[Federal Register Volume 75, Number 85 (Tuesday, May 4, 2010)]
[Proposed Rules]
[Pages 23631-23636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10426]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 956

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1267

RIN 2590-AA32


Federal Home Loan Bank Investments

AGENCY: Federal Housing Finance Agency, Federal Housing Finance Board.

ACTION: Notice of proposed rulemaking; request for comment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to re-
organize and re-adopt existing investment regulations that apply to the 
Federal Home Loan Banks (Banks) and that were previously adopted by the 
Federal Housing Finance Board (Finance Board) as new part 1267 of the 
FHFA's regulations. FHFA is also proposing to incorporate into the new 
part 1267 limits on the Banks' investment in mortgage-backed securities 
(MBS) and certain asset-backed securities (ABS) that are now set forth 
in the Financial Management Policy (FMP) that had been issued by the 
Finance Board. If the proposed rule is adopted in its current form, 
FHFA expects to terminate the FMP as of the effective date of the new 
rule.

DATES: Comments on the proposed rule must be received on or before July 
6, 2010. For additional information, see SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AA32 by any of 
the following methods:
    <bullet> E-mail: Comments to Alfred M. Pollard, General Counsel, 
may be sent by e-mail to <a href="/cdn-cgi/l/email-protection#0b596e6c486466666e657f784b4d434d4a256c647d"><span class="__cf_email__" data-cfemail="dc8eb9bb9fb3b1b1b9b2a8af9c9a949a9df2bbb3aa">[email protected]</span></a>. Please include ``RIN 
2590-AA32'' in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comments to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at <a href="/cdn-cgi/l/email-protection#396b5c5e7a5654545c574d4a797f717f78175e564f"><span class="__cf_email__" data-cfemail="80d2e5e7c3efedede5eef4f3c0c6c8c6c1aee7eff6">[email protected]</span></a> to ensure timely receipt by the 
agency. Please include ``RIN 2590-AA32'' in the subject line of the 
message.
    <bullet> Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA32, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
    <bullet> U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA32, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.

FOR FURTHER INFORMATION CONTACT: Louis Scalza, Associate Director, 202-
408-2953, Division of Federal Home Loan Bank Regulation, Federal 
Housing Finance Agency, 1625 Eye Street, NW., Washington, DC 20006; or 
Thomas E. Joseph, Senior Attorney-Advisor, 202-414-3095, Office of 
General Counsel, Federal Housing Finance Agency, Fourth Floor, 1700 G 
Street, NW., Washington, DC 20552. The telephone number for the 
Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comments on all aspects of the proposed rule, and will 
adopt a final regulation with appropriate changes after taking all 
comments into consideration. Copies of all comments will be posted on 
the Internet Web site at https://www.fhfa.gov. In addition, copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m., at the 
Federal

[[Page 23632]]

Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552. To make an appointment to inspect comments, please call the 
Office of General Counsel at (202) 414-6924.

II. Background

A. Creation of the Federal Housing Finance Agency and Recent 
Legislation

    Effective July 30, 2008, the Housing and Economic Recovery Act of 
2008 (HERA), Public Law 110-289, 122 Stat. 2654, created FHFA as a new 
independent agency of the Federal Government, and transferred to FHFA 
the supervisory and oversight responsibilities of the Office of Federal 
Housing Enterprise Oversight (OFHEO) over the Federal National Mortgage 
Association (Fannie Mae), and the Federal Home Loan Mortgage 
Corporation (Freddie Mac) (collectively, the Enterprises), the 
oversight responsibilities of the Finance Board over the Banks and the 
Office of Finance (OF) (which acts as the Banks' fiscal agent) and 
certain functions of the Department of Housing and Urban Development. 
See id. at section 1101, 122 Stat. 2661-62. FHFA is responsible for 
ensuring that the Enterprises and the Banks operate in a safe and sound 
manner, including that they maintain adequate capital and internal 
controls, that their activities foster liquid, efficient, competitive 
and resilient national housing finance markets, and that they carry out 
their public policy missions through authorized activities. See id. at 
section 1102, 122 Stat. 2663-64. OFHEO and the Finance Board were 
abolished July 30, 2009, one year after the enactment of HERA, however, 
the Enterprises, the Banks, and the OF continue to operate under 
regulations promulgated by OFHEO and the Finance Board until such 
regulations are superseded by regulations issued by FHFA. See id. at 
sections 1301, 1302, 1311, 1312, 122 Stat. 2794-95, 2797-98.

