the 

risk profile of the institution. At a 

minimum, the stress tests would have to 

be able to measure the price sensitivity 

of investments over different interest 

rate/yield curve scenarios. The 

methodology that the institution uses to 

analyze investment securities would 

have to be appropriate for the 

complexity, structure, and cash flows of 

the investments in its portfolio. 

The stress tests would have to enable 

the institution to determine at the time 

of purchase and each subsequent 

quarter-end that its investment 

securities, either individually or on a 

portfolio-wide basis, do not expose its 

capital, earnings, or liquidity to 

excessive risks. Also, the stress tests 

would have to enable the institution to 

evaluate the overall risk in the 

investment portfolio and compare it 

with defined board policy limits. 

Two of the new requirements in this 

proposal—the requirement that all 

securities, not just mortgage securities, 

must be stress tested; and the 

requirement that securities must be 

stress tested on a portfolio-wide basis— 

are discussed above. The other new 

requirement is that stress tests would 

have to enable an institution to 

determine that its investment securities 

do not expose it to excessive liquidity 

risk. We propose this requirement 

because we believe an institution 

should have insight into the amount of 

cash it could obtain through the sale of 

investments, if necessary. 

In conducting its stress tests, an 

institution would have to rely, to the 

maximum extent practicable, on 

verifiable information to support all of 

its assumptions, including prepayment 

and interest rate volatility assumptions, 

when applying its stress tests. An 

institution would have to document the 

basis for all assumptions used to 

evaluate a security and its underlying 

collateral, and it would also have to 

document all subsequent changes in its 

assumptions. 

In this proposal, we specifically seek 

comment on several areas related to 

stress testing. Should FCA retain a 

standardized stress-testing option for 

institutions that do not wish to or do not 

have the capability of defining their 

own stress tests? Given that the DoddFrank Act requires us to eliminate credit 

ratings as a criterion for the eligibility of 

investments, would allowing System 

institutions to develop their own 

standards result in a variety of 

investment portfolios that exhibit 

substantially different risk profiles? 

Could this result in an inappropriate 

amount of risk in some investment 

portfolios? Also, should our regulations 

require stress-testing on all investments 

at the time of purchase? If not, on which 

investments should we require stresstesting, and why? Should institutions be 

required to stress test their individual 

investments and their entire investment 

portfolio on a quarterly basis? Why or 

why not? 

c. Proposed § 615.5133(f)(3)—Ongoing 

Value Determination 

We propose to redesignate existing 

§ 615.5133(f)(2) as § 615.5133(f)(3). We 

propose to revise the last sentence of 

this provision to require an institution 

to evaluate the credit quality and price 

sensitivity of each investment in its 

portfolio and of its whole investment 

portfolio to the change in market 

interest rates. This change would clarify 

the meaning of this provision. We also 

propose to make other non-substantive 

changes to this provision. 

d. Proposed § 615.5133(f)(4)—Presale 

Value Verification 

We propose to redesignate existing 

§ 615.5133(f)(3) as § 615.5133(f)(4) and 

to change the word ‘‘security’’ to 

‘‘investment.’’ 

6. Proposed § 615.5133(g)—Reports to 

the Board of Directors 

We propose revisions to § 615.5133(g), 

which specifies information that 

management must report to the board or 

a board committee each quarter. 

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Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 51295 

14Existing § 615.5135 already requires Farm 

Credit banks to include investments in their interest 

rate shock analysis. Farm Credit banks may wish to 

review an advisory on interest rate risk 

management, issued by certain other agencies in 

January 2010, that discusses stress testing. See, 

Advisory on Interest Rate Risk Management, issued 

by the Board of Governors of the Federal Reserve 

System, the Federal Deposit Insurance Corporation, 

the National Credit Union Administration, the 

Office of the Comptroller of the Currency, the Office 

of Thrift Supervision, and the Federal Financial 

Institutions Examination Council State Liaison 

Committee (January 6, 2010). 

Proposed § 615.5133(g)(1) would retain 

the general quarterly reporting 

requirements but would add to and 

modify them to strengthen the overall 

reporting requirements. Proposed 

§ 615.5133(g)(2) would add a special 

reporting requirement. 

Proposed § 615.5133(g)(1) would 

require management to report to the 

board of directors or a designated board 

committee at least quarterly on the 

following: 

• Plans and strategies for achieving 

the board’s objectives for the investment 

portfolio; 

• Whether the investment portfolio 

effectively achieves the board’s 

objectives; 

• The current composition, quality, 

and liquidity profile of the investment 

portfolio; 

• The performance of each class of 

investments and the entire investment 

portfolio, including all gains and losses 

that the institution incurred during the 

quarter on individual investments that it 

sold before maturity and why they were 

liquidated; 

• Potential risk exposure to changes 

in market interest rates as identified 

through quarterly stress testing and any 

other factors that may affect the value of 

the institution’s investment holdings; 

• How investments affect the 

institution’s capital, earnings, and 

overall financial condition; 

• Any deviations from the board’s 

policies (must be specifically 

identified); and 

• The results of the institution’s 

quarterly stress test. 

We believe that these reporting 

requirements are best practices and are 

items that boards of directors or a 

designated board committee must know 

to exercise proper governance. We also 

believe that the use of the investment 

plan discussed below would be an 

important tool and an effective way to 

report to the board on the requirements 

above. Presenting an investment plan 

and its results to the board or designated 

board committee would provide 

assurances that all required reporting 

takes place. 

Proposed § 615.5133(g)(2) would add 

a special reporting requirement. It 

would require an institution to provide 

immediate notification to its board of 

directors or to a designated board 

committee if its portfolio exceeded the 

quarterly stress-test parameters defined 

in the board policy required by 

proposed § 615.5133(f)(2)(ii). We 

propose this requirement because 

exceeding board policy parameters 

could lead to serious risk exposures for 

the institution. 

7. Investment Plan and Investment 

Oversight Committee 

Although not a regulatory 

requirement, each System institution 

that maintains an investment portfolio 

should develop an investment plan and 

establish a formal investment oversight 

committee. These practices enable 

management to implement the 

investment direction provided by the 

institution’s board. In addition, as 

discussed above under reporting, 

management’s presentation of an 

investment plan to the board or 

designated board committee, along with 

the investment portfolio results, would 

provide assurances that required 

reporting takes place. 

An institution’s senior management 

should develop a sufficiently detailed 

investment plan to appropriately 

execute the board’s approved 

investment strategies and achieve 

business plan goals of the institution. 

The plan should be approved by senior 

management or an appropriate 

management committee. The investment 

plan should help provide for effective 

guidelines and control over the 

investment portfolio. The plan should 

be a working document that can deal 

with changes in market conditions. 

Investment plans should describe: 

• The target portfolio composition 

given the board’s investment policy, 

current market conditions, and 

projected liquidity needs; 

• The rebalancing activities needed to 

achieve the target portfolio; and 

• The performance measures that will 

be used to measure portfolio 

performance. Such measures should 

include target portfolio spread given the 

target portfolio composition and 

anticipated various spreads in relation 

to the institution’s cost of funds. 

To effectively implement the 

investment plan, each institution should 

consider establishing a formal 

investment committee to provide 

additional expertise and to serve as an 

additional control over investment 

management. In the past, the asset/ 

liability management committees, 

which oversee the management of 

investment portfolios in most System 

institutions, have generally provided 

sufficient oversight of these portfolios. 

However, the importance, volume, and 

growing complexity of System 

investments may warrant additional 

expertise in the form of a more 

specialized investment committee. In 

addition to providing additional 

expertise, the investment committee 

would also provide for separation of 

duties between allocation and risk 

strategies and the actual traders. This 

committee could also provide 

appropriate monitoring and governance 

as well as provide structure or 

formalization of many of the informal 

processes. 

D. Section 615.5135—Management of 

Interest Rate Risk 

Interest rate risk management is an 

important part of the overall financial 

management of a Farm Credit bank. The 

potentially adverse effects that interest 

rate risk may have on net interest 

income and the market value of equity 

is of particular importance. 

We believe that strong policy 

direction from a Farm Credit bank’s 

board of directors is essential to an 

effective interest rate risk management 

program. Existing § 615.5135 requires a 

bank’s board to adopt an interest rate 

risk management section of an asset/ 

liability management policy. Our 

proposed revisions to this rule would 

strengthen a bank’s interest rate risk 

management program. The existing 

requirements would remain. In 

addition, the revisions would require 

the interest rate risk management 

section of the asset/liability 

management policy to establish policies 

and procedures for the bank to: 

• Address the purpose and objectives 

of interest rate risk management; 

• Consider the impact of investments 

on interest rate risk based on the results 

of the stress testing required under 

proposed § 615.5133(f)(2); 14

• Describe actions needed to obtain 

its desired risk management objectives; 

• Identify exception parameters and 

approvals needed for any exceptions to 

the requirements of the board’s policies; 

• Describe delegations of authority; 

• Describe reporting requirements, 

including exceptions to limits contained 

in the board’s policies; and 

• Consider the nature and purpose of 

derivative contracts and establish 

counterparty risk thresholds and limits 

for derivatives used to manage interest 

rate risk. 

Boards of directors set policy 

direction for the institution. Bank 

management carries out this direction 

and is responsible for reporting back to 

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51296 Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 

15See 64 FR 28884 (May 28, 1999). 

