[Federal Register Volume 62, Number 53 (Wednesday, March 19, 1997)]
[Notices]
[Pages 13146-13154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X97-10319]


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FEDERAL HOUSING FINANCE BOARD

[No. 97-21]


Statement of Policy: Financial Management Policy for the Federal 
Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Policy statement.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is proposing to adopt as a statement of policy the 
``Financial Management Policy For The Federal Home Loan Bank System'' 
(FMP). The Finance Board is publishing the policy statement with only 
minor changes from the existing version of the FMP, and is soliciting 
public comments on the FMP for a period of 30 days.

DATES: The Finance Board will accept comments on the FMP until April 
18, 1997.

ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006. Comments will be available for public inspection at this 
address.

FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Senior Attorney, 
Office of General Counsel, (202) 408-2990, or Julie Paller, Senior 
Financial Analyst, (202) 408-2842, Federal Housing Finance Board, 1777 
F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    The FMP provides a framework within which the Federal Home Loan 
Banks (Banks) may implement their financial management strategies in a 
prudent and responsible manner. The FMP includes a series of guidelines 
relating to the investment, funding, and hedging practices of the 
Banks, as well as to the management of credit, interest rate, and 
liquidity risks. Adhering to the guidelines promotes the Banks' ability 
to accomplish their housing finance and community development missions 
while generating sufficient income to meet their various financial 
obligations. The FMP has evolved from a series of policies and 
guidelines initially adopted by the Finance Board's predecessor agency, 
the Federal Home Loan Bank Board (FHLBB). The FHLBB had adopted 
guidelines comparable to the FMP in the 1970s and revised them a number 
of times thereafter. The Finance Board adopted the FMP in 1991, 
consolidating in one document the previous policies on funds 
management, hedging, and interest rate swaps, and adding new guidelines 
on management of unsecured credit and interest rate risks.
    In recent years, the financial markets and the Banks' participation 
in those markets have evolved considerably. Moreover, Congress has 
altered the statutory provisions governing the Federal Home Loan Bank 
System (System), principally through the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA), Public Law 101-73, 103 
Stat. 415 (August 9, 1989). As a consequence of such financial and 
legislative changes, the FHLBB and Finance Board periodically revised 
their financial policies and guidelines so that the Banks could 
continue to manage their finances prudently, profitably, and in 
furtherance of their mission. In undertaking such revisions to the FMP 
and its predecessor policies, the FHLBB and Finance Board in the past 
accepted informal comments from the Banks as part of that process. In 
some instances, staff of the Banks submitted proposals for 
consideration by the agency, and in other instances staff of the Banks 
and the agency worked together to analyze the existing policies and to 
suggest ways in which they could be revised to reflect the changing 
environment in which the Banks operate. Such informal processes and 
collaborative efforts reflected the dual regulatory and managerial 
responsibilities exercised by the FHLBB and the Finance Board.
    More recently, however, the nature of the relationship between the 
Finance Board and the System has changed, both as a result of the 
changes brought about by FIRREA and of the process of devolution 
undertaken by the Finance Board. As a result of the Finance Board's 
determination to devolve to the Banks those managerial responsibilities 
that are not vested by statute in the Finance Board, the agency has 
assumed a more predominantly regulatory role with respect to the Banks. 
The Finance Board intends to concentrate its efforts on its regulatory 
role, overseeing the safety and soundness of the Banks and ensuring 
that they adhere to their housing finance and community development 
missions. In light of the changes in its role and its relationship with 
the Banks, the Finance Board has determined that it would be 
appropriate to issue the FMP as a statement of agency policy and to 
solicit comments on the FMP from the public at large.

II. Statement of Policy

    The Finance Board last revised and reissued the entire FMP in July 
1996, following which Banks and other parties raised several 
interpretive questions. In the version of the FMP that is being 
published today the Finance Board is proposing to resolve three 
interpretive questions, to incorporate into the FMP two other matters 
that the Finance Board has addressed previously by separate 
resolutions, and to make three additional changes that the Finance 
Board deems appropriate. The publication of the FMP as a proposed 
policy statement shall not suspend the effectiveness of the version of 
the FMP approved by the Finance Board on July 3, 1996 pursuant to 
Resolution No. 96-45, nor the separate revisions approved on December 
6, 1996 by Resolution No. 96-90 (relating to inflation-indexed 
consolidated obligations) or on January 14, 1997 by Resolution No. 97-
05

[[Page 13147]]

(relating to branch and agency offices). The Finance Board intends to 
consider the comments received before adopting this proposed revision 
to the FMP, including the six new revisions described below, in final 
form.

Branch and Agency Offices

    As part of the July 1996 revisions to the FMP, the Finance Board 
revised the definition of ``eligible financial institution'' to exclude 
the U.S. branch and agency offices of foreign commercial banks. 
Resolution No. 96-45 (July 3, 1996). In January 1997, the Finance Board 
reinstated those branch and agency offices as ``eligible financial 
institutions,'' provided that the foreign commercial bank has at least 
$250 million in Tier I (or tangible) capital, can be designated as at 
least a Level III counterparty under the FMP, and has a country risk 
rating of not lower than AA from Thomson Bankwatch. Resolution No. 97-
05 (January 14, 1997). The Finance Board has incorporated the changes 
from Resolution No. 97-05 into the proposed version of the FMP, 
although as noted above, the changes made by that resolution continue 
in effect.

Alternative Funding Sources

    On an annual basis, the Finance Board approves the authority of the 
Office of Finance Board (OF Board) to approve the issuance of System 
consolidated obligations (COs). The Banks' authority to participate in 
such debt issuances is addressed by section IV. of the FMP. As part of 
the Finance Board's approval of the Office of Finance 1997 Debt 
Issuance Authorization, the Finance Board made three changes to the FMP 
to allow the Banks to participate in the debt issues the OF Board is 
authorized to approve. Resolution No. 96-90 (December 6, 1996). Those 
changes made by Resolution 96-90 remain in effect and are included in 
the version of the FMP published today.
    The Banks may participate in COs for which the coupon or principal 
may vary based upon the movement of an eligible financial index. The 
first change to the FMP revised the definition of a financial index to 
include an index that is sanctioned by a national government and serves 
as an aggregate measure of inflation, including those indices derived 
from aggregate measures of economic performance and prices. This 
amendment permitted the Banks to participate in the issuance of 
inflation-indexed COs.
    Debt issues that are tied to a financial index pertaining to a 
foreign country or that are denominated in a foreign currency are 
subject to minimum sovereign risk rating requirements. The second 
change to the FMP permitted the use of sovereign risk ratings from 
Moody's or Standard & Poor's for countries not rated by Thomson 
Bankwatch (Thomson). All three rating agencies focus on the assessment 
of political and economic risk and their ratings generally tend to be 
well correlated.
    The third change to the FMP increased the minimum sovereign risk 
rating required from Thomson for index and currency eligibility from A- 
to AA- in order to conform the FMP to the practice of the OF. If a 
country is not rated by Thomson, a Sovereign Risk Rating for long-term 
bonds or deposits from Moody's of not lower than Aa3 or a Sovereign 
Risk Rating for Foreign Currency from Standard & Poor's of not lower 
than AA- may be used.

