Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 27951 

1See title VIII of the Farm Credit Act of 1971, as 

amended (Act), 12 U.S.C. 2279aa–2279cc et seq.) 

2See section 8.13 of the Act. 

§ 1980.320 Interest rate. 

The interest rate must not exceed the 

established, applicable usury rate. Loans 

guaranteed under this subpart must bear 

a fixed interest rate over the life of the 

loan. The rate shall be agreed upon by 

the borrower and the Lender and must 

not be more than the current Fannie 

Mae rate as defined in § 1980.302(a) of 

this subpart. The Lender must 

document the rate and the date it was 

determined. 

4. Section 1980.353 (c)(4) is revised to 

read as follows: 

§ 1980.353 Filing and processing 

applications. 

(c) * * * 

(4) Anticipated loan rates and terms, 

the date and amount of the Fannie Mae 

rate used to determine the interest rate, 

and the Lender’s certification that the 

proposed rate is in compliance with 

§ 1980.320 of this subpart. 

* * * * * 

Dated: April 30, 2010. 

Tammye Trevin ̃ o, 

Administrator, Rural Housing Service. 

[FR Doc. 2010–11383 Filed 5–18–10; 8:45 am] 

BILLING CODE 3410–XV–P 

FARM CREDIT ADMINISTRATION 

12 CFR Part 652 

RIN 3052–AC56 

Federal Agricultural Mortgage 

Corporation Funding and Fiscal 

Affairs; Farmer Mac Investments and 

Liquidity 

AGENCY: Farm Credit Administration. 

ACTION: Advance notice of proposed 

rulemaking (ANPRM). 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, us, or 

we) is considering amending our 

regulations governing the Federal 

Agricultural Mortgage Corporation 

(Farmer Mac or the Corporation) nonprogram investments and liquidity 

requirements. The objective of these 

regulations is to ensure that Farmer Mac 

holds an appropriate level of highquality, liquid investments to maintain 

a sufficient liquidity reserve, invest 

surplus funds, and manage interest rate 

risk. 

DATES: You may send us comments by 

July 6, 2010. 

ADDRESSES: We offer a variety of 

methods for you to submit comments on 

this advanced notice of proposed 

rulemaking. For accuracy and efficiency 

reasons, commenters are encouraged to 

submit comments by e-mail or through 

the Agency’s Web site. As facsimiles 

(fax) are difficult for us to process and 

achieve compliance with section 508 of 

the Rehabilitation Act, we are no longer 

accepting comments submitted by fax. 

Regardless of the method you use, 

please do not submit your comment 

multiple times via different methods. 

You may submit comments by any of 

the following methods: 

• E-mail: Send us an e-mail at regcomm@fca.gov. 

• FCA Web site: http://www.fca.gov. 

Select ‘‘Public Commenters,’’ then 

‘‘Public Comments,’’ and follow the 

directions for ‘‘Submitting a Comment.’’ 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Joseph T. Connor, Associate 

Director for Policy and Analysis, Office 

of Secondary Market Oversight, Farm 

Credit Administration, 1501 Farm 

Credit Drive, McLean, VA 22102–5090. 

You may review copies of all 

comments we receive at our office in 

McLean, Virginia, or on our Web site at 

http://www.fca.gov. Once you are in the 

Web site, select ‘‘Public Commenters,’’ 

then ‘‘Public Comments,’’ and follow the 

directions for ‘‘Reading Submitted 

Public Comments.’’ We will show your 

comments as submitted, but for 

technical reasons we may omit items 

such as logos and special characters. 

Identifying information that you 

provide, such as phone numbers and 

addresses, will be publicly available. 

However, we will attempt to remove email addresses to help reduce Internet 

spam. 

FOR FURTHER INFORMATION CONTACT: 

Joseph T. Connor, Associate Director for 

Policy and Analysis, Office of 

Secondary Market Oversight, Farm 

Credit Administration, McLean, VA 

22102–5090, (703) 883–4280, TTY 

(703) 883–4056; or 

Jennifer A. Cohn, Senior Counsel, Office 

of General Counsel, Farm Credit 

Administration, McLean, VA 22102– 

5090, (703) 883–4020, TTY (703) 883– 

4020. 

SUPPLEMENTARY INFORMATION: 

I. Objective 

The objective of this ANPRM is to 

solicit public comments on revisions 

and updates to Farmer Mac’s nonprogram investment and liquidity 

management regulations in light of 

investment and liquidity risk issues that 

arose during the recent financial crisis. 

With the benefit of information gained 

through this ANPRM and our internal 

analysis, we will consider changes to 

the regulations to enhance their 

fundamental objective: to ensure the 

safety and soundness and continuity of 

Farmer Mac operations. 

II. Background 

Congress established Farmer Mac in 

1988 as part of its effort to resolve the 

agricultural crisis of the 1980s. Congress 

expected that establishing a secondary 

market for agricultural and rural 

housing mortgages would increase the 

availability of competitively priced 

mortgage credit to America’s farmers, 

ranchers, and rural homeowners. 