16 In this context, ‘‘purchase’’ would include an 

acquisition such as a swap of one security in 

exchange for another. It would not include an 

acquisition through a merger or consolidation of 

institutions. This interpretation is consistent with 

our interpretation of the existing rule. 

17 Investments that do not meet our eligibility 

criteria that are acquired through a merger or 

consolidation would also be subject to the 

requirements of § 615.5143(b). 

18We use the term ‘‘Obligations of the United 

States’’ to refer to obligations that are fully and 

explicitly insured or guaranteed by the full faith 

and credit of the United States. Although the 

United States Government placed Fannie Mae and 

Freddie Mac in conservatorship in September 2008 

and has taken certain actions to effectively provide 

protection to the holders of obligations issued and 

guaranteed by the GSEs, these obligations are not 

explicitly insured or guaranteed by the United 

States Government’s full faith and credit. 

the board on its implementation of 

board direction and results. 

Consequently, we would expect that 

many of the above requirements would 

be carried out by management or a 

committee comprised of management 

and directors. 

In addition, our proposal would 

require that management of each Farm 

Credit bank must report at least 

quarterly to its board of directors, or to 

a designated committee of the board, 

describing the nature and level of 

interest rate risk exposure. Any 

deviations from the board’s policy on 

interest rate risk must be specifically 

identified in the report and approved by 

the board or a designated committee of 

the board. 

Finally, we propose several minor 

technical and clarifying amendments, 

such as changing ‘‘shall’’ to ‘‘must’’. 

E. Section 615.5136—Emergencies 

Impeding Normal Access of Farm Credit 

Banks to Capital Markets 

This section provides that an 

emergency shall be deemed to exist 

whenever a financial, economic, 

agricultural, or national defense crisis 

could impede the normal access of Farm 

Credit banks to the capital markets. 

Whenever FCA determines, after 

consultations with the Funding 

Corporation, that such an emergency 

exists, the FCA Board shall, in its sole 

discretion, adopt a resolution that 

increases the amount of eligible 

investments that banks are authorized to 

hold pursuant to § 615.5132, and/or 

modifies or waives the liquidity reserve 

requirement in § 615.5134. 

We propose revisions to provide 

additional flexibility to the resolution 

that the FCA Board may adopt. First, in 

recognition that events such as the 2008 

market turmoil may not allow for the 

deliberation contemplated by this 

regulation, we propose to clarify that the 

Funding Corporation consultation 

should occur only ‘‘to the extent 

practicable.’’ Second, the proposed rule 

would provide that FCA ‘‘may’’, rather 

than ‘‘shall’’, adopt a resolution. Third, 

rather than permitting the resolution to 

increase the authorized amount of 

eligible investments, the proposed rule 

would permit the resolution to modify 

the amount, qualities, and types of 

authorized, eligible investments. 

Finally, we propose to expressly permit 

the resolution to authorize other actions 

as deemed appropriate. 

F. Section 615.5140—Eligible 

Investments 

We last revised our listing of eligible 

investments, at § 615.5140, in 1999.15

Those amendments expanded the list of 

eligible investments and relaxed or 

repealed certain restrictions that had 

previously been in the regulation. As a 

result, those amendments allowed 

System institutions to purchase and 

hold a broader array of high-quality and 

liquid investments. Those revisions 

reflected changes in the financial 

markets and helped fulfill our objective 

of developing a regulatory framework 

that could more readily accommodate 

innovations in financial products and 

analytical tools. 

The recent financial crisis resulted in 

substantial turmoil in the financial 

markets. Overall, System institutions 

weathered this crisis better than many 

other regulated financial institutions. 

We believe this is due in part to the 

limited scope of authorized 

investments. Even so, some System 

institutions did experience losses on 

certain types of investments. 

Based on this experience, we now 

propose amendments that would clarify 

which investments are eligible, 

eliminate certain investments, and 

reduce portfolio limits where 

appropriate. In addition, we ask 

questions about the most effective way 

to comply with section 939A of the 

DFA. As discussed in greater detail 

below, that provision requires each 

Federal agency to revise all regulations 

that refer to or require reliance on credit 

ratings to assess creditworthiness of an 

instrument to remove the reference or 

requirement and to substitute other 

appropriate creditworthiness standards. 

1. Proposed Revisions to § 615.5140(a) 

a. Proposed § 615.5140(a)—Introductory 

Paragraph 

We propose revisions to the language 

in the introductory paragraph of 

§ 615.5140(a). The existing language 

authorizes institutions to hold only the 

eligible investments that are listed and 

prohibits institutions from purchasing 

investments that are not listed. It also 

prohibits them from holding 

investments that were eligible when 

purchased but that subsequently became 

ineligible. 

Like our existing regulation, our 

proposal would permit institutions to 

purchase only those investments that 

satisfy the eligibility criteria in 

§ 615.5140. An investment that does not 

satisfy the eligibility criteria would not 

be eligible for purchase and would be 

subject to the divestiture requirements 

of proposed § 615.5143(a) if it were 

purchased.16

In a change from our existing 

approach, however, eligibility would be 

determined only at the time of purchase. 

An investment that satisfies the 

eligibility criteria at the time of 

purchase but that subsequently failed to 

satisfy the eligibility criteria would not 

become ineligible and would not have 

to be divested. Instead, it would be 

subject to the requirements of proposed 

§ 615.5143(b), which would permit an 

institution to retain the investment 

subject to certain conditions.17 As 

discussed below, in our discussion of 

our proposed amendments to 

§ 615.5143, we believe this change 

would reduce regulatory burden 

without creating safety and soundness 

concerns. 

In addition, existing § 615.5140(a) 

states that all investments must be 

denominated in United States dollars. 

We propose to relocate this language to 

§ 615.5140(b). 

b. Proposed § 615.5140(a)(1) and (a)(2)— 

Obligations of the United States and 

Obligations of Government-Sponsored 

Agencies 

Existing § 615.5140(a)(1) lists 

‘‘Obligations of the United States’’ as an 

eligible asset class. Under that heading 

three items are listed: Treasuries; agency 

securities (except mortgage securities); 

and other obligations fully insured or 

guaranteed by the United States, its 

agencies, instrumentalities, and 

corporations. We believe this listing is 

confusing and does not appropriately 

differentiate among obligors. Although 

the heading reads ‘‘Obligations of the 

United States’’, the second and third 

items are intended to include debt 

securities and other non-mortgage 

obligations of GSEs such as Fannie Mae 

and Freddie Mac, which are not 

obligations of the United States.18

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Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 51297 

19As discussed above, in § 615.5131 we propose 

to define Government agency as ‘‘the United States 

Government or an agency, instrumentality, or 

corporation of the United States Government whose 

obligations are fully and explicitly insured or 

guaranteed as to the timely repayment of principal 

and interest by the full faith and credit of the 

United States.’’ 

20As discussed above, in § 615.5131 we propose 

to define Government-sponsored agency as ‘‘an 

agency, instrumentality, or corporation chartered or 

established to serve public purposes specified by 

the United States Congress but whose obligations 

are not explicitly insured or guaranteed by the full 

faith and credit of the United States Government, 

including but not limited to any Governmentsponsored enterprise.’’ 

21As discussed above, in § 615.5131 we propose 

to define Government agency as ‘‘the United States 

Government or an agency, instrumentality, or 

corporation of the United States Government whose 

obligations are fully and explicitly insured or 

guaranteed as to the timely repayment of principal 

and interest by the full faith and credit of the 

United States.’’ 

Accordingly, we propose to split this 

listing into two categories. We do not 

intend any substantive changes with 

this proposed revision. We intend only 

to clarify the existing language. 

The first listing, under 

§ 615.5140(a)(1), would be headed 

‘‘Obligations of the United States’’, and 

it would include only non-mortgage 

obligations, including but not limited to 

Treasuries, that are fully insured or 

guaranteed by a Government agency 

(which by definition means they are 

backed by the full faith and credit of the 

United States).19 The second listing, 

under § 615.5140(a)(2), would be 

headed ‘‘Obligations of GovernmentSponsored Agencies’’, and it would 

include debt securities and other nonmortgage obligations of GSEs, as well as 

of Federal agencies, such as the 

Tennessee Valley Authority, that issue 

obligations that are not explicitly 

insured or guaranteed by the full faith 

and credit of the United States.20

Proposed § 615.5140(a)(2) would 

permit institutions to purchase 

obligations of Government-sponsored 

agencies only if the obligations are 

senior debt securities. We believe that 

limiting permissible investments in this 

manner helps to ensure that institutions 

maintain only the highest quality 

investments in their portfolios. 

c. Proposed § 615.5140(a)(3)—Municipal 

Securities 

Existing § 615.5140(a)(2) places no 

investment portfolio limits for general 

obligation municipal securities. We 

propose to modify this provision 

(redesignated as § 615.5140(a)(3)) to 

impose a 15-percent investment 

portfolio limit on these securities. We 

propose this limit because we believe 

that a portfolio solely comprised of 

general obligation municipal securities 

would not provide sufficient liquidity in 

the event of a crisis in that particular 

market. We note that this limit is 

consistent with our existing revenue 

bond municipal securities investment 

portfolio limit. 

d. Proposed § 615.5140(a)(4)— 

International and Multilateral 

Development Bank Obligations 

Existing § 615.5140(a)(3) places no 

final maturity limit and no investment 

portfolio limit on international and 

multilateral development bank 

obligations. In redesignated 

§ 615.5140(a)(4), we propose imposing a 

10-year maturity limit and a 15-percent 

investment portfolio limit, to ensure a 

more diversified and liquid portfolio. 