B. The Bank System Generally

    The twelve Banks are instrumentalities of the United States 
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12 
U.S.C. 1423, 1432(a). The Banks are cooperatives; only members of a 
Bank may purchase the capital stock of a Bank, and only members or 
certain eligible housing associates (such as state housing finance 
agencies) may obtain access to secured loans, known as advances, or 
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a), 
1430b. Each Bank is managed by its own board of directors and serves 
the public interest by enhancing the availability of residential 
mortgage and community lending credit through its member institutions. 
See 12 U.S.C. 1427. Any eligible institution (generally a federally 
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock. See 12 U.S.C. 
1424; 12 CFR part 1263.
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    \1\ The twelve Banks are located in: Boston, New York, 
Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des Moines, 
Dallas, Topeka, San Francisco, and Seattle.
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    As government-sponsored enterprises (GSEs), the Banks are granted 
certain privileges under federal law. In light of those privileges and 
their status as GSEs, the Banks typically can borrow funds at spreads 
over the rates on U.S. Treasury securities of comparable maturity lower 
than most other entities. The Banks pass along a portion of their GSE 
funding advantage to their members--and ultimately to consumers--by 
providing advances and other financial services at rates that would not 
otherwise be available to their members.

C. Investment Requirements and the FMP

    Under sections 11(g), 11(h) and 16(a) of the Bank Act, 12 U.S.C. 
1431(g), 1431(h), 1436(a), a Bank is specifically authorized, subject 
to the rules of FHFA, to invest in: (1) Obligations of the United 
States; (2) deposits in banks and trust companies; (3) obligations, 
participations or other instruments of, or issued by, Fannie Mae or 
Government National Mortgage Association (Ginnie Mae); (4) mortgages, 
obligations or other securities that are or ever have been sold by 
Freddie Mac; (5) stock of Fannie Mae; (6) stock, obligations or other 
securities of any small business investment company (SBIC) formed 
pursuant to 15 U.S.C. 681, to the extent the investment is made for 
purposes of aiding a Bank member; and (7) instruments that a Bank has 
determined are permissible investments for fiduciary and trust funds 
under the laws of the state in which the Bank is located. Part 956 of 
the Finance Board regulations authorizes the Banks to invest in all the 
instruments specifically identified in the statute, except for stock in 
Fannie Mae, subject to certain safety and soundness limitations that 
are also set forth in the regulation. See 12 CFR 956.2, 956.3. The part 
956 regulations also allow the Banks to enter into derivative 
transactions, standby letters of credit which conform to other 
regulations, and commitments to make advances or commitments to make or 
purchase other loans. See 12 CFR 956.5. The Banks may, however, enter 
into derivative contracts only for hedging or other documented, non-
speculative purposes, such as intermediating derivative transactions 
for members, and the Banks are subject to prudential and safety and 
soundness requirements with regard to derivative transactions. See 12 
CFR 956.6.
    The FMP evolved from a series of policies and guidelines initially 
adopted by the former Federal Home Loan Bank Board, predecessor agency 
to the Finance Board, in the 1970s and revised a number of times 
thereafter. The Finance Board adopted the FMP in 1991, consolidating 
into one document the previously separate policies on funds management, 
hedging and interest-rate swaps, and adding new guidelines on the 
management of unsecured credit and interest-rate risks.\2\ Prior to the 
adoption of the part 956 regulations in 2000, the FMP governed how the 
Banks implemented their financial management strategies by specifying 
the types of investments the Banks could purchase. See Proposed Rule: 
Federal Home Loan Bank Acquired Member Assets, Core Mission Activities, 
Investments and Advances, 65 FR 25676, 25686 (May 3, 2000). The FMP 
also established mandatory guidelines relating to the funding and 
hedging practices of the Banks, the management of their credit, 
interest-rate, and liquidity risks, and the liquidity requirements for 
the Banks in addition to those required by statute.
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    \2\ See Fin. Bd. Res. No. 96-45 (July 3, 1996), as amended by 
Fin. Bd. Res. No. 96-90 (Dec. 6, 1996), Fin. Bd. Res. No. 97-05 
(Jan. 14, 1997), and Fin. Bd. Res. No. 97-86 (Dec. 17, 1997). See 
also 62 FR 13146 (Mar. 19, 1997)).
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    Beginning in 2000, many of the provisions contained in the FMP were 
superseded by regulations adopted by the Finance Board including 
regulations that implemented the new capital structure for the Banks 
that had been mandated by the Gramm-Leach-Bliley Act of 1999, Public 
Law 106-102, 113 Stat. 1338 (Nov. 12, 1999) (GLB Act). Among other 
things, the new capital structure incorporated risk-based capital 
requirements to support the risks in the Banks' activities, and 
therefore eliminated the need for most of the FMP restrictions on 
investments. See 12 CFR part 932. In approving the capital plans that 
each Bank was required to adopt under provisions of the GLB Act, the 
Finance Board issued separate orders providing that upon a Bank's 
implementation of its capital plan and its full coverage by the capital 
regime in part 932 of the regulations, the Bank would be exempted from 
future