In addition to serving its investorstakeholders, Farmer Mac, like all 

Government-sponsored enterprises 

(GSEs), has a public policy purpose 

embedded in its corporate mission that 

arises from having been created by an 

act of Congress. The public policy 

component of its mission explicitly 

includes its service to customerstakeholders (farmers, ranchers, rural 

homeowners, and rural utility 

cooperatives, all through their lenders).1

The public policy component also 

includes protection of taxpayerstakeholders. The latter arises from 

Farmer Mac’s ability to issue debt to the 

Department of the Treasury to cover 

guarantee losses under certain 

circumstances.2 These two public policy 

components of Farmer Mac’s mission 

are, in some respects, counterbalancing, 

as we now explain. 

A fundamental premise of finance is 

the natural positive relationship 

between risk and expected return. This 

means that when Farmer Mac increases 

its expected return, it also increases its 

risk of loss; the opposite is true when 

risk decreases. More return, in general, 

will better position Farmer Mac to 

reduce the rates it charges customers (a 

benefit to those stakeholders) and 

increase its earnings (a benefit to 

investor-stakeholders). However, the 

risk Farmer Mac assumes to earn a 

greater return increases the risk to 

others, including ultimately taxpayers, 

and thus adds an offsetting cost to these 

earnings benefits. 

In general, a guiding principle for 

FCA in establishing regulations is to 

maintain an appropriate balance 

between these costs and benefits, i.e., 

attempting to maximize Farmer Mac’s 

ability to serve its customers and 

provide an appropriate return for 

investors while ensuring that it engages 

in safe and sound operations, thereby 

providing a high degree of certainty that 

Farmer Mac will continue to be able to 

make its products available to serve 


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27952 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 

3Farmer Mac’s program investments in loans that 

are guaranteed by the USDA as described in section 

8.0(9)(B) of the Act, and which are securitized by 

Farmer Mac, are known as the ‘‘Farmer Mac II’’ 

program. 

4 Duration measures a bond’s or portfolio’s price 

sensitivity to a change in interest rates. Convexity 

measures the rate of change in duration with 

respect to a change in interest rates. Yield curve 

distribution refers to the distribution of the 

portfolio’s investments in short-, intermediate-, or 

long-term investments. Term structure of debt refers 

to the distribution of the Corporation’s debt 

maturities over time. Value-at-risk is a methodology 

used to measure market risk in an investment 

portfolio. 

customers and will never need to issue 

debt to the Department of Treasury. 

Liquidity is a firm’s ability to meet its 

obligations as they come due without 

substantial negative impact on its 

operations or financial condition. While 

the management of Farmer Mac’s nonprogram investment portfolio and its 

liquidity risk are closely linked, they are 

not synonymous. Management of the 

non-program investment portfolio, and 

specifically the associated market risk, 

is one component under the general 

heading of liquidity risk management. 

Liquidity risk is the risk that the 

Corporation is unable to meet expected 

obligations (and reasonably estimated 

unexpected obligations) as they come 

due without substantial adverse impact 

on its operations or financial condition. 

Reasonably estimated liquidity risk 

should consider scenarios of debt 

market disruptions, asset market 

disruptions such as industry sector 

security price risk scenarios, as well as 

contingent liquidity events. Contingent 

liquidity events include significant 

changes in overall economic conditions, 

or events that would impact the 

market’s perception of Farmer Mac such 

as reputation risks and legal risks, as 

well as a broad and significant 

deterioration in the agriculture sector 

and its potential impact on Farmer 

Mac’s need for cash to fulfill obligations 

under the terms of products such as 

Long-Term Standby Purchase 

commitments. 

Farmer Mac’s primary sources of 

liquidity are the principal and interest 

it receives from non-program and 

program investments and its access to 

debt markets. The sale of non-program 

investments—which consist of 

investment securities, cash, and cash 

equivalents—provides a secondary 

source of liquidity cushion in the event 

of a short-term disruption in Farmer 

Mac’s access to the capital markets that 

prevents Farmer Mac from issuing new 

debt. The sale of Farmer Mac’s program 

investments in agricultural mortgages, 

rural home loans, and rural utility 

cooperative loans could provide 

additional liquidity, although the 

amount of liquidity provided by these 

instruments in times of stress is 

uncertain. The reason for that 

uncertainty is that, with the exception 

of the subset of these investments that 

are guaranteed by the United States 

Department of Agriculture (USDA),3 we 

are not aware of significantly active 

markets in which to sell them. As a 

result, FCA regulations do not currently 

recognize any liquidity value in Farmer 

Mac’s program book of business (with 

the exception of a discounted amount of 

the Farmer Mac II volume). 

During 2008, the markets in corporate 

debt and asset-backed securities 

experienced significant value reductions 

in response to the general seizing up of 

these markets. For financial regulators, 

these events highlighted the need to 

reevaluate the requirements for liquidity 

risk management. This experience also 

has triggered broad re-evaluation of 

liquidity risk management among 

institutions and regulators globally— 

including a re-evaluation of the degree 

of confidence that is assumed in 

corporate policies and regulatory 

guidance regarding the availability of 

markets for debt issuance and asset sales 

under stressful economic or market 

conditions. We are interested in public 

response to questions regarding FCA 

regulatory requirements related to 

Farmer Mac’s management of market 

risk, liquidity risk, and funding risk. 