We believe that a portfolio containing 

longer term obligations or comprised of 

an excess of these obligations would not 

provide sufficient liquidity in the event 

of a crisis in that particular market. We 

note that System institutions have 

invested in these obligations only on a 

limited basis. 

e. Proposed § 615.5140(a)(5)—Money 

Market Instruments 

Existing § 615.5140(a)(4) permits 

institutions to invest in repurchase 

agreements that satisfy specified 

conditions. If the counterparty defaults, 

the regulation requires the institution to 

divest non-eligible securities in 

accordance with the divestiture 

requirements of § 615.5143. Under our 

proposal, (redesignated § 615.5140(a)(5)) 

as discussed above, an eligible 

investment could not become ineligible, 

and would not be required to be 

divested. Accordingly, we propose to 

delete this divestiture requirement. 

f. Proposed § 615.5140(a)(6)—Mortgage 

Securities 

Existing § 615.5140(5) requires stress 

testing of all mortgage securities. As 

discussed above, proposed § 615.5133(f) 

would require stress testing on all 

investments held in an institution’s 

portfolio. Accordingly, we propose to 

delete the specific stress-testing 

requirement for mortgage securities 

(which would be listed in redesignated 

§ 615.5140(a)(6)). 

The first category listed in existing 

§ 615.5140(a)(5) is mortgage securities 

that are issued or guaranteed by the 

United States. In redesignated 

§ 615.5140(a)(6), we propose to revise 

this category to refer to mortgage 

securities that are fully guaranteed or 

fully insured by a Government agency.21

This change makes clear that this 

category includes only mortgage 

securities that are fully backed by the 

full faith and credit of the United States. 

If the United States Government issues 

a mortgage security that is not fully 

guaranteed or fully insured by the full 

faith and credit of the United States 

Government, it is not eligible under this 

category. 

The second category listed in existing 

§ 615.5140(a)(5) is Fannie Mae and 

Freddie Mac mortgage securities. As 

discussed above, the United States 

Government placed these two housing 

GSEs in conservatorship in September 

2008, and their future remains 

uncertain. As long as they remain in 

conservatorship, we believe the existing 

50-percent investment portfolio limit is 

appropriate. Accordingly, we propose 

no changes to this category (which 

would be included in redesignated 

§ 615.5140(a)(6)) at this time. Depending 

on what happens to these GSEs in the 

future, a portfolio limit reduction or 

other restriction may become warranted. 

We invite your comments regarding 

revisions you believe we should make to 

this category of investments. 

The third category listed in existing 

§ 615.5140(a)(5) is non-Agency 

securities that comply with 15 U.S.C. 

77d(5) or 15 U.S.C. 78c(a)(41). For the 

purpose of clarification, in redesignated 

§ 615.5140(a)(6), we propose to replace 

the term ‘‘non-Agency’’ with a reference 

to securities that are not fully insured or 

guaranteed by a Government agency, 

Fannie Mae, or Freddie Mac. We intend 

no substantive change with this 

clarification. Furthermore, in this 

preamble we continue the shorthand 

reference to these securities as nonAgency mortgage securities. 

Under proposed § 615.5140(a)(6), a 

position in a non-Agency mortgage 

security would be eligible only if it is 

the senior-most position at the time of 

purchase. The FCA considers a position 

in a non-Agency mortgage security to be 

the senior-most position only if it 

currently meets both of the following 

criteria: 

• No other remaining position in the 

securitization has priority in 

liquidation. Remaining positions that 

are the last to experience losses in the 

event of default and which share those 

losses pro rata meet this criterion. 

• No other remaining position in the 

securitization has a higher priority 

claim to any contractual cash flows. 

Remaining positions that have the first 

priority claim to contractual cash flows 

(including planned amortization 

classes), as well as those that share on 

a pro rata basis a first priority claim to 

cash flows meet this criterion. 

Institutions should be aware that the 

tranche that is the senior-most position 

at the time they are considering 

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51298 Federal Register / Vol. 76, No. 160 / Thursday, August 18, 2011 / Proposed Rules 

22See 76 FR 24090 (April 29, 2011). 

23Future revisions could include changes to the 

portfolio limits for asset-backed securities 

contained in proposed § 615.5140(a)(7), as well as 

to changes to the portfolio limits for non-Agency 

mortgage securities contained in proposed 

§ 615.5140(a)(6). 

24 GICS was developed by Morgan Stanley Capital 

International and Standards and Poor’s. The GICS 

is an industry analysis framework for investment 

research portfolio management and asset allocation. 

The GICS structure consists of 10 sectors, 24 

industry groups, 68 industries, and 154 subindustries. More information can be found at http:// 

www.mscibarra.com/products/indices/gics. 

25Nationally recognized statistical rating 

organization. 

26 In addition, existing § 615.5140(b), which we 

propose to redesignate as § 615.5140(c), provides 

that whenever the obligor or issuer of an eligible 

investment is located outside the United States, the 

host country must maintain the highest sovereign 

rating for political and economic stability by an 

NRSRO. The DFA requires us to replace that 

NRSRO standard with an appropriate substitute. 

The following discussion also applies to that 

provision. 

purchase is not necessarily the same 

tranche that was in the senior-most 

position at the time of issue. Institutions 

should also be careful not to be misled 

by the labeling of tranches as ‘‘super 

senior’’ or ‘‘senior’’ in a prospectus (or 

on market reporting services). 

Institutions may purchase non-Agency 

mortgage-backed securities (MBS) only 

if the securities satisfy the above two 

criteria at the time of purchase. Any 

security that would not satisfy the 

eligibility criteria after purchase because 

of the terms of the contract or because 

of structural issues would not be 

eligible. 

In addition, we propose to reduce the 

investment portfolio limit for nonAgency mortgage securities from 15 to 

10 percent to reduce the exposure in 

MBS that are not fully insured or 

guaranteed by the United States. We 

believe reducing exposure in this area of 

uninsured securities would result in a 

more diversified and liquid portfolio. 

We note that the Office of the 

Comptroller of the Currency, Board of 

Governors of the Federal Reserve 

System, Federal Deposit Insurance 

Corporation, United States Securities 

and Exchange Commission, Federal 

Housing Finance Agency, and 

Department of Housing and Urban 

Development (collectively, the other 

agencies) have proposed a rule to 

implement the credit risk retention 

requirements of section 15G of the 

Securities and Exchange Act of 1934, as 

added by section 941 of the DFA.22 If 

this proposed rule of the other agencies 

is finalized, it could change the risk 

characteristics of investments that 

System institutions invest in. 

Consequently, FCA may consider 

further revisions to portfolio limits at 

that time.23

Finally, we propose to eliminate 

commercial mortgage-backed securities, 

which are included in existing 

§ 615.5140(a)(5), from the list of eligible 

investments. We believe that these 

securities pose undue risk due to the 

nature of the collateral underlying these 

securities. 

g. Proposed § 615.5140(a)(7)—AssetBacked Securities 

Existing § 615.5140(a)(6) authorizes 

investments in asset-backed securities 

with a 20-percent investment portfolio 

limit. In redesignated § 615.5140(a)(7), 

we propose to reduce the investment 

portfolio limit from 20 to 15 percent, 

with no more than 5 percent of the 

investment portfolio in any one type of 

collateral. We propose this change 

because we believe that certain assetbacked securities, such as home equity 

loans and manufactured housing loans, 

present appreciable, albeit manageable, 

risk. We believe this reduction will help 

limit the exposure of System 

institutions in investments such as 

manufactured housing and home equity 

loans that experienced considerable 

stress during the financial crisis. 

h. Proposed § 615.5140(a)(8)—Corporate 

Debt Securities 

Existing § 615.5140(a)(7) authorizes 

investments in corporate debt securities, 

subject to a 20-percent investment 

portfolio limit. The provision also 

prohibits investments in securities that 

are convertible to equity securities. 

In redesignated § 615.5140(a)(8), we 

propose to add a requirement that the 

securities must be senior debt securities 

to be eligible for purchase. We would 

leave the portfolio limit the same, but 

we would create additional 

diversification by requiring that no more 

than 10 percent of the investment 

portfolio be in any one of the 10 

industry sectors as defined by the 

Global Industry Classification Standard 

(GICS).24

i. Proposed § 615.5140(a)(9)— 

Diversified Investment Funds 

We propose to clarify our 

expectations for diversified investment 

funds contained in our existing 

§ 615.5140(a)(8). We believe the term 

‘‘diversified investment funds’’ could 

include closed-end funds, which are 

typically exchange-traded. We propose 

to add language stating that only openend funds are eligible, in order to 

reduce the possibility that investments 

are purchased for potentially 

speculative purposes. 

In addition, the existing rule imposes 

no investment portfolio limitation, as 

long as shares in each investment 

company comprise 10 percent or less of 

an institution’s portfolio. Our proposal 

would impose a 50-percent total 

investment portfolio limit, with no more 

than 10 percent in any single fund. We 

believe this proposal would provide for 

more appropriate diversification across 

an institution’s investment portfolio. 

