National Rural Utilities Cooperative 

Finance Corporation (CFC)

Implementation of 

Dodd-Frank Act 

2011
2

Table of Contents

A. Introduction to CFC

B. How and Why CFC Uses Derivatives

C. CFC Should be Exempt from DFA’s Margining and 

Clearing Requirements
3

A. Introduction to CFC
4

CFC is an Important Source of Capital to 

Utilities in Rural America

• Member-owned cooperative association

– Established in 1969; owned by America’s electric 

cooperatives

– Private financing arm of America’s rural utility 

systems

• CFC’s owners can qualify as commercial end users 

under DFA.
5

CFC’s Purpose is to Provide Financing so that 

Electric Cooperatives can Provide Electric 

Power to Rural America.
6

 Generation primarily built to 

meet native load requirements 

of member distribution systems 

only — no merchant or 

independent power producer 

risk; limited nuclear plant 

investment.

 Access to federal power on a 

preferential basis.

 Distribution companies have 

defined service territories —

largely residential and small 

commercial customers. 

 Generally, co–ops are able to 

opt out of deregulation in 

applicable states.

 Low cost (T+12 bps) long–term 

funding from USDA/ RUS, 

treasury rate funding. 

 Stable operations and industry 

outlook.

Electric Cooperatives: A Small But Important Segment of 

the Industry

$ Tax–exempt

debt

16% kWh

Government–Owned 

Utilities

Investors

$ Debt $ Equity

74% kWh

Investor–Owned 

Utilities

Investors Investors

Consumers

$ Equity $ Debt $ Debt

10% kWh

Cooperative–Member 

Owned Utilities

Investors

Consumers Consumers

CFC RUS

Data Source: NRECA, Strategic Analysis, February 2007.
7

Rural Electric Cooperatives – Principles & Values

1. Voluntary and open membership – Are open to all persons able to use their services and 

willing to accept the responsibilities of membership.

2. Democratic member control – Cooperatives are democratic organizations controlled by 

their members, who participate in setting their policies and making decisions.

3. Member economic participation – Members contribute equitably to, and democratically 

control, the capital of their cooperative. At least part of that capital is usually the 

common property of the cooperative.

4. Autonomy and independence – Cooperatives are autonomous corporations controlled 

by their members. If they enter into agreements with other organizations, including 

governments, or raise capital from external sources, they do so on terms that ensure 

democratic control by members and maintain their cooperative autonomy.

5. Consumer education to members – Cooperatives provide education, training and 

information for their members so they can contribute effectively to the development of 

their cooperatives.

6. Cooperation among cooperatives – Serve their members most effectively and strengthen 

the cooperative movement by working together through local, national, regional and 

international structures.

7. Concern for community – While focusing on member needs cooperatives work for the 

sustainable development of their communities through policies accepted by members.
8

As a Cooperative CFC is Owned by and 

Exclusively Serves its Members

Members System Functions

Distribution Cooperatives

Most electric cooperatives are distribution utilities 

purchasing wholesale power from others to distribute 

it, over their own distribution lines, to the ultimate 

customer.

Power Supply (Generation & 

Transmission) Cooperatives

Generation and transmission cooperatives carry high 

voltage electricity from generation facilities over long 

distances. G&Ts provide both generation and 

transmission functions.

Statewide and Associate Members

Most states have statewide associations supported by 

local cooperatives in that state. Provides a variety of 

services and legislative representation for members.

Rural Telephone Finance Cooperative (RTFC)

Affiliated business line for lending to rural telephone 

companies and their affiliates.

National Cooperative Services Corporation 

(NCSC)

Affiliated business line for providing financing to the 

for-profit or non-profit entities that are owned, 

operated or controlled by or provide substantial 

benefit to, members of CFC.
9

Loan and Guarantee Portfolio Overview

Elect.

Dist.

Elect.

G&T

RTFC

Other

Elect. Dist. - 68%

Other – 3% RTFC – 7%

Elect. G&T – 22%

As of August 31, 2010
10

CFC’s Public Purpose

• CFC is different from traditional financial service organizations.

• CFC focuses exclusively on providing capital to the rural utility 

industry.

– Management incentives are designed to reinforce its longterm mission and credit ratings

– Cooperative structure and nonprofit tax-exempt status 

influences capital structure

– High asset portfolio quality with low delinquency rate and 

high recovery rate

• Electric cooperatives provide affordable and reliable electric 

power in the most rural areas of the USA.

