[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36305-36306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14367]



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

[[Page 36305]]


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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.

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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, 
<a href="/cdn-cgi/l/email-protection#39545a525c5743505c53795f515f5b175e564f"><span class="__cf_email__" data-cfemail="c9a4aaa2aca7b3a0aca389afa1afabe7aea6bf">[email protected]</span></a>; or Charlotte A. Reid, Special Counsel, Office of 
General Counsel, 202/408-2510, <a href="/cdn-cgi/l/email-protection#50223539343310363836327e373f26"><span class="__cf_email__" data-cfemail="1664737f727556707e707438717960">[email protected]</span></a>. 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\
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    \1\ See 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)).
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    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\
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    \2\ See Fin. Bd. Res. No. 96-45, pp. 5-8.
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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 Gramm-Leach-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.
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    \3\ See Fin. Bd. Res. No. 96-45. p. 7.
    \4\ Title 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.
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    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.
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    \5\ The Gramm-Leach-Bliley Act provides for a five-year phase-in 
for new statutory leverage limits and risk-based capital 
requirements for the Banks.
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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 System-wide 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 asset-based 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

[[Page 36306]]

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-Leach-Bliley 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.
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    \6\ By 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).
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    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 Sec. 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\
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    \7\ On 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).
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    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-Leach-Bliley 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


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