[[Page 23633]]

compliance with all provisions of the FMP except for a few specific 
restrictions related to the Bank's investment in mortgage-backed and 
certain asset-backed securities along with some related restrictions on 
entering into some derivative transactions.\3\ See, e.g., Fin. Bd. Res. 
No. 2002-11 (Mar. 13, 2002). Currently, all the Banks but the Federal 
Home Loan Bank of Chicago (Chicago Bank) have implemented their capital 
plans and are fully subject to the part 932 capital provisions. Thus, 
only a few of the provisions of the FMP remain applicable to all the 
Banks.
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    \3\ The restrictions in question are found in sections 
II.C.2.,3.,4. and 5. and Section V.C.5. of the FMP. These limits, 
among other things, prohibit investment in residual interest and 
interest accrual classes of securities and in interest-only and 
principal-only stripped securities, and limit a Bank's investment in 
MBS and ABS to 300 percent of a Bank's total capital. The provisions 
also limit an increase in a Bank's holdings of MBS and ABS to no 
more than 50 percent of its total capital in any calendar quarter. 
The restrictions also prohibit the Bank from entering into swap 
transactions that would amortize similar to residual interest or 
interest accrual classes of securities or to interest-only and 
principal-only stripped securities.
    In March 2008, the Finance Board temporarily expanded the Banks' 
authority to invest in MBS guaranteed by the Enterprises by an 
additional three times total capital, subject to certain conditions. 
See Fin. Brd. Res. No. 2008-08 (Mar. 24, 2008). The temporary 
authority expired on March 31, 2010. The Finance Board believed that 
the temporary increase in the Banks' investment authority would help 
address severe liquidity and other constraints that were affecting 
the housing finance markets in early 2008.
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    In addition to the FMP provisions already discussed and applicable 
to all the Banks, the Chicago Bank remains subject to FMP provisions 
related to prudential limits on investments (other than MBS or ABS) \4\ 
and interest rate risk guidelines. The latter have been subsumed into 
the risk management and hedging guidelines that the Chicago Bank was 
required to submit for review and approval (and update as necessary) 
under Article III of the Consent Order To Cease and Desist entered into 
with the Finance Board on October 10, 2007 and which remains in effect. 
See 2007-SUP-01.
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    \4\ Even if the FMP were terminated so that these FMP prudential 
limits were no longer applicable to the Chicago Bank, the Bank would 
be subject to the new business activity requirements under part 980 
of current regulations. Therefore, the Bank would require FHFA's 
approval before it could make investments beyond what it is 
currently allowed, and FHFA could impose any prudent limits, as 
appropriate, as part of the approval process. See 12 CFR part 980.
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D. Considerations of Differences Between the Banks and the Enterprises

    Section 1201 of HERA requires the Director, when promulgating 
regulations relating to the Banks, to consider the following 
differences between the Banks and the Enterprises: Cooperative 
ownership structure; mission of providing liquidity to members; 
affordable housing and community development mission; capital 
structure; and joint and several liability. See section 1201 Public Law 
110-289, 122 Stat. 2782-83 (amending 12 U.S.C. 4513). The Director also 
may consider any other differences that are deemed appropriate. In 
preparing this proposed rule, FHFA considered the differences between 
the Banks and the Enterprises as they relate to the above factors. FHFA 
requests comments from the public about whether differences related to 
these factors should result in any revisions to the proposal. FHFA also 
requests comment on whether differences related to these factors are 
relevant to the issues and questions raised in section III.B. below.

