27486 Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Rules and Regulations 

1Section 619.9140 of FCA regulations defines 

‘‘Farm Credit banks’’ to include Farm Credit Banks, 

agricultural credit banks, and banks for 

cooperatives. 2Section 619.9050 of FCA regulations defines the 

term ‘‘association’’ to include (individually or 

collectively) Federal land bank associations, 

Federal land credit associations, production credit 

associations, and agricultural credit associations. 

3A service corporation cannot extend credit or 

provide insurance services. 

4The Federal Agricultural Mortgage Corporation 

(Farmer Mac), also a System institution, operates a 

secondary market for agricultural real estate 

mortgage loans, rural housing mortgage loans, and 

rural utility cooperative loans. This rulemaking 

does not affect Farmer Mac, and the use of the term 

‘‘System institution’’ in this preamble and the final 

rule does not include Farmer Mac. 

5One Farm Credit bank, is an agricultural credit 

bank, which lends to, and provides other financial 

services to farmer-owned cooperatives, rural 

utilities (electric and telephone), and rural water 

and waste water disposal systems. It also finances 

U.S. agricultural exports and imports, and provides 

international banking services to cooperatives and 

other eligible borrowers. 

6Under § 611.1135(a), which we do not propose 

to revise, service corporations may hold 

investments for the purposes authorized for their 

organizers. 

7 76 FR 51289, August 18, 2011. 

8 77 FR 66362, November 5, 2012. 

9See 79 FR 43301, July 25, 2014. 

10Final § 615.5140 identifies eligible investments 

for both Farm Credit banks and associations. 

Former § 615.5142 governs investment purposes for 

associations, but it did not prescribe the amount of 

association investments. 

FARM CREDIT ADMINISTRATION 

12 CFR Parts 611 and 615 

RIN 3052–AC84 

Organization; Funding and Fiscal 

Affairs, Loan Policies and Operations, 

and Funding Operations; Investment 

Eligibility 

AGENCY: Farm Credit Administration. 

ACTION: Final rule. 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, us, our, 

or we) adopts a final rule that amends 

our regulations governing investments 

of both Farm Credit System (FCS or 

System) banks and associations. The 

final rule strengthens eligibility criteria 

for investments that FCS banks 

purchase and hold, and implements 

section 939A of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act or DFA) by 

removing references to and 

requirements for credit ratings and 

substituting other appropriate standards 

of creditworthiness. The final rule 

revises FCA’s regulatory approach to 

investments by FCS associations by 

limiting the type and amount of 

investments that an association may 

hold for risk management purposes. 

DATES: This regulation shall become 

effective on January 1, 2019. 

FOR FURTHER INFORMATION CONTACT: 

David J. Lewandrowski, Senior Policy 

Analyst, Office of Regulatory Policy, 

(703) 883–4414, TTY (703) 883–4212, 

lewandrowskid@fca.gov; 

J.C. Floyd, Associate Director of Finance 

and Capital Market Team, Office of 

Regulatory Policy, (703) 883–4321, 

TTY (703) 883–4212, floydjc@fca.gov; 

or 

Richard A. Katz, Senior Counsel, Office 

of General Counsel, (703) 883–4020, 

TTY (703) 883–4056, katzr@fca.gov. 

SUPPLEMENTARY INFORMATION: 

I. Objectives 

The final rule objectives are to: 

• Strengthen investment practices at 

Farm Credit banks 1 and associations 2 to 

enhance their safety and soundness; 

• Ensure that Farm Credit banks hold 

sufficient high-quality liquid 

investments for liquidity purposes; 

• Enhance the ability of the Farm 

Credit banks and associations to supply 

credit to agricultural and aquatic 

producers and their cooperatives in 

times of financial stress; 

• Comply with section 939A of the 

Dodd-Frank Act; 

• Modernize the investment 

eligibility criteria for Farm Credit banks; 

and 

• Revise the investment regulation for 

associations to improve their investment 

management practices so they are more 

resilient to risk. 

II. Background 

Congress created the Farm Credit 

System, which consists of Farm Credit 

banks, associations, service 

corporations,3 and the Federal Farm 

Credit Banks Funding Corporation to 

provide permanent, stable, affordable, 

and reliable sources of credit and 

related services to American agricultural 

and aquatic producers.4 Farm Credit 

banks issue System-wide consolidated 

debt obligations in capital markets, 

which enable associations to fund 

short-, intermediate-, and long-term 

credit and related services to farmers, 

ranchers, producers and harvesters of 

aquatic products, rural residents for 

housing, and farm-related businesses.5

Farm Credit banks depend on 

investments to provide liquidity and to 

manage surplus short-term funds and 

interest rate risk. Investments also help 

enable associations to manage the risks 

they confront.6 Although Farm Credit 

banks get their funding through issuing 

System-wide consolidated debt 

securities, they must have enough 

available funds, cash and investments, 

to continue paying maturing obligations 

if access to the debt market becomes 

temporarily impeded. 

FCA regulations in subpart E of part 

615 impose comprehensive 

requirements on investment practices at 

all System institutions except Farmer 

Mac. We first proposed revisions to our 

investment regulations in 2011.7 In 

2012, we issued a final rule that adopted 

many of these proposed requirements, 

particularly those guiding prudent 

investment management practices at 

System banks.8 However, that final rule 

did not substantively revise the rules 

governing investment eligibility in 

§ 615.5140, or association investments 

in § 615.5142. In 2014, we proposed 

amendments to §§ 615.5140 and 

615.5142 to address comments from 

System institutions.9 More specifically, 

the proposed rule revised the eligibility 

criteria for System bank investments. In 

addition, proposed § 615.5142 would: 

(1) Impose a portfolio limit on 

association investments; (2) limit 

association investments to certain 

securities issued or guaranteed as to 

principal and interest by the United 

States Government and its Agencies; 

and, (3) delete the specific investment 

purposes of reducing interest rate risk 

and managing surplus short-term 

funds.10

A major reason that we engaged in 

this rulemaking is that investment 

products are becoming increasingly 

complex, and some investments are 

riskier and less liquid than previously 

believed. Section 939A of the DFA 

requires each Federal agency to review 

all its regulations that reference or 

require the use of credit ratings issued 

by a Nationally Recognized Statistical 

Rating Organization (NRSRO) to assess 

the creditworthiness of an instrument. 

Under this provision of the Dodd-Frank 

Act, Federal agencies must also remove 

references to NRSRO credit ratings from 

their regulations and substitute other 

appropriate creditworthiness standards 

in their place. As a result, FCA is 

removing the actual references to 

NRSRO credit ratings in our regulations 

in subpart E of part 615. 

FCA received over 1250 comment 

letters about our 2014 proposed 

regulations. FCS banks and associations 

submitted 12 comment letters, and we 

received separate comment letters from 

a System trade association and Farmer 

Mac. Commercial banks, and their 

various trade associations, as well as 

their directors, officers, and employees 

submitted the remaining comment 

letters. Most of the letters from bank 

commenters were form letters, and 

several individuals associated with the 

same bank submitted multiple or 


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11The FBRAs are the Board of Governors of the 

Federal Reserve System, the Office of the 

Continued 

duplicate copies of the same letter. 

System and Farmer Mac commenters 

sought revisions to the bank and 

association regulations to clarify 

specific provisions, or to address their 

concerns. The bank commenters 

opposed all provisions of the proposed 

rule, except the provisions 

implementing section 939A of the DFA. 

All the bankers asked FCA to withdraw 

the rule, and to refrain from revising the 

investment regulations for System banks 

and associations, unless the 

amendments implemented new 

statutory authority. 

III. Final Rule 

After reviewing and considering the 

comment letters, FCA now enacts a final 

rule that governs investment activities at 

System banks, associations, and service 

corporations. The final rule: (1) 

Implements section 939A of the DFA; 

(2) strengthens investment management 

practices at FCS institutions, other than 

Farmer Mac; (3) improves the quality of 

System bank investments and 

streamlines the list of eligible 

investments; (4) revises the investment 

purposes and types associations may 

hold; and (5) clarifies the rules of 

divestiture of ineligible investments, 

and establishes new transition rules. 

Additionally, we updated the 

definitions for investments in subpart E 

of part 615, and we made conforming 

amendments to other regulations. FCA 

plans to rescind two Informational 

Memoranda, revise a third Informational 

Memorandum, and updating FCA 

Bookletter BL–064 so that FCA guidance 

conforms with this final rule. 

FCA notes that all regulations in part 

615, subpart E, together create a 

regulatory investment management 

framework for System institutions. In 

this context, System institutions need to 

consider and follow all requirements 

specified in §§ 615.5132, 615.5133, 

615.5134, and 615.5140, as applicable. 

A System institution’s decision to 

purchase and hold investments must be 

driven by an internal assessment of their 

risk tolerances and liquidity needs, plus 

eligible investments held. 

A. Definitions 

The definitions in § 615.5131 apply to 

all our investment regulations in 

subpart E of part 615. We proposed to 

remove or revise several definitions in 

§ 615.5131 that pertain to eligible 

investments and credit ratings. These 

amendments align the definitions in 

FCA’s investment regulations with other 

FCA regulations, or with the definitions 

that other Federal agencies, such as the 

Board of Governors of the Federal 

Reserve System, the Office of the 

Comptroller of the Currency, the Federal 

Deposit Insurance Corporation, and 

Securities and Exchange Commission 

use in their regulations. 

We received a comment from a bank 

trade association about the proposed 

definition of ‘‘asset class.’’ Under the 

proposal, ‘‘asset class means a group of 

securities that exhibit similar 

characteristics and behave similarly in 

the marketplace.’’ As we noted in the 

preamble to the proposed rule, asset 

classes for bank investments include, 

but are not limited, to money market 

instruments, municipal securities, 

corporate bonds, mortgage-backed 

securities (MBS), asset-backed securities 

(ABS) (excluding MBS), and ‘‘any other 

asset class as determined by FCA.’’ The 

commenter opposed this provision 

because it authorizes FCA to approve 

other asset class types. The commenter 

asserted that FCA should not approve 

new asset classes except through a 

formal rulemaking. FCA responds that it 

has authority under various provisions 

of section 5.17 of the Farm Credit Act 

of 1971, as amended, (Act) to approve 

new investments, including new asset 

classes. As appropriate, FCA will decide 

how best to approve any new asset 

classes based on the circumstances and 

characteristics of the instrument when 

the issue arises. Sometimes, a notice 

and comment rulemaking is 

appropriate, while at other times, FCA 

may decide to issue a bookletter or 

informational memorandum, or approve 

such instruments under case-by-case 

authority. We adopt this definition as 

proposed. 

The same bank trade association also 

commented on the definition of 

‘‘obligor’’ in the proposed regulation. 

The commenter expressed concerns that 

the definition of ‘‘obligor’’ would permit 

System institutions to make loans to 

ineligible persons, businesses, agencies, 

or corporations under their investment 

authorities. Our investment regulations 

cannot confer authority on System 

institutions that exceed their powers 

under the Act. The Act separates the 

System’s lending authorities from its 

investment authorities. Therefore, our 

investment regulations cannot authorize 

System institutions to make loans to 

ineligible borrowers disguised as 

investments. We adopt this definition as 

proposed. 

We proposed to define a collateralized 

debt obligation (CDO) as a debt security 

collateralized by mortgage-backed 

securities (MBS) or asset-backed 

securities (ABS, or trust-preferred 

securities). Farmer Mac claimed that 

this definition was inconsistent with 

how the security markets defined CDOs. 

FCA agrees with the commenter. We 

addressed this concern by deleting the 

term ‘‘collateralized debt obligation’’ in 

final § 615.5131, and adding the term 

‘‘resecuritization.’’ Section 628.2 

already defines ‘‘resecuritization’’ to 

mean ‘‘a securitization which has more 

than one underlying exposure and in 

which one or more of the underlying 

exposures is a securitization exposure.’’ 

We will further discuss in greater detail 

why resecuritizations are ineligible 

investments for System banks below. 

We proposed to delete the definition 

of ‘‘eurodollar time deposit’’, ‘‘final 

maturity’’, ‘‘general obligations’’, 

‘‘Government agency’’, ‘‘Governmentsponsored agency’’, ‘‘liquid 

investments’’, ‘‘mortgage securities’’, 

‘‘Nationally Recognized Statistical 

Rating Organization (NRSRO)’’, 

‘‘revenue bond’’, and ‘‘weighted average 

life (WAL)’’ in § 615.5131. We received 

no comments on these revisions. 

Accordingly, the final rule deletes these 

definitions for the reasons explained in 

the preamble to the proposed rule. 

The proposal added definitions of 

‘‘asset-backed securities (ABS)’’, 

‘‘Country risk classification (CRC)’’, 

‘‘Diversified investment fund (DIF)’’, 

‘‘Government-sponsored enterprise 

(GSE)’’, ‘‘Mortgage-backed securities 

(MBS)’’, ‘‘sponsor’’, and ‘‘United States 

(U.S.) Government agency.’’ We 

received no comments on these new 

definitions, and we incorporate them 

into final § 615.5131 without revision. 

However, we made a technical, nonsubstantive revision by replacing the 

definition of ‘‘Country risk classification 

(CRC)’’ in final § 615.5131 with a crossreference to the identical definition in 

our Capital Adequacy regulations, 

§ 628.2. The preamble to the proposed 

rule explains our reasoning for adopting 

these definitions. 

B. Section 615.5132—Investments 

Purposes 

Under the existing rule, System banks 

may continue to buy and hold eligible 

investments to fulfill liquidity 

requirements, manage short-term funds, 

and manage interest rate risk, under 

§ 615.5132(a). A System trade 

association and a Farm Credit Bank 

interpret our regulations as requiring 

each System bank to designate a specific 

purpose under § 615.5132(a) for every 

investment it purchases and holds. The 

commenter claims that this is 

inconsistent with the approach that FCA 

proposed for System associations, and 

the approach that the Federal Banking 

Regulatory Agencies (FBRAs) 11


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Comptroller of the Currency, and the Federal 

Deposit Insurance Corporation. 

12See 79 FR 61440, October 10, 2014. 

followed in their liquidity coverage ratio 

regulation, which recognized that 

securities often serve multiple 

purposes.12 Accordingly, the 

commenter asserted that FCA should 

not require FCS banks to hold an 

investment for only one of the purposes 

identified in § 615.5132(a). The 

commenter urged FCA to grant System 

banks greater flexibility to decide the 

authorized purposes and allow them to 

change the designated purpose as 

circumstances warrant. 