2. Dodd-Frank Act Compliance 

In July 2010, to strengthen regulation 

of the financial industry in the wake of 

the financial crisis that unfolded in 

2007 and 2008, the President signed 

into law the Dodd-Frank Act. Section 

939A of the DFA requires the following: 

• Each Federal agency must review (i) 

all of its regulations that require the use 

of an assessment of the creditworthiness 

of a security or money market 

instrument, and (ii) any references to or 

requirements in its regulations regarding 

credit ratings. 

• Each Federal agency must modify 

its regulations to remove any reference 

to or requirement of reliance on credit 

ratings and to substitute in the 

regulations such standards of 

creditworthiness as the agency 

determines is appropriate. In making 

this determination, the agency must 

seek to establish, to the extent feasible, 

uniform standards of creditworthiness. 

We have completed our review of 

FCA regulations that impose 

creditworthiness requirements or that 

refer to or require the use of credit 

ratings. Existing § 615.5140(a) is one 

such regulation; it requires minimum 

NRSRO 25 credit ratings for many 

categories of investments—including 

municipal securities, certain money 

market instruments, non-Agency 

mortgage securities, asset-backed 

securities, and corporate debt 

securities—in order for them to be 

eligible. 

There are a number of different ways 

to assess creditworthiness, and we are 

considering which approach or 

combination of approaches would be 

most appropriate in this context. It may 

well be that we would want to propose 

several of these approaches in concert 

with one another. In the discussion 

below, we explore various approaches 

that could be considered for assessing 

creditworthiness as a determinant of 

eligibility for purposes of 

§ 615.5140(a).26

First, our regulation could specify 

financial measurements, benchmark 

indexes, and other measurable criteria 

against which institutions could 

evaluate the creditworthiness of their 

investments. The regulation could 

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specify factors and standards of criteria 

for various classes of investments. 

Institutions would need to ensure that 

these criteria were met in order for an 

investment to be eligible or suitable at 

the time of purchase. Some of the 

factors that could be considered as 

criteria to ensure a high quality, highly 

liquid investment portfolio include: 

• Credit spreads (i.e., whether it is 

possible to demonstrate that a position 

in certain investments is subject to a 

minimal amount of credit risk based on 

the spread between the security’s yield 

and the yield of Treasury or other 

securities, or based on credit default 

swap spreads that reference the 

security); 

• Default statistics (i.e., whether 

providers of credit information relating 

to securities express a view that specific 

securities have a probability of default 

consistent with other securities with a 

minimal amount of credit risk); 

• Inclusion on an index (i.e., whether 

a security, or issuer of the security, is 

commonly included as a component of 

a recognized index of instruments that 

are subject to a minimal amount of 

credit risk); 

• Priorities and enhancements (i.e., 

the extent to which a security includes 

credit enhancement features, along with 

an evaluation of the relative strength of 

the enhancements, such as 

overcollateralization and reserve 

accounts, or has priority under 

applicable bankruptcy or creditors’ 

rights provisions); 

• Price, yield and/or volume (i.e., 

whether the price and yield of a security 

or a credit default swap that references 

the security are consistent with other 

securities that are subject to a minimal 

amount of credit risk and whether the 

price resulted from active trading); and 

• Asset class-specific factors (e.g., in 

the case of structured finance products, 

the risk characteristics of the specific 

underlying collateral). 

Is this approach one that FCA should 

consider, and are there other criteria 

that should be included? Should the 

creditworthiness standard include 

specific standards for probability and 

loss given default? If so, why, and where 

could the Agency source such data to 

derive such probabilities? Also, should 

this vary by asset class and/or type of 

investment? Finally, would it be 

appropriate to combine this approach 

with one or more of the other 

approaches, and if so, which ones, and 

why? 

Second, our regulation could require 

System institutions to develop their 

own internal assessment process for 

evaluating the creditworthiness of 

investments. We believe that the level of 

due diligence needed to validate such a 

system could require significant effort 

on the part of System institutions. In 

addition, the internal evaluation system 

would need to be validated and might 

need to be frequently recalibrated based 

on changes in the marketplace. 

Institutions would need to be able to 

demonstrate to FCA that the probability 

of default characteristics and loss given 

default characteristics are verifiable and 

accurate. Any internal assessment 

would also have to consider an 

investment’s marketability, liquidity, 

and pricing risk for determining 

eligibility and suitability. 

The System has developed a 

standardized 14-point risk rating 

summary that institutions use to classify 

their loan portfolios. Similar criteria 

could possibly be used in the 

assessment of whether an investment is 

eligible or suitable for the portfolio. 

However, additional validation would 

likely be needed to ensure appropriate 

recognition of the critical factors present 

in investments. 

Is this second approach one that we 

should consider? Do System institutions 

have the capability of validating an 

internal assessment system for 

investments, and is it appropriate to 

allow institutions to develop their own 

internal model for assessing 

creditworthiness of investments? If so, 

what standards of creditworthiness 

should be included, and why? If we 

consider an internal model approach, 

what would be the criteria for eligibility, 

and why? Also, should an assessment of 

creditworthiness link directly to a 

bank’s loan rating system and if so, how 

should differences in classifications 

pertaining to eligibility be handled? 

Finally, would it be appropriate to 

combine this approach with one or more 

of the other approaches and, if so, 

which ones, and why? 

Third, FCA could develop regulations 

that would require institutions to use 

third party assessments to assess 

creditworthiness. Organizations other 

than NRSROs may have the capability to 

evaluate creditworthiness, and this 

evaluation could be considered in an 

institution’s eligibility and suitability 

assessment. We also believe that the 

DFA does not prohibit System 

institutions from looking to the NRSROs 

as a tool for assessing creditworthiness. 

Institutions that do so, however, should 

evaluate the quality of third party 

assessments by considering whether 

issuers or investors pay the rating fees. 

Moreover, as we have seen in the recent 

crisis, reliance on third party analysis 

can be problematic and cannot be used 

in isolation. Accordingly, if we were to 

require this approach, it would likely be 

in concert with one or more of the other 

approaches. 

Is this third approach one that we 

should consider? What reliable third 

party sources exist? Would it be 

appropriate to combine this approach 

with one or more of the other 

approaches and if so, which ones, and 

why? 

Fourth, FCA could develop a set of 

clearly defined criteria from which we 

would create a scale that ranks 

creditworthiness. We would then 

require System institutions to conduct 

due diligence to ensure that an 

investment they purchase actually 

complies with the criteria. The criteria 

could be as follows: 

Highest Standard—Obligations must 

be of the highest quality with minimal 

credit risk. Issuers must have an 

extremely strong capacity to meet its 

long-term financial obligations and a 

superior ability to repay short-term debt 

obligations. 

High Standard—Obligations must be 

of a high quality and subject to very low 

credit risk. Issuers must have a very 

strong capacity to meet its long-term 

financial obligations and a strong ability 

to repay short-term debt obligations. 

We recognize that these standards 

may be viewed differently by different 

System institutions. This approach 

would require significant due diligence 

and controls in place to ensure 

consistency. It could also result in one 

institution determining an investment is 

eligible while another may determine an 

investment is not eligible at the time of 

purchase. 

Is this fourth approach one that we 

should consider and, if so, what 

definitional criteria should be used? 

Would it be appropriate to combine this 

approach with one or more of the other 

approaches and, if so, which ones, and 

why? 

In considering the requirements of the 

Dodd-Frank Act and the reasons for its 

enactment, do the above approaches 

allow for too much subjectivity and 

inconsistency? Alternatively, is there an 

approach that would allow for objective 

criteria that would lead to consistency 

in assessing eligibility? We are also 

considering how difficult and costly in 

practice any of the potential approaches 

or combination of approaches would be. 

In addition, we are considering whether 

there are other approaches to assessing 

creditworthiness that would be more 

appropriate. Finally, as a related matter, 

we are interested in what specific 

methods and standards an institution 

should be required to apply to 

appropriately assess the political and 

economic stability of a foreign country 

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27See 64 FR 28885–28886 (May 28, 1999). 

28 Id. 

that hosts the obligor or issuer of an 

eligible investment. 

3. Changes to Remainder of § 615.5140 

As discussed above, we propose to 

relocate to § 615.5140(b) the 

requirement, currently contained in the 

introductory paragraph of § 615.5140(a), 

that all investments must be 

denominated in United States dollars. 

We propose to delete our existing 

§ 615.5140(c), which requires that all 

eligible investments, except money 

market instruments, must be 

marketable. We expect that in an 

upcoming rulemaking, we will propose 

to include that requirement in 

§ 615.5134. 

We propose to reduce to 15 percent 

the 20-percent obligor limit contained in 

our existing § 615.5140(d)(1). We 

believe this reduction is appropriate 

because it helps to ensure 

diversification among obligors. 

We also propose to clarify, consistent 

with the amendments to terminology 

that we propose in § 615.5140(a) and (b), 

that the obligor limit does not apply to 

obligations that are issued or guaranteed 

as to interest and principal by 

Government agencies or Governmentsponsored agencies (rather than to 

obligations that are issued or guaranteed 

as to interest and principal by the 

United States, its agencies, 

instrumentalities, or corporations). We 

intend no substantive change with this 

clarification. 

