Fact Sheet Farm Credit Administration

1501 Farm Credit Drive

McLean, Virginia 22102-5090

October 11, 2012 Contact: Michael Stokke or Christine Quinn,

703-883-4056

E-mail: info-line@fca.gov

Website: www.fca.gov

Fact Sheet on Investment Management

for Farm Credit System Banks and Associations

The Farm Credit Administration Board today adopted a final rule revising its regulations that 

govern the investment management of Farm Credit System (FCS or System) banks and 

associations. FCA had revised these regulations in 1999 and 2005. During the recent 

financial crisis, FCA recognized that these regulations should be updated and strengthened. 

These changes should further strengthen investment management activities at FCS 

institutions. In an upcoming rulemaking, we will be addressing investment eligibility and 

association investments. 

Summary of Changes

Section 615.5131 Definitions: For clarity, we add definitions for “Government agency” and 

“Government-sponsored agency.” We also make conforming changes to these same definitions 

in section 615.5201, which provides definitions for our capital adequacy rules.

Section 615.5132 Investment Purposes: FCA regulations limit the eligible investments of a 

Farm Credit bank to 35 percent of the bank’s total outstanding loans. We revise the regulation to 

allow Farm Credit banks, when calculating the amount of eligible investments they may hold, to 

exclude collateral posted as margin for derivative transactions. We make this change because 

Farm Credit banks use derivative products as an integral part of their interest rate risk 

management activities and as a supplement to the issuance of debt securities in the capital 

markets. Banks are required to post collateral to counterparties resulting from entering into 

derivative transactions, and we do not want to discourage them from implementing appropriate 

risk management practices. We also make changes to the 35 percent calculation; these 

changes will provide increased investment management flexibility.

Section 615.5133 Investment Management: The revised regulation provides additional board 

policy requirements, enhances internal controls of investments, and strengthens board reporting 

requirements. It also allows increased investment management flexibility, where appropriate. It 

requires institutions to stress-test all investments that are structured or that have uncertain cash 

flows, including all mortgage-backed securities and asset-backed securities, before purchase. 

(The existing regulation requires pre-purchase stress testing only of mortgage securities.) The 
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revised regulation also expressly requires quarterly stress testing of the entire investment 

portfolio, on both an individual security basis and a portfolio-wide basis.

Section 615.5135 Management of Interest Rate Risk: We incorporate our interest rate risk 

management program requirements into a new § 615.5180 and remove § 615.5135 from our 

regulations.

Section 615.5136 Emergencies Impeding Normal Access of Farm Credit Banks to Capital 

Markets: This provision authorizes FCA, if it determines that an emergency exists, to adopt, in 

its sole discretion, a resolution providing relief from its eligibility and liquidity requirements. We 

are finalizing changes that would broaden FCA’s discretion in its granting of relief. 

Section 615.5140 Eligible Investments: We make technical changes to the investment 

eligibility criteria table.

Section 615.5141 Stress Tests for Mortgage Securities: We incorporate our stress-testing 

requirements into § 615.5133 and remove § 615.5141 from our regulations.

Section 615.5143 Management of Ineligible Investments and Reservation of Authority to 

Require Divestiture: Under the final rule, the eligibility of investments is determined only at the 

time of purchase; an institution that purchases an ineligible investment must divest within 60 

days unless FCA approves a divestiture plan for a longer period. An investment that is eligible 

when acquired, however, does not lose its eligibility even if its credit quality deteriorates. 

Instead, the final regulation specifies liquidity requirements and collateral treatment (all of which 

largely mirror the conditions we currently impose in connection with approving divestiture plans) 

for investments with deteriorated credit quality. In addition, the final rule requires institutions to 

develop a plan to reduce the risk from investments as their credit quality deteriorates. The final 

rule also reserves FCA’s authority to require divestiture for failure to comply with FCA 

regulations regarding permissible purposes of investments, as well as for safety and soundness 

reasons.

Section 615.5174 Farmer Mac Securities: We remove the requirement that a System 

institution must stress-test Farmer Mac securities backed by loans that the institution originated. 

However, an institution must perform stress testing on mortgage securities issued or guaranteed 

by Farmer Mac that are backed by loans it did not originate. In addition, because other 

investments would no longer have to be divested if they fail a stress test, we remove this 

requirement for Farmer Mac securities as well. 

Section 615.5180 Bank Interest Rate Risk Management Program: We combine the 

requirements of § 615.5135, § 615.5180, and § 615.5181 for clarity purposes. We also rename 

this section. We strengthen the interest rate risk management program of Farm Credit banks by 

adding new requirements for the interest rate risk management section of a bank’s asset/liability 

management policy.

Section 615.5181 Bank Interest Rate Risk Management Program: We incorporate these 

interest rate risk requirements into § 615.5180 and remove § 615.5181 from our regulations.

Section 615.5182 Interest Rate Risk Management by Associations and Farm Credit 

System Institutions Other Than Banks: We make technical changes to the regulation.