FCA responds to this comment even 

though we proposed no change to 

§ 615.5132. We note that § 615.5132(a) 

does not restrict System banks to 

holding each investment for only one 

purpose. In fact, § 615.5140(a)(1)(i) 

states that eligible investments may be 

held for one or more of the investment 

purposes authorized in § 615.5132(a). 

However, the preamble to the proposed 

rule notes that certain investments, such 

as private placements, are not suitable 

for liquidity and, therefore, a System 

bank would need to document the 

specific purpose or reason for holding 

such investments. FCA finds no reason 

to revise either § 615.5132(a) or 

§ 615.5140(a)(1) to address the 

commenters concerns. 

C. Section 615.5133—Investment 

Management 

Section 615.5133 governs investment 

management practices at Farm Credit 

banks, associations, and service 

corporations. System institutions hold 

investments for different purposes and, 

therefore, investment practices will 

vary. This regulation requires the boards 

of directors of System institutions to 

adopt an internal control framework 

that protects their institutions from 

potential losses. Under this regulation, 

the policies must establish risk 

tolerance parameters that address credit, 

market, liquidity and operational risks. 

Additionally, this regulation requires 

the institution to set up delegations of 

authority, internal controls, portfolio 

diversification requirements, obligor 

limits, due diligence requirements, and 

to report regularly to the board of 

directors. 

Except for a few minor stylistic 

changes, we proposed no substantive 

changes to § 615.5133(a), (b), (d), and 

(e), which respectively addresses the 

responsibilities of the boards of 

directors, general requirements for 

investment policies, delegation of 

authority, and internal controls. We 

received no comments on these 

provisions, which we now adopt as a 

final rule. We proposed to redesignate 

§ 615.5133(f), which addresses due 

diligence, and § 615.5133(g), which 

address reports to the board, as 

§ 615.5133(h) and (i), respectively. We 

proposed to enhance the portfolio 

diversification and the counterparty 

(i.e., obligor) limits for Farm Credit 

banks, which were previously in 

§ 615.5133(c)(1)(i), and establish them 

as free-standing provisions in 

redesignated § 615.5133(f) and (g), 

respectively. We received comments 

about risk tolerance requirements in 

§ 615.5133(c), portfolio diversification 

in redesignated § 615.5133(f), and the 

obligor limits in redesignated 

§ 615.5133(g), which we will now 

address. 

1. Risk Tolerance 

Proposed § 615.5133(c)(1)(ii) would 

address concentration risk. It would 

require that an institution’s investment 

policies establish concentration limits 

for single or related obligors, sponsors, 

geographical areas, industries, 

unsecured exposures, and asset classes 

or obligations with similar 

characteristics. We proposed to add 

sponsors and unsecured investments to 

this regulatory provision because we 

believe undue concentration in a 

sponsor or unsecured investments could 

present excessive risk. Concentration 

limits should be commensurate with the 

types and complexity of investments 

that an institution holds. 

We received a comment about 

proposed § 615.5133(c)(1)(ii) from a 

bank trade association. This commenter 

opined that FCA should establish a 

specific concentration limit by 

regulation, rather than allowing FCS 

institutions to set their own 

concentration limits. Both FCA and the 

FBRAs no longer prescribe 

concentration limits by regulation 

because each financial institution has its 

own business model and risk appetite. 

Financial institution regulators examine 

each regulated institution for robust risk 

management practices. The commenter 

has not identified any compelling 

reasons FCS institutions should not be 

subject to the same supervisory 

framework as banks. 

2. Liquidity Risk 

FCA proposed to revise 

§ 615.5133(c)(3), which governs how 

System institutions manage the liquidity 

characteristics of investments they hold. 

Specifically, we proposed to separately 

address the different liquidity needs of 

System banks and associations. 

Proposed § 615.5133(c)(3)(i) would 

address liquidity in the investment 

policies of Farm Credit banks, while 

proposed § 615.5133(c)(3)(ii) would 

address the liquid characteristics of 

investments that associations hold. We 

proposed this revision because of the 

differences in how Farm Credit banks 

and associations manage liquidity. Farm 

Credit banks hold liquidity reserves to 

manage funding and liquidity risks for 

themselves, their affiliated associations, 

and certain service corporations. In 

contrast, System associations have more 

limited funding and liquidity risk 

exposure because their only substantial 

liability is their debt obligation to their 

funding bank. We received no 

comments on proposed § 615.5133(c)(3), 

and we now adopt it as a final rule with 

minor stylistic changes. 

3. Farm Credit Bank Portfolio 

Diversification 

As discussed above, proposed 

§ 615.5133(f) emphasized the 

importance of a well-diversified 

investment portfolio. This provision 

would require System banks to adopt 

policies that prevent their investment 

portfolios from posing significant risk of 

loss due to excessive concentrations in 

asset classes, maturities, industries, 

geographic areas, and obligors. The 

proposed rule retained the provisions of 

the previous regulations that imposed 

no concentration limits on securities 

issued or guaranteed by the U.S. 

government and its agencies, and kept a 

50-percent cap on MBS securities issued 

or guaranteed by a Governmentsponsored enterprise (GSE). In 2014, we 

proposed a 15-percent portfolio cap on 

all other eligible asset classes. Under 

our proposal, no Farm Credit bank 

could invest more than 10 percent of 

total capital in a single obligor, and the 

securities of a single obligor could not 

exceed 3 percent of the bank’s total 

outstanding investments. 

System commenters asked us to 

remove the portfolio limit on money 

market funds. The commenters stressed 

that money market funds are diversified 

in nature and they are an effective 

vehicle for liquidity risk management, 

and the short-term maturities make 

these investments self-liquidating, 

which provide the banks with a reliable 

source of liquidity during periods of 

market stress. We are persuaded by this 

logic and, therefore, we omit the 

portfolio limit on money market funds 

in final § 615.5133(f)(3)(iii). 

System commenters also claimed that 

the limit of 3 percent in the overall 

investment portfolio for each obligor is 

unnecessary because the proposed rule 

reduced the regulatory obligor limit 

from 20 percent to 10 percent of total 

capital. According to the commenters, 


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13Revised § 615.5140(a) would apply to Farm 

Credit banks only. As discussed below, all 

association eligibility requirements would be in 

revised § 615.5140(b). 

14As noted in the preamble to the proposed rule, 

non-convertible senior debt includes: (1) U.S. 

Government and U.S. Government agencies debt 

securities, (2) Government-sponsored enterprises 

debt securities, (3) municipal (debt) securities, (4) 

corporate debt securities, and (4) other senior debt 

securities. Senior debt securities may be secured by 

a specific pool of collateral or may be unsecured 

with priority of claims over junior types of debt or 

equity securities. To be eligible under this criterion, 

a senior debt security must not be convertible into 

a non-senior debt security or an equity security. See 

79 FR 43301, 43304, July 25, 2014. Since 1993, FCA 

has stated it is generally inappropriate for System 

institutions to maintain an ownership interest in 

commercial enterprises by holding equity 

securities. See 58 FR 63059, 63049–50, November 

30, 1993. 15See 79 FR 43301, 43304, July 25, 2014. 

obligor exposure limits based on capital 

provides sufficient protection for 

System banks, and the proposed, 

additional 3-percent obligor limit on the 

overall investment portfolio does not 

add meaningful protection from a risk 

management perspective. We agree with 

the commenters, and therefore, we have 

deleted this limit from the final 

regulation. 

D. Section 615.5134—Liquidity Reserve 

We proposed technical, nonsubstantive revisions to the terms 

‘‘Government-sponsored enterprise 

(GSE)’’ and ‘‘U.S. Government agency’’ 

in our liquidity reserve regulation in 

§ 615.5134. These changes conform to 

the definitions in § 615.5131. We 

received no comments about this 

change. This change is consistent with 

recent changes to FCA’s capital 

regulations as well as guidance from the 

FBRAs. For these reasons, we adopt the 

proposed provision as a final rule 

without change. 

We proposed to clarify that MBS fully 

guaranteed by a U.S. Government 

agency qualify for Level 2 liquidity and 

MBS fully guaranteed by a GSE qualify 

for Level 3 liquidity. A System 

commenter requested that we treat the 

MBS of a GSE in conservatorship as full 

faith and credit obligations of the 

United States and, therefore, qualifying 

for Level 2 of the Liquidity Reserve. 

FCA declined this request. Our 

approach is consistent with FCA’s 

capital regulations and that of the 

FBRAs, which points to the uncertainty 

of the future government support of 

GSEs in conservatorship. 

We made a clarifying change to the 

table ‘‘to omit two lines: In Level 2 

‘‘Additional Levels 1 investments’’, and 

in Level 3 ‘‘Additional Level 1 or 2 

investments’’ as well as the 

accompanying discount factors. We 

determined these two provisions are 

confusing and difficult to follow and are 

redundant given the preceding section 

of the regulation dealing with day 

counts. 

E. Section 615.5140(a)—Eligible 

Investments for Farm Credit Banks 

Proposed § 615.5140(a)(2) sets forth 

the types of eligible investments that 

Farm Credit banks may purchase and 

hold. The intent of this provision is to 

ensure that System banks invest only in 

high-quality investments. We received 

comments on each investment type, 

which we now discuss.13

1. Non-Convertible Senior Debt 

Securities 

The proposed rule would continue to 

authorize FCS banks to invest in nonconvertible senior debt securities. A 

bank trade association questioned 

whether System institutions should 

have authority to invest in corporate 

bonds. The commenter claims that 

corporate bonds are not as high quality 

as government bonds, and expose 

investors to greater interest rate risk. 

The commenter’s concern is that a 

corporate bond could allow System 

banks to become the only, or the 

majority, investor, which the 

commenter believes could enable the 

System to exceed the lending 

constraints in the Act. 

FCA is not willing to ban investments 

in all corporate bonds, as the 

commenter requests. Our regulations 

have allowed FCS institutions to invest 

in high-quality corporate bonds since 

1993. System institutions use these 

high-quality corporate bonds to build 

and diversify their liquidity portfolios. 

This regulatory provision imposes high 

credit quality standards, portfolio and 

obligor limits, and purpose restrictions 

on non-convertible senior debt 

securities. These restrictions mean that 

the FCS may purchase and hold only 

publicly traded debt securities. Under 

proposed § 615.5140(a)(2)(i), which is 

redesignated as final 

§ 615.5140(a)(1)(ii)(A), investments in 

corporate debt securities fall under an 

institution’s investment authority and, 

therefore, they do not violate the 

lending restrictions of the Act. 

Accordingly, final § 615.5140(a)(1)(ii)(A) 

will allow FCS banks to buy and hold 

a non-convertible, senior debt security, 

which includes corporate bonds. 

Under proposed § 615.5140(a)(2)(i), 

System banks could not invest in senior 

debt securities that can convert into 

another debt or equity security.14 FCA 

received no comments on nonconvertible senior debt securities, and it 

adopts this provision as final and 

redesignate it as § 615.5140(a)(1)(ii)(A) 

without substantive change. 

2. Money Market Instruments 

As under our previous rule, 

investments in money market 

instruments would be eligible under the 

proposed rule. Money market 

instruments include short-term 

instruments such as (1) Federal funds, 

(2) negotiable certificates of deposit, (3) 

bankers’ acceptances, (4) commercial 

paper, (5) non-callable term Federal 

funds (6) Eurodollar time deposits, (7) 

master notes, and (8) repurchase 

agreements collateralized by eligible 

investments as money market 

instruments. A money market 

instrument is an eligible security if it 

matures in 1 year or less. 

Two System commenters asked that 

we remove the asset class limit for 

money market instruments because their 

short-term maturities make them selfliquidating. FCA agrees with the 

commenters that money market 

instruments are liquid due to their short 

maturities and, therefore, no longer 

warrant a portfolio limit. However, the 

10-percent obligor limit would still 

apply for these investments. 

Accordingly, FCA has removed the 15- 

percent portfolio diversification 

requirement for money market 

instruments in final § 615.5133(f)(3)(iii). 

3. Mortgage-Backed Securities and 

Asset-Backed Securities Guaranteed by 

the U.S. Government and U.S. 

Government Agencies 

Under proposed § 615.5140(a)(2)(iii), 

MBS and ABS that are fully guaranteed 

as to the timely payment of principal 

and interest by a U.S. Government 

agency would remain eligible securities 

because of their high credit quality. As 

we explained in the preamble to the 

proposed rule, securities labeled 

‘‘government guaranteed’’ satisfy this 

criterion only if they are fully 

guaranteed as to the timely payment of 

principal and interest.15 We received no 

comments on proposed 

§ 615.5140(a)(2)(iii) and, therefore, we 

adopt this provision as final and 

redesignated § 615.5140(a)(1)(ii)(C) 

without substantive change. 

4. Mortgage-Backed Securities and 

Asset-Backed Securities Guaranteed by 

GSEs 

Under the proposed rule, MBS and 

ABS that are fully and explicitly 

guaranteed as to the timely payment of 

principal and interest by GSEs would 


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16Securities are eligible under this provision only 

if a GSE fully guarantees the timely payment of both 

the principal and interest due. A GSE ‘‘wrap’’ 

(guarantee) does not make a security eligible under 

this provision unless it is a guarantee of all 

principal and interest. When considering whether 

to purchase a security with a GSE guarantee or 

wrap, an institution must ensure that it is fully 

guaranteed. 

17 In 2011, we originally proposed that one of the 

criteria for senior-most MBSs was that no other 

remaining position in the securitization had a 

higher priority claim to any contractual cashflows. 

76 FR 51289, August 18, 2011. In response to 

System comment letters, we deleted this criterion 

in our 2014 proposed rule. 

18The Investment Company Act of 1940 does not 

define the term ‘‘mutual fund’’ but SEC literature 

uses it interchangeably with an open-end fund, 

which that statute defines. 

19Exchange-traded funds are investment funds 

that are legally classified as open-end funds or unit 

investment trusts under the Investment Company 

Act of 1940. 

20A money market fund is a special type of 

mutual fund under the Investment Company Act of 

1940 and 17 CFR 270.2a–7—Money market funds. 