Obligations that are not fully insured 

or fully guaranteed by a Government 

agency or Government-sponsored 

agency present relatively greater risk 

than do obligations that are so insured 

or guaranteed. We also believe that 

money market instruments generally 

present more limited risk. We seek 

comment on whether an overall 

combined portfolio limit—including all 

obligations except for money market 

instruments and those fully insured or 

fully guaranteed by Government 

agencies and Government-sponsored 

agencies—would be appropriate. Should 

we implement such a limit and, if so, 

what should the limit be? In addition, 

in light of the concentration that can 

occur in the housing sector, should we 

consider implementing a housing sector 

limit? Why or why not? 

G. Section 615.5141—Stress Tests for 

Mortgage Securities 

Because we propose to relocate our 

stress-testing requirements to 

§ 615.5133(f), we also propose to remove 

this stand-alone, stress-testing section 

from our regulations. 

H. Section 615.5142—Association 

Investments 

Section 615.5142 implements sections 

2.2(10) and 2.12(18) of the Act, which 

require each funding bank to supervise 

and approve the investment activities of 

its affiliated associations. Section 

615.5142 authorizes an association to 

hold eligible investments, listed in 

§ 615.5140, with the approval of its 

funding bank, for the purposes of 

reducing interest rate risk and managing 

surplus short-term funds. Each bank 

must review annually the investment 

portfolio of every association that it 

funds. 

Although funding banks are required 

to supervise and approve the investment 

activities of an association, when we 

adopted this regulation in 1999, we 

emphasized that bank oversight does 

not absolve an association’s board and 

managers of their fiduciary duties to 

manage investments in a safe and sound 

manner. We stated that the fiduciary 

responsibilities of association boards 

obligate them to develop appropriate 

investment management policies and 

practices to manage the risks associated 

with investment activities. We also 

stated that each association’s investment 

managers must fully understand the 

risks of its investments and make 

independent and objective evaluations 

of investments prior to purchase.27

In addition, we emphasized that each 

association with a nonagricultural 

investment portfolio is required to 

develop an investment policy that is 

based on its unique characteristics and 

that is commensurate with the nature of 

its investment activities and portfolio. 

An association must comply with all the 

requirements in § 615.5133 if the level 

or type of its investments could expose 

its capital to material loss.28

This guidance is still valid today. 

However, we believe additional 

clarification and a regulatory revision 

are appropriate. 

As a point of clarification, although 

§ 615.5142 permits association 

investments for the purpose of, in 

pertinent part, reducing interest rate 

risk, the interest rate risk of most 

associations is managed by their 

respective funding banks. Accordingly, 

interest rate risk at the association level 

is generally minimized although not 

completely eliminated. The use of 

investments for reducing interest rate 

risk should be commensurate with the 

actual interest rate risk exposure of the 

association. Furthermore, associations 

that engage in investment activities 

must ensure that their investments do 

not increase interest rate risk. 

Section 615.5142 also permits 

associations to invest surplus short-term 

funds. We are concerned that an 

association could draw on its line of 

credit with its funding bank to obtain 

‘‘surplus’’ short-term funds that it 

would invest in an investment with a 

longer term or repricing characteristics 

than the term and repricing 

characteristics of the funding. Funding 

a longer term investment with shortterm funds creates the potential for 

interest rate risk. Because of this 

potential risk, associations must 

carefully manage their investments of 

surplus short-term funds. 

Accordingly, we propose to add 

paragraph (b) to § 615.5142. Paragraph 

(b) would require that before an 

association purchases an eligible 

investment for the purpose of managing 

surplus short-term funds, it must ensure 

that the investment’s repricing and 

maturity characteristics match the 

characteristics of the surplus short-term 

funds to be invested. 

In addition, although we do not 

propose this as a requirement at this 

time, we believe that in order for an 

investment to be made for the purpose 

of managing surplus ‘‘short-term’’ funds, 

the funds generally should be invested 

in instruments that are ‘‘overnight’’ or 

that have maturities of 30 days or less. 

We seek comment on whether we 

should define surplus short-term funds 

and if so how. Further, is our belief that 

surplus short-term funds should only be 

invested in overnight investments or in 

investments with maturities of 30 days 

or less appropriate? Lastly, is our 

proposed limitation on the permissible 

characteristics of investments purchased 

for the purpose of managing surplus 

short-term funds appropriate for 

associations, or does it unreasonably 

restrict an association’s ability to 

properly hold and manage investments? 

I. Section 615.5143—Management of 

Ineligible and Unsuitable Investments 

Existing § 615.5143 requires an 

institution to dispose of an investment 

that is ineligible (under the § 615.5140 

criteria) within 6 months unless we 

approve, in writing, a plan that 

authorizes the institution to divest the 

instrument over a longer period of time. 

An acceptable divestiture plan must 

require the institution to dispose of the 

ineligible investment as quickly as 

possible without substantial financial 

loss. Until the institution actually 

disposes of the ineligible investment, 

the institution’s investment portfolio 

managers must report on specified 

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29As discussed elsewhere in this preamble, 

section 939A of the Dodd-Frank Act requires us to 

remove credit ratings from our eligibility criteria 

and to substitute other appropriate standards of 

creditworthiness. We are currently asking questions 

about how best to develop appropriate 

creditworthiness standards to include in our 

eligibility criteria in § 615.5140. Once we have 

revised our eligibility criteria, a credit-rating 

downgrade would no longer cause an investment to 

fail to satisfy the criteria, but an inability to meet 

the new creditworthiness standards would cause an 

investment to fail to satisfy the criteria. 

30 In this context, ‘‘purchase’’ would include an 

acquisition such as a swap of one ineligible security 

for another. It would not include an acquisition 

through a merger or consolidation of institutions. 

Investments that do not meet our eligibility criteria 

that are acquired through a merger or consolidation 

would be subject to the requirements of 

§ 615.5143(b). 

matters to the board of directors at least 

quarterly. 

During the financial crisis of the past 

few years, we have received numerous 

divestiture plans from System 

institutions seeking our permission to 

continue to retain ineligible 

investments. Nearly all of these plans 

have involved investments that have 

become ineligible due to credit ratings 

downgrades.29 Typically, the analyses 

in the divestiture plans have indicated 

that holding the instruments until 

maturity or until market conditions 

improve would minimize losses, 

compared with incurring a substantial 

loss with a sale in the then-current 

market. Moreover, the investments have 

not materially affected the financial 

capacity of the institution. Accordingly, 

we have approved all investment plans 

that we have received in at least the last 

5 years. 

The automatic 6-month divestiture 

requirement, with FCA approval needed 

for a longer divestiture period, has 

proven to be inefficient and 

unnecessary. The existing regulation 

requires institutions to expend time and 

effort to develop a divestiture plan, 

requires FCA staff to expend time and 

effort reviewing the plan and 

developing a recommendation, and 

requires the FCA Board to expend time 

and effort determining whether to 

approve the plan. 

Accordingly, to reduce the regulatory 

burden on System institutions and to 

improve efficiency, proposed 

§ 615.5143(b) would permit an 

institution to retain an investment that 

no longer satisfies the eligibility criteria 

set forth in § 615.5140 (that satisfied the 

criteria when purchased), without the 

need for FCA approval, subject to 

specified requirements that are 

summarized below. 

Section 615.5143(b) would also 

permit an institution to retain an 

investment that satisfies the § 615.5140 

eligibility criteria but that is not suitable 

because it does not satisfy the risk 

tolerance established in the institution’s 

board policy pursuant to § 615.5133(c), 

subject to the same specified 

requirements. 

The specified requirements that 

would have to be satisfied in order to 

retain an investment that no longer 

satisfies the § 615.5140 eligibility 

criteria or that is unsuitable are as 

follows: 

1. The institution must notify FCA 

promptly in writing upon determining 

that the investment no longer satisfies 

the § 615.5140 eligibility criteria or is 

unsuitable; 

2. The investment must not be used 

to fund the liquidity reserve 

requirement in § 615.5134; 

3. The institution must include the 

investment in the § 615.5132 investment 

portfolio limit; 

4. The institution must include the 

investment as collateral under 

§ 615.5050 and net collateral under 

§ 615.5301(c) at the lower of cost or 

market value; and 

5. The institution must develop a plan 

to reduce risk arising from the 

investment. 

The first requirement, regarding FCA 

notification, is necessary so that we can 

evaluate whether the institution is 

responding appropriately to the 

situation. The second and fourth 

requirements, regarding exclusion from 

the liquidity reserve and inclusion in 

collateral and net collateral, are 

warranted by safety and soundness 

concerns. The third condition, regarding 

inclusion in the investment portfolio 

limit under § 615.5132, is simply an 

express statement that we find no basis 

to exclude these investments from that 

limit. And the final requirement, 

regarding the development of a risk 

reduction plan, is necessary for safety 

and soundness purposes. 

Proposed § 615.5143(a) provides that 

an investment that does not satisfy the 

§ 615.5140 eligibility criteria at the time 

of purchase is ineligible. Institutions 

must not purchase ineligible 

investments. An institution that 

purchases an ineligible investment must 

notify us promptly, in writing, and must 

divest of the investment no later than 60 

calendar days after determining that the 

investment is ineligible unless we 

approve, in writing, a plan that 

authorizes divestiture over a longer 

period of time.30

Although it is not stated in the 

regulation, we clarify here that an 

acceptable divestiture plan must require 

an institution to dispose of the 

investment as quickly as possible 

without substantial financial loss. The 

plan must also contain sufficient 

analysis to support continued retention 

of the investment, including its impact 

on the institution’s capital, earnings, 

liquidity, and collateral position. Our 

decision will not be based solely on 

financial loss. 