III. The Proposed Rule

    The proposed rule would re-organize current part 956 of the Finance 
Board's regulations and re-adopt it as part 1267 of the FHFA's 
regulations. More significantly, it would also incorporate into the 
regulation restrictions that are now applicable to the Banks and are 
contained in the FMP. Adopting these restrictions in a regulation would 
consolidate all the investment requirements in one place and allow FHFA 
to terminate the FMP. In addition, the proposed rule would make other 
conforming changes to the part 956 regulations related to the transfer 
of the regulations to chapter XII, 12 CFR part 1267 and to the 
incorporation of the FMP restrictions into the rule.

A. Highlights of the Proposed Rule

    The proposed rule would re-organize the current 956 rules by 
combining Sec.  956.2 and Sec.  956.5, which respectively provide a 
list of authorized investments and authorization for derivative and 
other transactions, into new Sec.  1267.2. This would consolidate all 
authority for investments and other transactions into a single section 
but does not otherwise substantially alter the part 956 provisions. The 
proposed rule would carry over current Sec.  956.3, which sets forth a 
list of prohibited investments and other prudential requirements as new 
Sec.  1267.3. The proposed rule would incorporate as new Sec.  
1267.3(a)(5) through (7) restrictions found in section II.C.3. through 
C.5. of the FMP related to investment in MBS and ABS, including the 
prohibition on investment in residual interest and interest accrual 
classes of securities and interest-only and principal-only stripped MBS 
and ABS.
    New Sec.  1267.3(c) would incorporate the limits now in section 
II.C.2. of the FMP that limit a Bank's level of investment in MBS and 
eligible ABS to 300 percent of its total capital. The proposed 
provision also states that a Bank's purchase of MBS and ABS in any 
calendar quarter cannot cause its total holdings of such securities to 
increase by more than 50 percent of its total capital as of the 
beginning of such quarter. Both these limits are carried over directly 
from the Finance Board's FMP without change. The proposed provision 
also clarifies that a Bank would not be required to divest securities 
solely to bring the level of its holdings into compliance with the 
limits in new Sec.  1267.3(c), provided that the original purchase of 
the securities complied with these limits.
    The proposed rule also would re-adopt the limitations and 
prudential requirement on use of derivative instruments now found in 
Sec.  956.6 as new Sec.  1267.4. FHFA is also proposing to add to this 
section new paragraph (b) which would incorporate the remaining 
applicable limitations on derivative transaction found in section 
V.C.5. of the FMP. These FMP restrictions are meant to prevent the 
Banks from using derivatives to create exposures or investments similar 
to residual interest and interest accrual classes of securities, 
interest-only and principal-only stripped MBS and ABS, or other 
investments that are currently prohibited by section II.C. of the FMP 
(and would continue to be prohibited by new Sec.  1267.3(a)(5) through 
(7)).

B. Potential Additional Limitations and Specific Requests for 
Information

    The FMP limits on total investment in MBS and ABS that FHFA is 
proposing to incorporate into new Sec.  1267.3 address both mission and 
safety and soundness concerns. FHFA acknowledges that some of the 
Banks' investments in private-label MBS have resulted in accounting 
charges for other-than-temporary impairment (OTTI) but is proposing 
transferring the existing limits on MBS and ABS contained in the FMP as 
an administrative reorganization. FHFA is specifically requesting 
comments on whether more restrictive limits or other modifications to 
the MBS investment requirements are needed.
    Some of the Banks' OTTI charges were on private-label MBS that were 
backed by subprime and nontraditional residential mortgage loans. To 
address certain issues associated with subprime and nontraditional 
loans, the Finance Board's Office of Supervision issued two advisory 
bulletins that remain