III. Section-by-Section Questions for 

Public Comment 

A discussion of our existing 

regulations (which became effective in 

the third quarter of 2005), along with 

our questions about changes we are 

considering to these regulations, follow. 

For ease of use, Section IV., at the end 

of this document, lists the key questions 

asked throughout this section. 

A. Section 652.10—Investment 

Management and Requirements 

Effective risk management requires 

financial institutions to establish: (1) 

Policies; (2) risk limits; (3) mechanisms 

for identifying, measuring, and 

reporting risk exposures; and (4) strong 

corporate governance including specific 

procedures and internal controls. 

Section 652.10 requires Farmer Mac to 

establish and follow certain 

fundamental practices to effectively 

manage risks in its investment portfolio. 

This provision requires Farmer Mac’s 

board of directors to adopt written 

policies that establish risk limits and 

guide the decisions of investment 

managers. Board policies must establish 

objective criteria so investment 

managers can prudently manage credit, 

market, liquidity, and operational risks. 

Investment policies must provide for 

specific risk limits and diversification 

requirements for the various classes of 

eligible investments and for the entire 

investment portfolio. Risk limits must 

be based on Farmer Mac’s business mix, 

capital position, the term structure of its 

debt, the cash flow attributes of both onand off-balance sheet obligations and 

risk tolerance capabilities. Risk 

tolerance can be expressed through 

several parameters such as duration, 

convexity, sector distribution, yield 

curve distribution, term structure of 

debt, credit quality, risk-adjusted return, 

portfolio size, total return volatility, or 

value-at-risk.4 Farmer Mac must use a 

combination of parameters to 

appropriately limit its exposure to credit 

and market risk. The policies must also 

establish other controls—such as 

delegation of responsibilities, separation 

of duties, timely and effective valuation 

practices, and routine reporting—that 

are consistent with sound business 

practices. 

1. Earnings Performance and Risk 

Benchmarks 

We have questions regarding several 

areas of § 652.10. Our first general area 

of discussion pertaining to this section 

concerns the usefulness of adding 

regulatory guidance to benchmark 

earnings performance and risk profiles 

of the investment portfolio to evaluate 

liquidity risk and non-program 

investment management. Section 

652.10(c) requires Farmer Mac’s board 

to establish investment risk limits, and 

§ 652.10(g) requires Farmer Mac’s 

management to report to the board on 

investment performance and risk. The 

regulation does not, however, include 

specific requirements regarding 

acceptable levels of either earnings 

performance (such as the spread over 

cost of funds or the spread over an 

appropriate yield benchmark) or risk 

(such as measured by historical 

variation of returns or as implied by 

changes in earnings levels). 

Risk is measured in terms of the 

uncertainty (i.e., volatility) of the 

expected earnings stream. Inferences 

about real-time changes in risk can be 

drawn from the real-time changes in 

prices, i.e., the yield the market 

demands on the instruments at any 

point in time. An increase in return 

demanded by investors implies greater 

risk. In this discussion, we use return 

measurements as a proxy for relative 

risk measurements. 

Earnings spreads are performance 

indicators with implications regarding 

relative risk. For example, in times of 

market turbulence, investors may prefer 


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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 27953 

5The scenario ignores interest rate effects which 

could influence the spread in either direction 

depending on the circumstances, and also the 

impact of any new investments over the period. 

6 Yields are generally viewed as containing four 

compensation components: (1) The risk-free rate 

(which includes a load for expected inflation), (2) 

credit premium over the risk-free rate, which 

compensates the investor for default risk, (3) 

liquidity premium over the risk-free rate, which 

compensates the investor for the risk that he will 

be unable to sell the investment quickly at, or near, 

par, and (4) premium associated with the value of 

embedded options (if any). For purposes of this 

explanation, we assume option-adjusted spreads to 

remove the impact on spreads of changes in the 

value of embedded options. 

7Excluding Treasury and GSE investments with 

regard, at least, to credit risk. 

8 In addition, another scenario may be worth 

considering. Is there a plausible scenario under 

which Farmer Mac’s cost of funds would drop 

precipitously enough to increase earnings spreads 

above some wide threshold over benchmark spreads 

that would be due solely to positive developments 

in Farmer Mac’s business, and therefore have no 

implications on the liquidity risk of its 

investments? 

9 ‘‘Principles for Sound Liquidity Risk 

Management and Supervision’’, Basel Committee on 

Banking Supervision, Bank for International 

Settlements, September 2008 (or successor 

document, in the future). This document can be 

found at http://www.bis.org/publ/bcbs144.htm. 

debt issued by Farmer Mac simply 

because it is GSE debt—a ‘‘flight to 

quality’’—and not because of any 

positive developments in Farmer Mac’s 

business. With its debt in greater 

demand, its cost of funds would 

decrease. The coupon interest Farmer 

Mac receives on its investments would 

continue at its previous level.5 The 

result would be a widening in the 

spread between Farmer Mac’s earnings 

rates and its cost of funds. Would this 

scenario clearly imply an increase in 

Farmer Mac’s liquidity risk? 