– Provide essential service

– Are managed in a conservative manner

– For the most part, are not rate regulated

– Consistently report strong metrics

– Do not have motivation for speculative investments
11

CFC’s Metrics and Capital Structure Differ 

from For-Profit Banks and Savings and 

Loan Institutions.

• Because of its nonprofit cooperative and tax exempt status, CFC 

is unable to issue equity securities.

• Instead of Equity Securities, CFC issues long-dated subordinated 

debt (Capital Term Certificates) to its members. These securities 

and retained earnings provide ―equity like‖ comfort to investors 

in CFC securities.

• CFC’s Capital Structure and use of ―Adjusted Equity‖ and other 

metrics has been well accepted for 40 years by rating agencies 

and creditors who have recognized the prudent and 

conservative nature of our financial structure.

• CFC requests that the CFTC not rely solely on GAAP or for-profit 

banking standards to determine whether an entity is ―highly 

leveraged‖.
12

Loan Options

Lines of Credit unsecured credit loans for short–term working capital needs.

Long–term Concurrent Financing long–term financing of up to 35 years to supplement Rural Utilities Service (RUS) loans.

100% Long–term Financing lending to independent borrowers (members that have chosen to leave the RUS 

program).

Letters of Credit short–term lending that enhance the credit to trading partners and other suppliers.

PowerVisionTm financing with a draw period of five years for electric plant or other approved 

purposes. 

Associate Member Financing

lending to not–for–profit cooperative organizations that are owned, operated, or 

controlled by a National Rural distribution, G&T, statewide, or regional owner and that 

are providing non–electric services for the benefit of their consumers.

RUS Guaranteed Loans available funding for electric facilities, with the RUS repayment guarantee helping to 

keep interest rates down. 

Joint CFC–RUS Combustion Turbine Financing provide funds to meet cash requirements prior to permanent financing from RUS.

Clean Renewable Energy Bonds (CREBs) provides electric cooperatives and other not–for–profit utilities incentives to invest in 

renewable generation resources.

CFC’s Objective is to offer Cost-Based Financial 

Products, not to Maximize its Net Income.
13

 Board of Directors consists of twenty–three persons elected from general membership: 

» Twenty general managers or directors from member systems.

» Two from the industry’s trade association, National Rural Electric Cooperative 

Association (NRECA).

» One at–large position that meets the requirements of the audit committee financial 

expert (as defined by Section 407 of the Sarbanes–Oxley Act of 2002).

 No members of CFC management hold board seats.

 Elected member serves a 3–year term; limited to a maximum of 2 consecutive terms.

 Regularly meets in executive sessions; management may not attend.

 Maintains audit, finance advisory, executive, loan, and corporate relations committees.

 Audit committee consists of no less than seven board members. Meetings held up to 5 

times a year with external and internal auditors in executive session without CFC 

management present. 

 Board members affiliated with a cooperative requesting a loan or guarantee are not 

allowed to attend or participate in the decision–making process. 

CFC Is Committed to Strong Corporate Governance
14

Background of NRUCFC

 National Rural Utilities Cooperative Finance Corporation is a member–owned, non–governmental organization 

that provides financial products to 1,526 member systems consolidated across the United States of America.

» The Company offers full–service financing, investment, and related services to its members, and offers a 

wide range of flexible, low–cost financing programs and interest rate options.

» Headquartered in Herndon, Virginia, outside of Washington, D.C., the Company raises funds for loan 

programs with support of its owners’ equity and investments through the sale of multiple financing vehicles 

in the private and public financial markets.

» The Company is governed by a 23–member board made up of cooperative utility directors and managers. It 

has approximately 231 employees, including well seasoned regional credit portfolio managers. 

 Points to Remember: 

» Primary objective is to provide its utility members/owners with an assured source of capital at the lowest 

reasonable loan and guarantee rates consistent with sound financial performance.

» Has no exposure to residential mortgages, mortgage–backed securities, collateralized loan or debt 

obligations, or structured investment vehicles. Financial derivatives only utilized for interest rate and 

currency hedging.

» NRUCFC is a member–owned finance company. CFC is not a bond insurance company. 

» Largest non–governmental lender to rural utility industry in the U.S.A with over $20 billion of gross loans 

outstanding, and its owners have invested over $4 billion in a wide array of securities at November 30, 2008.

» NRUCFC has securities listed on NYSE and is a “Well-Known and Seasoned Issuer” in the public markets. 

