Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36305

1See Fin. Bd. Res. No. 96–45 (July 3, 1996), as

amended by Fin. Bd. Res. No. 96–90 (Dec. 6, 1996),

Fin. Bd. Res. No. 97–05 (Jan. 14, 1997), and Fin. Bd.

Res. No. 97–86 (Dec. 17, 1997). See also 62 FR

13146 (Mar. 19, 1997)).

2See Fin. Bd. Res. No. 96–45, pp. 5–8.

3See Fin. Bd. Res. No. 96–45. p. 7.

4Title VI of the Gramm-Leach-Bliley Act, the

Federal Home Loan Bank System Modernization

Act of 1999, Pub. L. 106–102, 113 Stat. 1338 (Nov.

12, 1999) (Gramm-Leach-Bliley) changed the Banks’

annual REF Corp. payment from a fixed, aggregate

payment of $300 million to a payment of 20 percent

of each Bank’s net earnings (net of AHP and

operating expenses). The Finance Board uses

duration of equity as its primary measure of interest

rate risk. Additionally, since 1995, each Bank has

been required to contribute a minimum of 10

percent of its annual income (net of its REFCorp

obligation) to the AHP, with a Bank System-wide

minimum of $100 million.

5The Gramm-Leach-Bliley Act provides for a fiveyear phase-in for new statutory leverage limits and

risk-based capital requirements for the Banks.

FEDERAL HOUSING FINANCE BOARD

[NO. 2000–25]

RIN 3069–AA88

Changes to the Financial Management

Policy of the Federal Home Loan Bank

System

AGENCY: Federal Housing Finance

Board.

ACTION: Notice.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is amending its

policy statement entitled ‘‘Financial

Management Policy of the Federal Home

Loan Bank System’’ (‘‘FMP’’) to: (1)

delete the ‘‘Funding Guidelines’’ in

section IV; (2) insert a new section IV

titled ‘‘Hedging Requirements’’; and (3)

revise the ‘‘Interest Rate Risk

Limitations’’ in section VII. These FMP

amendments are being made in

conjunction with changes to the Finance

Board’s regulations governing the

issuance of consolidated obligations

(COs) under section 11 of the Federal

Home Loan Bank Act (Act) (12 U.S.C.

1431) and the authority and operations

of the Office of Finance (OF), described

in detail in a Final Rule published

elsewhere in this issue of the Federal

Register (OF Final Rule).

DATES: The FMP amendments are

effective June 7, 2000.

FOR FURTHER INFORMATION CONTACT:

Joseph A. McKenzie, Deputy Chief

Economist, Office of Policy, Research

and Analysis, 202/408–2845,

mckenziej@fhfb.gov; or Charlotte A.

Reid, Special Counsel, Office of General

Counsel, 202/408–2510, reidc@fhfb.gov.

Staff also can be reached by regular mail

at the Federal Housing Finance Board,

1777 F Street, NW, Washington, DC

20006.

SUPPLEMENTARY INFORMATION:

I. Background

The FMP evolved from a series of

policies and guidelines initially adopted

by the former Federal Home Loan Bank

Board (FHLBB), predecessor agency to

the Finance Board, in the 1970s and

revised a number of times thereafter.

The Finance Board adopted the FMP in

1991, consolidating into one document

the previously separate policies on

funds management, hedging and

interest-rate swaps, and adding new

guidelines on the management of

unsecured credit and interest-rate risks.1

The FMP governs how the Banks may

implement their financial management

strategies by specifying the types of

investments the Banks may purchase

pursuant to their statutory investment

authority. The FMP also establishes

mandatory guidelines relating to the

funding and hedging practices of the

Banks, the management of their credit,

interest-rate, and liquidity risks, and the

liquidity requirements for the Banks in

addition to those required by statute.