21Our regulation has not imposed credit rating 

requirements on investments in obligations of 

United States. U.S. Government agencies, GSEs, and 

international and multilateral development banks, 

and in DIFs and certain money market instruments. 

remain eligible investments.16 Section 

615.5174 authorize Farmer Mac AMBSs. 

As already noted in the liquidity reserve 

preamble discussion, a System 

commenter asked that the final rule treat 

securities of GSEs under 

conservatorship in the same fashion as 

though they were full faith and credit 

obligations of the U.S. Government. For 

the reasons explained earlier, we do not 

agree with the commenter, and we do 

not change this provision of the final 

rule. 

5. Senior-most Positions of Non-Agency 

Mortgage-Backed Securities and AssetBacked Securities 

Previous § 615.5140(a)(5) and (6) 

classified non-agency mortgage-backed 

securities (including non-agency 

commercial mortgage-backed securities), 

and asset-backed securities as eligible 

investments. In 2014, FCA proposed 

restricting that provision by only 

allowing an institution to buy the 

senior-most position of a tranched nonagency MBS or ABS as an eligible 

security.17 A non-agency MBS or ABS, 

which is not tranched, and which 

payments are made on a pro-rata basis 

would be eligible securities under the 

proposed rule. Under proposed 

§ 615.5140(a)(2)(v), an eligible MBS 

must satisfy the definition of ‘‘mortgage 

related security’’ in 15 U.S.C. 78c(a)(41). 

Non-agency commercial MBS (CMBS) 

that meet these requirements are eligible 

investments for System banks under this 

regulatory provision. Non-agency MBSs 

and CMBS must also meet the criteria in 

the Secondary Market Mortgage 

Enhancement Act of 1984 (SMMEA). 

We received no comments on the 

eligibility of the senior-most position of 

non-agency securities and, therefore, we 

adopt this provision as final and 

redesignate it as § 615.5140(a)(1)(i)(E). 

6. Private Placement Securities 

During this rulemaking, FCA used the 

term ‘‘private placement’’ securities 

when referring to privately placed 

bonds or debt securities. Private 

placement refers to the sale of securities 

to a few sophisticated investors without 

registration with the Securities and 

Exchange Commission, and often 

without a prospectus. As a result, a 

private placement security normally is 

not a liquid security and not held for 

liquidity purposes; however, they may 

be appropriate for risk management. A 

bank trade association opined that FCA 

should not authorize any System 

institution to purchase private 

placement securities. This comment 

letter, however, focused on FCA 

approval of private placement securities 

on a case-by case basis. Since private 

placements are not liquid, they need to 

be approved by FCA on a case-by-case 

basis under § 615.5140(e). We discuss 

this issue in greater detail below. 

7. International and Multilateral 

Development Bank Obligations 

Proposed § 615.5140(a)(2)(vi) retained 

the previous authority of Farm Credit 

banks to invest in obligations of 

international and multilateral 

development banks, if the United States 

is a voting shareholder. We received no 

comment on this provision and, 

therefore, we adopt this provision as 

final and redesignate it as 

§ 615.5140(a)(1)(i)(F). 

8. Shares of a Diversified Investment 

Fund 

For many years, these regulations 

have authorized System banks to invest 

in several types of money market funds 

offered by investment companies 

registered under section 8 of the 

Investment Company Act of 1940, 15 

U.S.C. 80a–1 et seq. The proposed rule 

retained this original authority, 

although FCA updated and modified 

some of the terminology. Under 

proposed § 615.5140(a)(2)(vii), shares of 

a diversified investment fund (DIF) 

would remain an eligible investment if 

the DIF’s portfolio consists solely of 

eligible investments under any other 

paragraph of proposed § 615.5140(a)(2), 

or § 615.5174. The investment 

company’s risk and return objectives 

and use of derivatives must be 

consistent with the investment policies 

of the Farm Credit bank. FCA proposed, 

however, more restrictive portfolio 

diversification limits on DIF 

investments than those that now exist. 

FCA received no comments about 

what constitutes a DIF. However, we 

wish to clarify that a diversified 

investment fund consists of any of three 

categories of investment funds, which 

are mutual funds,18 closed-end funds or 

unit investment trusts registered under 

the Investment Company Act of 1940. A 

diversified investment fund also 

includes exchanged-traded funds 19 and 

money market funds.20 ExchangeTraded Funds (ETFs) while considered 

mutual funds or unit investment trusts, 

differ from traditional mutual funds and 

unit investment trusts (UITs). An 

investor’s investment consists of 

purchased shares in these investment 

funds. All these investment funds meet 

the criteria of this regulation provision, 

which we redesignate as 

§ 615.5140(a)(1)(i)(G). 

A bank trade association objected to 

DIFs as eligible investments for FCS 

institutions. The commenter claimed 

that the proposed rule did not limit the 

scope of investments in DIFs, so this 

authority could be very broad and 

exceed the lending constraints of the 

Act. FCA disagrees and points out that 

both §§ 615.5134 and 615.5140 impose 

very stringent criteria for investments in 

DIFs. Furthermore, our regulations have 

allowed investments in DIFs for over 20 

years, and the proposed rule did not 

expand this authority, or permit System 

banks to invest in DIFs for purposes that 

are beyond managing liquidity, shortterm surplus funds, or interest rate risks. 

Additionally, this regulation still 

requires the portfolio of any eligible DIF 

to be comprised solely of investments 

authorized by §§ 615.5140 and 

615.5174. System banks can only invest 

in DIFs by buying shares of investment 

companies registered under section 8 of 

the Investment Company Act of 1940. 

Contrary to the commenter’s claim, DIFs 

are eligible only if System banks 

exclusively hold the liquid, low-risk 

assets found in final and redesignated 

§ 615.5140(a)(1)(ii)(G). Because DIFs are 

investments, they do not enable the FCS 

to exceed the lending constraints of the 

Act. 

9. Obligors’ Creditworthiness Standard 

Previous § 615.5140 relied on NRSRO 

credit ratings to determine the eligibility 

of investments in many asset classes, 

including municipal securities, certain 

money market instruments, non-agency 

mortgage-backed securities, assetbacked securities, and corporate debt 

securities.21 As noted earlier, section 

939A of the DFA requires each Federal 


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22http://www.oecd.org/trade/xcred/crc.htm. 

agency to revise all 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. 

FCA proposed § 615.5140(a)(3) to 

implement section 939A of the DFA by 

addressing the creditworthiness of the 

obligor of securities that System banks 

buy and hold as investments. 

Our proposed rule would have 

required at least one obligor of the 

investment to have ‘‘very strong 

capacity’’ to meet its financial 

commitment for the expected life of the 

investment. If a Farm Credit bank is 

relying upon an obligor located outside 

of the United States to meet its financial 

commitment, the proposal required: 

That obligor’s sovereign host country to 

have the highest or second-highest consensus 

Country Risk Classification (CRC) (a 0 or a 1) 

as published by the Organization of 

Economic Cooperation Development (OECD 

or must be an OECD member that is unrated; 

or the investment must be fully guaranteed 

as to the timely payment of principle and 

interest.22

A System trade association, an FCS 

association, and Farmer Mac 

commented that the proposed 

creditworthiness standard for obligors 

was too stringent. These commenters 

suggested that the final rule should 

require at least one obligor to have a 

‘‘strong’’ capacity to meet its financial 

commitment for the expected life of the 

investment, rather than the ‘‘very 

strong’’ capacity referred to in the 

proposed rule. One of these commenters 

asked FCA to provide further 

clarification about how ‘‘very strong 

capacity to meet its financial 

commitments’’ is related to a ‘‘very low 

probability of default.’’ These 

commenters also urged FCA to adopt 

the FBRA’s creditworthiness standard of 

‘‘investment grade.’’ 

FCA declined the commenters’ 

request to relax the creditworthiness 

standard for obligors. FCA believes a 

security with ‘‘low credit risk’’ is one 

where the Farm Credit bank determines 

the issuer has a ‘‘very strong’’ capacity 

to meet all financial commitments 

under the security’s projected life even 

under adverse economic conditions. 

Securities that exhibit these 

characteristics are liquid and 

marketable. Farm Credit banks primarily 

hold securities for liquidity purposes 

and, therefore, the creditworthiness 

standards for these securities ensure 

that they are marketable and readily 

convertible into cash in a crisis at 

minimum costs. 

We recognize our regulations 

governing margin and capital 

requirements for covered swap entities, 

and capital adequacy for all System 

institutions use the ‘‘investment grade’’ 

standard. However, we determine that 

‘‘investment grade’’ is not appropriate 

for these investment regulations. FCA 

believes not all securities that meet the 

‘‘investment grade’’ requirements would 

be of suitable high credit quality and 

marketable for liquidity purposes. 

Therefore, FCA declines to lower its 

proposed investment creditworthiness 

standard. 

We now respond to the comment 

requesting clarification about the 

relationship between ‘‘very strong 

capacity to meet its financial 

commitments’’ and a ‘‘very low 

probability of default.’’ In evaluating the 

creditworthiness of a security, a Farm 

Credit bank should consider any of the 

following factors as well as any 

additional factors it deems appropriate: 

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

possible to demonstrate that a security 

is subject to an amount of credit risk 

based on the spread between the 

security’s yield and the yield of 

Treasury or other securities); 

• Securities-related research (i.e., 

whether providers of securities-related 

research believe the issuer of the 

security will be able to meet its financial 

commitments, generally or specifically, 

with respect to the securities held by the 

Farm Credit bank); 

• Internal or external credit risk 

assessments; 

• 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 an 

amount of credit risk); 

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

a security, or issuer of the security, is 

included as a component of a 

recognized index of instruments that are 

subject to a specific amount of credit 

risk); 

• Priorities and enhancements (i.e., 

the extent to which credit 

enhancements, such as 

overcollateralization and reserve 

accounts cover a security) 

• Price, yield, and volume (i.e., 

whether the price and yield of a security 

are consistent with other securities that 

the institution has determined are 

subject to an 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 quality of the underlying assets). 

10. Credit and Other Risk in the 

Investment 

In addition to imposing 

creditworthiness standards on obligors, 

we also proposed that an eligible 

investment must exhibit low credit risk 

and other risk characteristics consistent 

with the purposes for which it is held, 

such as interest rate risk. Institutions 

must consider other risks but are not 

limited to just those listed in 

§ 615.5133(c). FCA received a System 

comment that proposed § 615.5140(a)(4) 

limits the ability of System banks to use 

an investment for more than one 

investment purpose. We already 

responded to that comment above in the 

preamble discussion of final § 615.5132. 

In addition, our discussion in the 

preamble about the creditworthiness of 

the obligor explains our position of 

credit quality, and this provision 

requires no revision. Therefore, we 

adopt this provision as final and 

redesignate it as § 615.5140(a)(1)(iv). 

11. Currency Denomination 

Since 1993, § 615.5140(a) has required 

all investments at System institutions to 

be denominated in U.S. dollars. We 

proposed no change to this requirement, 

and we received no comments about it. 

Accordingly, we retain this requirement 

in the final rule without revision, but 

redesignate it as § 615.5140(a)(v). 

12. Ineligible Investments 

The proposed rule, § 615.5140(c), 

would have prohibited Farm Credit 

banks from purchasing collateralized 

debt obligations (CDOs), as originally 

defined in § 615.5131. As discussed in 

the preamble to the definitions section 

above, Farmer Mac objected to our 

definition of ‘‘CDO,’’ and we responded 

by substituting the term 

‘‘resecuritization’’ for ‘‘CDO.’’ 

However, the final rule would 

prohibit System banks from purchasing 

and holding resecuritizations as we 

originally proposed. During the 

financial crisis of 2008–2009, many 

risky securitization exposures were 

resecuritized into new complex 

securities where not all buyers fully 

understood the risks in the different 

tranches of these new resecuritization 

exposures. These securities, which were 

sometimes known as CDO-squared, 

CDO-cubed, or reperformers, exposed 

investors to higher risk than the basic 

securitization structure. Basel III and the 

FBRAs recognized the higher risk posed 

by resecuritizations, and assigned a 

higher risk weight to them than basic 


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23See § 628.43(b)(5)—A supervisory calibration 

parameter, p, is equal to 0.5 for securitization 

exposures that are not resecuritization exposures 

and equal to 1.5 for resecuritization exposures. 

24See sections 2.2(10) and (11), and 2.12(17) and 

(18) of the Act. Additionally, sections 2.2(10) and 

2.12(18) of the Act authorize System associations to 

deposit funds with any member bank of the Federal 

Reserve System, or with any bank insured by the 

Federal Deposit Insurance Corporation. 

securitization exposure.23 FCA strongly 

believes the complex nature of the risks 

within these resecuritization exposures 

are inappropriate investments for 

System banks. Therefore, we consider 

these resecuritization exposures to be 

ineligible investments for the purposes 

authorized in § 615.5132. FCA also 

believes certain pools of previously 

delinquent or reperforming loans that 

were once part of a different 

securitization exposure exhibit similar 

risks as a resecuritization exposure. The 

final rule prohibits System banks from 

purchasing resecuritizations without 

FCA’s approval under final 

§ 615.5140(e), except when both 

principal and interest are fully and 

explicitly guaranteed by the U.S. 

Government or a GSE. 

13. Reservation of Authority 

Proposed § 615.5140(d) would have 

made explicit our authority, on a caseby-case basis, to determine that an 

investment poses inappropriate risk, 

notwithstanding that it satisfies the 

investment eligibility criteria. The 

proposal also provides that FCA would 

notify a Farm Credit bank as to the 

proper treatment of any such 

investment. We received no comment 

on this provision. We retain this 

provision to safeguard the safety and 

soundness of banks, and we redesignate 

it as § 615.5140(c). 

F. Association Investments 

FCA proposed to substantially revise 

§ 615.5142, which governed association 

investments. Previously, § 615.5142 did 

not impose a portfolio limit on the total 

amount of association investments. 

Additionally, our former regulation 

permitted associations to hold the same 

types of investments as Farm Credit 

banks even though associations are not 

subject to the liquidity reserve 

requirement in § 615.5134, and they are 

not exposed to the same liquidity and 

market (interest rate) risks as their 

funding banks. Previously, § 615.5142 

authorized each 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. The regulation 

also required each Farm Credit bank to 

review annually the investment 

portfolio of every association it funds. 