Obligations Guaranteed by the United States

    The investment guidelines of the FMP list the types of assets that 
are authorized investments pursuant to Sections 11(g), 11(h), or 16(a) 
of the Federal Home Loan Bank Act, 12 U.S.C. 1431(g), (h), 1436(a). One 
such type is any marketable obligation issued or guaranteed by the 
United States. A question has been raised whether this provision 
encompasses obligations for which the principal may be guaranteed by 
the United States, but the interest may not be guaranteed or may be 
guaranteed only in part.
    The version of the FMP approved in 1991 provided that only the 
direct obligations of the United States were authorized investments. In 
1993, the Finance Board broadened the provision to include obligations 
guaranteed by the United States. The inclusion of obligations 
guaranteed by the United States recognizes that the full faith and 
credit of the United States is not limited to obligations issued by the 
United States Treasury, and that there is no difference in an 
instrument's credit risk where the full faith and credit of the United 
States is pledged through a guaranty, rather than directly. The Finance 
Board is proposing to revise Section II.B.6. of the Investment 
Guidelines to clarify that it includes only those instruments that 
possess the same credit risk as a direct obligation of the United 
States, meaning that the guaranty must extend to both the principal and 
interest due on the obligation.

Unsecured Credit Guidelines

    The July 3, 1996 revisions to the FMP made separate changes to the 
Hedge Transactions Guidelines and to the Unsecured Credit Guidelines, 
which have prompted a question about the inter-relationship of those 
provisions. Footnote 6 of the hedging guidelines was revised to include 
among the eligible counterparties certain entities with a Moody's 
rating of at least Baa or a Standard & Poor's rating of at least BBB, 
but only if transactions with those parties result in no unsecured 
credit exposure for the Bank. The Finance Board also revised Section 
VI.B. of the Unsecured Credit Guidelines to exclude from the definition 
of ``unsecured extensions of credit'' certain off-balance sheet 
extensions of credit that are subject to a specified type of net cross-
collateral agreement. A question has been raised as to whether the two 
provisions could be read together to allow some level of unsecured 
credit exposure to triple-B rated counterparties, if subject to the 
required net cross-collateral requirement.
    In making those revisions to the FMP the Finance Board intended 
that they be applied independently of each other, and that transactions 
with triple-B rated counterparties not result in any unsecured credit 
exposure to the Banks. The Finance Board is proposing to revise Section 
VI.B. of the Unsecured Credit Guidelines to state expressly that the 
only off-balance sheet extensions of credit subject to a net collateral 
exchange agreement that may be deemed not to be unsecured extensions of 
credit are those made to institutions that meet the requirements for at 
least a Level III counterparty, as defined within the Unsecured Credit 
Guidelines.

Counterparty Downgrade

    The Unsecured Credit Guidelines provide that when a rating agency 
places a Bank's counterparty on creditwatch for a potential downgrade 
the Bank should treat the counterparty as if a downgrade actually has 
occurred. The Finance Board is proposing to revise Section VI.C.2.f. of 
the Unsecured Credit Guidelines to clarify that for purposes of 
determining the remaining available credit line for on-balance sheet 
investment purposes, the Bank shall assume that the agency has assigned 
to the counterparty a rating at the next lower notch, for example, a 
downgrade from A-1+ to A-1, A-1 to A-2, or AA2 to AA3. The Finance 
Board expects that a Bank would assume a larger downgrade than the 
minimum required by the FMP, if warranted by the circumstances, and 
would take the appropriate steps.

[[Page 13148]]

Interest Rate Risk Guidelines: Exclusion of FIRREA Cash Flows and Other 
Amendments

    Internal models employed by the Banks to calculate their duration 
of equity have become increasingly sophisticated, and have effectively 
supplanted reliance on the Finance Board's internal model for 
calculating duration of equity. The models currently used by the Banks 
have the capacity to discount cash flows associated with various assets 
and liabilities at rates appropriate to the instrument. For these 
reasons, the Finance Board is proposing to modify Sections VII.B.1. and 
3. of the Interest Rate Risk Guidelines to: (1) Exclude specific 
reference to the CO cost curve as an appropriate uniform discounting 
methodology, and (2) provide that duration of equity calculations 
should be performed by the Banks employing calculation methods and 
assumptions that reasonably capture the interest rate risks inherent in 
their on-and off-balance sheet activities.
    In addition, the Finance Board is proposing to revise Section 
VII.B.4. to exclude the REFCorp and AHP cash flows from Bank duration 
of equity calculations. The System pays $300 million annually for 
interest on the REFCorp bonds, with each Bank's portion determined by a 
two-part formula. Initially, each Bank pays 20 percent of its net 
income (first round). If the aggregate of those payments yields less 
than $300 million, each Bank pays an additional amount based on its 
share of System advances to institutions insured by the Savings 
Association Insurance Fund (second round). The annual AHP payment is 
the greater of $100 million or 10 percent of System net income.
    When the FMP's interest rate risk guidelines were first implemented 
in 1991, the REFCorp and AHP payments were not included in the cash 
flows used to calculate each Bank's duration of equity. Subsequently, 
some of the Banks concluded that it was appropriate to include the 
REFCorp and/or AHP cash flows when calculating duration of equity and 
measuring interest rate risk. They assumed that their shares of the 
System's obligations could be considered fixed liabilities represented 
by fixed annual payments or cash outflows, and should be explicitly 
included in their asset/liability management. When the FMP was revised 
in 1993, the Finance Board required that each Bank report its cash 
flows and calculate its duration of equity both with and without the 
projected cash flows which represent the Bank's share of the System's 
REFCorp and AHP obligations. The Finance Board, in Decision Memorandum 
No. 94-DM-48 dated November 10, 1994, indicated that when measuring 
individual Bank compliance with the FMP's interest rate risk limits, it 
would take into consideration the Bank's determination to include or 
exclude the FIRREA cash flows in its interest rate risk management 
strategies.
    With the growth in System income since 1993, however, an increasing 
share of the total REFCorp payment is generated by the first round of 
the formula. In 1996, the amount of the obligation generated by the 
second round represented only eight percent of the total REFCorp 
payment. By comparison, in 1995, 1994 and 1993 the second round share 
represented 17, 30, and 40 percent of the total, respectively. In 1996, 
each Bank's contribution to the AHP represented 10 percent of its 
income.
    As System income increases, the percentage of income each Bank pays 
to REFCorp and AHP will converge to the System average. To the extent 
that the REFCorp and AHP obligations represent a fixed percentage of 
each Bank's income, they are, in effect, a tax, which ordinarily is not 
considered when estimating a Bank's duration and market value of 
equity. Because the percentage paid by each Bank is currently very 
close to the System average (no Bank paid more than 1.1 percent more or 
less than the System average in 1996), the Finance Board considers it 
appropriate to treat the payment as if it were a tax and is proposing 
to exclude the REFCorp and AHP cash flows from Bank duration of equity 
calculations. Any Bank that exceeds the duration limits as a result of 
this change will be expected to develop a plan for returning to 
compliance.