Until the institution divests of the 

investment: 

1. It must not be used to fund the 

liquidity reserve requirement in 

§ 615.5134; 

2. It must be included in the 

§ 615.5132 investment portfolio limit; 

and 

3. It must not be included as collateral 

under § 615.5050 or net collateral under 

§ 615.5301(c). 

We believe each institution should 

exercise sufficient due diligence to 

ensure it does not purchase ineligible 

investments. Such a purchase would 

indicate weaknesses in an institution’s 

internal controls and due diligence, and 

the institution should expect greater 

examination scrutiny if this occurs. We 

expect such a purchase to be extremely 

rare. 

Proposed § 615.5143(c) would require 

each institution to report to its board at 

least quarterly on the following: 

1. The status and performance of each 

investment that is ineligible; was 

eligible when purchased but now does 

not meet the eligibility criteria; or is 

unsuitable because it does not fit the 

institution’s risk tolerance; 

2. The impact that the investments 

described above may have on the 

institution’s capital, earnings, liquidity, 

and collateral position; and 

3. The terms and status of any 

required divestiture plan or risk 

reduction plan. 

This reporting allows the institution’s 

board to exercise appropriate oversight 

over investments that are ineligible, 

unsuitable, or otherwise problematic. 

Finally, proposed § 615.5143(d) 

would reserve FCA’s authority to 

require an institution to divest of any 

investment at any time for safety and 

soundness purposes. In using this 

authority, the FCA would consider the 

expected loss on the transaction (or 

transactions) and the impact on the 

institution’s financial condition and 

performance. Because the proposed rule 

would not require divestiture of any 

investment that was eligible when 

purchased, FCA must reserve the 

authority to require divestiture of 

investments when necessary. 

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31 Institutions remain subject to the stress-testing 

expectations we set forth in our Informational 

Memorandum dated March 4, 2010. These 

expectations apply to all sources of risk to an 

institution’s balance sheet, including but not 

limited to loans and investments. 

32As discussed above, we propose to move the 

investment stress-testing requirements from 

§ 615.5141 to § 615.5133(f). 

J. Section 615.5174—Farmer Mac 

Securities 

We propose changes to § 615.5174(d), 

which governs stress testing of Farmer 

Mac securities, which Farm Credit 

banks, associations, and service 

corporations are permitted to purchase 

and hold for the purposes of managing 

credit and interest rate risk and 

furthering their mission to finance 

agriculture. Existing § 615.5174(d) 

requires institutions to perform stress 

tests on Farmer Mac securities in 

accordance with the requirements of 

§ 615.5141. It also requires institutions 

to divest Farmer Mac securities that fail 

a stress test, as required by § 615.5143. 

Institutions often participate existing 

mortgage loans to Farmer Mac in 

exchange for mortgage-backed securities 

guaranteed by Farmer Mac. These 

securities are, in essence, loans that 

have had the credit risk transferred to 

Farmer Mac. The loans were not subject 

to the stress-testing requirements 

applicable to investments, and it does 

not seem reasonable to impose those 

stress-testing requirements on the 

securities with which the loans were 

exchanged. Accordingly, we propose to 

remove the requirement that a System 

institution must subject Farmer Mac 

securities backed by loans that the 

institution originated to the stress 

testing applicable to investments.31 If a 

System institution purchases a Farmer 

Mac security from another System 

institution or from outside the System, 

however, the security would remain 

subject to the stress testing applicable to 

investments.32

In addition, because other 

investments would no longer have to be 

divested if they fail a stress test, we 

propose to remove this requirement for 

Farmer Mac securities as well. 

We also propose to add a definition of 

the term ‘‘you’’ in a new § 615.5174(e), 

to clarify that the regulation applies to 

Farm Credit banks, associations, and 

service corporations. 

Finally, throughout § 615.5174 we 

propose conforming changes to 

references to regulations we are 

proposing to revise, to ensure the 

references continue to refer to the 

appropriate regulatory provisions. 

IV. Regulatory Flexibility Act 

Pursuant to section 605(b) of the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.), the FCA hereby certifies that the 

proposed rule will not have a significant 

economic impact on a substantial 

number of small entities. Each of the 

banks in the System, considered 

together with its affiliated associations, 

has assets and annual income in excess 

of the amounts that would qualify them 

as small entities. Therefore, System 

institutions are not ‘‘small entities’’ as 

defined in the Regulatory Flexibility 

Act. 

List of Subjects in 12 CFR Part 615 

Accounting, Agriculture, Banks, 

banking, Government securities, 

Investments, Rural areas. 

For the reasons stated in the 

preamble, part 615 of chapter VI, title 12 

of the Code of Federal Regulations is 

proposed to be amended as follows: 

PART 615—FUNDING AND FISCAL 

AFFAIRS, LOAN POLICIES AND 

OPERATIONS, AND FUNDING 

OPERATIONS 

1. The authority citation for part 615 

is revised to read as follows: 

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 

2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 

4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 

8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the 

Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 

2019, 2020, 2073, 2074, 2075, 2076, 2093, 

2122, 2128, 2132, 2146, 2154, 2154a, 2160, 

2202b, 2211, 2243, 2252, 2278b, 2278b–6, 

2279aa, 2279aa–3, 2279aa–4, 2279aa–6, 

2279aa–7, 2279aa–8, 2279aa–10, 2279aa–12); 

sec. 301(a) of Pub. L. 100–233, 101 Stat. 1568, 

1608; sec. 939A of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, 

Pub. L. 111–203, 124 Stat 1326, 1887 (15 

U.S.C. 78o–7 note) (July 21, 2010). 

Subpart E—Investment Management 

2. Section 615.5131 is amended by: 

a. Removing designations for 

paragraphs (a) through (l); and 

b. Adding alphabetically two new 

definitions to read as follows: 

§ 615.5131 Definitions. 

* * * * * 

Government agency means the United 

States Government or an agency, 

instrumentality, or corporation of the 

United States Government whose 

obligations are fully and explicitly 

insured or guaranteed as to the timely 

repayment of principal and interest by 

the full faith and credit of the United 

States Government. 

Government-sponsored agency means 

an agency, instrumentality, or 

corporation chartered or established to 

serve public purposes specified by the 

United States Congress but whose 

obligations are not explicitly insured or 

guaranteed by the full faith and credit 

of the United States Government, 

including but not limited to any 

Government-sponsored enterprise. 

* * * * * 

3. Section 615.5132 is amended by 

adding a new sentence at the end to 

read as follows: 

§ 615.5132 Investment purposes. 

* * * Eligible investments listed 

under § 615.5140 that are pledged by a 

Farm Credit bank to meet margin 

requirements for derivative transactions 

may be excluded when calculating the 

amount of eligible investments held by 

the Farm Credit bank pursuant to this 

section. 

4. Revise §§ 615.5133 to read as 

follows: 

§ 615.5133 Investment management. 

(a) Responsibilities of board of 

directors. Your board of directors must 

adopt written policies for managing 

your investment activities. Your board 

must also ensure that management 

complies with these policies and that 

appropriate internal controls are in 

place to prevent loss. At least annually, 

the board, or a designated committee of 

the board, must review and 

affirmatively validate the sufficiency of 

these investment policies. Any changes 

to the policies must be adopted by the 

board. 

(b) Investment policies—general 

requirements. Your board’s written 

investment policies must address the 

purposes and objectives of investments; 

risk tolerance; delegations of authority; 

internal controls; due diligence to 

determine eligibility, suitability, and the 

value of investments; and reporting 

requirements. Furthermore, your 

investment policies must address the 

means for reporting, and approvals 

needed for, exceptions to established 

policies. Investment policies must be 

sufficiently detailed, consistent with, 

and appropriate for the amounts, types, 

and risk characteristics of your 

investments. You must document in 

your records or board minutes any 

analyses used in formulating your 

policies or amendments to the policies. 

(c) Investment policies—risk 

tolerance. Your investment policies 

must establish risk and concentration 

limits for the various types, classes, and 

sectors of eligible investments and for 

the entire investment portfolio. These 

policies must ensure that you maintain 

appropriate and prudent diversification 

of your investment portfolio. Risk limits 

must be based on your institutional 

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objectives, capital position, and risk 

tolerance. Your policies must identify 

the types and quantity of investments 

that you will hold to achieve your 

objectives and control credit, market, 

liquidity, and operational risks. Each 

association or service corporation that 

holds significant investments and each 

bank must establish risk limits in its 

investment policies for the following 

four types of risk. 

(1) Credit risk. Investment policies 

must establish: 

(i) Credit quality standards, limits on 

counterparty risk, and risk 

diversification standards that limit 

concentrations as follows. 

Concentration limits must be based on 

a single or related counterparty(ies). 

Concentration limits must also be based 

on a geographical area, industries or 

sectors, asset classes, or obligations with 

similar characteristics. 

(ii) Criteria for selecting brokers, 

dealers, and investment bankers 

(collectively, securities firms). You must 

buy and sell eligible investments with 

more than one securities firm. As part 

of your review of your investment 

policies required under paragraph (a) of 

this section, your board of directors, or 

a designated committee of the board, 

must review the criteria for selecting 

securities firms. Any changes to the 

criteria must be approved by the board. 