The proposed rule would limit 

association investments to securities 

that are issued or fully guaranteed or 

insured as to the timely payment of 

principal and interest by the United 

States or any of its agencies in an 

amount that does not exceed 10 percent 

of its total outstanding loans. The 

proposed rule also addresses: (1) 

Investment and risk management 

practices at System associations; (2) 

funding bank supervision of association 

investments; (3) requests by associations 

to FCA to hold other investments; and 

(4) transition requirements for System 

associations to come into compliance 

with the new rule. 

We proposed these changes because 

most System associations have 

increased in size and complexity over 

the past two decades, offering a 

diversity of products and services to 

adapt to a changing and increasingly 

competitive agricultural sector. The 

changes in agriculture have introduced 

new risks to the associations. For 

example, while the associations have 

adopted adequate risk management 

strategies to effectively adapt to this 

changing environment, they remain 

concentrated in agriculture and have 

limited ability to manage concentration 

risk. Although the previous regulation 

allowed the associations to use 

investments for managing surplus shortterm funds and reducing interest rate 

risk, they could not use investments to 

manage concentration risk. For these 

reasons, we designed the proposed rule 

to strike a balance by granting 

associations greater flexibility in the 

purposes for which they may hold 

investments, while placing new limits 

on the amounts and types of 

investments they may hold. Under the 

proposed rule, associations would have 

the flexibility to manage concentration 

risks with securities that are issued or 

fully guaranteed or insured as to the 

timely payment of principal and interest 

by the U.S. Government or its agencies. 

The Act specifically authorizes System 

associations to buy and sell obligations 

of, or insured by, the United States or 

any agency thereof, and make other 

investments as may be approved by 

their respective funding banks under 

regulations issued by FCA.24

Before we address the substantive 

comments that we have received, we 

notify the public that we have 

consolidated all the provisions 

governing eligible investments for all 

System institutions into a single 

regulation, § 615.5140. Accordingly, 

FCA has removed § 615.5142 

concerning association investments, and 

redesignated it as final § 615.5140(b). 

Proposed § 615.5142(d) would have 

redesignated, but not substantively 

changed, § 615.5140(e) concerning other 

association investments approved by 

FCA. The final rule restores case-by case 

approvals for both banks and 

associations to § 615.5140(e). Although 

we received, no comments about 

restructuring final § 615.5140, we 

consolidated the two sections for greater 

uniformity in the rule. Addressing 

eligible investments in a single 

regulation will make it easier for both 

FCA examiners and System institutions 

to use and apply this rule. 

1. Association Investment Purposes 

The proposed rule would remove the 

requirements in the previous regulation 

that authorize associations to hold 

investments for the purposes of 

reducing interest rate risk and managing 

surplus short-term funds. The preamble 

to the proposed rule explained that 

these requirements may be too 

restrictive and too inflexible for 

associations to effectively manage their 

risks in today’s environment. For many 

associations, a limited portfolio of highquality investments could help diversify 

risks they experience as lenders that 

primarily lend to a single-industry 

agriculture. 

We invited comments about whether 

this rule should identify specific 

purposes for associations to purchase 

and hold investments, and we asked the 

commenters to expressly identify any 

specific purposes that the final 

regulation should retain or require, and 

why. Two bank trade associations stated 

that the final rule should identify 

specific risk management purposes for 

associations to purchase and hold 

investments. One commenter asked if 

associations are no longer required to 

manage surplus short-term funds and 

reduce interest rate risks, what is the 

reason for these investments? 

FCA responded that System 

institutions face four broad types of 

risks: (1) Credit; (2) market (interest 

rate); (3) liquidity; and (4) operational. 

Although the previous regulation 

allowed associations to hold 

investments only for managing surplus 

short-term funds (liquidity), and 

reducing interest rate risk (market risk), 

the associations remain exposed to 

broader risk both in individual 

investments and in their overall 

portfolios. Additionally, the prior 

regulation permitted associations to 

hold the same investments as FCS 

banks, which exposed them to the same 

four risks. For this reason, § 615.5133 

requires all FCS banks and association 

to address these four risks in their 


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25 Investments in Farmer Mac AMBS are covered 

by § 615.5174. Investments in Farmer Mac AMBS 

cannot exceed the total amount of outstanding loans 

of a System bank or association. 

26For Generally Accepted Accounting Principles’ 

(GAAP) purposes, the association should treat the 

purchase of an individual loan as purchase of an 

interest in an assignment in a loan participation. 

System institutions, when purchasing the 

guaranteed portion of an individual loan, also must 

comply with the lending eligibility and loan 

purpose of parts 613 and 614, as if they originated 

the loan. 

27The SBA issues a ‘‘SBA Guaranteed Pool 

Certificate’’ to those securitizations created by 

third-party issuers. In effect, the SBA 

unconditionally guarantees the security. Farmer 

Mac issues Farmer Mac 2 AMBSs whose underlying 

assets consist of the guaranteed portions of USDA 

loans. 

28SBA is a Government agency while Farmer Mac 

is a GSE. 

investment policies. The investment 

policies must be commensurate with the 

size and complexity of the institution’s 

investment portfolio. As discussed in 

greater detail below, this final rule 

retains and strengthens the investment 

management requirements in 

§ 615.5133. Additionally, new limits on 

the amount and types of investments in 

our proposal would counterbalance the 

greater flexibility in investment 

purposes. 

As stated above, FCA seeks to grant 

associations greater flexibility in 

investment purposes, while placing 

more restrictions on the types and 

amount of investments they may hold. 

Contrary to claims in banker comment 

letters, this rule restricts, rather than 

expands the types of investments that 

associations may purchase and hold. 

This rule no longer authorizes 

associations to hold the same 

investments as FCS banks, such as 

money market instruments, corporate 

bonds, and certain asset-backed 

securities. 

In contrast, a System association 

asked FCA to retain the investment list 

in the previous regulation, which it 

claims associations need to manage 

‘‘prepayment [extension or contraction] 

risk, credit risk, liquidity risk and yield 

risk.’’ However, FCA determines that 

the new regulation provides sufficient 

risk management tools for associations, 

and their need for investments is 

different from their funding banks. By 

only authorizing associations to hold 

securities issued or unconditionally 

guaranteed by the U.S. Government and 

its agencies, the regulation eliminates 

most credit risk associated with such 

assets, and helps mitigate risk in their 

overall portfolios. Securities issued or 

unconditionally guaranteed by the U.S 

Government and its agencies still 

present market (interest rate), liquidity, 

and operational risks to associations. As 

discussed elsewhere in this preamble, 

placing a 10-percent portfolio cap on 

associations for the first time, and 

limiting the types of investments that 

associations may hold, result in a 

conservative and risk-adverse regulatory 

approach. The low credit risk in these 

investments offer the opportunity to 

diversify the balance sheet credit risks 

for those associations that choose to 

exercise their investment authorities. 

2. Eligible Association Investments 

Proposed § 615.5142(a) would 

authorize System associations to invest 

solely in obligations that the United 

States Government and its agencies 

issue, fully guarantee, or insure as to the 

timely payment of principal and 

interest. Sections 2.2(11) and 2.2(17) 

expressly authorize System associations 

to invest in such obligations of the 

United States and its agencies. Such 

obligations are usually liquid and 

marketable. Although MBS issued by 

the U.S. Government and its agencies 

pose almost no credit risk to investors, 

they potentially expose investors to 

other risks, especially market (interest 

rate and prepayment risk). We find that 

these investments are suitable for 

managing risk at associations because 

they have no credit risk and they enable 

associations to diversify their portfolios. 

Additionally, all System institutions 

may hold Farmer Mac AMBS as eligible 

investments.25

Bankers and their trade associations 

commented that this provision would 

allow System associations to buy 

ineligible loans that are guaranteed by 

the United States and its agencies in 

contravention of the Act. FCA revised 

this provision to address these concerns. 

FCA has addressed the commenters’ 

concerns by changing the term 

‘‘obligations’’ to ‘‘securities’’ in the third 

sentence of the final rule. If an 

association purchases the governmentguaranteed portions of individual loans, 

such purchases do not meet the criteria 

for an investment security under the 

final rule.26 FCA has added rule text to 

clarify that only securities that the U.S. 

Government and its agencies 

unconditionally guarantee are eligible 

investments for associations. Under the 

final regulation, only investments 

defined and booked as securities under 

GAAP qualify as authorized investments 

under the final rule. 

For further clarification, FCA notes 

that pool assemblers purchase 

guaranteed portions of loans in the 

secondary market, and securitize these 

assets. In this context, not all these 

securitizations will be eligible 

investments for associations. We 

anticipate that System associations most 

likely will purchase and hold either 

securities guaranteed by SBA or issued 

by Farmer Mac.27 The SBA and Farmer 

Mac guarantee the timely payment of 

principal and interest to investors.28

Under GAAP, such assets are reported 

as investments. System banks and 

associations purchase Farmer Mac 2 

AMBSs under § 615.5174, not under 

§ 615.5140. Farmer Mac 2 AMBSs and 

guaranteed SBA securities are eligible 

investments for associations under the 

final regulation. We have redesignated 

proposed § 615.5142(a) as final 

§ 615.5140(b)(1). 

3. Association Portfolio Limits 

Proposed § 615.5142(a) limits 

association investments to 10 percent of 

total outstanding loans. This portfolio 

limit ensures that loans to eligible 

borrowers always comprise most of the 

assets of FCS associations, which is 

consistent with the System’s mission. 

Our regulations authorize Farm Credit 

banks to hold significantly larger 

investment portfolios than System 

associations because the: (1) Banks 

maintain liquidity and manage interest 

rate risk for all but a few affiliated 

associations; and (2) associations 

borrow almost exclusively from their 

funding banks. 

The proposed 10-percent portfolio 

limit on investments should be 

sufficient to enable associations to 

develop robust strategies to manage 

risks if association investment policies, 

management practices and procedures, 

and appropriate internal controls 

support those investment activities. 

Furthermore, the proposed 10-percent 

limit should help associations manage 

their concentration risk as singleindustry lenders. FCA believes that the 

proposed 10-percent portfolio limit on 

investments strikes an appropriate 

balance by enabling associations to 

appropriately manage and diversify 

risks while continuing to serve their 

primary mission of lending to farmers 

and other eligible borrowers. 

We received comments about the 

proposed portfolio limits from both 

System and non-System commenters. 

The principal concerns raised by the 

commenters focused on: (1) How FCA 

would apply the 10-percent limit; (2) 

which investments the portfolio limit 

covered, and (3) whether the 10-percent 

limit is prudent. 

System commenters raised three 

primary issues about the proposed 

portfolio limit for association 

investments. Several System 

commenters inquired whether the 10- 

percent limit on investments applies to 


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29See section 384J of the Consolidated Farm and 

Rural Development Act, 7 U.S.C. 2009cc–9. 

both investments authorized under 

§ 615.5142(a) and those approved by 

FCA on a case-by-case basis. 

Additionally, some System commenters 

opined that the 10-percent limit was too 

restrictive, and that FCA should 

increase it to 15-percent. Others 

suggested that a limit based on ‘‘total 

outstanding loans’’ would be too 

restrictive. These commenters suggested 

that the final rule tie the portfolio cap 

to a broader array of assets including; 

‘‘earning assets,’’ ‘‘loans plus missionrelated investments plus UBEs plus 

RBICs plus [Farmer Mac] MBS’’ or ‘‘total 

assets.’’ 

Bankers and their trade associations 

commenters opposed the proposed 

portfolio limit on association 

investments for other reasons. First, 

these commenters wanted FCA to base 

the portfolio limit on association capital 

levels, not total outstanding loans. One 

of the bank trade association 

commenters misinterpreted the 

proposed portfolio limit for associations 

by assuming that it established two 

separate 10-percent limits; one for U.S. 

Government-guaranteed investments, 

and one for ‘‘all other association 

investments.’’ This commenter 

requested that FCA limit eligible 

investments to 10 percent of capital (5 

percent for guaranteed investments and 

5 percent for non-guaranteed 

investments), which would include 1 

percent of capital for ‘‘other 

investments’’ which are ‘‘for purposes 

that are [consistent] with the Act’s 

lending constraints.’’ Second, these 

commenters claim that the proposed 

portfolio limit was too high because 

investments at most associations would 

rarely equal or exceed 10 percent of 

total outstanding loans. Third, bank 

commenters claimed that if loan volume 

declines at an association, it should 

then liquidate investments to comply 

with the portfolio limit, which would 

expose it to losses on their required sale 

due to their presumed illiquidity. 

We now respond to requests that we 

either increase or decrease the portfolio 

limit for investments. As stated above, 

System commenters claimed that a 10- 

percent limit was too restrictive, and 

they request that we increase it to 15 

percent. System commenters have not 

convinced us that the 10-percent limit is 

too restrictive. FCA notes that the 

policies at some System associations 

with active investment programs 

establish a 15-percent portfolio limit for 

investments, while in practice, 

investments at most associations rarely 

equal or exceed 10 percent of total 

outstanding loans. In contrast, bank 

trade associations commenters asked us 

to significantly lower the proposed 10- 

percent limit. However, a lower limit 

would not provide meaningful risk 

diversification, or the necessary 

economies of scale for associations to 

justify the added costs of establishing 

and maintaining the infrastructure and 

internal controls for holding and 

managing an investment portfolio of 

securities unconditionally guaranteed 

by the United States Government and its 

agencies. Reducing the portfolio limit 

below 10 percent could hamper 

associations from holding such 

investments, thereby denying them 

more diversified and better quality asset 

portfolios. For this reason, we decline 

both requests. 

We now address requests from bank 

commenters that FCA change the 

denominator for the portfolio limit 

calculation from total outstanding loans 

to capital. These commenters stated that 

all FRBAs impose investment limits that 

are based on references to capital, rather 

than loans or other assets. Additionally, 

these commenters assert that a limit tied 

to capital would more effectively reduce 

the risk exposure to System 

associations. FCA responds that the 

purpose of the portfolio limit is to 

ensure that most association assets are 

loans to eligible agricultural and aquatic 

producers while promoting portfolio 

diversity. Under the final rule, 

associations may hold only securities 

that are unconditionally guaranteed by 

the U.S. Government and its agencies 

for risk management purposes, which 

effectively eliminates the credit risk 

exposure that the commenters fear. 

Furthermore, § 615.5182 requires 

associations to manage interest rate risk 

associated with such Governmentguaranteed investments. For these 

reasons, a portfolio limit based on a 

reference to capital is unnecessary. In 

this context, the statutory framework for 

the FCS is different than that for banks. 