Housing and Community Development Investments

    The Finance Board has encouraged the Banks to submit proposals to 
engage in pilot programs for new mission-related activities. The 
Finance Board has determined that the pilot program structure is the 
most effective way to encourage the Banks and their members to test the 
viability and benefits of any new activities in a controlled manner 
that limits the risks to a Bank and to the System. As part of the July 
1996 revisions to the FMP, the Finance Board established a detailed set 
of criteria under which to evaluate any such proposals. The Finance 
Board has employed those criteria most recently in approving pilot 
programs proposed by the New York, Atlanta, and Chicago Banks, 
respectively.
    The FMP criteria provide that any such new investments to support 
housing and community development must: (1) Ensure the appropriate 
levels of expertise and controls necessary to manage risk and preserve 
the triple-A rating; (2) ensure that the Bank's involvement assists in 
providing financing that may not otherwise be available or may be 
available only on less attractive terms; and (3) ensure that the 
investment promotes, or does not detract from, the cooperative nature 
of the System. Prior to entering into such an investment, a Bank must 
provide a complete description of the contemplated investment activity, 
including a comprehensive analysis of how the above criteria are 
fulfilled, and must obtain from the Finance Board written confirmation 
that the criteria have been satisfied.
    These criteria follow closely the criteria recommended by the 
General Accounting Office (GAO) for the consideration of new products 
and services for the Banks. GAO Report No. 94-38, at pages 97-99. The 
GAO developed six criteria for evaluating proposals for new products 
and services, which it viewed as necessary to maintain the safety and 
soundness and missions of the System. Those criteria are: (1) Avoiding 
competition with members; (2) possessing the expertise to conduct the 
new activities profitably; (3) conforming to the housing finance, 
affordable housing, and community development missions; (4) addressing 
a need that others are not adequately meeting; (5) pricing the product 
to provide an adequate rate of return; and (6) maintaining the System's 
triple-A rating. The Finance Board believes that the FMP criteria are 
consistent with those developed by GAO and establish a prudent 
analytical framework within which to evaluate proposals from the Banks.
    The text of the proposed FMP follows:

Federal Housing Finance Board--Statement of Policy

Financial Management Policy for the Federal Home Loan Bank System

I. Policy Objective

    The Federal Housing Finance Board (Finance Board) Financial 
Management Policy (FMP) for the Federal Home Loan Bank System has been 
established to provide a framework within which the Federal Home Loan 
Banks (Banks) are allowed to implement prudent and responsible 
financial management strategies that assist them in accomplishing their 
mission, and in

[[Page 13149]]

generating income sufficient to meet their financial obligations, in a 
safe, sound, and profitable manner. The specific objectives of each 
section of the FMP are listed below.

A. Investment Guidelines

    1. Establish policy with respect to the use of funds not required 
for the Banks' advances programs or operating requirements.
    2. Specify permissible investment assets.
    3. Establish eligibility requirements for investment 
counterparties.
    4. Establish requirements with respect to the characteristics of 
permissible investments.
    5. Establish limits for permissible investment assets.

B. Liquidity Guidelines

    1. Implement the provisions of the Federal Home Loan Bank Act 
(Act), as amended, with respect to required deposit reserves.
    2. Establish additional liquidity requirements.
    3. Specify the types and characteristics of investment assets which 
may be used to satisfy the reserve and liquidity requirements.

C. Funding Guidelines

    1. Identify authorized funding sources.
    2. Prescribe the conditions under which the Banks may enter into 
non-U.S. dollar denominated and other non-standard financing 
arrangements.
    3. Establish individual Bank leverage limits.

D. Hedge Transaction Guidelines

    1. Define authorized hedging transactions and counterparties.
    2. Establish requirements and limitations for authorized hedging 
transactions.
    3. Establish a framework for the valuation and collateralization of 
interest rate swap and option transactions.
    4. Establish standards for hedge documentation.

E. Unsecured Credit Guidelines

    1. Establish minimum standards for counterparties receiving 
extensions of unsecured credit.
    2. Establish limits on the amount of unsecured credit a Bank may 
extend.
    3. Establish a method for measuring unsecured credit risk.

F. Interest Rate Risk Guidelines

    1. Establish limits on the aggregate interest rate risk a Bank may 
incur.
    2. Establish a method for measuring interest rate risk.

G. Implementation Guidelines

    1. Define the responsibilities of a Bank's board of directors, 
management, and internal audit staff.
    2. Define the responsibilities of the Federal Housing Finance 
Board.

II. Investment Guidelines

A. Purpose

    To establish policy on the use of funds not required for credit 
programs or operations, to explicitly permit the purchase of mission-
related and liquid assets, and to provide a safe and sound mechanism 
for generating income during periods of reduced credit demand to ensure 
that financial commitments can be met and that dividends can be 
maintained at levels sufficient to attract and retain members. Each 
Bank will be responsible for determining the extent to which its 
investment authority will be used to augment income from advances, 
consistent with Finance Board regulations and policies.