The company is subject to the Sarbanes-Oxley law and is in compliance with all applicable requirements.
15

B. How and Why CFC Uses Derivatives
16

How & Why CFC Uses Derivatives

• Derivative use is limited to plain vanilla interest rate 

exchange agreements. Since 1983, CFC has 

executed derivatives for the following reasons:

– To practice good risk management

– To match-fund its fixed and variable loan pools and manage 

the size of its warehouse/prefund position

– To provide flexibility in loan structuring and match cash-flows 

that may have deferral periods, accretions and other types of 

amortizations

– To mitigate interest rate risk on forward starting loans

– To create lower cost synthetic fixed/floating liabilities vs. 

issuance in the cash market

– To limit exposure to exchange rate fluctuations when foreign 

currency denominated debt is issued. (None currently 

outstanding.)
17

CFC uses Derivatives to Hedge Market Interest Rate Risk

Pay-Fixed Swap

Pay-Floating Swap

Fixed 

Rate

Loan 

Capital Portfolio

Markets

LIBOR + X Bps

Fixed Rate (i.e. 

Bond Coupon)

Counterparty

Investors

Fixed Rate (i.e. 

Bond Coupon)

• In this example, CFC 

receives fixed interest 

from an aggregate loan 

portfolio but pays 

floating LIBOR to capital 

market investors. This 

mismatch in interest 

rate creates exposure, 

prompting CFC to swap 

the fixed rate from its 

loan portfolio to 

floating.

• In this example, CFC 

issues fixed rate notes 

and uses the proceeds 

to pay down 

Commercial Paper. 

CFC then swaps the 

fixed notes to floating 

so as to maintain its 

floating exposure and 

achieve a lower cost of 

funds.

LIBOR

Counterparty

LIBOR

Fixed 

Rate

$

$
18

Interest Rate Management

•Credit and market risk associated with the derivatives portfolios is offset 

and managed through the following:

–Highly rated, diverse counterparties consisting of participants in CFC’s 

revolving credit facilities

–Transactions are awarded on multi–tranche basis to ensure 

competitive pricing and to allow benchmark comparison when 

calculating fair values

–Notional limits per counterparty

–Offsetting trades executed with individual counterparties to reduce 

overall net credit exposure

–Counterparty rating triggers embedded for long-dated swap tenors

–Netting/resetting provisions

–CFC has fully executed ISDAs with every swap counterparty

–Complete legal review of all swap confirms on executed trades

–Thorough external and internal audit review of overall swap portfolio 

management and supporting documentation
19

CFC Enters into Swaps with Highly Rated 

Counterparties

SWAP PORTFOLIO BY RATING 5.31.2010

S&P RATINGS MOODY'S RATINGS

Range

Number 

of 

Banks Notional

% of 

Portfolio Range

Number 

of Banks Notional

% of 

Portfolio

AAA to AA- 5 2,435,992,325 22% Aaa to Aa3 13 7,885,335,946 70%

A+ to A 12 8,069,939,046 72% A1 to A2 5 2,800,005,425 25%

BBB to BBB+ 2 508,346,000 5% Baa1 2 508,346,000 5%

NR 1 179,410,000 2%

20 11,193,687,371 100% 20 11,193,687,371 100%
20

CFC Enters into a Limited Number of 

Swaps Each Year.

Deal Count Year Notional

42 1998 1,334,710,896

11 1999 974,350,000

32 2000 3,998,853,500

40 2001 7,617,378,573

21 2002 6,514,500,000

45 2003 4,433,402,643

14 2004 1,058,531,800

35 2005 3,247,134,500

20 2006 1,451,878,525

31 2007 2,945,218,401

25 2008 2,203,708,000

17 2009 1,558,201,100

14 2010 1,091,684,925

347 38,429,552,863
21

C. CFC Should be Exempt from DFA’s 

Margining & Clearing Requirements
22

CFC Should be Exempt from the 

Margining and Clearing Requirements of 

DFA.

• CFC is owned by and functions as a private financing 

arm for entities that are commercial end users eligible 

for exemption.