To ensure an appropriate level of 

earnings performance while limiting risk 

to an acceptable level, should our 

regulations (and/or Farmer Mac board 

policy) specify earnings performance 

benchmarks and some acceptable band 

of earnings performance above and 

below such benchmarks? The 

benchmark could be used to evaluate 

investment portfolio earnings and risk. 

Earnings performance that is too low 

compared to the benchmark would 

indicate a need for improved 

management of earnings performance, 

and earnings performance that is too 

high indicating unacceptable levels of 

liquidity risk, or credit risk, or both? A 

detailed explanation and more detailed 

questions follow. 

Investor behavior is an indicator of 

relative risk in the market. For purposes 

of this explanation, we divide the 

universe of investors into two general 

categories by risk tolerance—either riskseeking or risk-averse. In periods of 

‘‘flight to quality,’’ two changes occur in 

investor behavior relative to the preturbulence baseline: (1) Risk-seeking 

investors demand higher yields (and 

theoretically the increase is specifically 

higher liquidity premium or credit 

premium, or both) 6 and (2) risk-averse 

investors accept lower yields from 

perceived higher-quality issuers. In 

periods of ‘‘flight to quality,’’ interest 

rates on non-GSE debt securities would 

tend to move up, while interest rates on 

GSE debt would tend to move down. 

For Farmer Mac, this has two 

implications: (1) Its cost of funds 

declines; and (2) the liquidity risk in its 

non-program investments increases. The 

latter occurs because the market’s view 

of the relative liquidity and credit 

strength of marketable securities has 

deteriorated—which is why investments 

purchased in a more normal 

environment would then sell at 

discount to par in order to provide riskseeking investors with the increased 

liquidity/credit premiums they require.7

The market’s perception of liquidity 

and credit quality constantly fluctuates. 

Therefore, a key question is: Is there 

some level of increased earnings spread 

(relative to an appropriate spread 

benchmark) that could reasonably be 

assumed to indicate an unacceptable 

amount of increased liquidity risk? We 

do not believe that an institution should 

be penalized for a decline in the 

liquidity of what had previously been 

acceptable investments due to events 

over which it had no influence. 

However, should the regulations (or 

board policy) recognize the reduced 

liquidity in the investment portfolio and 

guide management’s response to steer 

the institution back toward a more 

acceptable level of liquidity risk? If so, 

how might Farmer Mac’s liquidity 

management policy establish limits 

around an investment portfolio 

benchmark, either statically or 

dynamically, to reflect the potential 

changes in investment value that can 

occur in stressful market or economic 

environments? 

There may be market-based measures 

such as spreads (and the amount of time 

over which unusually wide or narrow 

spreads are sustained) that would be 

more dynamic indicators of liquidity 

risk and enhance the recognition of, and 

response to, significantly increased risks 

through discounting procedures that are 

indexed to major changes in such 

indicators. Dynamic indicators could be 

included in Farmer Mac board policy 

and, when exceeded, simply instruct 

management to steer the portfolio back 

toward the targeted indicator level over 

some period of time. From a conceptual 

perspective, a dynamic indicator 

showing an unusually wide spread may 

indicate increased risk in the liquidity 

value of the investment portfolio. 

Further, an unusual degree of narrowing 

of spreads (that occurs despite no 

change in Farmer Mac’s financial 

position) may indicate reduced risk in 

the liquidity value of the investment 

portfolio. Therefore, a dynamic 

indicator based on earnings spreads of 

eligible securities might be used to 

establish limits that would trigger a 

rebalancing of the investment portfolio. 

This rebalancing would help ensure that 

the portfolio maintains stability in 

market value even under stressful 

conditions.8

We recognize that one possible 

complicating factor to such spread 

limits might be the inability in some 

cases to clearly identify the underlying 

funding instruments (and therefore the 

costs) of a given subset of Farmer Mac’s 

investments. Therefore, return levels 

(i.e., yields) might offer another 

indication of relative risk. Yield 

thresholds might be an alternative for a 

dynamic threshold to help ensure that 

portfolio liquidity risk does not exceed 

acceptable levels. For example, would it 

be appropriate for Farmer Mac to set 

triggers based on weighted-average yield 

thresholds set at some level above a 

benchmark eligible investment portfolio 

return—which, when triggered, would 

require management to rebalance the 

investment portfolio (or asset class 

within the portfolio)? 

2. Contingency Liquidity Funding Plan 

Our second area of discussion 

pertaining to this regulation concerns 

§ 652.10(c)(3). That provision requires 

that Farmer Mac’s investment policies 

describe the liquidity characteristics of 

eligible investments that it will hold to 

meet its liquidity needs and objectives, 

but it does not require liquidity 

contingency funding planning. Such 

plans are generally regarded as a key 

component of good corporate 

governance, and Farmer Mac currently 

has a contingency funding plan in place. 