[[Page 23634]]

applicable to the Banks and contain guidance designed to promote better 
risk management of private-label MBS with these types of underlying 
loans. On April 12, 2007, the Office of Supervision issued Advisory 
Bulletin 2007-AB-01 that established expectations for the Banks' pre-
purchase analysis and periodic reviews of MBS investments. The Bulletin 
also advised the Banks' boards of directors to establish: (1) Limits on 
the level of MBS with underlying nontraditional or subprime mortgage 
collateral; (2) requirements for the level of credit protection for 
particular credit tranches when purchased at the time of original 
issuance of the security, and (3) limits on concentrations by 
geographic area, issuer, servicer, and size. On July 1, 2008, the 
Office of Supervision issued Advisory Bulletin 2008-AB-02 that 
expressed the expectation that the Banks' purchases of private-label 
MBS will be limited to securities in which the underlying mortgage 
loans comply with all aspects of the federal banking agencies' 
Interagency Guidance on Nontraditional Mortgage Product Risks, issued 
on October 4, 2006 (71 FR 58609), and Statement on Subprime Mortgage 
Lending, issued on July 10, 2007 (72 FR 37569), (collectively 
``interagency guidance''). The interagency guidance emphasizes 
underwriting standards intended to ensure a borrower's ability to repay 
a mortgage loan at the fully indexed rate and assuming an amortizing 
repayment schedule. FHFA believes that future investments in private-
label MBS backed by mortgage loans that conform to the interagency 
guidance and are purchased in line with the guidelines set forth in the 
April 2007 Advisory Bulletin may offer some protection against OTTI 
losses.
    The Banks' OTTI charges are problematic. In the third quarter of 
2009, the Banks' OTTI charges on private-label MBS totaled $2.2 
billion. Cumulative OTTI on such investments through the third quarter 
of 2009 was $12.4 billion. These charges raise questions as to the 
Banks' ability to: (1) Properly manage the risks associated with 
investments in private-label MBS, and (2) adopt and implement prudent 
private-label MBS investment and credit risk policies.
    In particular, in the FHFA's 2008 Annual Report to Congress, the 
agency expressed concern regarding the financial condition of some 
Banks and the negative performance of their private-label MBS. FHFA 
examination comments were that, to varying degrees, the Banks' 
investment policies and risk mitigation measures were deficient in 
terms of post-purchase monitoring, overreliance on NRSRO ratings, and 
limited risk reporting. Considering these factors, several Banks were 
found to have significant weaknesses in their private-label MBS credit 
risk management systems.
    Thus, FHFA is considering whether it should adopt additional 
restrictions, or lower the overall limit, on the Banks' investment in 
MBS generally, and in private-label MBS, in particular, as part of the 
final rule. In this regard, FHFA is seeking specific comments and 
information on the following:
    1. Although the proposed rule would retain the FMP provision 
limiting MBS holdings to 300 percent of a Bank's capital, FHFA also 
requests comment on what other measures might offer a prudent limit on 
MBS holdings that also would mitigate potential future losses from the 
Banks' MBS portfolios. Comments on this issue may address both the 
magnitude of the limit (i.e., 300 percent of capital) and its basis 
(i.e., capital). For example, because retained earnings can absorb 
losses without compromising the par value of Bank capital stock, a 
limit based on a Bank's retained earnings may offer a more prudent 
basis for limiting private-label MBS investments.
    2. In addition to the overall limit on MBS investments, FHFA 
requests comments on whether there should be a separate limit or 
additional restrictions on the purchase of private-label MBS (e.g., a 
limit of one or two times capital, or a separate limit linked to 
retained earnings or some other basis). If such provisions are 
appropriate, FHFA seeks comments on the appropriate magnitude of the 
limit and its basis, as well as whether the rule should prohibit the 
purchase of private-label MBS.
    3. In addition to the types of limits contemplated by the questions 
immediately above, FHFA seeks comments on whether it should restrict 
purchases of private-label MBS based on collateral characteristics 
(e.g., restrictions based on whether the underlying mortgages are 
commercial or residential real estate loans, adjustable-rate loans, 
interest-only loans, or credit scores below certain levels). If such 
limits are appropriate, FHFA also would request comments on the types 
of characteristics and restrictions that should be implemented. For 
example, FHFA has considered proposing a limit on a Bank's private-
label MBS purchases that decreases as the amount of relatively risky 
collateral in the Bank's mortgage pools and portfolio increases. Such 
restrictions could serve to limit the Bank's exposure to credit losses 
by reducing purchases of private-label MBS with relatively risky 
collateral.
    4. At one time, the FMP limited the purchase of private-label MBS 
to only those instruments rated in the highest investment grade 
category.\5\ FHFA requests comments on whether it should re-introduce 
that type of limit as a means to limit the potential risks to the Banks 
from their MBS portfolios, and whether it would suffice to adopt a 
ratings requirement only for private-label MBS backed by certain types 
of collateral (e.g., subprime or Alt-A loans).
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    \5\ This provision was in section II.B. of the FMP, and no 
longer applies to the Banks that have converted to the GLB Act 
capital structure.
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    If the proposed rule is adopted in its current form, FHFA 
anticipates that it would rescind the FMP as of the effective date of 
the new rule.