• Transferring Risk to a Clearing Organization is not 

needed

– CFC effectively manages its derivatives portfolio

– CFC has the financial strength to meet obligations 

associated with non-cleared Swaps:

• CFC is rated at A+ level for senior secured debt

• CFC has never missed any payment on an obligation

• CFC has substantial liquidity

• CFC’s portfolio strength is due to the nature of its membership
23

CFC’s Credit Rating History

Senior Secured Debt

Year Moody’s Investors 

Service

Standard & Poor’s 

Corporation

1972-1973 A A

1974 A A+

1975-1978 A AA

1979-1984 Aa AA

1985-1989 Aa2 AA

1990 Aa3 A+

1991-1993 Aa3 A+

1994-2000 Aa3 AA

2001 Aa3 AA2002-2010 A1 A+
24

Liquidity Management

• At August 31, 2010, CFC had the following projected liquidity sources 

available:

Liquidity Source Amount ($Millions)

Cash and Cash Equivalents $451

Scheduled Loan Amortization & Prepayments (1) $1,267

Farmer Mac Revolving Funding Availability (2) $913

Excess CP and Daily Liquidity Fund (―DLF‖) (3) $459

Bank Bid Note Capacity (4) $470

Total $3,560

(1) Scheduled loan amortization and expected prepayments over the next twelve months 

(2) The amount available was reduced to $513 million due to the issuance of notes totaling $400 million under these note 

purchase agreements in September and October 2010.

(3) CFC limits the amount of CP and DLF to the amount of backup liquidity available under our bank lines.

(4) Unadvanced portion subject to market conditions

• Rural Economic Development Loan & Grant (REDLG) program: 

$500 million available commitment in November 2010.

• CFC is a well-known seasoned issuer and believes it has adequate 

access to both long-term and short-term global funding options.
25

Strong Member Support

• At May 31, 2010, CFC’s members provided more 

than $4.4 billion in capital to CFC.

• CFC’s members have consistently increased their 

financial commitment to CFC over the years.

$267 $250 $251 $291 $372

$1,184 $1,384 $1,276 $935 $999

$255

$308 $393 $723 $634

$1,428

$1,381 $1,407 $1,462 $1,413

$545

$566 $613 $604 $669

$278 $398

$0

$1,000

$2,000

$3,000

$4,000

$5,000

FY2006 FY2007 FY2008 FY2009 FY2010

($ in Millions)

Daily liquidity fund Commercial paper

MTNs Members' subordinated certificates

Members' equity Member Capital Securities
26

Electric Cooperatives Have Higher

Credit Ratings than Investor Owned Electric Utilities

Source: (1) Moody’s Investor Service, Standard & Poor’s & Fitch Ratings, May 2010

(2) Standard & Poor’s, First Quarter 2010

Note: Only about 33 electric co-ops have a public rating.

U.S. Publicly Rated Electric 

Cooperatives (1)

U.S. Shareholder–Owned 

Electric Utilities (2)

AA/Aa2 to AA-/Aa3, 

15%

BBB+/Baa1 to 

BBB- /Baa3, 15%

A+/A1 to A-/A3, 

70%
27

Co-op Ratepayers Have a Strong History of Reliable and 

Timely Payments of Electric Bills

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Medians

Accounts Receivable over 60 Days

Amounts Written Off

Percentage of Total Operating Revenue
28

Equity of Rural Electric Distribution Systems

Equity % of Assets 

(Medians)

20%

25%

30%

35%

40%

45%

19701973197619791982198519881991199419972000200320062009
29

Electric Co-op and CFC Exposure to Adverse 

Regulatory Orders is Limited

Source: CFC

Total Rate Regulated State

$2,391,609

11.8%

Non-Rate Regulated States

$17,796,598

88.2%

Consolidated Loans Outstanding

Rate Regulated States Vs Non-Rate Regulated States

12 M.E. May 31, 2009
30

0.00

0.50

1.00

1.50

2.00

2.50

3.00

TIER 2.07 2.03 2.11 2.30 2.28 2.33 2.20 2.29 2.24 2.27 2.30

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RUS requires a 1.25 TIER, high 2 of most recent 3 years. CFC requires a 1.35 MDSC, high 2 of most recent 3 years.

Medians

Times Interest Earned Ratio (TIER) for Electric

Distribution Co-ops
31

Proposed Margin Requirements

• Existing Derivatives should be exempted.

• Net Out of Money position rather than Notional should 

be basis for any Margin Requirement.
32

Regulatory 

Requirement

Net MTM Collateral

Notional Collateral 

(at 15% of Swaps)

2.5% 

Cost 

Drag

6.0% 

Cost 

Drag

2.5% 

Cost 

Drag

6.0% Cost 

Drag

A. If Pledging Required for 

all Swaps, including 

those existing prior to 

DFA. 26 bps 63 bps

505 

bps 1,212 bps

B. If Pledging Required 

only on swaps issued 

after DFA regulations. 4 bps 11 bps 23 bps 55 bps

* Assumes $1 Billion in new loans to spread these additional costs.

Annual Cost to CFC if CFTC Regulations Require 

Collateral Pledging*