Would it be appropriate for our 

regulations to require a liquidity 

contingency funding plan? If so, how 

specific should the regulation be 

regarding required components of the 

plan versus simply requiring that the 

plan reasonably reflect current 

standards, for example, those specified 

by the Basel Committee on Banking 

Supervision? 9

3. Debt Maturity Management Plan 

Third, the maturity structure of 

Farmer Mac’s debt is a key driver of its 

liquidity position at any given time and 


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27954 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 

10Section 652.10, on investment management 

and requirements, currently governs only nonprogram investment activities. This would be a new 

requirement governing the liquidity of Farmer 

Mac’s program investments. 

11The purpose of this minimum daily liquidity 

reserve requirement is to enable Farmer Mac to 

continue its operations if its access to the capital 

markets were impeded or otherwise disrupted. 

a key input to the calculation of its 

minimum liquidity reserve requirement 

(discussed in Section III.B. of this 

preamble). Under normal yield curve 

conditions, long-term debt—debt 

maturing in greater than 1 year—is more 

costly than short-term debt—debt 

maturing in less than 1 year. Long-term 

debt, however, is generally viewed as 

adding stability and strength to a 

corporation’s liquidity position 

compared to short-term debt given the 

need to frequently roll over such debt. 

Farmer Mac’s term structure of debt, 

as published in its balance sheet, has 

normally been heavily weighted in 

short-term debt. Farmer Mac often 

synthetically extends the term of much 

of its short-funded debt using swap 

contracts, which results in a lower net 

cost of funds compared to simply 

issuing longer term debt. The fact that 

these combinations of debt and 

derivative positions behave like longer 

term debt contributes to the stability 

and strength of its liquidity position. 

However, the practice adds counterparty 

risk on the swaps and short-term debt 

rollover risk to Farmer Mac’s overall 

liquidity risk position compared to 

issuing long-term debt. 

In light of the marginal funding 

instability that results from relying 

primarily on shorter term debt—even 

when the maturity is extended 

synthetically—would it be appropriate 

to require Farmer Mac to establish a 

debt maturity management plan? If so, 

how might such a requirement be 

structured? 

We recognize that the minimum daily 

liquidity reserve requirement includes 

incentives to this same end of 

moderating the term structure of debt. 

However, this question asks specifically 

whether this additional requirement 

would appropriately augment the 

minimum daily liquidity reserve 

requirement and partially compensate 

for some of the shortcomings of that 

measurement discussed in Section III.B. 

of this preamble. 

4. Evidence of Market for Program 

Investments 

Finally, as discussed above, we are 

aware of no significantly active markets 

in which Farmer Mac could sell its 

program investments held on-balance 

sheet (other than Farmer Mac II assets), 

and therefore the amount of liquidity 

provided by these investments is 

uncertain. We recognize that Farmer 

Mac from time to time has sold these 

instruments successfully in the past. 

Moreover, the principal and interest 

cash flows on these assets provide 

liquidity in the normal course of 

business. In light of the foregoing, 

should the availability of a liquid 

market for Farmer Mac’s program 

investments be considered in the 

Corporation’s liquidity contingency 

funding plan? 10

B. Section 652.20(a)—Minimum Daily 

Liquidity Reserve Requirement 

The minimum daily liquidity reserve 

requirement found at § 652.20(a) 

requires Farmer Mac to hold eligible 

liquidity instruments such as cash, 

eligible non-program investments, and/ 

or Farmer Mac II assets (subject to 

certain discounts) to fund its operations 

for a minimum of 60 days.11

This ‘‘days-of-liquidity’’ metric, while 

useful, has drawbacks. Perhaps foremost 

among those drawbacks is that this 

metric contains information about a 

single point-in-time, but it provides no 

projected information. A large days-ofliquidity measurement today provides 

little or no information about what the 

measurement might be tomorrow. 

Are there other metrics or approaches 

that might improve upon, augment, or 

appropriately replace days-of-liquidity 

as currently used in § 652.20(a)? For 

example, in the current days-of-liquidity 

calculation, once discounts have been 

applied to assets, each liquid asset 

dollar (net of discounts) is viewed (for 

purposes of the calculation) as being of 

equal quality and liquidity value. 

However, clearly there is greater 

liquidity value in, for example, the 

amount of undiscounted cash dollars in 

that total than there is in the dollars 

associated with corporate debt 

securities. Under the current rule, the 

debt securities are discounted at either 

5 percent or 10 percent for purposes of 

estimating liquidity value, but the actual 

amount realized in a sale would depend 

on many factors. If stress developed 

suddenly in the market, the debt 

securities might be worth considerably 

less than the discounted amounts, but 

the cash dollars would not change. 