See FMP secs. III–IV.2

II. Proposed FMP Amendments

On January 4, 2000, the Finance

Board published for comment a notice

of proposed amendments to the FMP, in

conjunction and conformance with

proposed regulatory changes to the

Finance Board’s regulations regarding

the OF (Proposed OF Rule). See 64 FR

339 (Jan. 4, 2000) (Proposed FMP

Amendments). The Proposed FMP

Amendments would have deleted FMP

sec. IV. C. ‘‘Funding Guidelines,’’ as

unnecessary in light of the Proposed OF

Rule, with the exception that the current

Bank-by-Bank, liability-based leverage

limit would have been replaced with a

minimum total capital requirement

recast as a percentage of assets. The

Proposed FMP Amendments would

have required that a Bank’s capital must

be at least 4.76 percent of assets, or,

inversely, that a Bank’s total assets

could not exceed 21 times its capital.

The Proposed FMP Amendments also

would have amended section IV.C.3 of

the FMP to eliminate the distinction

between standard and non-standard

debt issues and require the Banks to

hedge debt issues linked to equity or

commodity prices or those denominated

in foreign currencies.

Finally, the Proposed FMP

Amendments would have amended

section VII 3 of the FMP, which

currently permits the Banks to include

the cash flows associated with their

REFCorp and Affordable Housing

Program (AHP) payment obligations in

their duration of equity calculations, to

restrict the Banks from treating the

REFCorp obligation as if it were a fixed

dollar obligation. In light of the GrammLeach-Bliley Act,4 changes to the Banks’

REFCorp obligation the Proposed FMP

Amendments would have required the

Banks to treat these obligations as

typical variable expenses (similar to

operating expenses) for purposes of the

Banks’ asset-liability management.

The sixty-day public comment period

closed on March 6, 2000. The Finance

Board received seven comment letters:

six from Banks and one from a Bank

trade association. Generally, the

commenters opposed the proposed

change to the leverage limit as more

restrictive than the current allowance

and premature in advance of the new

statutory leverage limit and risk-based

capital requirements imposed by the

Gramm-Leach-Bliley Act.5 The

commenters offered no objection to the

revisions to the hedging requirements or

the duration of equity calculation.

III. Comments on the Proposed

Amendments and Analysis of Changes

Made in the FMP Amendments

A. Leverage Limit

The Proposed FMP Amendments, and

corresponding Proposed OF Rule, did

not include the 20-to-1 Bank Systemwide leverage limit from the Finance

Board’s regulations, or the 20-to-1

liability-based leverage limit on each

Bank contained in the FMP. Instead, the

Proposed FMP Amendments recast the

leverage limit applicable to each Bank

from a liability-based limit to an assetbased limit, and required that each Bank

maintain capital in an amount equal to

at least 4.76 percent of the Bank’s total

assets. See 65 FR at 328, 339. This limit

required that the assets of a Bank not

exceed 21 times its capital.

The Finance Board did not believe

that either the elimination of the Bank

System-wide leverage limit from the

Finance Board’s regulations, or the

proposed revision to the leverage limit

contained in the FMP, would have any

practical effect on the Bank System or

its bondholders. The Finance Board, as

the regulator of the Banks, would

continue to monitor each Bank for

compliance with the individual leverage

limit included in the FMP. The existing

FMP provision prohibits a Bank from

participating in COs if such transactions

would cause the Bank’s liabilities to

exceed 20 times the Bank’s capital. The

Proposed FMP Amendments established

an equivalent leverage standard, stated

as a percentage of assets, which would

require each Bank to maintain capital of

36306 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

6By resolution of its board of directors, the

Finance Board directed that, through June 30, 2000,

a Bank may have leverage up to 25 to 1 as long as

that Bank’s ratio of non-mortgage investments to

COs does not exceed 12 percent. The Finance Board

adopted this additional leverage flexibility on an

interim basis to allow the Banks to provide Year

2000 funding to their members. See Fin. Bd. Res.

No. 99–33 (May 28, 1999).

7On May 3, 2000, the Finance Board published

for notice and comment a proposed rule that

included a listing of activities that would qualify as

core mission activities. See 65 FR 25676 at 25688

(May 3, 2000).

at least 4.76 percent of its total assets.

The imposition of the proposed

standard on each Bank would ensure

that the Bank System itself stays within

the leverage limit, rendering any

retention of a Bank System-wide

leverage limit unnecessary. Further, the

Finance Board noted that with the

recent passage of the Gramm-LeachBliley Act, the Banks would be subject

to asset-based statutory leverage limits

and risk-based capital requirements.

