Fact Sheet Farm Credit Administration

1501 Farm Credit Drive

McLean, Virginia 22102-5090

October 13, 2011 Contact: Michael Stokke or Christine Quinn,

703-883-4056

E-mail: info-line@fca.gov

Website: www.fca.gov

Fact Sheet on Farmer Mac Non-Program Investment and Liquidity Management: 

Notice of Proposed Rulemaking

The Farm Credit Administration (FCA) Board adopted a proposed rule on October 13, 2011, to 

revise its regulations governing non-program investment and liquidity management at the 

Federal Agricultural Mortgage Corporation (Farmer Mac). FCA first issued these regulations in 

2005. The recent financial crisis and recent developments in best practices present several 

opportunities to update and strengthen these regulations. 

In addition, in July 2010, the President signed into law the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act). Section 939A of the Dodd-Frank Act requires all 

Federal agencies to review their regulations that refer to or require the use of credit ratings, to 

remove those references and requirements, and to substitute other appropriate standards of 

creditworthiness. While this proposed rule does not propose new standards, it does discuss and 

seek comment regarding the best approach to setting creditworthiness standards for eligible 

investments purchased by Farmer Mac. Below is a summary of the proposed changes and a 

listing of the questions on which FCA seeks comment.

Summary of Proposed Changes 

652.5 Definitions — We propose to add definitions for “cash,” “contingency funding plan,” 

“liability maturity management plan,” “liquidity reserve,” and “Office of Secondary Market 

Oversight (OSMO)” to introduce the terms or define acronyms for increased user-friendliness to 

the reader.

652.10 Investment Management — We propose additional Board policy requirements and 

enhanced internal controls of investments. We also propose to address investment eligibility 

through a section entitled “Due Diligence.” We propose to incorporate stress testing into the 

section. We also propose to strengthen our regulations over investment reporting so that the 

-more-
2

Board of Directors would have sufficient information regarding investment portfolio practices and 

results.

652.15 Non-Program Investment Purposes and Limitation — We propose to add a new 

permissible purpose for non-program investments: investments that complement program 

business. This purpose would recognize that certain investments, such as investments with a 

rural focus that are backed by the full faith and credit of the United States Government, could 

advance Farmer Mac’s mission. Farmer Mac would, however, need to seek FCA’s prior 

approval for any investments not explicitly authorized on the list of eligible investments. 

We propose to exclude from the calculation of the 35-percent-of-total-outstanding-loans portfolio 

maximum all investments posted as margin against derivative exposures. We propose this 

change because the Dodd-Frank Act may result in additional margin requirements for Farmer 

Mac, and we do not want to discourage the use of derivatives as an appropriate risk 

management tool. We propose to revise the maximum non-program investment limit to 

eliminate the outdated floor on that maximum of $1.5 billion which, given its growth, Farmer Mac 

should not need to rely on in the future.

652.20 Eligible Investments — We propose to reduce some of our maturity and portfolio 

concentration limits and eliminate commercial mortgage-backed securities from the list of 

authorized investments. The proposal would also make clear that subordinated debt is not a 

permissible investment. We further propose to revise single obligor limits; e.g., none for 

Treasuries and 15 percent of regulatory capital for all others – down from the existing 25 

percent of regulatory capital. 

652.25 Management of Ineligible and Unsuitable Investments — The existing rule requires 

Farmer Mac to divest of ineligible investments within six months unless FCA approves a 

divestiture plan for a longer period. Under the proposed rule, the eligibility of investments would 

be determined only at the time of purchase. Investments that are eligible at the time of purchase 

would remain eligible even if their credit quality deteriorates – though such events would trigger 

additional reporting requirements. The proposed rule specifies liquidity reserve treatment for

investments with deteriorated credit quality. The proposed rule would also reserve FCA’s 

authority to require divestiture for safety and soundness reasons.

652.30 Management of Interest Rate Risk — We propose to strengthen the interest rate risk 

management section by broadening its application to the whole investment portfolio. Under the 

proposal, Farmer Mac would have to establish policies and procedures to, among other things, 

consider the nature and purpose of derivative contracts and establish derivative counterparty 

limits.

652.35 Liquidity Management — We propose to add a requirement for a Liability Maturity 

Management Plan (LMMP) to emphasize the need to effectively manage the term structure of 

liabilities and the associated funding risk. We also propose to add a requirement for liquidity 

-more-
3

Contingency Funding Plan (CFP) to ensure that well-conceived and sufficiently detailed plans 

are in place to deal with all aspects of response to a variety of liquidity stress scenarios.

652.40 Liquidity Reserve Requirement and Supplemental Liquidity — We propose to 

restructure the minimum liquidity standard as well as to increase the minimum from 60 days to 

90 days of maturing obligations. The proposal would require Farmer Mac to hold cash and/or 

Treasury securities (“Level 1” assets) in an amount sufficient to meet obligations for 30 days. A 

second tier of liquid assets (“Level 2” assets) would be required to fund an additional 60 days of 

maturing obligations, for a total of 90 days of liquidity. Finally, “supplemental liquidity,” above the 

90-day minimum, would be made up of either Level 1 and 2 assets or a third-most-liquid tier of 

eligible asset classes.

We also propose to restructure discounts applied to non-program investments for purposes of 

calculating days of liquidity. The restructuring achieves a simplified approach but also deepens 

discounts on assets that represent the third-most-liquid tier of eligible assets.

652.45 Temporary Regulatory Waivers or Modifications for Extraordinary Situations — 

This provision authorizes FCA, if it determines that an extraordinary situation exists which 

necessitates a temporary regulator waiver or modification, to provide relief from FCA’s eligibility 

and liquidity reserve requirements. We propose a provision that would authorize FCA, in such a 

situation, to also take other actions as deemed appropriate. 

Questions Regarding Dodd-Frank Act Compliance—Substitutes for Credit Ratings

The rule suggests three alternative approaches, but welcomes public comment on how these 

might be used in combination as well as any others that might not be specifically discussed.

Questions: Should FCA regulations specify financial measurements, benchmark indexes, or 

other measurable criteria against which institutions could evaluate the creditworthiness of their 

investments? 

• Should such a creditworthiness standard include specific standards for probability of 

default (PD) and loss given default (loss severity)?

• If so, why, and where could the agency obtain the data needed to derive such 

probabilities and loss severity standards? 

• Also, should creditworthiness criteria vary by asset class and/or type of investment?

• Finally, would it be appropriate to combine this approach with one or more of the other 

approaches discussed below, and if so, which ones, and why? 

Question: Should FCA develop regulations that would require Farmer Mac to develop its own 

internal assessment processes for evaluating creditworthiness of investments? 

• If so, what principles should be applied in creating such a system, and why? 

• Would the amount of resources needed to establish and maintain such a system 

potentially be overly burdensome to Farmer Mac? 

-more-
4

• Would it be appropriate to combine this approach with one or more of the other 

approaches? If so, which ones, and why? 

Question: Should FCA develop regulations that would require institutions to use third-party 

assessments to assess creditworthiness? 

• What reliable third-party sources exist? 

• Should creditworthiness criteria distinguish between issuer-paid third-party sources and 

investor-paid third-party sources? If so, how? 

• How might we combine this approach with one or more of the other approaches to 

create an optimal regulatory structure? 

###