B. Permissible Investments

    To the extent they are specifically authorized under Sections 
ll(g), ll(h) or 16(a) of the Act, or to the extent a Bank has 
determined that they are securities in which fiduciary or trust funds 
may invest under the laws of the state in which the Bank is located, 
the following investments are permitted:
    1. Overnight and term funds, that on the settlement date have a 
remaining term to maturity not exceeding 9 months, placed with eligible 
financial institutions.\1\
    2. Overnight and term resale agreements, that on the settlement 
date have a remaining term to maturity not exceeding 9 months, with 
eligible counterparties, using for collateral securities which are 
eligible investments under this section, and Federal Housing 
Administration (FHA) and Veterans' Administration (VA) mortgages.\2\
    3. U.S. dollar deposits, that on the settlement date have a 
remaining term to maturity not exceeding 9 months, placed with eligible 
financial institutions.
    4. Commercial paper, bank notes, and thrift notes traded in U.S. 
financial markets and rated both P-1 by Moody's and A-1 by Standard & 
Poor's, that on the settlement date have a remaining term to maturity 
not exceeding 9 months.\3\
    5. Bankers' acceptances, drawn on and accepted by eligible 
financial institutions, that on the settlement date have a remaining 
term to maturity not exceeding 9 months.
    6. Marketable obligations issued or guaranteed as to both principal 
and interest by the United States.
    7. Marketable direct obligations of U.S. Government Sponsored 
Agencies and Instrumentalities for which the credit of such 
institutions is pledged for repayment of both principal and interest.
    8. Securities representing an interest in pools of mortgages (MBS) 
issued, guaranteed or fully insured by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), 
or the Federal National Mortgage Association (FNMA), or Collateralized 
Mortgage Obligations (CMOs), including Real Estate Mortgage Investment 
Conduits (REMICs), backed by such securities.
    9. Other MBS, CMOs, and REMICs rated Aaa by Moody's or AAA by 
Standard & Poor's.
    10. Asset-backed securities collateralized by manufactured housing 
loans or home equity loans and rated Aaa by Moody's or AAA by Standard 
& Poor's.
    11. Marketable direct obligations of state or local government 
units or agencies, rated at least Aa by Moody's or AA by Standard & 
Poor's, where the purchase of such obligations by a FHLBank provides to 
the issuer the customized terms, necessary liquidity, or favorable 
pricing required to generate needed funding for housing or community 
development.
    12. Other investments that support housing and community 
development, provided that prior to entering into such investments, the 
Bank:
    a. ensures the appropriate levels of expertise, establishes 
policies, procedures, and controls, and provides for any reserves 
required to effectively limit and manage risk exposure and preserve the 
Bank's and the System's triple-A rating;
    b. ensures that its involvement in such investment activity assists 
in providing housing and community development financing that is not 
generally available, or that is available at lower levels or under less 
attractive terms;
    c. ensures that such investment activity promotes (or at the very 
least, does not detract from) the cooperative nature of the System;
    d. provides a complete description of the contemplated investment 
activity (including a comprehensive analysis of how the above three 
requirements are fulfilled) to the Finance Board; and
    e. receives written confirmation from the Finance Board, prior to 
entering into such investments, that the above

[[Page 13150]]

investment eligibility standards and requirements have been satisfied.

C. Limitations on Authorized Investments

    1. Investments in other than U.S. Dollar denominated securities are 
prohibited.
    2. A Bank may enter into agreements to purchase MBS, CMOs, REMICs, 
and eligible asset-backed securities so long as such purchases will not 
cause the aggregate book value of such securities held by the Bank to 
exceed 300 percent of the Bank's capital. A Bank may not increase its 
holdings of such securities in any one calendar quarter by more than 50 
percent of its total capital at the beginning of that quarter.\4\
    3. The purchase of Interest Only or Principal Only stripped MBS, 
CMOs, REMICs, and eligible asset-backed securities is prohibited.
    4. The purchase of residual interest or interest accrual classes of 
CMOs, REMICs, and eligible asset-backed securities is prohibited.
    5. The purchase of fixed rate MBS, CMOs, REMICs, and eligible 
asset-backed securities, or floating rate MBS, CMOs, REMICs, and 
eligible asset-backed securities that on the trade date are at rates 
equal to their contractual cap, with average lives that vary more than 
six years under an assumed instantaneous interest rate change of 300 
basis points, is prohibited.

III. Liquidity Guidelines

A. Purpose

    To implement statutory requirements and to ensure each Bank's 
ability to meet potential funding needs arising from credit demands, 
deposit withdrawals, and debt redemptions without incurring material 
losses.

B. Statutory Deposit Reserve Requirements

    Each Bank is required to maintain an amount equal to the total 
deposits received from its members invested in:
    1. Obligations of the United States.
    2. Deposits in banks or trust companies (as defined in Finance 
Board regulation) which are eligible financial institutions.
    3. Advances that mature in 5 years or less to members.

C. Additional Liquidity Requirements

    1. Each Bank is required to maintain a daily average liquidity 
level each month in an amount not less than:
    a. 20 percent of the sum of its daily average demand and overnight 
deposits and other overnight borrowings during the month, plus
    b. 10 percent of the sum of its daily average term deposits, 
Consolidated Obligations (COs) and other borrowings that mature within 
one year.
    2. Eligible Investments: The following investments, to the extent 
permitted under subsection II.B, are eligible for compliance with 
subsection III.C.1 liquidity requirements:
    a. Overnight funds and overnight deposits, as otherwise described 
in subsection II.B.1.
    b. Resale agreements, which mature in 31 days or less, as otherwise 
described in subsection II.B.2.
    c. Negotiable certificates of deposit, bankers' acceptances, 
commercial paper, bank notes, and thrift notes as described in 
subsections II.B.3, 4, and 5.
    d. Marketable obligations of the United States as described in 
subsection II.B.6 which mature in 36 months or less.
    e. Marketable direct obligations of U.S. Government Sponsored 
Agencies and Instrumentalities as described in subsection II.B.7 which 
mature in 36 months or less.
    f. Cash and collected balances held at Federal Reserve Banks and 
eligible financial institutions, net of member pass-throughs.
    3. Limitation: A security that has been pledged under a repurchase 
agreement cannot be used to satisfy liquidity requirements.

IV. Funding Guidelines

A. Purpose

    To establish parameters for the use of alternative funding sources 
and structures in order that each Bank may fund its activities in a 
prudent, cost effective manner.

B. Bank Specific Liabilities

    1. Deposits: A Bank may accept deposits from members, from any 
institution for which it is providing correspondent services, from 
another Federal Home Loan Bank, and from other instrumentalities of the 
United States, subject to provisions of the Act and the Finance Board's 
regulatory and policy requirements.
    2. Federal Funds: A Bank may purchase federal funds from any 
financial institution that participates in the federal funds market.
    3. Repurchase Agreements: Repurchase agreements requiring the 
delivery of collateral by a Bank are permitted with any Federal Reserve 
Bank, U.S. Government Sponsored Agencies and Instrumentalities, primary 
dealers recognized by the Federal Reserve Bank of New York, eligible 
financial institutions, and states and municipalities with a Moody's 
Investment Grade rating of 1 or 2. Repurchase agreements not requiring 
the delivery of collateral by the Bank may be entered into with any 
supplier of funds.