Therefore, to recognize greater 

differences in the liquidity value of 

different asset classes, and to augment 

the minimum days-of-liquidity 

requirement, would it be appropriate to 

establish a subcategory of the minimum 

days-of-liquidity requirement that would 

include, for example, only cash or 

Treasury securities in the definition of 

‘‘primary liquid assets’’ but also set a 

smaller minimum required number of 

days? Recognizing that liquidity risk 

cannot be eliminated for Farmer Mac, 

could a ‘‘primary’’ days-of-liquidity 

minimum add significant certainty to 

Farmer Mac’s liquidity policies at an 

acceptable cost? We recognize that the 

return on such investments is likely to 

be lower than Farmer Mac’s funding 

costs, which would create a drag on 

earnings. If such a requirement is 

warranted, what would be the 

appropriate number of minimum 

primary days-of-liquidity, balancing the 

benefits gained from maintaining these 

higher quality liquid assets against their 

higher cost? 

C. Section 652.20(c)—Discounts 

Section 652.20(c) requires Farmer 

Mac to apply specified discounts to all 

investments in the liquidity portfolio, 

other than cash and overnight 

investments, in order to reflect the risk 

of diminished marketability of even 

these liquid investments under adverse 

market conditions. The investments that 

must be discounted include money 

market instruments, floating and fixed 

rate debt and preferred stock securities, 

diversified investment funds, and 

Farmer Mac II assets. In the wake of the 

recent disruptions in financial markets, 

we are considering whether a more 

conservative view of the discounts is 

appropriate. 

At the same time, we recognize that 

deep discounts, if actually realized 

during a liquidation, impact not only 

Farmer Mac’s ability to meet obligations 

in a timely manner, but also its capital 

position. In other words, the loss on sale 

of these assets at extremely deep 

discounts could, at large volumes, have 

a very detrimental impact on capital 

levels. 

Thus, in setting this policy, there is a 

trade-off between setting deeper, more 

conservative discounts versus the 

alternative of excluding those assets 

from eligibility (or, in the case of Farmer 

Mac II assets, excluding them from the 

liquidity reserve) because appropriately 

deep discounts might reasonably be so 

deep that, if realized, they could 

destabilize Farmer Mac’s capital 

position. In light of these concerns, 

would it be appropriate to re-evaluate 

the discounts in § 652.20(c) to better 

reflect the risk of diminished 

marketability of liquid investments 

under adverse conditions? If so, which 

ones and what would be the appropriate 

degree of change? In particular, we 

request public comment on whether the 

discount currently applied on Farmer 

Mac II securities is appropriate. 

In addition, the existing, relatively 

coarse discounting schedule could 


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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 27955 

12 70 FR 40641 (July 14, 2005). 

13 Id. 

14Under § 652.35(a)(2), Government-sponsored 

agency mortgage securities, but no other such 

securities, are limited to 50 percent of Farmer Mac’s 

total non-program investment portfolio. In addition, 

§ 652.35(d)(1) bars Farmer Mac from investing more 

than 100 percent of its regulatory capital in any one 

Government-sponsored agency. 

15By interest rate risk, we refer to the price 

sensitivity of mortgage instruments over different 

interest rate/yield curve scenarios, including 

prepayment and interest rate volatility 

assumptions—as described in current § 652.40. 

overlook important liquidity-quality 

characteristics of individual 

investments. Would it be appropriate to 

refine the schedule of discounts in 

§ 652.20(c)? For example, there is no 

difference in the discounts applied to 

AAA-rated versus AA-rated corporate 

debt securities. Conversely, is the 

coarseness of the current discount 

schedule more desirable because of its 

simplicity? 

D. Section 652.35(a)—Eligible NonProgram Investments 

The current rule provides Farmer Mac 

with a broad array of eligible highquality, liquid investments while 

providing a regulatory framework that 

can readily accommodate innovations in 

financial products and analytical tools. 

Farmer Mac may purchase and hold 

the eligible non-program investments 

listed in § 652.35 to maintain liquidity 

reserves, manage interest rate risk, and 

invest surplus short-term funds. As we 

stated in our preamble adopting this 

rule, only investments that can be 

promptly converted into cash without 

significant loss are suitable for 

achieving these objectives.12 We further 

stated our intent that all eligible 

investments be either traded in active 

and universally recognized secondary 

markets or valuable as collateral.13 For 

many of the investments, the regulation 

requires that they not exceed certain 

maximum percentages of the total nonprogram investment portfolio. We 

established these portfolio caps to limit 

credit risk exposures, promote 

diversification, and encourage 

investments in securities that exhibit 

low levels of price volatility and 

liquidity risk. In addition, the table sets 

single obligor limits to help reduce 

exposure to counterparty risk. 

Would the experience gained during 

the financial markets crisis of 2008 and 

2009 justify adjustments to many of the 

portfolio limits in § 652.35 to add 

conservatism to them and improve 

diversification of the portfolio? We 

invite comments on appropriate 

changes for each asset class, final 

maturity limit, credit rating 

requirement, portfolio concentration 

limit, and other restrictions. We also 

request comment on several specific 

provisions, as follows. 

1. Section 652.35(a)(1)—Obligations of 

the United States 

Section 652.35(a)(1) permits Farmer 

Mac to invest in Treasuries and other 

obligations (except mortgage securities) 

fully insured or guaranteed by the 

United States Government or 

Government agency without limitation. 