FBRAs do not tie investments at banks 

to loans or other assets because their 

statutes do not limit their lending 

activity to a single economic sector. 

As noted earlier, a bank trade 

association asked that the final rule 

limit non-guaranteed investments to 5 

percent of capital, and ‘‘other 

investments’’ to 1 percent of capital. 

The commenter also suggested that the 

final rule prohibit associations from 

holding non-guaranteed and ‘‘other 

investments’’ for purposes that are 

inconsistent with the Act’s lending 

constraints. FCA already addressed the 

comment about using capital as the 

reference for a portfolio limit. More 

importantly, the final rule does not 

allow associations to disguise ineligible 

loans as investments in violation of the 

Act, and as explained elsewhere in this 

preamble, we amended the final rule to 

address this specific concern. 

We now respond to System 

commenters who asked us to change the 

portfolio limit from ‘‘total outstanding 

loans’’ to either ‘‘earning assets,’’ or 

‘‘total assets.’’ We decline this request 

because ‘‘total outstanding loans’’ is a 

standard that provides associations with 

a sufficient level of investments to 

manage their risks prudently and 

economically. Our investment 

regulations use the same standard for 

calculating the limit for Farm Credit 

banks, which play a far greater role in 

managing liquidity and market risk for 

the entire System than associations. 

Under the circumstances, FCA finds no 

compelling reason for enacting a 

permissive standard for System 

associations, and a more stringent one 

for Farm Credit banks. Separately, FCA 

has consistently held that the principal 

statutory mission of the System is 

lending to agricultural and aquatic 

producers, and their cooperatives. A 

portfolio limit tied to loans ensures that 

agricultural credits remain the primary 

assets of all System banks and 

associations. A portfolio limit based on 

either ‘‘earning’’ or ‘‘total’’ assets could 

permit associations to hold a greater 

amount of assets that are unrelated to 

agriculture. 

Several System commenters asked 

that the portfolio limit calculation 

exclude equity investments in Rural 

Business Investment Companies 

(RBICs), an Unincorporated Business 

Entities (UBEs), or Farmer Mac Class B 

stock (held only by System investors) 

from its numerator. FCA agrees with 

System commenters, and the final rule 

excludes both debt and equity 

investments in these three entities from 

the calculation of the 10-percent limit. 

The amount that System institutions, 

either alone or together, may invest in 

RBICs are limited by statute.29

Investments in UBEs are subject to 

limits in § 611.1153(h). FCA does not 

intend to place any limitations on either 

the purchase of Farmer Mac Class B 

equity or Farmer Mac issued 

Agricultural Mortgage Backed Securities 

(AMBS) because it would discourage 

System institutions from using Farmer 

Mac in its risk management strategies. A 

System bank or association may 

purchase Farmer Mac Class B equity 

under § 615.5173 and Farmer Mac 

AMBSs under § 615.5174. 

Several System institutions suggested 

that the calculation for the portfolio 

limit revealed a potential conflict 

because the numerator would use a 30- 


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30Although we received no similar comment 

about the bank investment portfolio limit, we note 

that the same rationale applies. A System bank 

would not need to divest of investments that were 

eligible when purchased even if a decline in total 

outstanding loans causes it to exceed the 35-percent 

portfolio limit. However, System banks could not 

purchase additional investments. 

31Proposed § 615.5142(b)(1) would not require 

System associations to comply with proposed 

§ 615.5133(f) and (g) because those two provisions 

explicitly apply only to System banks. Proposed 

§ 615.5142(b) has been redesignated as final 

§ 615.5140(b)(2)(i). FCA did not redesignate 

§ 615.5133(f) and (g). 

day average while the denominator 

would use a 90-day average. These 

commenters requested that the final 

regulation set a 90-day average daily 

balance for both the numerator and 

denominator. FCA disagrees with the 

commenter that a 10-percent limit 

calculation should use a 90-day average 

balance for both the numerator and the 

denominator. FCA believes that the 

commenter’s approach could favorably 

influence the association’s calculation 

of the numerator of the 90-day average, 

and thus periodically exceed the 10- 

percent portfolio limit. After 

considering various alternatives, FCA 

decides that using a date-specific total 

investment amount for the numerator 

best achieves our objective that each 

association never exceeds the 10- 

percent portfolio limit. This approach 

simplifies the calculation by removing 

one of the two averages proposed. FCA 

will keep the denominator calculation at 

a 90-day average because FCA’s capital 

regulations and call report instructions 

already require FCS institutions to 

calculate 90-day average daily balances 

for loans outstanding. 

The final rule requires System 

associations to compute the 10-percent 

limit based upon a total amount for 

investments on a specific date in the 

numerator, divided by a 90-day average 

daily balance of loans outstanding in the 

denominator. This calculation values 

investments at amortized cost. Loans, as 

defined in § 615.5131, are calculated 

quarterly (as of the last day of March, 

June, September, and December) by 

using the average daily balance of loans 

during the quarter. For this calculation, 

loans would include accrued interest, 

but would not include allowances for 

loan loss adjustments. 

FCA changes the 30-day average daily 

balance in proposed § 615.5142(a) to a 

date specific amount in final and 

redesignated § 615.5140(b)(3). FCA has 

made a conforming change to the final 

rule, which requires associations to 

compute the limit using for the 

numerator, the date-specific amount of 

investments divided by the 

denominator, using the amount of the 

90-day average balance reported in the 

most recent call report. Unless 

otherwise directed by FCA, associations 

should calculate this limit quarterly. 

A bank trade association asserted that 

if loan volume declines at an 

association, the association should 

liquidate investments to stay within the 

10-percent limitation. FCA notes that 

proposed § 615.5142(e)(2) expressly 

stated that an association would not 

need to divest of investments that were 

eligible when purchased even if a 

decline in total outstanding loans causes 

it to exceed the 10-percent portfolio 

limit. However, the rule would prohibit 

associations from purchasing additional 

investments until their total amount is 

equal to or less than the 10-percent 

limit. FCA retains this approach in the 

final rule and redesignate it as 

§ 615.5140(b)(5). Requiring liquidation 

of investments when total outstanding 

loans decline could expose associations 

to unnecessary losses due to 

fluctuations in investment prices and 

associated transaction costs.30 The 

commenter also claimed that it is 

unclear whether association 

investments authorized by the proposed 

rule would be liquid, and this could 

increase risk to an association in the 

event it had to liquidate eligible 

investments. Given that this regulation 

limits association investments for risk 

management purposes to securities that 

are issued, or unconditionally 

guaranteed or insured by the U.S. 

Government or its agencies, the 

commenter’s concern lacks merit. 

After reviewing all the comments, 

FCA has decided to retain the proposed 

portfolio limit of 10 percent of total 

outstanding loans, although the final 

rule contains some minor adjustments, 

which we explained earlier. This new 

regulation imposes a portfolio limit on 

association investments, whereas the 

former regulation had none. As we 

explained in the preamble to the 

proposed rule, the 10-percent limit on 

investments ensures that loans to 

agricultural producers and other eligible 

borrowers constitute most of association 

assets. In this context, the primary 

purpose of the portfolio limit is to 

ensure that System associations adhere 

to their statutory mission as a GSE to 

finance agriculture. Additionally, the 

10-percent portfolio limit strikes an 

appropriate balance that enables 

associations to effectively manage and 

diversify risks while staying within the 

boundaries of the Act. Since 

associations may hold only investments 

issued, guaranteed or insured by the 

United States Government and its 

agencies, and investments approved by 

FCA on a case-by-case basis, a portfolio 

limit that does not exceed 10 percent of 

loans allows an appropriate economy of 

scale based on expected overhead costs 

and compliance with investment 

management requirements in 

§ 615.5133. 

Both System institutions and bank 

commenters asked whether the 10- 

percent limit applied to investments 

that FCA approves on a case-by-case 

basis. FCA confirms that the final 

regulation will apply an aggregate limit 

of 10 percent to investments authorized 

in § 615.5140. 

4. Association Risk Management 

Requirements 

The proposed rule addressed risk 

management practices that associations 

must follow if they select, purchase, and 

hold investments. We designed these 

provisions to ensure that System 

associations comply with prudent 

investment management practices. The 

proposed rule would have required each 

association to evaluate its investment 

management policies, and determine 

and document how its investment 

activities adhere to prudent risk 

management processes and procedures. 

Under the proposed rule, each 

association must comply with proposed 

§ 615.5133(a), (b), (c), (d), (e), (h), and 

(i), which govern investment 

management practices at all System 

institutions.31 From FCA’s perspective, 

compliance with these provisions of 

§ 615.5133 would instill discipline in 

investment management practices at 

each System association, which protects 

its safety and soundness. Additionally, 

each association’s investment 

management must be appropriate for the 

size, risk characteristics, and complexity 

of the association and its investment 

portfolio. Investment management must 

consider the association’s unique 

circumstances, risk tolerances, and 

objectives. 

We asked for comments on whether 

these new requirements would impose 

undue regulatory burden on System 

associations and their funding banks. 

FCA received no comments about risk 

management practices at associations. 

Since these risk management practices 

enhance safety and soundness at System 

associations, we adopt the proposed 

regulatory requirements without 

substantive revision. 

The rule requires each association to 

assess how investments that they 

purchase and hold impact the 

association’s credit risk profile, and 

affect its risk-bearing capacity. Such 

factors that associations should consider 

and evaluate include, but are not 

limited to, its management experience 


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32FCA notes that the General Financing 

Agreement (including any attached, referenced, or 

related documents) can be a useful tool for funding 

banks to review and monitor the investment 

activities of their affiliated associations. See 

§ 614.4125. 

and capability to understand and 

manage complex structures and unique 

risks in the investments it purchases 

and holds. Associations may purchase 

and hold investments in final 

§ 615.5140(b)(1) only for managing risks. 

Although FCA does not expect 

associations to suffer losses or breakeven on investments, using investments 

primarily for speculative purposes or 

generating gains from trading is an 

impermissible activity. Likewise, the 

intentional mismatched funding of 

investments and the resulting increase 

in interest rate risk would typically be 

inappropriate unless used as an 

effective hedge against other risks on the 

balance sheet. Other risks that 

associations should consider and 

evaluate include prepayment (extension 

and contraction) risks and interest rate 

cap risks and how these risks 

potentially impact earnings. 

5. Funding Bank Supervision of 

Association Investments 

Sections 2.2(10) and 2.12(18) of the 

Farm Credit Act require each 

association to obtain its funding bank’s 

approval of the association’s investment 

activities under FCA regulations. 

Proposed § 615.5142(c) sets forth the 

requirements for funding banks to 

review, approve, and oversee the 

investment activities of its affiliated 

associations. As required by statute, 

each association must request from its 

funding bank prior approval to buy and 

hold investments under this section. 

FCA structured the proposed rule to 

provide flexibility so that funding banks 

could approve types or classes of 

investments, rather than each individual 

investment. However, the proposed 

rule, would require funding banks to 

review and approve prospective 

association investments, prior to 

submission to FCA for case-by-case 

approval. The FCA Board continues to 

be the final authority for approving all 

association case-by-case investments. 

The proposed rule would require each 

bank to explain in writing its reasons for 

approving or denying the association’s 

investment requests. 

Once an association has established a 

satisfactory investment management 

program that its funding bank has 

approved, the association could 

purchase and hold investments that the 

Act and this regulation authorize. The 

intent of this provision is to balance the 

association investment activities with 

the funding and oversight role of the 

bank. As part of the approval, the 

funding bank must evaluate, determine 

and document that the association has: 

(1) Adequate policies, procedures, 

internal controls, and accounting and 

reporting systems for its investments; (2) 

the capability and expertise to 

effectively manage risks in investments; 

and (3) complied with requirements of 

proposed § 615.5142(b). Any prior 

System association investment 

management program that the funding 

bank previously approved would need 

to be reviewed and re-approved once 

proposed § 615.5142 becomes final and 

effective. FCA notes that the General 

Financing Agreement (GFA) (including 

any attached, referenced, or related 

documents) could establish covenants 

governing the investment activities of an 

affiliated association. As such, the GFA 

can be a useful tool for funding banks 

to review and monitor the investment 

activities of their affiliated associations. 

Finally, the proposed rule would keep 

the previous requirement that each 

System bank annually review the 

investment portfolio of every affiliated 

association.32 As part of its annual 

review, the bank must evaluate whether 

the association’s: (1) Investments 

mitigate and manage its risks; and (2) 

risk management practices continue to 

be adequate. 

FCA received comments from System 

institutions and commercial banks 

about funding bank approval of 

investments on a program rather than 

individual basis. We have already 

addressed this issue in a preceding 

section. Commercial bank trade 

associations claimed that FCA was 

abdicating its responsibilities by 

authorizing the funding banks to 

approve classes of association 

investments. We respond that sections 

2.2(10) and 2.12(18) of the Act authorize 

associations to hold investments as may 

be approved by their funding bank 

under the regulations of FCA. This 

regulation meets this statutory 

requirement. Additionally, the final 

regulation only allows associations to 

invest in obligations issued, guaranteed, 

or insured by the U.S. Government and 

its agencies. As stated above, case-bycase investments must be approved by 

FCA. For these reasons, we adopt 

proposed § 615.5142(c)(1) as final and 

redesignate it as § 615.5140(b)(4). 

6. Transition Issues From Previous to 

New Investment Regulations 

Proposed § 615.5142(e)(1), would not 

require an association to divest of any 

investments held before the effective 

date of this rule provided we previously 

authorized the investment under former 

§ 615.5140 or by official written Agency 

action. As we explained in the preamble 

to the proposed rule, this transition rule 

would allow an association to continue 

to hold previous investments that would 

no longer be authorized by the final 

rule. After this final rule is effective, 

institutions may not extend or renew 

investments past their maturity unless 

they are authorized by regulation or 

FCA approval. 

Proposed § 615.5142(e)(3) would 

apply to all investments that an 

association acquires after the new 

regulation becomes effective. 

Specifically, all investments that an 

association purchases after proposed 

§ 615.5142 becomes effective as a final 

rule would be subject to § 615.5143 of 

this part, which governs the managing 

and divesting of ineligible investments. 