C. Consolidated Obligations

    A Bank may participate in COs, so long as entering into such 
transactions will not cause the Bank's total COs and unsecured 
liabilities, as defined in Section 910.0 of the Finance Board's 
regulations (but excluding interBank loans), to exceed 20 times the 
Bank's total capital. Each Bank shall make every effort to manage its 
liabilities and capital to ensure compliance with the 20:1 leverage 
limit.
    1. A Bank may participate in the following types of standard debt 
issues:
    a. Debt with a fixed rate and fixed maturity, in either coupon or 
discount form.
    b. Debt with a fixed maturity whose coupon rate may vary in 
predetermined increments or based upon the movement of U.S. Treasury 
securities, U.S. Dollar LIBOR, the 11th District Cost of Funds Index, 
or FHLBank COs.
    c. Debt whose principal may be called or redeemed in whole or in 
part at the discretion of the Bank, at the discretion of the investor, 
or based upon the movement of U.S. Treasury securities, U.S. Dollar 
LIBOR, the 11th District Cost of Funds Index, or FHLBank COs.
    d. Debt whose principal amortizes according to a predetermined 
schedule.
    e. Debt with a coupon rate that may change from fixed to floating, 
or vice versa, at the discretion of the Bank, according to a 
predetermined schedule, or based upon the movement of one or more 
financial indices.
    2. A Bank may also participate in non-standard debt issues, some 
examples of which are:
    a. Debt whose coupon may vary based upon the movement of an 
eligible financial index (other than those identified in subsection 
C.1.b. above).\5\
    b. Debt whose principal is subject to redemption in whole or in 
part, based upon the movement of one or more eligible financial indices 
(other than those identified in subsection C.1.c. above).
    c. Debt whose principal balance may increase based upon the 
movement of one or more eligible financial indices.
    d. Debt whose coupon may vary based upon the movement of two or 
more eligible financial indices, including transactions which multiply 
the effect of rate changes.
    e. Debt denominated in a currency other than U.S. Dollars, 
including the European Currency Unit (ECU), whose

[[Page 13151]]

exchange rate risk relative to the U.S. Dollar can be effectively 
hedged.
    3. If a Bank participates in a debt issue other than the standard 
transactions described in subsection C.1 above, the Bank will be 
required to enter into a contemporaneous hedging arrangement that 
allows the interest rate and/or basis risk to be passed through to the 
hedge counterparty, unless the Bank is able to document that the debt 
will: (a) Be used to fund mirror-image assets in an amount equal to the 
debt; or (b) offset or reduce interest rate or basis risk in the Bank's 
portfolio, or otherwise assist the Bank in achieving its interest rate 
and/or basis risk management objectives. If a Bank participates in debt 
denominated in a currency other than U.S. Dollars, the currency 
exchange risk must be hedged.
    4. An FHLBank shall not directly place consolidated obligations 
with another FHLBank.

V. Hedge Transaction Guidelines

A. Purpose

    To allow the implementation of hedging programs that control the 
interest rate and basis risk which arises in the ordinary course of 
business.

B. Permitted Instruments and Strategies

    Long and short positions in the cash, forward, futures, and option 
markets (including caps and floors), and the purchase and sale of 
interest rate exchange agreements (swaps) are permitted if they assist 
a Bank in achieving its interest rate and/or basis risk management 
objectives. Hedging strategies must be explicitly stated at the time of 
execution and adequate documentation must be maintained during the life 
of the hedge. A Bank may also enter into interest rate swaps and 
options with a member to facilitate the member's asset/liability 
management strategies. Speculative use of hedging instruments is 
prohibited.\6\

C. Hedging With Interest Rate Swaps and Options (Including Caps and 
Floors)

    1. All swaps entered into by a Bank shall be governed by the FMP.
    2. Unsecured credit exposure resulting from interest rate swaps and 
options (as defined in subsection VI.B.) is governed by the FMP's 
Unsecured Credit Guidelines.
    3. Collateral Requirements: A Bank shall require collateral for 
interest rate swaps and options from those counterparties (or 
guarantors) that, on the trade date of the transaction, do not qualify 
for unsecured extensions of credit, and for risk exposure that, on the 
trade date of the transaction, exceeds the limits for unsecured 
extensions of credit established in the FMP. (Each Bank's board of 
directors may identify a level of exposure it deems material before a 
collateral call will be required, either at the initiation, or 
throughout the life, of a hedge agreement. If a Bank chooses to 
identify a minimum collateral call level, that level or the method for 
calculating it must be included in the Bank's policy, as required in 
subsection VIII.A.1.f. of the FMP.)
    a. The dollar amount of collateral shall be determined by the Bank 
commensurate with the risk undertaken and shall be maintained in 
accordance with the requirements of the Bank's agreement with the 
counterparty.
    b. Collateral required during the life of the transaction shall be 
no less than the market value of the swap, as determined by the Bank, 
plus net accrued interest due to the Bank, unless the transaction is 
subject to a net collateral exchange agreement as described in 
subsection VI. B.
    c. For option transactions in which the Bank is a potential 
receiver of payments, a minimum initial collateral maintenance level 
must be established that is no less than the market value of the 
contract, plus amounts due to the Bank under the contract.
    d. Collateral agreements entered into by a Bank that are not 
required by the FMP will not be subject to FMP collateral requirements.
    4. A Bank may enter into an unsecured interest rate swap or option 
agreement with a counterparty that does not meet the minimum credit 
standards as long as the transaction results in a net reduction of 
credit risk arising from previously existing swap or option agreements 
with that counterparty, and a master agreement executed by the Bank and 
the counterparty provides for such netting.
    5. A Bank may, for hedging purposes, enter into interest rate swap 
agreements in which the notional principal balance amortizes based upon 
the prepayment experience of a specified group of MBS or the behavior 
of an interest rate index (Indexed Principal Swaps), or swap agreements 
which may be terminated or extended at the option of the Bank or its 
counterparty (swaptions).
    a. Interest rate swaps that amortize according to the behavior of 
Interest Only or Principal Only stripped MBS/CMOs/REMICs are 
prohibited.
    b. Interest rate swaps that amortize according to the behavior of 
residual interest or interest accrual classes of CMOs or REMICs are 
prohibited.
    c. Indexed principal swaps that have average lives that vary by 
more than six years under an assumed instantaneous change in interest 
rates of 300 basis points are prohibited, unless they are entered into 
in conjunction with the issuance of COs or the purchase of permissible 
investments in which the interest rate risk is passed through to the 
investor or counterparty.
    6. In addition to interest rate caps and floors, a Bank may take 
long and short hedge positions in any options contract provided that:
    a. The underlying instrument is an investment or a futures contract 
permissible under this policy.
    b. The hedge is constructed such that the price volatility of the 
option position is consistent with the price volatility of the cash 
instrument being hedged or with the option component of that 
instrument.
    c. The option contract is traded on an organized exchange regulated 
by the Commodity Futures Trading Commission or the Securities and 
Exchange Commission; or through a recognized securities dealer which 
reports its position regularly to the Federal Reserve Bank of New York.
    7. Documentation:
    a. Market value determinations and subsequent collateral 
adjustments should be made, at a minimum, on a monthly basis.
    b. Failure of a counterparty to meet a collateral call will result 
in an early termination event.
    c. Early termination pricing and methodology shall be detailed in 
all interest rate swap and option contracts in which a Bank is involved 
as principal. This methodology must reflect a reasonable estimate of 
the market value of the swap or option at termination. Standard 
International Swap and Derivatives Association, Inc. language relative 
to early termination pricing/methodology may be used to satisfy this 
requirement.
    d. The transfer of an agreement or contract by a counterparty shall 
be made only with the consent of the Bank.
    e. Transactions with a single counterparty shall be governed by a 
single master agreement when practicable.
    8. Non-U.S. Dollar denominated swaps are authorized only to convert 
matching non-U.S. Dollar denominated debt to U.S. Dollar denominated 
debt, or to offset another non-U.S. Dollar denominated swap.