Given that Farmer Mac might not 

always hold the ‘‘on the run’’ (i.e., 

highest liquidity) issuance of Treasury 

securities, would imposing maximum 

maturity limitations enhance the resale 

value of these investments in stressful 

conditions? 

2. Section 652.35(a)(2)—Obligations of 

Government-Sponsored Agencies 

In light of the recent financial 

instability of Government-sponsored 

agencies such as Fannie Mae and 

Freddie Mac, would it be appropriate to 

revise this section to put concentration 

limits on exposure to these entities in 

§ 652.35(a)(2)? 14

3. Section 652.35(a)(3)—Municipal 

Securities 

Section 652.35(a)(3) authorizes 

investment in municipal securities. 

Currently, revenue bonds are limited to 

15 percent or less of Farmer Mac’s total 

investment portfolio, while general 

obligations have no such limitation. The 

maturity limits and credit rating 

requirements are also more generous for 

general obligations. The requirements in 

§ 652.35(a)(3) carry the implied 

assumption that general obligation 

bonds are always less risky than 

revenue bonds. But is that always the 

case? In the scenario of severe economic 

recession, could a municipal issuer’s tax 

base erode faster than the revenues on 

a bridge or toll road, for example? 

Would it be more appropriate for our 

regulation to limit both sub-categories 

equally? 

4. Section 652.35(a)(6)—Mortgage 

Securities 

Section 652.35(a)(6) authorizes 

investments in non-Government agency 

or Government-sponsored agency 

securities that comply with 15 U.S.C. 

77(d)5 or 15 U.S.C. 78c(a)(41). These 

types of mortgage securities are 

typically issued by private sector 

entities and are mostly comprised of 

securities that are collateralized by 

‘‘jumbo’’ mortgages with principal 

amounts that exceed the maximum 

limits of Fannie Mae or Freddie Mac 

programs. We invite comment on 

whether it is appropriate to include 

mortgage securities collateralized by 

‘‘jumbo’’ mortgages as an eligible 

liquidity investment. 

5. Section 652.35(a)(8)—Corporate Debt 

Securities 

Section 652.35(a)(8) authorizes 

investment in corporate debt securities. 

The rule does not contain concentration 

limits related to industry sector 

exposure. We request comment on 

whether such industry sector exposure 

limits should be added. Further, is it 

appropriate to allow investments in 

subordinated debt as the current rule 

does? If so, is it appropriate that 

subordinated debt receives discounts 

and investment limits at the same level 

as more senior types of corporate debt? 

E. Section 652.35(d)(1)—Obligor Limits 

An appropriate level of diversification 

is a key attribute of a liquidity 

investment portfolio. In § 652.35(d)(1), 

we prohibit Farmer Mac from investing 

more than 25 percent of its regulatory 

capital in eligible investments issued by 

any single entity, issuer, or obligor. 

Government-sponsored agencies have a 

different obligor limit; Farmer Mac may 

not invest more than 100 percent of its 

regulatory capital in any one 

Government-sponsored agency. There 

are no obligor limits for Government 

agencies. 

Do the obligor limits in § 652.35(d)(1) 

generally provide for an adequate level 

of diversification? Specifically, in light 

of the uncertainty associated with the 

current conservatorships of both Fannie 

Mae and Freddie Mac, is it appropriate 

to maintain a higher obligor limit for 

Government-sponsored agencies? 

F. Section 652.40—Stress Tests for 

Mortgage Securities 

In the current rule, stress-testing 

requirements apply to one type of 

asset—mortgage securities—and one 

type of stress—interest rate risk.15 Is the 

scope of the stress-testing requirement 

adequate, or should it be broadened to 

apply to the entire investment portfolio 

(both individually and at a portfolio 

level)? Should the scope of the stresstesting be expanded to include market 

price risks due to factors other than 

interest rate changes? We refer to both 

firm-specific risks and systemic risks. 

Firm-level risks include operational 

fraud, deteriorating program asset 

quality, and negative media coverage. 

Systemic risks include industry sector 

shocks such as occurred on September 

11, 2001, with payment system 

disruption, or asset class as was seen in 

the financial services sector in 2007 and 


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27956 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Proposed Rules 

2008. If the scope of required stresstesting is expanded, what types and 

severity of liquidity event scenarios 

should be tested, and how should 

forward-looking cash-flow projections 

be built around these scenarios? 

IV. List of Key Questions 

• To ensure an appropriate level of 

earnings performance while limiting 

risk to an acceptable level, should our 

regulations (and/or Farmer Mac board 

policy) specify earnings performance 

benchmarks and some acceptable band 

of earnings performance above and 

below such benchmarks? If so, how 

might Farmer Mac’s liquidity 

management policy establish limits 

around an investment portfolio 

benchmark, either statically or 

dynamically, to reflect the potential 

changes in investment value that can 

occur in stressful market or economic 

environments? 

• Would it be appropriate for our 

regulations to require a liquidity 

contingency funding plan? If so, how 

specific should the regulation be 

regarding required components of the 

plan versus simply requiring that the 

plan reasonably reflect current 

standards, for example, those specified 

by the Basel Committee on Banking 

Supervision? 