A bank trade association opposed this 

provision because it believes that FCA 

should not permit associations to hold 

investments that the final rule no longer 

authorizes. The commenter claimed that 

FCA should require immediate 

divestiture of these readily marketable 

investments. FCA responds that these 

investments were eligible when 

purchased under regulations and a pilot 

program that were then in effect. It is 

customary and accepted practice among 

financial institution regulators to allow 

institutions to retain investments until 

maturity, if prior regulations or agency 

action authorized their purchase unless 

a statute requires immediate divestiture 

or there is a compelling safety and 

soundness reason. As noted above, 

institutions cannot renew or extend 

such investments after they mature. 

Accordingly, we adopt proposed 

§ 615.5142(e)(1) as final and redesignate 

it as § 615.5140(b)(5). 

G. Other Investments Approved by FCA 

Since 1999, our investment 

regulations have allowed all System 

institutions to purchase and hold other 

investments (not listed in our 

regulation) that FCA approves. The 

regulation requires that all requests for 

our approval must explain the risk 

characteristics of the investment and the 

institution’s purpose and objectives for 

making the investment. We proposed no 

changes to this provision of our 

regulation, which still can be found at 

§ 615.5140(e), and the final rule retains 

this authority without revision. Case-by 

case approvals enable System 

institutions to purchase and hold other 

investments that are consistent with 

their statutory authorities and the 

objectives of the Act. Currently, FCA 

requires System institutions to submit 

information and analysis with each 

approval request that demonstrates that 


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33See Information Memorandum of September 4, 

2014, (Appendix B, requirement 15). 

34More specifically, the Act expressly allows 

Farm Credit banks and associations, ‘‘to buy and 

sell obligations of, or insured by, the United States 

or any agency thereof, or securities backed by the 

full faith and credit of any such agency, and make 

other investments as may be authorized under 

regulations issued by the Farm Credit 

Administration.’’ 

35 494 U.S. 56 (1990). 

36 328 U.S. 293 (1946). 

37Some System institutions may not elect to 

follow subchapter T in the Internal Revenue Code. 

Such institutions would pay taxes on retained net 

income. 

the asset is accounted for as an 

investment under GAAP,33 and not a 

loan to an ineligible borrower. 

The bankers and their trade 

associations opposed the case-by-case 

approval authority. These commenters 

claim that the case-by-case approval 

authority in the regulation goes beyond 

the investment provisions in the Act 

and Congressional intent. They further 

claimed that this regulatory provision 

enables FCA to approve ‘‘illegal’’ loans 

to ineligible borrowers and classify 

them as investments. Specifically, these 

commenters claim that the proposed 

rule and guidance provided by the 

Informational Memorandum dated 

September 4, 2014, would permit FCS 

institutions to evade lending restrictions 

by buying instruments that are 

improperly labeled as ‘‘debt securities,’’ 

‘‘obligations,’’ or ‘‘bonds.’’ The 

commenters state that the proposed rule 

and the Information Memorandum 

dated September 4, 2014, does not state 

that ‘‘investments’’ explicitly exclude 

commercial business loans. A related 

complaint was that the proposed rule 

did not identify specific criteria that 

FCA would use to distinguish loans 

from investments and that the approval 

of private placements would further 

blur this distinction. According to the 

commenters, such approvals would 

enable System institutions to 

impermissibly compete with tax-paying 

banks. Another concern of banks and 

their trade associations is that the caseby-case approvals lack transparency. 

FCA proposed no changes to the 

regulation governing case-by-case 

approvals of investments by System 

banks and associations. Accordingly, 

this final rule makes no changes to this 

existing regulatory provision. Therefore, 

FCA is not required to respond to the 

issues raised above by commercial 

bankers because they are not relevant to 

this rulemaking. However, FCA will 

address each of these issues to be 

responsive to the bankers and their 

trade associations, and transparent to 

the public. 

Several provisions of the Farm Credit 

Act allow FCA to approve new 

investments at the request of System 

institutions. Sections 1.5(15), 2.2(10), 

2.12(18), and 3.0(13)(A) expressly 

authorize Farm Credit banks and 

associations to make other investments 

as may be authorized under FCA 

regulations.34 Additionally, section 

5.17(a)(5) authorizes FCA to ‘‘grant 

approvals provided for under this Act 

either on a case-by-case basis or through 

regulations that confer approval on 

actions of System institutions.’’ 

Pursuant to these statutory provisions, 

FCA regulations have for many years 

permitted System institutions to request 

Agency approval of new investments 

that are not specifically covered in our 

regulations. This regulatory approach 

provides flexibility so System 

institutions can adapt to changing 

market conditions within their statutory 

authority. Financial markets often 

respond to economic and financial 

changes by creating new types of 

investments. By approving new 

investments under this case-by-case 

authority, FCA enables the System to 

react to evolving conditions in the 

marketplace. 

In exercising its explicit statutory 

authority to approve System 

investments, FCA remains within the 

Act. The statute grants System 

institutions both lending and 

investment authorities, although it does 

not always establish specific criteria 

that distinguish loans from investments. 

As the Agency charged with 

interpreting, administering, and 

implementing the Act, FCA must look to 

caselaw, other statutes, accounting 

conventions, and guidance from the 

FBRAs to properly distinguish loans 

from investments. FCA does not have 

authority to approve, nor does it 

approve, ‘‘illegal’’ loans to ineligible 

borrowers and classify them as 

investments, as the commenters allege. 

As stated earlier, FCA, pursuant to the 

Informational Memorandum of 

September 4, 2014, only approves 

obligations that qualify as investments 

under GAAP. Additionally, FCA will 

also analyze whether a proposed 

investment meets the necessary criteria 

under Federal Securities statutes, such 

as the Securities Act of 1933, the 

Securities Exchange Act of 1934, and 

the Investment Company Act of 1940. 

As part of its analysis, FCA will also 

consider relevant Federal caselaw such 

as Reves v. Ernest & Young,35 and SEC 

v. W.J. Howey Co.36 Finally, FCA uses 

the Federal Financial Institution 

Examination Council’s call report 

instructions on investments and loans 

as additional guidance. 

In response to bank concerns about 

whether private placements are 

investments or loans, FCA notes that the 

same logic also applies to case-by-case 

approval of private placements. We 

observe that private placements are not 

liquid, but they are often suitable for 

other risk management purposes. 

Private placement securities may be 

appropriate in limited circumstances for 

interest rate risk management purposes. 

Bank commenters point out that private 

placements are not widely sold to 

public investors. FCA responds that it 

has authority to approve such private 

placement securities on a limited basis 

under specific conditions provided they 

meet the criteria of an investment. FCA 

intends to look at all relevant facts when 

it determines whether a private 

placement is an investment, not a loan 

to an ineligible borrower. 

A bank trade association raised 

concerns that investments approved on 

a case-by-case basis would be subject to 

a favorable tax treatment, which would 

enable System banks and associations to 

earn additional income. The arguments 

of the bankers and their trade 

associations have not persuaded us that 

case-by-case approval of investments 

allows System institutions to ‘‘unfairly’’ 

compete with tax-paying banks. We note 

that many community banks, which 

submitted comments, may organize as 

Subchapter S corporations. The tax 

treatment for System institutions under 

the Internal Revenue Code for 

subchapter T37 is similar to the tax 

treatment of small banks, with less than 

or equal to 100 investors, that file under 

subchapter S. 

FCS debt usually trades close to 

Treasuries. We note that commercial 

banks may pay the same costs for funds 

as the System by funding or discounting 

their agricultural loans through two 

GSEs—Farmer Mac or the Federal Home 

Loan Banks. Also, System banks must 

hold large liquidity portfolios consisting 

of cash and high-quality investments. 

Although System banks may deposit 

cash at a Federal Reserve bank, they do 

not earn interest on their deposits in 

contrast to Federal Reserve member 

banks. In addition, most Treasuries are 

‘‘negative carry-trades’’ for System 

institutions because they funded these 

investments at a debt price slightly 

above Treasury rates. 

Commercial bankers also claimed that 

case-by-case approvals lack 

transparency. The FCA Board must 

decide whether to approve any 

investments that are not expressly 

authorized by regulation. All resolutions 

that the FCA Board votes on are public 


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documents, and FCA publishes 

summaries of Board actions on its 

website. Thus, the public can easily find 

out information about investments that 

FCA has approved on a case-by-case 

basis. Such information includes the 

investment type, investment amount, 

the System institution(s) making the 

investment, general obligor 

characteristics, and the investment 

location. Usually, institutions withdraw 

requests for approval if during the 

review process, FCA staff indicates that 

the proposed transaction does not 

qualify as an investment, or otherwise is 

not within the applicants’ investment 

authority. 

Commercial bank commenters 

requested that FCA publish a list of the 

potential investments it would approve 

on a case-by-case basis under the final 

rule. We believe that the bankers’ 

approach would deny FCA and the 

System the flexibility to respond to 

changing market circumstances. As 

discussed earlier, sections 1.5(15), 

2.2(11), 2.12(18), 3.1(13)(A), and 

5.17(a)(5) expressly authorize System 

banks and associations to hold other 

investments that FCA approves by 

regulation. FCA exercises its express 

statutory authority in a manner that is 

consistent with law, and safety and 

soundness. 

Commercial bank commenters noted 

that proposed § 615.5142(a) stated that 

associations may hold investments only 

for risk management purposes. They 

disputed that investments approved by 

FCA on a case-by-case purposes are for 

risk management. Under existing 

§ 615.5140(e), case-by-case approvals 

have not been subject to the existing 

purpose requirements for association 

investments. This will continue 

unchanged in this final rule because 

FCA proposed no changes, and has 

made no changes to the case-by-case 

authority. We note, however, that the 

purposes for the investments and the 

risk characteristics of the investment are 

part of what FCA evaluates in its 

approval process. 

H. Management of Ineligible 

Investments and Reservation of 

Authority To Require Divestiture 

Our divestiture regulations have long 

required System institutions to: (1) 

Quickly divest of investments that were 

ineligible when purchased; and (2) 

effectively mitigate the risk associated 

with investments that became ineligible 

when their credit quality deteriorated. 

FCA expects that System institutions 

will rarely find themselves holding 

ineligible investments in their portfolio 

except potentially in times of a 

widespread financial crisis. Under our 

regulatory framework, institutions must 

report investments that are ineligible 

when purchased immediately to FCA 

and divest within 60 calendar days or 

pursuant to a divestiture plan approved 

by FCA. If an eligible investment later 

deteriorates and poses additional risk to 

the institution, the focus of the 

institution becomes risk mitigation. FCA 

reserves authority to require divestiture 

in specific circumstances. 

The proposed rule would retain most 

of the substantive divestiture 

requirements in previous § 615.5143. 

However, the proposed rule identified 

which divestiture requirements apply to 

banks, and which ones apply to 

associations. More specifically, final 

and redesignated § 615.5140(b)(5) 

addresses how the new 10-percent 

portfolio limit for associations pertains 

to these divestiture requirements. 

A bank trade association commented 

that FCA should not allow System 

institutions to hold any investment that 

becomes ineligible. This commenter 

asked FCA to require System 

institutions to divest of such 

investments within 6 months. FCA finds 

this suggestion to be unduly inflexible. 

Requiring automatic divestiture within 

6 months seems punitive because it may 

not allow FCA to consider the least 

costly remedy for the institution. The 

commenter’s suggestion that the final 

regulation should require institutions to 

divest of investments that later became 

ineligible due to a credit downgrade 

does not consider that some of these 

investments may later experience a 

credit upgrade. In these cases, 

mandatory divestiture within 6 months 

may expose the System institution to 

unnecessary losses. 

A comment from a bank trade 

association asked whether FCA is 

requiring FCS institutions to divest of 

investments approved under the 

Investment in Rural America—Pilot 

Programs after discontinuing those 

programs. The commenter also 

questioned why FCA would allow a 

System institution to continue to hold 

any investment approved under the 

pilot program after the program ended. 

Investments held under the Pilot 

Programs were designated as rural 

community investments that furthered 

the System’s mission to increase the 

flow of funds into rural areas. In 

response to the commenter’s question, 

we cite the FCA News Release NR 13– 

15(11–14–13) which states: 

‘‘ . . . [T]he Farm Credit Administration 

Board voted to conclude effective December 

31, 2014, each pilot program approved after 

2004 as part of the investments in Rural 

America program. The Board’s action permits 

each Farm Credit System (System) institution 

that is participating in a pilot program to 

continue to hold its investments through the 

maturity dates for the investments, provided 

the institution continues to meet all 

conditions.’’ 

As stated above, the FCA Board 

permitted System institutions to hold 

these investments until maturity, and 

this approach mitigated potential losses 

to institutions that held these 

investments. 

For these reasons, FCA adopts 

proposed § 615.5143 as a final 

regulation without substantive change. 

However, we made some minor stylistic 

changes which primarily included 

revising cross references to association 

investments which are now in final 

§ 615.5140 instead of § 615.5142. 

H. Miscellaneous 

1. Appropriate Use of Derivatives 

Derivatives can be appropriate and 

useful for hedging and risk 

management. While our regulations do 

not prohibit a System bank from using 

derivatives to build an investment 

portfolio, use of these derivatives must 

be consistent with an authorized 

investment purpose and not used for 

speculative purposes. We note that most 

cleared derivative contracts are very 

liquid, while many non-cleared 

derivative contracts are less liquid. 

2. Conforming Changes to Other 

Regulation Sections 

We received no comments about 

provisions in the proposed rule that 

made conforming changes to references 

in §§ 611.1153, 611.1155, 615.5174, and 

615.5180. Accordingly, we will 

incorporate these changes into the final 

rule. 

IV. Effective Date 

We recognize that Farm Credit banks 

may require time to bring their policies 

and procedures into compliance with 

the new requirements of the final rule. 

A passage in the preamble to the 

proposed rule stated that we were 

contemplating whether the compliance 

date of the final rule for Farm Credit 

banks should be 6 months after its 

effective date. We invited comments as 

to whether this delayed compliance 

timeframe would be appropriate. We 

also asked for comments on whether a 

delayed compliance date would be 

appropriate for associations. 

An FCS bank claimed that System 

institutions would need 12 months to 

make the necessary changes to come 

into compliance with the final rule. We 

believe that the changes in this rule for 

both banks and associations are not so 

extensive that System institutions need 

a full 12 months to come into 


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compliance. We also believe that a more 

prolonged delay would be detrimental 

to the safe and sound operations of 

System institutions. For these reasons, 

we believe that 6 months is sufficient 

time for all System institutions to bring 

their policies, procedures, and internal 

controls into compliance with the final 

rule. Accordingly, the final rule will 

become effective on January 1, 2019. 