[[Page 13152]]

D. Hedging in the Financial Futures Markets:

    1. Long and short positions in financial futures may be used for 
hedging purposes provided that:
    a. The underlying instrument is an investment or other transaction 
permissible under this policy.
    b. The price of the futures contract has a high correlation with 
the price of the cash instrument being hedged.
    c. The futures contract is traded on an organized exchange 
regulated by the Commodity Futures Trading Commission.
    2. If delivery of the underlying security will cause a Bank to 
exceed any investment limitation of the FMP, the Bank must close out 
its position prior to taking delivery.
    3. Any Bank with a position which exceeds 5 percent of the open 
interest in any specific futures contract month shall report that 
position to the investment desks of the other Banks and to the Managing 
Director of the Finance Board within one business day of the initiation 
of the position. Notification shall also be provided when such a 
position declines below 5 percent.

E. Hedging in the Cash or Forward Markets

    1. The purchase or sale of cash market securities for either 
regular (cash) or forward delivery is permitted, provided that:
    a. Only securities that are permissible investments under this 
policy are used.
    b. The price of the cash or forward instrument has a high 
correlation with the price of the instrument being hedged.
    c. Any security purchased in the cash market for hedging purposes 
is subject to the investment limits of the FMP.
    2. Short positions in instruments authorized in the FMP, the 
purchase of securities under resale agreements, and the borrowing of 
securities in connection with short sales is authorized for hedging 
purposes.

VI. Unsecured Credit Guidelines

A. Purpose

    To set prudent limits on unsecured credit risk arising from 
authorized investment and hedging strategies.

B. Scope

    All on- and off-balance sheet extensions of credit, in which the 
value of collateral pledged to the Bank by a counterparty is less than 
the credit the Bank has extended to that counterparty. Off-balance 
sheet extensions of credit to institutions that are at least Level III 
counterparties (as defined in section VI.C.2), which are subject to a 
net collateral exchange agreement having prudent limits on the maximum 
allowable levels of unsecured credit exposure as approved by the Bank's 
board of directors, shall not be considered unsecured extensions of 
credit. (Inter-Bank loans, obligations of an FHLBank, and obligations 
of, or guaranteed by, the United States are not subject to the 
requirements of this section.) \7\

C. Eligibility for Unsecured Extensions of Credit

    1. The amount of unsecured credit that may be extended to 
individual counterparties shall be commensurate with the counterparty's 
credit quality. A counterparty's credit quality shall be determined by 
credit ratings of the counterparty's debt, debt securities, or 
deposits.
    2. Acceptable Credit Ratings: A Bank may extend unsecured credit to 
counterparties assigned the following credit ratings at the transaction 
trade date:

----------------------------------------------------------------------------------------------------------------
                                                                                   Standard &                   
                               Thomson Bankwatch         IBCA          Moody's       Poor's           IDC       
----------------------------------------------------------------------------------------------------------------
Level I......................  A                  A                     P-1  Aaa     A-1  AAA  Above 190.       
                               A/B                A/B                                                           
Level II.....................  B                  B                           Aa           AA  165-190.         
                               B/C                B/C                                                           
Level III....................  C                  C                            A            A  140-164.         
----------------------------------------------------------------------------------------------------------------

    a. With respect to investments in instruments other than commercial 
paper, bank notes and thrift notes, Thomson Bankwatch shall be the 
primary short-term rater; i.e., a short-term rating from Moody's, 
Standard & Poor's, IBCA or IDC may only be used if the counterparty is 
not rated by Thomson. For investments other than commercial paper, bank 
notes, or thrift notes, an A-1 or P-1 rating from Standard & Poor's or 
Moody's may only be used to determine allowable levels of unsecured 
credit exposure when it is a stand-alone rating and not the result of 
credit enhancement of a counterparty's commercial paper issue. For 
long-term investments, only ratings from Moody's and Standard & Poor's 
may be used. The use of short- or long-term credit ratings shall be 
appropriate to the term of the transaction: i.e., short-term ratings 
for transactions with a maturity equal to 1 year or less; long-term 
ratings for transactions with a maturity greater than 1 year.
    b. Single-A and double-A ratings from Moody's and Standard & Poor's 
shall be interpreted to include the full range of the generic rating 
category (e.g., single-A will include A- and A3).
    c. Rating downgrades of counterparties shall not require the 
liquidation of existing positions.
    d. A Bank will have discretion to choose the rating it will use if 
the rating agencies disagree on either a counterparty's long or its 
short-term credit rating.
    e. In the event of a split rating (i.e., a counterparty falling 
into different FMP unsecured credit levels based on its short- and 
long-term ratings), the higher of the two ratings will dictate the 
total amount of unsecured credit the Bank may extend to the 
counterparty; however, the lower of the two ratings will limit the 
allowable credit exposure to the counterparty for transactions with 
maturities governed by that rating.
    f. When a counterparty is placed on creditwatch for potential 
downgrade by a rating agency, the Bank shall: (1) For purposes of 
determining the remaining available credit line for on-balance sheet 
investment purchases assume a rating from that agency at the next lower 
notch, e.g., a downgrade from A-1+ to A-1 or from AA2 to AA3; or (2) 
for off-balance sheet transactions, take action deemed appropriate by 
the Bank, taking into account contractual agreements in force with the 
counterparty.
3. Limitations on Unsecured Credit Extensions
    a. Unsecured extensions of credit to a single U.S. Government 
Sponsored Agency or Instrumentality shall not exceed 100 percent of a 
Bank's capital.
    b. Unsecured extensions of credit to a single Level I counterparty 
shall not exceed 30 percent of a Bank's capital.