Also, as part of your review required 

under paragraph (a) of this section, the 

board, or a designated committee of the 

board, must review your existing 

relationships with securities firms and 

determine whether to continue your 

relationships with them. Any changes to 

the existing relationships with securities 

firms must be approved by the board. 

(iii) Collateral margin requirements 

on repurchase agreements. You must 

regularly mark the collateral to market 

and ensure appropriate controls are 

maintained over collateral held. 

(2) Market risk. Investment policies 

must set market risk limits for specific 

types of investments and for the 

investment portfolio. Your board of 

directors must establish market risk 

limits in accordance with these 

regulations (including, but not limited 

to, § 615.5135 and paragraph (f)(2) of 

this section) and our other policies and 

guidance. 

(3) Liquidity risk. Investment policies 

must describe the liquidity 

characteristics of eligible investments 

that you will hold to meet your liquidity 

needs and institutional objectives. 

(4) Operational risk. Investment 

policies must address operational risks, 

including delegations of authority and 

internal controls in accordance with 

paragraphs (d) and (e) of this section. 

(d) Delegation of authority. All 

delegations of authority to specified 

personnel or committees must state the 

extent of management’s authority and 

responsibilities for investments. 

(e) Internal controls. You must: 

(1) Establish appropriate internal 

controls to detect and prevent loss, 

fraud, embezzlement, conflicts of 

interest, and unauthorized investments. 

(2) Establish and maintain a 

separation of duties and supervision 

between personnel who execute 

investment transactions and personnel 

who post accounting entries, reconcile 

trade confirmations, report compliance 

with investment policy, and approve, 

revalue, and oversee investments. 

(3) Maintain management information 

systems that are appropriate for the 

level and complexity of your investment 

activities. 

(4) Implement an effective internal 

audit program to review, at least 

annually, your investment controls, 

processes, and compliance with FCA 

regulations and other regulatory 

guidance. Your internal audit program 

must specifically include a review of 

your process for ensuring all 

investments, at the time of purchase, are 

eligible and suitable for purchase under 

your board’s investment policies. 

(f) Due diligence to determine 

eligibility, suitability, and value of 

investments. 

(1) Eligibility and suitability for 

purchase. Before you purchase an 

investment, you must conduct sufficient 

due diligence to determine whether it is 

eligible under § 615.5140 and suitable 

for purchase under your board’s 

investment policies. You must verify the 

value of the investment (unless it is a 

new issue) with a source that is 

independent of the broker, dealer, 

counterparty or other intermediary to 

the transaction. Your investment 

policies must fully address the extent of 

pre-purchase analysis that management 

must perform for various classes of 

investments. You must document your 

assessment of eligibility and suitability, 

including the information used in your 

assessment. You may use all sources 

available to you, including third party 

sources, to assess the investment. Your 

assessment of each investment at the 

time of purchase must at a minimum 

include an evaluation of credit risk, 

liquidity risk, market risk, and interest 

rate risk, and an assessment of the cash 

flows and the underlying collateral of 

the investment. 

(2) Pre-purchase and quarterly stress 

testing. 

(i) Prior to purchasing an investment, 

you must stress test it, in accordance 

with paragraph (f)(2)(iii) of this section, 

as defined in your board policy. Your 

board must approve the purchase of any 

investment that exceeds the stress-test 

parameters defined in your board 

policy. 

(ii) On a quarter-end basis, you must 

stress test your entire investment 

portfolio, including a stress test of each 

individual investment, in accordance 

with paragraph (f)(2)(iii) of this section, 

as defined in your board policy. The 

policy defining the stress tests must 

specify what actions you will take if 

your portfolio exceeds the quarter-end, 

stress-test parameters defined in the 

board policy, and, at a minimum must 

include the development of a plan to 

bring your portfolio back into 

compliance with those parameters. 

(iii) Your pre-purchase and quarterend stress tests must be defined in a 

board approved policy and must 

include defined parameters for the types 

of securities you purchase. The stress 

tests must be comprehensive and 

appropriate for the risk profile of your 

institution. At a minimum, the stress 

tests must be able to measure the price 

sensitivity of investments over different 

interest rate/yield curve scenarios. The 

methodology that you use to analyze 

investment securities must be 

appropriate for the complexity, 

structure, and cash flows of the 

investments in your portfolio. The stress 

tests must enable you to determine at 

the time of purchase and each 

subsequent quarter that your investment 

securities, either individually or on a 

portfolio-wide basis, do not expose your 

capital, earnings, or liquidity to 

excessive risks. Your stress tests must 

enable you to evaluate the overall risk 

in the investment portfolio compared to 

your defined board policy limits. You 

must rely to the maximum extent 

practicable on verifiable information to 

support all your assumptions, including 

prepayment and interest rate volatility 

assumptions, when you apply your 

stress tests. You must document the 

basis for all assumptions that you use to 

evaluate the security and its underlying 

collateral. You must also document all 

subsequent changes in your 

assumptions. 

(3) Ongoing value determination. At 

least monthly, you must determine the 

fair market value of each investment in 

your portfolio and the fair market value 

of your whole investment portfolio. In 

doing so you must also evaluate the 

credit quality and price sensitivity to 

the change in market interest rates of 

each investment in your portfolio and 

your whole investment portfolio. 

(4) Presale value verification. Before 

you sell an investment, you must verify 

its value with a source that is 

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independent of the broker, dealer, 

counterparty, or other intermediary to 

the transaction. 

(g) Reports to the board of directors. 

(1) Quarterly. At least quarterly, your 

management must report on the 

following to your board of directors or 

a designated board committee: 

(i) Plans and strategies for achieving 

the board’s objectives for the investment 

portfolio; 

(ii) Whether the investment portfolio 

effectively achieves the board’s 

objectives; 

(iii) The current composition, quality, 

and liquidity profile of the investment 

portfolio; 

(iv) The performance of each class of 

investments and the entire investment 

portfolio, including all gains and losses 

that you incurred during the quarter on 

individual investments that you sold 

before maturity and why they were 

liquidated; 

(v) Potential risk exposure to changes 

in market interest rates as identified 

through quarterly stress testing and any 

other factors that may affect the value of 

your investment holdings; 

(vi) How investments affect your 

capital, earnings, and overall financial 

condition; 

(vii) Any deviations from the board’s 

policies (must be specifically 

identified); and 

(viii) The results of your quarterly 

stress test. 

(2) Special. You must provide 

immediate notification to your board of 

directors or to a designated board 

committee if your portfolio exceeds the 

quarterly stress test parameters defined 

in the board policy required by 

paragraph (f)(2)(ii) of this section. 

5. Revise §§ 615.5135, 615.5136 and 

615.5140 to read as follows: 

§ 615.5135 Management of interest rate 

risk. 

(a) The board of directors of each 

Farm Credit Bank, bank for 

cooperatives, and agricultural credit 

bank must develop and implement an 

interest rate risk management program 

as set forth in subpart G of this part. 

(b) The board of directors of each 

Farm Credit Bank, bank for 

cooperatives, and agricultural credit 

bank must adopt an interest rate risk 

management section of an asset/liability 

management policy that establishes 

interest rate risk exposure limits as well 

as the criteria to determine compliance 

with these limits. At a minimum, the 

interest rate risk management section 

must establish policies and procedures 

for the bank to: 

(1) Address the purpose and 

objectives of interest rate risk 

management; 

(2) Identify and analyze the causes of 

risks within its existing balance sheet 

structure; 

(3) Measure the potential impact of 

these risks on projected earnings and 

market values by conducting interest 

rate shock tests and simulations of 

multiple economic scenarios at least on 

a quarterly basis and by considering the 

impact of investments on interest rate 

risk based on the results of the stress 

testing required under § 615.5133(f)(2); 

(4) Describe, explore, and implement 

actions needed to obtain its desired risk 

management objectives; 

(5) Document the objectives that the 

bank is attempting to achieve by 

purchasing eligible investments that are 

authorized by § 615.5140 of this subpart; 

(6) Evaluate and document, at least 

quarterly, whether these investments 

have actually met the objectives stated 

under paragraph (b)(5) of this section; 

(7) Identify exception parameters and 

approvals needed for any exceptions to 

the requirements of the board’s policies; 

(8) Describe delegations of authority; 

(9) Describe reporting requirements, 

including exceptions to limits contained 

in the board’s policies; 

(10) Consider the nature and purpose 

of derivative contracts and establish 

counterparty risk thresholds and limits 

for derivatives used to manage interest 

rate risk. 

(c) At least quarterly, management of 

each Farm Credit Bank, bank for 

cooperatives, or agricultural credit bank 

must report to its board of directors, or 

a designated committee of the board, 

describing the nature and level of 

interest rate risk exposure. Any 

deviations from the board’s policy on 

interest rate risk must be specifically 

identified in the report and approved by 

the board. 

§ 615.5136 Emergencies impeding normal 

access of Farm Credit banks to capital 

markets. 

An emergency shall be deemed to 

exist whenever a financial, economic, 

agricultural or national defense crisis 

could impede the normal access of Farm 

Credit banks to the capital markets. 

Whenever the Farm Credit 

Administration determines, after 

consultation with the Federal Farm 

Credit Banks Funding Corporation to 

the extent practicable, that such an 

emergency exists, the Farm Credit 

Administration Board may, in its sole 

discretion, adopt a resolution that: 

(a) Modifies the amount, qualities, 

and types of eligible investments that 

Farm Credit Banks, banks for 

cooperatives and agricultural credit 

banks are authorized to hold pursuant to 

§ 615.5132 of this subpart; 

(b) Modifies or waives the liquidity 

reserve requirement in § 615.5134 of 

this subpart; and/or 

(c) Authorizes other actions as 

deemed appropriate. 

