Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35607

1 1992 Act, section 1313(b)(1) (12 U.S.C.

4513(b)(1)).

2 60 FR 7468, Feb. 8, 1995.

3 12 U.S.C. 4611.

4 61 FR 29592, Jun. 11, 1996.

5Section 1362 (12 U.S.C. 4612).

6 60 FR 30201.

Conversion of UF4 to UF6 is performed by

exothermic reaction with fluorine in a tower

reactor. UF6 is condensed from the hot

effluent gases by passing the effluent stream

through a cold trap cooled to -10°C. The

process requires a source of fluorine gas.

(6) Especially Designed or Prepared

Systems for the conversion of UF4 to U

metal.

Conversion of UF4 to U metal is performed

by reduction with magnesium (large batches)

or calcium (small batches). The reaction is

carried out at temperatures above the melting

point of uranium (1130°C).

(7) Especially designed or prepared

systems for the conversion of UF6 to UO2.

Conversion of UF6 to UO2 can be

performed by one of three processes. In the

first, UF6 is reduced and hydrolyzed to UO2

using hydrogen and steam. In the second,

UF6 is hydrolyzed by solution in water,

ammonia is added to precipitate ammonium

diuranate, and the diuranate is reduced to

UO2 with hydrogen at 820°C. In the third

process, gaseous UF6, CO2, and NH3 are

combined in water, precipitating ammonium

uranyl carbonate. The ammonium uranyl

carbonate is combined with steam and

hydrogen at 500–600°C to yield UO2. UF6 to

UO2 conversion is often performed as the

first stage of a fuel fabrication plant.

(8) Especially Designed or Prepared

Systems for the conversion of UF6 to UF4.

Conversion of UF6 to UF4 is performed by

reduction with hydrogen.

Appendix L to Part 110 [Amended]

23. In newly redesignated Appendix L

to Part 110, the entry ‘‘Tungsten 185 (W

85)’’ is revised to read ‘‘Tungsten 185

(W 185).’’

Dated in Rockville, MD, this 28th day of

June 1996.

For the Nuclear Regulatory Commission.

James M. Taylor,

Executive Director for Operations.

[FR Doc. 96–17236 Filed 7–5–96; 8:45 am]

BILLING CODE 7590–01–P

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

12 CFR Part 1750

RIN 2550–AA03

Office of Federal Housing Enterprise

Oversight; Minimum Capital

AGENCY: Office of Federal Housing

Enterprise Oversight, HUD.

ACTION: Final regulation.

SUMMARY: The Office of Federal Housing

Enterprise Oversight (OFHEO) is issuing

a final regulation that sets forth the

methodology for computing the

minimum capital requirement for the

Federal National Mortgage Association

(Fannie Mae) and the Federal Home

Loan Mortgage Corporation (Freddie

Mac) (collectively, the Enterprises). The

final regulation also establishes

procedures for the filing of quarterly

minimum capital reports by each

Enterprise. In addition, the final

regulation establishes procedures under

which OFHEO will determine the

capital classification of each Enterprise

on a quarterly basis.

EFFECTIVE DATE: August 7, 1996.

FOR FURTHER INFORMATION CONTACT: Gary

L. Norton, Deputy General Counsel

(202/414–3800); Isabella W. Sammons,

Associate General Counsel (202/414–

3800); Michael P. Scott, Assistant

Director, Office of Research, Analysis

and Capital Standards (202/414–3800),

1700 G Street, N.W., 4th Floor,

Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Background

Title XIII of the Housing and

Community Development Act of 1992,

Pub. L. No. 102–550, known as the

Federal Housing Enterprises Financial

Safety and Soundness Act of 1992 (1992

Act), established OFHEO as an

independent office within the

Department of Housing and Urban

Development. OFHEO is responsible for

ensuring that the Enterprises are

adequately capitalized and operating in

a safe and sound manner. Included

among the express statutory authorities

of the Director of OFHEO is the

authority to issue regulations

establishing minimum and risk-based

capital standards.1

As a separate rulemaking procedure,

OFHEO published an Advance Notice of

Proposed Rulemaking (ANPR) 2 as the

first step toward developing the riskbased capital regulation required by

section 1361 of the 1992 Act.3 The riskbased capital regulation will specify a

stress test that will determine the

amount of capital that an Enterprise

must hold to maintain positive capital

throughout a 10-year period of

economic stress. That amount, plus an

additional 30 percent to cover

management and operations risk, will

constitute the risk-based capital

requirement of the Enterprise.