When implemented, the new risk-based

capital regime would provide an

additional safeguard to the Bank System

and its bondholders by requiring Banks

to hold capital in proportion to the risks

they assume.

The commenters uniformly opposed

the proposed 4.76 percent asset-based,

Bank-by-Bank, capital requirement. A

number of commenters objected to the

proposed change on the basis that

secured liabilities, principally

repurchase agreements, are not now

subject to a capital requirement. Under

the Proposed FMP Amendments,

however, assets funded by repurchase

agreements and other secured liabilities

would be subject to capital charges.

Repurchase agreements represent a de

minimis portion of Bank funding. At

December 31, 1999, repurchase

agreements were less than one-tenth of

one percent of the total funding of the

Banks, eight of the Banks had no

repurchase agreements, and one Bank

accounted for a majority of the Bank

System’s repurchase agreements. The

Finance Board finds these arguments

unpersuasive.

Several commenters recommended

providing the Banks with a level of

asset/liability management flexibility

similar to that provided under a

resolution adopted by Finance Board to

assist the Banks in meeting member

demand for Year 2000 liquidity. See

Finance Board Res. No. 99–33 (May 28,

1999) 6 (1999 Resolution). One

commenter argued in favor of retaining

the 25:1 leverage limit established in the

1999 Resolution, stating that the

flexibility provided therein should not

be forfeited. A majority of the

commenters opposed eliminating the

Bank System-wide leverage limit in the

current regulations, and urged deferral

of a new leverage limit until after the

new capital regulations required under

the Gramm-Leach-Bliley Act have been

adopted and the Banks’ capital plans

have been reviewed and approved.

The Finance Board agrees with the

recommendation that the leverage

requirement should be included in the

Finance Board’s regulations rather than

in the FMP. The OF Final Rule,

published elsewhere in this issue of the

Federal Register incorporates into

§ 966.3(a) of the Finance Board’s

regulations the leverage provision that

was originally proposed in the notice of

Proposed FMP Amendments. In

addition, in response to the comments

received, the OF Final rule extends and

makes permanent the leverage authority

provided to the Banks in the 1999

Resolution. In particular, the OF Final

Rule allows a Bank to have asset-based

leverage of up to 25 to 1 if that Bank’s

non-mortgage assets do not exceed 11

percent of that Bank’s total assets that

are not funded by deposits or capital.

For the purpose of the OF Final Rule,

non-mortgage assets equal the total

assets after deducting core mission

activity assets and assets described in

sections II.B. 8 through II.B. 11 of the

FMP.7

The Finance Board believes that,

when implemented, the new risk-based

capital regime would provide an

additional safeguard to the Bank System

and its bondholders by requiring Banks

to hold capital in proportion to the risks

they assume. The FMP Amendments,

and the OF Final Rule published

elsewhere in this issue of the Federal

Register, are consistent with the

requirements of the Gramm-LeachBliley Act.

Accordingly, the Finance Board is

deleting existing section VI, ‘‘Funding

Guidelines’’ from the FMP, as proposed.

B. Hedging Requirement

The Finance Board is replacing

section IV of the FMP with a new

section IV titled ‘‘Hedging

Requirements.’’ The ‘‘Hedging

Requirements’’ provision is adopted as

proposed, without change, to read as

follows:

IV. Hedging Requirements

Prohibition on foreign currency or

commodity positions. A Bank shall not take

a position in any commodity or foreign

currency. If a Bank participates in

consolidated obligations denominated in a

currency other than U.S. dollars or linked to

equity or commodity prices, it must hedge

the currency, equity, and commodity risks.

C. Duration of Equity Calculation

The Finance Board is revising section

VII of the FMP, which sets forth

guidelines for the Banks on the

management of interest-rate risk,

including certain interest rate risk

limitations. New section VII.B.4 is

adopted as proposed, without change, to

read as follows:

Each Bank is required to report its cash

flows and calculate its duration and market

value of equity without projected cash flows

that represent the Bank’s share of the

System’s REFCorp and AHP obligations.

Dated: June 2, 2000.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 00–14367 Filed 6–6–00; 8:45 am]

BILLING CODE 6725–01–P