IV. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for review.

V. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of small entities as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore in accordance 
with section 605(b) of the RFA, FHFA certifies that this proposed rule, 
if promulgated as a final rule, will not have significant economic 
impact on a substantial number of small entities.

List of Subjects in 12 CFR Parts 956 and 1267

    Community development, Credit, Federal home loan bank, Housing, 
Reporting and recordkeeping requirements.

    Accordingly, for reasons stated in the preamble and under the 
authority of 12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513, 4526, 
FHFA proposes to amend subchapter G of chapter IX and subchapter D of 
chapter XII of title 12 of the Code of Federal Regulations as follows:

CHAPTER IX--FEDERAL HOUSING FINANCE BOARD

SUBCHAPTER G--FEDERAL HOME LOAN BANK ASSETS AND OFF-BALANCE SHEET ITEMS

PART 956--[REMOVED]

    1. Remove part 956.

[[Page 23635]]

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER D--FEDERAL HOME LOAN BANKS

    2. Add part 1267 to subchapter D to read as follows:

PART 1267--FEDERAL HOME LOAN BANK INVESTMENTS

Sec.
1267.1 Definitions.
1267.2 Authorized investments and transactions.
1267.3 Prohibited investments and prudential rules.
1267.4 Limitations and prudential requirements on use of derivative 
instruments.
1267.5 Risk-based capital requirements for investments.


    Authority: 12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513, 
4526.


Sec.  1267.1  Definitions.