§ 615.5140 Eligible investments. 

(a) You may purchase only the 

investments that satisfy the eligibility 

criteria in this section. An investment 

that does not satisfy the eligibility 

criteria at the time of purchase is not 

eligible for purchase and is subject to 

the requirements of § 615.5143(a) if 

purchased. An investment that satisfies 

the eligibility criteria at the time of 

purchase but subsequently fails to 

satisfy the eligibility criteria is subject to 

the requirements of § 615.5143(b). 

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BILLING CODE 6705–01–C 

(b) Denomination. All investments 

must be denominated in United States 

dollars. 

(c) Rating of foreign countries. 

Whenever the obligor or issuer of an 

eligible investment is located outside 

the United States, the host country must 

maintain the highest sovereign rating for 

political and economic stability by an 

NRSRO. 

(d) Obligor limits. 

(1) General. You may not invest more 

than 15 percent of your total capital in 

eligible investments issued by any 

single institution, issuer, or obligor. 

This obligor limit does not apply to 

obligations, including mortgage 

securities, that are issued or guaranteed 

as to interest and principal by 

Government agencies or Governmentsponsored agencies. 

(2) Obligor limits for your holdings in 

an investment company. You must 

count securities that you hold through 

an investment company towards the 

obligor limit of this section unless the 

investment company’s holdings of the 

security of any one issuer do not exceed 

five (5) percent of the investment 

company’s total portfolio. 

(e) Other investments approved by the 

FCA. You may purchase and hold other 

investments that we approve. Your 

request for our approval must explain 

the risk characteristics of the investment 

and your purpose and objectives for 

making the investment. 

§ 615.5141 [Removed] 

6. Section 615.5141 is removed. 

7. Section 615.5142 is amended by: 

a. Adding the designation (a) to the 

existing paragraph; and 

b. Adding a new paragraph (b) to read 

as follows: 

§ 615.5142 Association investments. 

(a) * * * 

(b) Before an association purchases an 

eligible investment for the purpose of 

managing surplus short-term funds, it 

must ensure that the investment’s 

repricing and maturity characteristics 

match the characteristics of the surplus 

short-term funds to be invested. 

8. Section 615.5143 is revised to read 

as follows: 


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1Federal Trade Commission: Retail Food Store 

Advertising and Marketing Practices: Statement of 

Basis and Purpose: The Rule, 36 FR 8777 (May 13, 

1971). The Rule became effective on July 12, 1971. 

2 Id. at 8781. 

3Federal Trade Commission: Amendment to 

Trade Regulation Rule Concerning Retail Food 

Store Advertising and Marketing Practices, 54 FR 

35456 (Aug. 28, 1989). 

4 Id. at 35467. 

§ 615.5143 Management of ineligible and 

unsuitable investments. 

(a) Investments ineligible when 

purchased. Investments that do not 

satisfy the eligibility criteria set forth in 

§ 615.5140 at the time of purchase are 

ineligible. You may not purchase 

ineligible investments. If you determine 

that you have purchased an ineligible 

investment, you must notify us 

promptly in writing after such 

determination. You must divest of the 

investment no later than 60 calendar 

days after you determine that the 

investment is ineligible unless we 

approve, in writing, a plan that 

authorizes you to divest the investment 

over a longer period of time. Until you 

divest of the investment: 

(1) It must not be used to fund the 

liquidity reserve necessary to meet the 

liquidity reserve requirement in 

§ 615.5134; 

(2) It must be included in the 

§ 615.5132 investment portfolio limit; 

and 

(3) It must not be included as 

collateral under § 615.5050 or net 

collateral under § 615.5301(c). 

(b) Investments that no longer satisfy 

eligibility criteria or are unsuitable. If an 

investment (that satisfied the eligibility 

criteria set forth in § 615.5140 when 

purchased) no longer satisfies the 

eligibility criteria, or if an investment is 

not suitable because it does not fit the 

risk tolerance established in your board 

policy pursuant to § 615.5133(c), you 

may continue to hold it, subject to the 

following requirements: 

(1) You must notify FCA promptly in 

writing upon your determination that 

the investment no longer satisfies the 

eligibility criteria contained in 

§ 615.5140 or is not suitable; 

(2) You must not use the investment 

to fund the liquidity reserve necessary 

to meet the liquidity reserve 

requirement in § 615.5134; 

(3) You must include the investment 

in the § 615.5132 investment portfolio 

limit; 

(4) You must include the investment 

as collateral under § 615.5050 and net 

collateral under § 615.5301(c) at the 

lower of cost or market value; and 

(5) You must develop a plan to reduce 

the investment’s risk to you. 

(c) Board reporting requirements. You 

must report to your board at least 

quarterly on the following: 

(1) The status and performance of 

each investment described in 

paragraphs (a) and (b) of this section. 

(2) The impact that any investments 

described in paragraphs (a) and (b) of 

this section may have on your capital, 

earnings, liquidity, and collateral 

position; and 

(3) The terms and status of any 

required divestiture plan or risk 

reduction plan. 

(d) Reservation of authority. FCA 

retains the authority to require you to 

divest of any investment at any time for 

safety and soundness reasons. The 

timeframe set by FCA will consider the 

expected loss on the transaction (or 

transactions) and the impact on your 

financial condition and performance. 

Subpart F—Property, Transfers of 

Capital, and Other Investments 

9. Section 615.5174 is amended by: 

a. Removing the reference 

‘‘§ 615.5131(f)’’ and adding in its place, 

the reference ‘‘§ 615.5131’’ in paragraph 

(a); and 

b. Revising paragraph (d); and 

c. Adding a new paragraph (e) to read 

as follows: 

§ 615.5174 Farmer Mac securities. 

* * * * * 

(d) Stress Test. You must perform 

stress tests, in accordance with 

§ 615.5133(f)(2), on mortgage securities, 

issued or guaranteed by Farmer Mac, 

that are backed by loans that you did 

not originate. 

(e) You. Means a Farm Credit bank, 

association, or service corporation. 

Dated: August 12, 2011. 

Dale L. Aultman, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 2011–20965 Filed 8–17–11; 8:45 am] 

BILLING CODE 6705–01–P 

FEDERAL TRADE COMMISSION 

16 CFR Part 424 

Retail Food Store Advertising and 

Marketing Practices Rule 

AGENCY: Federal Trade Commission 

(‘‘FTC’’ or ‘‘Commission’’). 

ACTION: Advance notice of proposed 

rulemaking; request for public 

comment. 

SUMMARY: As part of the Commission’s 

systematic review of all current FTC 

rules and guides, the Commission 

requests public comment on the overall 

costs, benefits, necessity, and regulatory 

and economic impact of the FTC’s rule 

for ‘‘Retail Food Store Advertising and 

Marketing Practices’’ (‘‘Unavailability 

Rule’’ or ‘‘Rule’’). 

DATES: Comments must be received on 

or before October 19, 2011. 

ADDRESSES: Interested parties may file a 

comment online or on paper, by 

following the instructions in the 

Request for Comment part of the 

SUPPLEMENTARY INFORMATION section 

below. Write ‘‘16 CFR Part 424—Retail 

Food Store Advertising Rule, Project No. 

P104203’’ on your comment, and file 

your comment online at https:// 

ftcpublic.commentworks.com/ftc/ 

unavailabilityruleanpr, by following the 

instructions on the web-based form. If 

you prefer to file your comment on 

paper, mail or deliver your comment to 

the following address: Federal Trade 

Commission, Office of the Secretary, 

Room H–113 (Annex N), 600 

Pennsylvania Avenue, NW., 

Washington, DC 20580. 

FOR FURTHER INFORMATION CONTACT: Jock 

Chung, (202) 326–2984, Attorney, 

Division of Enforcement, Bureau of 

Consumer Protection, Federal Trade 

Commission, 600 Pennsylvania Avenue, 

NW., Washington, DC 20580. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Unavailability Rule states that it 

is an unfair or deceptive act or practice 

for ‘‘retail food stores’’ to advertise 

‘‘food, grocery products or other 

merchandise’’ at a stated price if those 

stores do not have the advertised 

products in stock and readily available 

to consumers during the effective period 

of the advertisement. The original Rule, 

promulgated in 1971,1 permitted food 

retailers to defend against a charge of 

failure to have items available by 

maintaining records showing that the 

advertised items were timely ordered 

and delivered in quantities sufficient to 

meet reasonably anticipated demand.2

In 1989, after a comment period and 

public hearings, the Commission 

concluded that the costs of complying 

with the original Rule exceeded the 

benefits to consumers and amended the 

Rule.3 The Rule now provides that even 

if stores do not have the advertised 

products in stock and readily available 

during the effective period of their 

advertisement, they comply with the 

Rule if ‘‘the advertisement clearly and 

adequately discloses that supplies of the 

advertised products are limited or the 

advertised products are available only at 

some outlets.’’ 4 In addition, the 

amendment provides that it would not 

be a rule violation if: (1) The store 

ordered the advertised products in 

adequate time for delivery in quantities 

mstockstill on DSK4VPTVN1PROD with PROPOSALS