• In light of the marginal funding 

instability that results from relying 

primarily on shorter term debt—even 

when the maturity is extended 

synthetically—would it be appropriate 

to require Farmer Mac to establish a 

debt maturity management plan? If so, 

how might such a requirement be 

structured? 

• Should the availability of a liquid 

market for Farmer Mac’s program 

investments be considered in the 

Corporation’s liquidity contingency 

funding plan? 

• Are there other metrics or 

approaches available that might 

improve upon, augment, or 

appropriately replace days-of-liquidity 

as currently used in § 652.20(a)? For 

example, to recognize greater 

differences in the liquidity value of 

different asset classes, and to augment 

the minimum days-of-liquidity 

requirement, would it be appropriate to 

establish a subcategory of the minimum 

days-of-liquidity requirement that 

would include, for example, only cash 

or Treasury securities in the definition 

of ‘‘primary liquid assets’’ but also set a 

smaller minimum required number of 

days? If such a requirement is 

warranted, what would be the 

appropriate number of minimum 

primary days-of-liquidity, balancing the 

benefits gained from maintaining these 

higher quality liquid assets against their 

higher cost? 

• Would it be appropriate to reevaluate the discounts in § 652.20(c) in 

order to better reflect the risk of 

diminished marketability of liquid 

investments under adverse conditions? 

If so, which ones and what would be the 

appropriate degree of change? In 

particular, we request public comment 

on whether the discount currently 

applied on Farmer Mac II securities is 

appropriate. Would it be appropriate to 

refine the schedule of discounts in 

§ 652.20(c)? For example, there is no 

difference in the discounts applied to 

AAA-rated versus AA-rated corporate 

debt securities. 

• Would the experience gained 

during the financial markets crisis of 

2008 and 2009 justify adjustments to 

many of the portfolio limits in § 652.35 

to add conservatism to them and 

improve diversification of the portfolio? 

We invite specific comments on 

appropriate changes for each asset class, 

final maturity limit, credit rating 

requirement, portfolio concentration 

limit, and other restrictions. 

Given that Farmer Mac might not 

always hold the ‘‘on the run’’ (i.e., 

highest liquidity) issuance of Treasury 

securities, would imposing maximum 

maturity limitations enhance the resale 

value of these investments in stressful 

conditions? 

In light of the recent financial 

instability of Government-sponsored 

agencies such as Fannie Mae and 

Freddie Mac, would it be appropriate to 

revise this section to put concentration 

limits on exposure to these entities in 

§ 652.35(a)(2)? 

The requirements in § 652.35(a)(3) 

carry the implied assumption that 

general obligation bonds are always less 

risky than revenue bonds. But is that 

always the case? Would it be more 

appropriate for our regulation to limit 

both sub-categories equally? 

We invite comment on whether it is 

appropriate to include mortgage 

securities collateralized by ‘‘jumbo’’ 

mortgages as an eligible liquidity 

investment. 

Further, is it appropriate to allow 

investments in subordinated debt as the 

current rule does? If so, is it appropriate 

that subordinated debt receives 

discounts and investment limits at the 

same level as more senior types of 

corporate debt? 

• Do the obligor limits in 

§ 652.35(d)(1) generally provide for an 

adequate level of diversification? 

Specifically, in light of the uncertainty 

associated with the current 

conservatorships of both Fannie Mae 

and Freddie Mac, is it appropriate to 

maintain a higher obligor limit for 

Government-sponsored agencies? 

• Is the scope of the stress-testing 

requirement adequate, or should it be 

broadened to apply to the entire 

investment portfolio (both individually 

and at a portfolio level)? Should the 

scope of the stress-testing be expanded 

to include market price risks due to 

factors other than interest rate changes? 

If the scope of required stress-testing is 

expanded, what types and severity of 

liquidity event scenarios should be 

tested, and how should forward-looking, 

cash flow projections be built around 

these scenarios? 

V. Conclusion 

We welcome comments on all 

provisions of this notice, even if we did 

not request specific comments on those 

provisions. 

Dated: May 13, 2010. 

Roland E. Smith, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 2010–12012 Filed 5–18–10; 8:45 am] 

BILLING CODE 6705–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2010–0478; Directorate 

Identifier 2008–NM–090–AD] 

RIN 2120–AA64 

Airworthiness Directives; Airbus Model 

A300 B4–600, B4–600R, and F4–600R 

Series Airplanes, and Model C4–605R 

Variant F Airplanes (Collectively Called 

A300–600 Series Airplanes); and Model 

A300 and A310 Series Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for the 

products listed above. This proposed 

AD results from mandatory continuing 

airworthiness information (MCAI) 

originated by an aviation authority of 

another country to identify and correct 

an unsafe condition on an aviation 

product. The MCAI describes the unsafe 

condition as: Two cases of complete 

nose landing gear (NLG) shock absorber 

bolts failure were reported to the 

manufacturer. In both cases, the crew 

was unable to retract the gear and was 

forced to an In Flight Turn Back. In one 

case, the aircraft experienced a low 

speed runway excursion. The root cause 

of the bolts failure has been identified 


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