    As used in this part:
    Asset-backed security or ABS means a debt instrument backed by 
loans, but does not include debt instruments that meet the definition 
of a mortgage-backed security.
    Bank, written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act, as amended (12 U.S.C. 
1432).
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    Consolidated obligation means any bond, debenture or note on which 
the Banks are jointly and severally liable and which was issued under 
section 11 of the Bank Act (12 U.S.C. 1431) and in accordance with any 
implementing regulations, whether or not such instrument was originally 
issued jointly by the Banks or by the Federal Housing Finance Board on 
behalf of the Banks.
    Deposits in banks or trust companies means:
    (1) A deposit in another Bank;
    (2) A demand account in a Federal Reserve Bank;
    (3) A deposit in or sale of federal funds to:
    (i) An insured depository institution, as defined in section 2(9) 
of the Bank Act, that is designated by the Bank's board of directors;
    (ii) A trust company that is a member of the Federal Reserve System 
or insured by the Federal Deposit Insurance Corporation and is 
designated by the Bank's board of directors; or
    (iii) A U.S. branch or agency of a foreign Bank as defined in the 
International Banking Act of 1978, as amended, (12 U.S.C. 3101 et seq.) 
that is subject to supervision of the Board of Governors of the Federal 
Reserve System and is designated by the Bank's board of directors.
    Derivative contract means generally a financial contract the value 
of which is derived from the values of one or more referenced assets, 
rates, or indices of asset values, or credit-related events. Derivative 
contracts include interest rate derivative contracts, foreign exchange 
rate derivative contracts, equity derivative contracts, precious metals 
derivative contracts, commodity derivative contracts and credit 
derivatives, and any other instruments that pose similar risks.
    GAAP means the United States generally accepted accounting 
principles.
    Indexed principal swap means an interest rate swap agreement in 
which the notional principal balance amortizes based upon the 
prepayment experience of a specified group of MBS or ABS or the 
behavior of an interest rate index.
    Interest-only stripped security or IO means a class of mortgage-
backed or asset-backed security that is allocated only the interest 
payments made on the underlying mortgages or loans and receives no 
principal payments.
    Investment grade means:
    (1) A credit quality rating in one of the four highest credit 
rating categories by an NRSRO and not below the fourth highest credit 
rating category by any NRSRO; or
    (2) If there is no credit quality rating by an NRSRO, a 
determination by a Bank that the issuer, asset or instrument is the 
credit equivalent of investment grade using credit rating standards 
available from an NRSRO or similar standards.
    Mortgage-backed security or MBS means a security or instrument, 
including collateralized mortgage obligations (CMOs), and Real Estate 
Mortgage Investment Trusts (REMICS), that represents an interest in, or 
is secured by, one or more pools of mortgages loans.
    NRSRO means a credit rating organization registered with the 
Securities and Exchange Commission as a nationally recognized 
statistical rating organization.
    Principal-only stripped security or PO means a class of mortgage-
backed or asset-backed security that is allocated only the principal 
payments made on the underlying mortgages, or loans and receives no 
interest payments.
    Total capital shall have the meaning set forth in Sec.  1229.1 of 
this title.


Sec.  1267.2  Authorized investments and transactions.

    (a) In addition to assets enumerated in parts 950 and 955 of this 
title and subject to the applicable limitations set forth in this part, 
and in part 980 of this title, each Bank may invest in:
    (1) Obligations of the United States;
    (2) Deposits in banks or trust companies;
    (3) Obligations, participations or other instruments of, or issued 
by, the Federal National Mortgage Association or the Government 
National Mortgage Association;
    (4) Mortgages, obligations, or other securities that are, or ever 
have been, sold by the Federal Home Loan Mortgage Corporation pursuant 
to section 305 or 306 of the Federal Home Loan Mortgage Corporation Act 
(12 U.S.C. 1454 or 1455);
    (5) Stock, obligations, or other securities of any small business 
investment company formed pursuant to 15 U.S.C. 681, to the extent such 
investment is made for purposes of aiding members of the Bank; and
    (6) Instruments that the Bank has determined are permissible 
investments for fiduciary or trust funds under the laws of the state in 
which the Bank is located.
    (b) Subject to any applicable limitations set forth in this part 
and in part 980 of this title, a Bank also may enter into the following 
types of transactions:
    (1) Derivative contracts;
    (2) Standby letters of credit, pursuant to the requirements of part 
1269 of this title;
    (3) Forward asset purchases and sales;
    (4) Commitments to make advances; and
    (5) Commitments to make or purchase other loans.


Sec.  1267.3  Prohibited investments and prudential rules.

    (a) Prohibited investments. A Bank may not invest in:
    (1) Instruments that provide an ownership interest in an entity, 
except for investments described in Sec.  1265.3(e) and (f) of this 
title;
    (2) Instruments issued by non-United States entities, except United 
States branches and agency offices of foreign commercial banks;
    (3) Debt instruments that are not rated as investment grade, 
except:
    (i) Investments described in Sec.  1265.3(e) of this title; and
    (ii) Debt instruments that were downgraded to a below investment 
grade rating after acquisition by the Bank;
    (4) Whole mortgages or other whole loans, or interests in mortgages 
or loans, except:
    (i) Acquired member assets;
    (ii) Investments described in Sec.  1265.3(e) of this title;

[[Page 23636]]