V. Regulatory Flexibility Act 

Pursuant to section 605(b) of the 

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

et seq.), FCA hereby certifies that the 

final 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 more than 

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 

12 CFR Part 611 

Agriculture, Banks, banking, Rural 

areas. 

12 CFR Part 615 

Accounting, Agriculture, Banks, 

banking, Government securities, 

Investments, Rural areas. 

For the reasons stated in the 

preamble, parts 611 and 615 of chapter 

VI, title 12 of the Code of Federal 

Regulations are amended as follows: 

PART 611—ORGANIZATION 

■ 1. The authority citation for part 611 

continues to read as follows: 

Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 

1.13, 2.0, 2.1, 2.2, 2.10, 2.11, 2.12, 3.0, 3.1, 

3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 4.12, 4.12A, 

4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 

5.17, 5.25, 7.0–7.13, 8.5(e) of the Farm Credit 

Act (12 U.S.C. 2002, 2011, 2012, 2013, 2020, 

2021, 2071, 2072, 2073, 2091, 2092, 2093, 

2121, 2122, 2123, 2124, 2128, 2129, 2130, 

2142, 2154a, 2183, 2184, 2203, 2208, 2209, 

2211, 2212, 2213, 2214, 2243, 2252, 2261, 

2279a–2279f–1, 2279aa–5(e)); secs. 411 and 

412 of Pub. L. 100–233, 101 Stat. 1568, 1638; 

sec. 414 of Pub. L. 100–399, 102 Stat. 989, 

1004. 

§ 611.1153 [Amended] 

■ 2. Section 611.1153 is amended by 

removing in paragraph (i)(1) the 

reference ‘‘§ 615.5140(e)’’ and adding in 

its place the reference ‘‘§ 615.5140(b) or 

§ 615.5142(d)’’. 

§ 611.1155 [Amended] 

■ 3. Section 611.1155 is amended by 

removing in paragraph (a)(1) the 

reference ‘‘§ 615.5140(e)’’ and adding in 

its place the reference ‘‘§ 615.5140(b) or 

§ 615.5142(d)’’. 

PART 615—FUNDING AND FISCAL 

AFFAIRS, LOAN POLICIES AND 

OPERATIONS, AND FUNDING 

OPERATIONS 

■ 4. 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 Pub. 

L. 92–181, 85 Stat. 583 (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), Pub. L. 100–233, 101 

Stat. 1568, 1608; sec. 939A, Pub. L. 111–203, 

124 Stat. 1326, 1887 (15 U.S.C. 78o–7 note). 

■ 5. Section 615.5131 is amended by: 

■ a. In the definition of ‘‘Asset-backed 

securities (ABS)’’, removing the words 

‘‘mortgage securities’’ and adding in 

their place the words ‘‘mortgage-backed 

securities’’; 

■ b. Adding in alphabetical order 

definitions for ‘‘Asset class’’, ‘‘Country 

risk classification (CRC)’’, and 

‘‘Diversified investment fund (DIF)’’; 

■ c. Removing the definitions for 

‘‘Eurodollar time deposit’’, ‘‘Final 

maturity’’, ‘‘General obligations’’, 

‘‘Government agency’’, and 

‘‘Government-sponsored agency’’; 

■ d. Adding in alphabetical order a 

definition for ‘‘Government-sponsored 

enterprise (GSE)’’; 

■ e. Removing the definition for ‘‘Liquid 

investments’’ and ‘‘Mortgage securities’’; 

■ f. Adding in alphabetical order a 

definition for ‘‘Mortgage-backed 

securities (MBS)’’; 

■ g. Removing the definition for 

‘‘Nationally Recognized Statistical 

Rating Organization (NRSRO)’’; 

■ h. Adding in alphabetical order 

definitions for ‘‘Obligor’’ and 

‘‘Resecuritization’’; 

■ i. Removing the definition for 

‘‘Revenue bond’’; 

■ j. Adding in alphabetical order 

definitions for ‘‘Sponsor’’ and ‘‘United 

States (U.S.) Government agency’’; and 

■ k. Removing the definitions for 

‘‘Weighted average life (WAL)’’. 

The additions read as follows: 

§ 615.5131 Definitions. 

* * * * * 

Asset class means a group of 

securities that exhibit similar 

characteristics and behave similarly in 

the marketplace. Asset classes include, 

but are not limited to, money market 

instruments, municipal securities, 

corporate bond securities, MBS, ABS, 

and any other asset class as determined 

by FCA. 

Country risk classification (CRC) as 

defined in § 628.2 of this chapter. 

Diversified investment fund (DIF) 

means an investment company 

registered under section 8 of the 

Investment Company Act of 1940. 

Government-sponsored enterprise 

(GSE) means an entity established or 

chartered by the United States 

Government to serve public purposes 

specified by the United States Congress 

but whose debt obligations are not 

explicitly guaranteed by the full faith 

and credit of the United States 

Government. 

* * * * * 

Mortgage-backed securities (MBS) 

means securities that are either: 

(1) Pass-through securities or 

participation certificates that represent 

ownership of a fractional undivided 

interest in a specified pool of residential 

(excluding home equity loans), 

multifamily or commercial mortgages; 

or 

(2) A multiclass security (including 

collateralized mortgage obligations and 

real estate mortgage investment 

conduits) that is backed by a pool of 

residential, multifamily or commercial 

real estate mortgages, pass through 

MBS, or other multiclass MBSs. 

Obligor means an issuer, guarantor, or 

other person or entity who has an 

obligation to pay a debt, including 

interest due, by a specified date or when 

payment is demanded. 

Resecuritization as defined in § 628.2 

of this chapter. 

Sponsor means a person or entity that 

initiates a transaction by selling or 

pledging to a specially created issuing 

entity, such as a trust, a group of 

financial assets that the sponsor either 

has originated itself or has purchased. 

United States (U.S.) Government 

agency means an instrumentality of the 

U.S. Government whose obligations are 

fully guaranteed as to the timely 

payment of principal and interest by the 

full faith and credit of the U.S. 

Government. 

* * * * * 

■ 6. Section 615.5133 is revised to read 

as follows: 

§ 615.5133 Investment management. 

(a) Responsibilities of board of 

directors. The board of directors must 

adopt written policies for managing the 

institution’s investment activities. The 

board must also ensure that 

management complies with these 

policies and that appropriate internal 

controls are in place to prevent loss. At 


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least annually, the board, or a 

designated committee of the board, must 

review the sufficiency of these 

investment policies. 

(b) Investment policies—general 

requirements. Investment policies must 

address the purposes and objectives of 

investments; risk tolerance; delegations 

of authority; internal controls; due 

diligence; and reporting requirements. 

The investment policies must fully 

address the extent of pre-purchase 

analysis that management must perform 

for various classes of investments. The 

investment policies must also address 

the means for reporting, and approvals 

needed for, exceptions to established 

policies. A Farm Credit banks 

investment policy must address 

portfolio diversification and obligor 

limits under paragraphs (f) and (g) of 

this section. Investment policies must 

be sufficiently detailed, consistent with, 

and appropriate for the amounts, types, 

and risk characteristics of its 

investments. 

(c) Investment policies—risk 

tolerance. Investment policies must 

establish risk limits for eligible 

investments and for the entire 

investment portfolio. The investment 

policies must include concentration 

limits to ensure prudent diversification 

of credit, market, and, as applicable, 

liquidity risks in the investment 

portfolio. Risk limits must be based on 

all relevant factors, including the 

institution’s objectives, capital position, 

earnings, and quality and reliability of 

risk management systems and must take 

into consideration the interest rate risk 

management program required by 

§ 615.5180 or § 615.5182, as applicable. 

Investment policies must identify the 

types and quantity of investments that 

the institution will hold to achieve its 

objectives and control credit risk, 

market risk, and liquidity risk as 

applicable. Each association or service 

corporation that holds significant 

investments and each Farm Credit bank 

must establish risk limits in its 

investment policies, as applicable, for 

the following types of risk: 

(1) Credit risk. Investment policies 

must establish: 

(i) Credit quality standards. Credit 

quality standards must be established 

for single or related obligors, sponsors, 

secured and unsecured exposures, and 

asset classes or obligations with similar 

characteristics. 

(ii) Concentration limits. 

Concentration limits must be 

established for single or related obligors, 

sponsors, geographical areas, industries, 

unsecured exposures, asset classes or 

obligations with similar characteristics. 

(iii) Criteria for selecting brokers and, 

dealers. Each institution must buy and 

sell eligible investments with more than 

one securities firm. The institution must 

define its criteria for selecting brokers 

and dealers used in buying and selling 

investments. 

(iv) Collateral margin requirements on 

repurchase agreements. To the extent 

the institution engages in repurchase 

agreements, it must regularly mark the 

collateral to fair market value 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. 

(3) Liquidity risk—(i) Liquidity at 

Farm Credit banks. Investment policies 

must describe the liquidity 

characteristics of eligible investments 

that the bank will hold to meet its 

liquidity needs and other institutional 

objectives. 

(ii) Liquidity at associations. 

Investment policies must describe the 

liquid characteristics of eligible 

investments that the association will 

hold. 

(4) Operational risk. Investment 

policies must address operational risks, 

including delegations of authority and 

internal controls under 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. Each institution 

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 between personnel 

who supervise or execute investment 

transactions and personnel who 

supervise or engage in all other 

investment-related functions. 

(3) Maintain records and management 

information systems that are appropriate 

for the level and complexity of the 

institution’s investment activities. 

(4) Implement an effective internal 

audit program to review, at least 

annually, the investment management 

practices including internal controls, 

reporting processes, and compliance 

with FCA regulations. This annual 

review’s scope must be appropriate for 

the size, risk and complexity of the 

investment portfolio. 

(f) Farm Credit bank portfolio 

diversification—(1) Well-diversified 

portfolio. Subject to the exemptions set 

forth in paragraph (f)(3) of this section, 

each Farm Credit bank must maintain a 

well-diversified investment portfolio as 

set forth in paragraph (f)(2) of this 

section. 

(2) Investment portfolio 

diversification requirements. A welldiversified investment portfolio means 

that, at a minimum, investments are 

comprised of different asset classes, 

maturities, industries, geographic areas, 

and obligors. These diversification 

requirements apply to each individual 

security that the Farm Credit bank holds 

within a DIF. In addition, except as 

exempted by paragraph (f)(3) of this 

section, no more than 15 percent of the 

investment portfolio may be invested in 

any one asset class. Securities within 

each DIF count toward the appropriate 

asset class. Measurement of this 

diversification requirement must be 

based on the portfolio valued at 

amortized cost. 

(3) Exemptions from investment 

portfolio diversification requirements. 

The following investments are not 

subject to the 15-percent investment 

portfolio diversification requirement 

specified in paragraph (f)(2) of this 

section: 

(i) Investments that are fully 

guaranteed as to the timely payment of 

principal and interest by a U.S. 

Government agency; 

(ii) Investments that are fully and 

explicitly guaranteed as to the timely 

payment of principal and interest by a 

GSE, except that no more than 50 

percent of the investment portfolio may 

be comprised of GSE MBS. Investments 

in Farmer Mac securities are governed 

by § 615.5174 and are not subject to this 

limitation; and 

(iii) Money market instruments 

identified in § 615.5131. 

(g) Farm Credit bank obligor limit. No 

more than 10 percent of a Farm Credit 

bank’s total capital (Tier 1 and Tier 2) 

as defined by § 628.2 of this chapter 

may be invested in any one obligor. This 

obligor limit does not apply to 

investments in obligations that are fully 

guaranteed as to the timely payment of 

principal and interest by U.S. 

Government agencies or fully and 

explicitly guaranteed as to the timely 

payment of principal and interest by 

GSEs. For a DIF, both the DIF itself and 

the entities obligated to pay the 

underlying debt are obligors. 

(h) Due diligence—(1) Pre-purchase 

analysis—(i) Eligibility and compliance 

with investment policies. Before 

purchasing an investment, the 

institution must conduct sufficient due 

diligence to determine whether the 

investment is eligible under § 615.5140 

and complies with its board’s 

investment policies. The institution 


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must document its assessment and 

retain any supporting information used 

in that assessment. The institution may 

hold an investment that does not 

comply with its investment policies 

only with the prior approval of its 

board. 

(ii) Valuation. Prior to purchase, the 

institution must verify the fair market 

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. 

(iii) Risk assessment. At purchase, the 

institution must at a minimum include 

an evaluation of the credit risk 

(including country risk when 

applicable), liquidity risk, market risk, 

interest rate risk, and underlying 

collateral of the investment, as 

applicable. This assessment must be 

commensurate with the complexity and 

type of the investment. The institution 

must also perform stress testing on any 

structured investment that has uncertain 

cash flows, including all MBS and ABS, 

before purchase. The stress test must be 

commensurate with the type and 

complexity of the investment and must 

enable the institution to determine that 

the investment does not expose its 

capital, earnings, or liquidity if 

applicable, to risks that are greater than 

those specified in its investment 

policies. The stress testing must comply 

with the requirements in paragraph 

(h)(4)(ii) of this section. The institution 

must document and retain its risk 

assessment and stress tests conducted 

on investments purchased. 

(2) Ongoing value determination. At 

least monthly, the institution must 

determine the fair market value of each 

investment in its portfolio and the fair 

market value of its whole investment 

portfolio. 

(3) Ongoing analysis of credit risk. 

The institution must establish and 

maintain processes to monitor and 

evaluate changes in the credit quality of 

each investment in its portfolio and in 

its whole investment portfolio on an 

ongoing basis. 

(4) Quarterly stress testing. (i) The 

institution must stress test its entire 

investment portfolio, including stress 

tests of each investment individually 

and the whole portfolio, at the end of 

each quarter. The stress tests must 

enable the institution to determine that 

its investment securities, both 

individually and on a portfolio-wide 

basis, do not expose its capital, 

earnings, or liquidity if applicable, to 

risks that exceed the risk tolerance 

specified in its investment policies. If 

the institution’s portfolio risk exceeds 

its investment policy limits, the 

institution must develop a plan to 

comply with those limits. 