[[Page 13153]]

    c. Unsecured extensions of credit to a single Level II counterparty 
shall not exceed 20 percent of a Bank's capital.
    d. Unsecured extensions of credit to a single Level III 
counterparty shall not exceed 10 percent of a Bank's capital.
    e. The maximum amount of unsecured credit that may be extended to 
any counterparty shall not exceed 25 percent of that counterparty's 
Tier I capital (or tangible capital if Tier I is not available).
    f. Limitations on extensions of unsecured credit apply to the 
specific counterparty receiving the credit or the party guaranteeing 
repayment on behalf of the counterparty. However, each Bank is expected 
to evaluate its aggregate unsecured credit exposure to affiliated 
counterparties and impose limits on such extensions of credit if 
necessary.
    g. Unsecured extensions of credit to (except those that result from 
a Bank entering into swaps and other hedging arrangements with) Level 
III counterparties may not be made for terms in excess of one (1) 
business day.
    h. Maximum Effective Maturities for Unsecured Extensions of Credit 
(as defined in subsection VI.B.) Arising from Interest Rate Swap 
Agreements and Similar Transactions: \8\

------------------------------------------------------------------------
                                                       Maximum effective
                                 Counterparty credit      maturity of   
                                        rating             agreements   
------------------------------------------------------------------------
Long Term.....................  Aaa, AAA               No maturity      
                                                       limit.           
                                Aa, AA                 7 years.         
                                A, A                   5 years.         
Short Term *..................  A1, P1, A, B           1 year.          
------------------------------------------------------------------------
 A-1 or P-1 ratings must be based on Standard & Poor's or Moody's rating
  of the counterparty, and may not not be the result of credit          
  enhancement of a counterparty's commercial paper issue.               
 Note: At its discretion, a Bank may use long term credit ratings for   
  all interest rate swap agreements and similar transactions, regardless
  of the term of those agreements.                                      

    i. Contingent Collateralization of Agreements: Contracts for 
interest rate exchange agreements or similar transactions with 
effective maturities longer than 10 years shall require full 
collateralization of the agreement value plus accrued interest 
(maintenance margin) in the event of a counterparty downgrade below 
Level III.

VII. Interest Rate Risk Guidelines

A. Purpose

    To set prudent limits on the extent to which each Bank may be 
exposed to interest rate risk.

B. Interest Rate Risk Limitation

    1. Each Bank is required to maintain the duration of its equity (at 
current interest rate levels using an appropriate discounting 
methodology) within a range of +5 years to -5 years.
    2. Each Bank is required to maintain its duration of equity, under 
an assumed 200 basis point change in interest rates, within a range of 
+7 years to -7 years.
    3. Duration of equity calculations shall be performed by each Bank 
at intervals prescribed by the Finance Board. Each Bank shall employ 
calculation methods and assumptions that reasonably capture the 
interest rate risks inherent in its on- and off-balance sheet 
activities.
    4. Each Bank is required to report its cash flows and calculate its 
duration and market value of equity without projected cash flows which 
represent the Bank's share of the System's REFCorp and AHP obligations.

VIII. Implementation Guidelines

A. The Board of Directors of Each Bank Shall

    1. Adopt and forward to the Finance Board a Bank financial 
management policy consistent with the FMP within 90 calendar days of 
the effective date of the FMP. The Bank's policy will address:
    a. the role of the investment portfolio in fulfilling the Bank's 
public purpose, maintaining liquidity, and generating earnings;
    b. explicit limits (in percent) on changes in net market value (in 
addition to limits on changes in net market value implicit in the 
duration limits set forth in subsection VII.B.) resulting from interest 
rate risk and convexity;
    c. how the investment strategy addresses the mark to market 
accounting requirements of SFAS 115;
    d. the cash flow implications of the FIRREA obligations and their 
impact on the Bank's measurement and control of interest rate risk;
    e. a commitment to attain and maintain a stand-alone triple-A 
rating on long-term deposits or other unsecured long-term liabilities;
    f. any maximum threshold and minimum collateral call levels 
approved by the Bank's board for off-balance sheet transactions and the 
methods by which such levels are determined; and
    g. the maximum allowable level of term (i.e., one year or greater), 
unsecured credit exposure arising from on-balance sheet transactions.
    2. Review and approve, prior to implementation, any significant 
changes in financial strategies undertaken by Bank management.
    3. To the extent that the Bank enters into investment transactions 
not explicitly permitted under Sections ll(g), ll(h), or 16(a) of the 
Act, ensure that such investments are securities in which fiduciary and 
trust funds may invest under the laws of the state in which the Bank is 
located.
    4. Identify the tolerable risk limits for mortgage-backed and 
asset-backed security investments, including the amount of capital 
(market value) the Bank is willing to expose under a 200 basis point 
movement in interest rates.
    5. Evaluate modeling and management expertise available to measure 
and control the credit, interest rate, basis, and other risks involved 
in financing and investment arrangements entered into by the Bank.
    6. Establish policies that promote diversity in the Bank's funding 
sources and investments.
    7. Authorize specific individuals to develop financial strategies 
and to execute financial transactions governed by the FMP. (Duties and 
responsibilities shall be appropriately divided so that no one 
individual has sole responsibility for any two of the following 
functions: trading; funds and security transfer; and portfolio 
accounting.)
    8. Approve the opening of any unsecured checking or settlement 
accounts with counterparties that do not meet the credit standards 
established in the FMP. Decide whether to maintain any existing 
unsecured checking or settlement accounts with counterparties that have 
been downgraded below credit standards established in the FMP. 
Justification for such approvals shall be available to Finance Board 
examiners for review. (Unsecured checking or settlement accounts with 
counterparties that do not meet the credit standards of the FMP but 
that are covered by deposit insurance or are otherwise guaranteed are 
exempt from this requirement).
    9. Approve a list of brokers, reporting dealers, and futures 
commission merchants with whom the Bank may purchase and sell 
securities and contracts.

B. Management of Each Bank Shall

    1. Establish internal control systems to ensure compliance with the 
FMP.
    2. Submit a monthly report to its board of directors and to the 
Finance Board regarding the activities governed by the FMP. At a 
minimum, the report shall cover the areas of investments, liquidity, 
funding, hedging, unsecured credit risk, and interest rate risk. It 
will also discuss compliance with the limitations in the FMP and the 
Bank's internal policies. Any exceptions to the FMP shall be 
highlighted and explained

[[Page 13154]]

in the compliance report submitted to the Finance Board; such report 
shall be in a format defined by the Finance Board.
    3. Provide periodic data, as requested by the Finance Board, to 
facilitate its oversight of FMP compliance.
    4. Establish one or more securities safekeeping agents and notify 
the Finance Board accordingly. (Authorized agents include Federal 
Reserve Banks, Federal Home Loan Banks, and other eligible financial 
institutions domiciled in the U.S.)
    5. Account for financial transactions executed under the FMP in 
accordance with Generally Accepted Accounting Principles.