    (iii) Marketable direct obligations of state, local, or tribal 
government units or agencies, having at least the second highest credit 
rating from an NRSRO, where the purchase of such obligations by the 
Bank provides to the issuer the customized terms, necessary liquidity, 
or favorable pricing required to generate needed funding for housing or 
community lending;
    (iv) Mortgage-backed securities, or asset-backed securities 
collateralized by manufactured housing loans or home equity loans, that 
meet the definition of the term ``securities'' under 15 U.S.C. 
77b(a)(1) and are not otherwise prohibited under paragraphs (a)(5) 
through (a)(7) of this section; and
    (v) Loans held or acquired pursuant to section 12(b) of the Bank 
Act (12 U.S.C. 1432(b)).
    (5) Residual interest and interest accrual classes of securities;
    (6) Interest-only and principal-only stripped securities; and
    (7) Fixed rate mortgage-backed securities or eligible asset-backed 
securities or floating rate mortgage-backed securities or 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, unless the instrument qualifies as an acquired member asset 
under part 955 of this title.
    (b) Foreign currency or commodity positions prohibited. A Bank may 
not take a position in any commodity or foreign currency. The Banks may 
issue consolidated obligations denominated in a currency other than 
U.S. Dollars or linked to equity or commodity prices, provided that the 
Banks meet the requirements of Sec.  966.8(d) of this title, and all 
other applicable requirements related to issuing consolidated 
obligations.
    (c) Limits on certain investments. (1) A purchase, otherwise 
authorized under this part, of mortgage-backed securities or asset-
backed securities, may not cause the aggregate book value of all such 
securities held by the Bank to exceed 300 percent of the Bank's total 
capital. A Bank will not be required to divest securities solely to 
bring the level of its holdings into compliance with the limits of this 
paragraph, provided that the original purchase of the securities 
complied with the limits in this paragraph.
    (2) A Bank's purchase of any mortgage-backed or asset-backed 
security may not cause its total holdings of mortgage-backed and asset-
backed securities to increase in any calendar quarter by more than 50 
percent of its total capital as of the beginning of such quarter.


Sec.  1267.4  Limitations and prudential requirements on use of 
derivative instruments.

    (a) Non-speculative use. Derivative instruments that do not qualify 
as hedging instruments pursuant to GAAP may be used only if a non-
speculative use is documented by the Bank.
    (b) Additional prohibitions. (1) A Bank may not enter into interest 
rate swaps that amortize according to behavior of instruments described 
in Sec.  1267.3(a)(5) or (a)(6) of this part.
    (2) A Bank may not enter into indexed principal swaps that have 
lives that vary by more than six years under an assumed instantaneous 
change in interest rates of 300 basis points, unless they are entered 
into in conjunction with the issuance of consolidated obligations or 
the purchase of permissible investments or entry into a permissible 
transaction in which all interest rate risk is passed through to the 
investor or counterparty.
    (c) Documentation requirements. (1) Derivative transactions with a 
single counterparty shall be governed by a single master agreement when 
practicable.
    (2) A Bank's agreement with the counterparty for over-the-counter 
derivative contracts shall include:
    (i) A requirement that market value determinations and subsequent 
adjustments of collateral be made at least on a monthly basis;
    (ii) A statement that failure of a counterparty to meet a 
collateral call will result in an early termination event;
    (iii) A description of early termination pricing and methodology, 
with the methodology reflecting a reasonable estimate of the market 
value of the over-the-counter derivative contract at termination 
(standard International Swaps and Derivatives Association, Inc. 
language relative to early termination pricing and methodology may be 
used to satisfy this requirement); and
    (iv) A requirement that the Bank's consent be obtained prior to the 
transfer of an agreement or contract by a counterparty.


Sec.  1267.5  Risk-based capital requirements for investments.

    Any Bank which is not subject to the capital requirements set forth 
in part 932 of this title shall hold retained earnings plus general 
allowance for losses as support for the credit risk of all investments 
that are not rated by an NRSRO, or are rated or have a putative rating 
below the second highest credit rating, in an amount equal to or 
greater than the outstanding balance of the investments multiplied by:
    (a) A factor associated with the credit rating of the investments 
as determined by FHFA on a case-by-case basis for rated assets to be 
sufficient to raise the credit quality of the asset to the second 
highest credit rating category; and
    (b) 0.08 for assets having neither a putative nor actual rating.

    Dated: April 28, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-10426 Filed 5-3-10; 8:45 am]
BILLING CODE 8070-01-P


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