(ii) The institution’s stress tests must 

be defined in a board-approved policy 

and must include defined parameters 

for the security types purchased. The 

stress tests must be comprehensive and 

appropriate for the institution’s risk 

profile. At a minimum, the stress tests 

must be able to measure the price 

sensitivity of investments over a range 

of possible interest rates and yield curve 

scenarios. The stress test methodology 

must be appropriate for the complexity, 

structure, and cash flows of the 

investments in the institution’s 

portfolio. The institution must rely to 

the maximum extent practicable on 

verifiable information to support all its 

stress test assumptions, including 

prepayment and interest rate volatility 

assumptions. The institution must 

document the basis for all assumptions 

used to evaluate the security and its 

underlying collateral. The institution 

must also document all subsequent 

changes in its assumptions. 

(5) Presale value verification. Before 

the institution sells an investment, it 

must verify its fair market value with an 

independent source not connected with 

the sale transaction. 

(i) Reports to the board of directors. 

At least quarterly, the institution’s 

management must report on the 

following to its board of directors or a 

designated board committee: 

(1) Plans and strategies for achieving 

the board’s objectives for the investment 

portfolio; 

(2) Whether the investment portfolio 

effectively achieves the board’s 

objectives; 

(3) The current composition, quality, 

and the risk and liquidity profiles of the 

investment portfolio; 

(4) The performance of each class of 

investments and the entire investment 

portfolio, including all gains and losses 

realized during the quarter on 

individual investments that the 

institution sold before maturity and why 

they were liquidated; 

(5) 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 

its investment holdings; 

(6) How investments affect its capital, 

earnings, and overall financial 

condition; 

(7) Any deviations from the board’s 

policies (must be specifically 

identified); 

(8) The status and performance of 

each investment described in 

§ 615.5143(a) and (b) or that does not 

comply with the institution’s 

investment policies; including the 

expected effect of these investments on 

its capital, earnings, liquidity, as 

applicable, and collateral position; and 

(9) The terms and status of any 

required divestiture plan or risk 

reduction plan. 

■ 7. In § 615.5134, paragraph (b) is 

amended by revising the table to read as 

follows: 

§ 615.5134 Liquidity reserve. 

* * * * * 

(b) * * * 

Liquidity level Instruments Discount (multiply by) 

Level 1 ..................................... ........................ • Cash, including cash due from traded but not yet settled 

debt.

100 percent 

• Overnight money market investment ................................... 100 percent 

• Obligations of U.S. Government agencies with a final remaining maturity of 3 years or less.97 percent 

• GSE senior debt securities that mature within 60 days, excluding securities issued by the Farm Credit System.95 percent 

• Diversified investment funds comprised exclusively of 

Level 1 instruments.

95 percent 

Level 2 ..................................... ........................ • Obligations of U.S. Government agencies with a final remaining maturity of more than 3 years.97 percent 

• MBS that are fully guaranteed by a U.S. Government 

agency as to the timely repayment of principal and interest.

95 percent 

• Diversified investment funds comprised exclusively of Levels 1 and 2 instruments.95 percent 


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Liquidity level Instruments Discount (multiply by) 

Level 3 ..................................... ........................ • GSE senior debt securities with maturities exceeding 60 

days, excluding senior debt securities of the Farm Credit 

System.

93 percent for all Level 3 instruments 

• MBS that are fully guaranteed by a GSE as to the timely 

repayment of principal and interest.

• Money market instruments maturing within 90 days ...........

• Diversified investment funds comprised exclusively of levels 1, 2, and 3 instruments.

* * * * * 

■ 8. Section 615.5140 is revised to read 

as follows: 

§ 615.5140 Eligible investments. 

(a) Farm Credit banks—(1) Investment 

eligibility criteria. A Farm Credit bank 

may purchase an investment only if it 

satisfies the following investment 

eligibility criteria: 

(i) The investment must be purchased 

and held for one or more investment 

purposes authorized in § 615.5132. 

(ii) The investment must be one of the 

following: 

(A) A non-convertible senior debt 

security; 

(B) A money market instrument with 

a maturity of 1 year or less; 

(C) A portion of an MBS or ABS that 

is fully guaranteed as to the timely 

payment of principal and interest by a 

U.S. Government agency; 

(D) A portion of an MBS or ABS that 

is fully and explicitly guaranteed as to 

the timely payment of principal and 

interest by a GSE; 

(E) The senior-most position of an 

MBS or ABS that a U.S. Government 

agency does not fully guarantee as to the 

timely payment of principal and interest 

or a GSE does not fully and explicitly 

guarantee as to the timely payment of 

principal and interest, provided that the 

MBS satisfies the definition of 

‘‘mortgage related security’’ in 15 U.S.C. 

78c(a)(41); 

(F) An obligation of an international 

or multilateral development bank in 

which the U.S. is a voting member; or 

(G) Shares of a diversified investment 

fund registered under the Investment 

Company Act of 1940, if its portfolio 

consists solely of securities that satisfy 

paragraph (a)(1)(ii)(A), (B), (C), (D), (E), 

or (F) of this section, or are eligible 

under § 615.5174. The investment 

company’s risk and return objectives 

and use of derivatives must be 

consistent with the Farm Credit bank’s 

investment policies. 

(iii) At least one obligor of the 

investment must have very strong 

capacity to meet its financial 

commitment for the expected life of the 

investment. If any obligor whose 

capacity to meet its financial 

commitment is being relied upon to 

satisfy this requirement is located 

outside the U.S., either: 

(A) That obligor’s sovereign host 

country must have the highest or 

second-highest consensus Country Risk 

Classification (0 or 1) as published by 

the Organization for Economic 

Cooperation and Development (OECD) 

or be an OECD member that is unrated; 

or 

(B) The investment must be fully 

guaranteed as to the timely payment of 

principal and interest by a U.S. 

Government agency. 

(iv) The investment must exhibit low 

credit risk and other risk characteristics 

consistent with the purpose or purposes 

for which it is held. 

(v) The investment must be 

denominated in U.S. dollars. 

(2) Resecuritizations. Notwithstanding 

any other provision of this section, 

System banks may not purchase 

resecuritizations (except when both 

principal and interest are fully and 

explicitly guaranteed by the U.S. 

Government or a GSE) without approval 

under paragraph (e) of this section. 

(b) Farm Credit associations—(1) Risk 

management investments. Each Farm 

Credit System association, with the 

approval of its funding bank, may 

purchase and hold investments to 

manage risks. Each association must 

identify and evaluate how the 

investments that it purchases 

contributes to management of its risks. 

Only securities that are issued by, or are 

unconditionally guaranteed or insured 

as to the timely payment of principal 

and interest by, the United States 

Government or its agencies are 

investments that associations may 

acquire for risk management purposes 

under this paragraph (b). 

(2) Secondary market Governmentguaranteed loans. Loans purchased in 

the secondary market that are 

unconditionally guaranteed or insured 

by the U.S. Government or its agencies 

as to principal and interest are not 

eligible risk management investments 

under this paragraph (b). 

(3) Risk management requirements. 

Each association that purchases 

investments for risk management must 

document how its investment activities 

contribute to managing risks as required 

by paragraph (b)(1) of this section. Such 

documentation must address and 

evidence that the association: 

(i) Complies with § 615.5133(a), (b), 

(c), (d), and (e). These investment 

management processes must be 

appropriate for the size, risk and 

complexity of the association’s 

investment portfolio. 

(ii) Complies with § 615.5182 for 

investments that exhibit interest rate 

risk that could lead to significant 

declines in net income or in the market 

value of capital. 

(iii) Assesses how these investments 

impact the association’s overall credit 

risk profile and how these investment 

purchases aid in diversifying, hedging, 

or mitigating overall credit risk. 

(iv) Considers and evaluates any other 

relevant factors unique to the 

association or to the nature of the 

investments that could affect the 

association’s overall risk-bearing 

capacity, including but not limited to 

management experience and capability 

to understand and manage unique risks 

in investments purchased. 

(4) Association investment portfolio 

limit. The total amount of investments 

purchased and held under this section 

must not exceed 10 percent of the 

association’s total outstanding loans. In 

computing this limit: 

(i) Include in the numerator the daily 

(point-in-time) balance of all 

investments purchased and held under 

this section. Unless otherwise directed 

by FCA, associations must use the 

investment balance on the last business 

day of the quarter when calculating the 

numerator of the portfolio limit under 

this paragraph. For this calculation, 

value investments at amortized cost and 

accrued interest. 

(ii) Include in the denominator the 90- 

day average daily balance of total 

outstanding loans as defined in 

§ 615.5132. For this calculation, value 

loans at amortized cost and include 

accrued interest. The denominator does 

not include any allowance for loan loss 

adjustments. 

(iii) Exclude from the numerator the 

following: 


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Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Rules and Regulations 27503 

(A) Equity investments in 

unincorporated business entities 

authorized in § 611.1150 of this chapter; 

(B) Equity investments in Rural 

Business Investment Companies 

organized under 7 U.S.C. 2009cc et seq.; 

(C) Equity investments in Class B 

Farmer Mac stock authorized in 

§ 615.5173; and 

(D) Farmer Mac agricultural mortgagebacked securities under § 615.5174. 

(5) Funding bank supervision of 

association investments. (i) The 

association must not purchase and hold 

investments without the funding bank’s 

prior approval. The bank must review 

the association’s prior approval requests 

and explain in writing its reasons for 

approving or denying the request. The 

prior approval is required before the 

association engages in investment 

activities and with any significant 

change(s) in investment strategy. 

(ii) In deciding whether to approve an 

association’s request to purchase and 

hold investments, the bank must 

evaluate and document that the 

association: 

(A) Has adequate policies, procedures, 

and controls, in place for its investment 

accounting and reporting; 

(B) Has capable staff with the 

necessary expertise to manage the risks 

in investments; and 

(C) Complies with paragraph (b)(3) of 

this section. 

(iii) The bank must review annually 

the investment portfolio of every 

association that it funds. This annual 

review must evaluate whether the 

association’s investments manage risks 

over time, and the continued adequacy 

of the associations’ risk management 

practices. 

(6) Transition for association 

investments. (i) An association is not 

required to divest of any investment 

held on January 1, 2019 that was 

authorized under § 615.5140 as 

contained in 12 CFR part 615 revised as 

of January 1, 2018 or otherwise by 

official written FCA action that allowed 

the association to continue to hold such 

investment. Once such investment 

matures, the association must not renew 

it unless the investment is authorized 

pursuant to this section. 

(ii) No association is required to 

divest of investments if a decline in 

total outstanding loans causes it to 

exceed the portfolio limit in paragraph 

(b)(3) of this section. However, the 

institution must not purchase new 

investments unless, after they are 

purchased, the total amount of 

investments held falls within the 

portfolio limit. 

(c) Reservation of authority. FCA may, 

on a case-by-case basis, determine that 

a particular investment you are holding 

poses inappropriate risk, 

notwithstanding that it satisfies the 

investment eligibility criteria. If so, we 

will notify you as to the proper 

treatment of the investment. 

(d) [Reserved] 

(e) Other investments approved by 

FCA. You may purchase and hold 

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. 

§ 615.5142 [Removed and reserved] 

■ 9. Section 615.5142 is removed and 

reserved. 

■ 10. Section 615.5143 is revised to read 

as follows: 

§ 615.5143 Management of ineligible 

investments and reservation of authority to 

require divestiture. 

(a) Investments ineligible when 

purchased. Investments that do not 

satisfy the eligibility criteria set forth in 

§ 615.5140(a) or (b) or investments FCA 

had not approved under § 615.5140(e), 

as applicable, at the time of purchase 

are ineligible. System institutions must 

not purchase ineligible investments. If 

the institution determines that it has 

purchased an ineligible investment, it 

must notify FCA within 15 calendar 

days after the determination. The 

institution must divest of the 

investment no later than 60 calendar 

days after determining that the 

investment is ineligible unless FCA 

approves, in writing, a plan that 

authorizes the institution to divest the 

investment over a longer period. Until 

the institution divests of the ineligible 

investment: 

(1) A Farm Credit bank must not use 

the ineligible investment to satisfy its 

liquidity requirement(s) under 

§ 615.5134; 

(2) The institution must include the 

ineligible investment in the portfolio 

limit calculation defined in § 615.5132 

or § 615.5140(b)(3), as applicable; and 

(3) A Farm Credit bank must exclude 

the ineligible investment as collateral 

under § 615.5050. 

(b) Investments that no longer satisfy 

investment eligibility criteria. If the 

institution determines that an 

investment (that satisfied the eligibility 

criteria set forth in § 615.5140(a) or (b), 

as applicable, when purchased) no 

longer satisfies the criteria, or that an 

investment that FCA approved pursuant 

to § 615.5140(e), no longer satisfies the 

conditions of approval, the institution 

may continue to hold the investment, 

subject to the following requirements: 

(1) The institution must notify FCA 

within 15 calendar days after such 

determination; 

(2) A Farm Credit bank must not use 

the ineligible investment to satisfy its 

liquidity requirement(s) under 

§ 615.5134; 

(3) The institution must include the 

ineligible investment in the portfolio 

limit calculation defined in § 615.5132 

or § 615.5140(b)(3), as applicable; 

(4) A Farm Credit bank may continue 

to include the investment as collateral 

under § 615.5050 at the lower of cost or 

market value; and 

(5) The institution must develop a 

plan to reduce the investment’s risk to 

the institution. 

(c) Reservation of authority. FCA 

retains the authority to require the 

institution to divest of any investment at 

any time for failure to comply with 

§ 615.5132(a) or § 615.5140(a), (b), or (e), 

or for safety and soundness reasons. The 

timeframe set by FCA will consider the 

expected loss on the transaction (or 

transactions) and the effect on the 

institution’s financial condition and 

performance. 

§ 615.5174 [Amended] 

■ 11. In § 615.5174, paragraph (d) is 

amended by removing the reference 

‘‘§ 615.5133(f)(1)(iii) and 

§ 615.5133(f)(4)’’ and adding in its place 

‘‘§ 615.5133(h)(1)(iii) and (h)(4)’’. 

§ 615.5180 [Amended] 

■ 12. In § 615.5180, paragraph (c)(3) is 

amended by removing the reference 

‘‘§ 615.5133(f)(4)’’ and adding in its 

place the reference ‘‘§ 615.5133(h)(4)’’. 

Dated: June 5, 2018. 

Dale L. Aultman, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 2018–12366 Filed 6–11–18; 8:45 am] 

BILLING CODE 6705–01–P 


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