C. The Internal Auditor of Each Bank Shall Establish Internal Auditing 
Programs That Test for Compliance With the FMP

D. The Federal Housing Finance Board Shall

    1. Monitor each Bank's compliance with the FMP.
    2. Interpret any questions related to the FMP.
    3. Consider requests for exceptions to the FMP.

E. This Most Recently Amended Version of the FMP Shall

    1. Become effective on ____________________, 1997.
    2. Amend and replace the Financial Management Policy dated July 3, 
1996. Financial transactions and contracts that were authorized for, 
and entered into by, the Banks under these and any relevant preceding 
policies, and that remain outstanding on the effective date of the FMP, 
are grandfathered for purposes of compliance with the amended policy 
guidelines.

Footnotes

    1. The term ``eligible financial institutions'' includes:
    a. Federal Home Loan Banks;
    b. FDIC-insured financial institutions, including U.S. 
subsidiaries of foreign commercial banks, whose most recently 
published financial statements exhibit at least $100 million of Tier 
I (or tangible) capital if the institution is a member of the 
investing FHLBank or least $250 million of tangible capital for all 
other FDIC-insured institutions, and which have been rated at least 
a level III institution as defined in subsection VI.C. of the FMP.
    c. U.S. branch or agency offices of foreign commercial banks, 
provided that the most recently published financial statements of 
the foreign commercial bank exhibit at least $250 million of Tier I 
(or tangible) capital and the foreign bank can be designated at 
least a Level III counterparty as defined under Section VI.C.2. and 
has a country risk rating of not lower than AA from Thomson 
Bankwatch.
    2. Eligible counterparties for resale agreements include the 
Federal Reserve Bank of New York, primary dealers in government 
securities recognized by the Federal Reserve whose capital exceeds 
$250 million or whose obligations under such agreements are 
guaranteed by parent firms whose capital exceeds $250 million, and 
U.S. Government Sponsored Enterprises for which the credit of such 
institution is pledged for repayment. The Bank for International 
Settlements (BIS) and the central banks of foreign countries with a 
Thomson Bankwatch country risk rating of at least double-A are 
considered eligible counterparties, provided the resales are 
collateralized solely by FHLBank System consolidated obligations. 
Resale agreements may be consummated using a designated custodian, 
provided the custodian is a domestic eligible financial institution 
and documentation is provided which evidences the Bank's security 
interest in the collateral held by the custodian.
    3. Commercial paper, bank note, and thrift note issuers shall be 
in the banking, housing, finance, or securities industries as 
determined by an FHLBank. Commercial paper, bank note, and thrift 
note issuers (or guarantors if applicable) must exhibit on their 
most recently published audited financial statements at least $100 
million of tangible capital if the institution is a member of the 
investing FHLBank or at least $250 million of tangible capital for 
all other institutions. If the commercial paper, bank note, or 
thrift note issue receives its A-1/P-1 rating by virtue of a 
guarantee or other credit enhancement, both the minimum tangible 
capital requirement and the maximum allowable unsecured credit 
exposure (as determined in subsection VI.C.) shall apply to the 
guarantor rather than to the issuer.
    4. For purposes of determining compliance with the 300 percent 
of capital limit, investment levels will be measured as of the 
transaction trade date and capital levels will be based on the 
Bank's most recently available monthly financial statement. A Bank 
will not be required to divest securities solely to bring the level 
of its holdings into compliance with the limit. A Bank's dollar roll 
financing activity will not be included in calculating the Bank's 
position relative to the limit.
    5. A ``financial index'' is defined as an index that pertains 
to: (1) Interest rates, (2) baskets of equities, (3) currencies, or 
(4) aggregate measures of inflation, sanctioned by a national 
government, including those derived from aggregate measures of 
economic performance and prices. In the event of debt tied to a 
basket of equities, the basket should include a sufficient number of 
equities to ensure that the movement of the index is not dictated by 
the performance of just one equity in the basket. To be considered 
``eligible,'' an index must be publicly available and verifiable 
independent of underwriters or selling group members. For an index 
that pertains to a foreign country, that country must be assigned a 
Country Risk Rating no lower than AA- by Thomson Bankwatch. In the 
event a country is not rated by Thomson Bankwatch, Sovereign Risk 
Ratings from Moody's or Standard & Poor's may be used subject to the 
following requirements: a country must be assigned a Sovereign Risk 
Rating for long-term bonds or deposits from Moody's of not lower 
than Aa3 or a Sovereign Risk Rating for Foreign Currency from 
Standard & Poor's of not lower than AA-. The European Currency Unit 
(ECU) shall be deemed an eligible index.
    6. Eligible non-member counterparties for hedging transactions 
include:
    a. Eligible financial institutions;
    b. Foreign financial institutions rated at least a Level III 
institution, as defined in subsection VI.C. of the FMP, and 
domiciled in countries receiving a country risk rating of at least 
AA from Thomson Bankwatch;
    c. Domestic corporations or partnerships, foreign corporations, 
domestic subsidiaries of foreign corporations, international 
organizations, and foreign governments or their agencies, rated at 
least single-A by Moody's or Standard & Poor's, or rated Baa by 
Moody's or BBB by Standard & Poor's provided transactions with such 
counterparties result in no unsecured credit exposure for the Bank; 
and
    d. U.S. Government Sponsored Agencies.
    7. For purposes of the FMP, unsecured extensions of credit will 
be measured as follows:
    a. For on-balance sheet transactions, an amount equal to the sum 
of the book value of the item plus net payments due the Bank.
    b. For off-balance sheet transactions, an amount equal to the 
sum of the net market value of the agreement, as determined by the 
Bank, plus net payments due the Bank.
    c. Extensions of credit arising from off-balance sheet 
transactions with one counterparty may be netted provided the Bank 
and the counterparty have executed a master agreement that provides 
for such netting.
    8. The effective maturity of interest rate exchange agreements 
may be considered the term from settlement to the date on which an 
FHLBank has the unilateral and unconditional option to terminate the 
agreement at its then current market value. For Indexed Principal 
Swaps, the effective maturity shall be the weighted average maturity 
using consensus prepayment speed estimates for current interest rate 
levels, unless an appropriate alternative methodology is applied.

    Dated: March 5, 1997.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR No. 97-6878 Filed 3-18-97; 8:45 am]
BILLING CODE 6725-01-U