The ANPR solicited public comment

on a variety of issues concerning the

development of the risk-based capital

regulation. In light of the complex

issues, OFHEO decided to issue the

proposed risk-based capital regulation

in two Notices of Proposed Rulemaking

(NPRs).

The first NPR addresses two key

components of the stress test—the

‘‘benchmark loss experience’’ (the basis

for determining the extent of Enterprise

credit losses during the stress test) and

the use of the OFHEO House Price Index

(HPI) in the stress test to estimate

changes over time in the values of

single-family properties securing

Enterprise mortgages.4 A second NPR,

currently being developed, will address

the remaining aspects of the risk-based

capital stress test and how the stress test

will be used to determine the

Enterprises’ risk-based capital

requirements.

In addition to the risk-based capital

standard, the 1992 Act prescribes a

minimum capital standard for the

Enterprises.5 This final regulation

implements the minimum capital

standard of the 1992 Act. Unlike the

risk-based capital requirement that is

computed by applying the stress test,

the minimum capital requirement is

computed on the basis of capital ratios

that are applied to certain defined onbalance sheet assets and off-balance

sheet obligations of the Enterprises.

OFHEO issued a proposed Minimum

Capital regulation on June 8, 1995.6 As

discussed in the preamble to the

proposed regulation, the proposed

regulation contained the interim

administrative procedures with respect

to the methodology for computing the

minimum capital requirement for onand off-balance sheet items, except for

interest rate and foreign exchange rate

contracts for which the methodology

was modified. The proposed regulation

also established procedures for the filing

of minimum capital reports by the

Enterprises each quarter, or at other

times as required by the Director. The

proposed regulation further required

OFHEO to provide each Enterprise with

notice and opportunity to comment on

its proposed capital classification.

OFHEO received five comments in

response to the proposed regulation.

Comments were received from a federal

government agency (Office of Thrift

Supervision), both Enterprises, and two

trade associations (America’s

Community Bankers and Mortgage

Bankers Association of America).

OFHEO has carefully considered the

comments in developing the final

regulation. A discussion of the

comments received follows.

II. Comments on the Proposed

Minimum Capital Regulation

General Comments

Freddie Mac commented generally on

OFHEO’s role with respect to the
35608 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

7Marginal capital requirements are incremental

capital requirements for each additional dollar of

business.

8Freddie Mac cites S. Rep. No. 282, 102d Cong.,

2d Sess. 24 (1992).

9The Senate report accompanying the legislation

states: ‘‘A more detailed [stress test] model will be

more likely to create the right incentives and less

likely to create perverse incentives.’’ S. Rep. No.

282, 102d Cong., 2d Sess. 24 (1992).

10 12 U.S.C. 4513(a).

11 12 U.S.C. 4513(b).

12 12 U.S.C. 4501.

13Section 1364 (12 U.S.C. 4614).

14Sections 1365–1367 (12 U.S.C. 4615–4617).

15Section 1364(b) (12 U.S.C. 4614(b)).

16Sections 1365(a)(1) and 1369C (12 U.S.C.

4615(a)(1) and 4622).

minimum capital standard of the 1992

Act. First, Freddie Mac noted that the

1992 Act details what the capital

standard is, unlike the statutes

governing the capital standards for

banks and thrifts. Therefore, Freddie

Mac concluded that the Minimum

Capital regulation should reflect

Congress’ intent that OFHEO act as the

implementor, rather than the creator, of

the minimum capital standard.

OFHEO agrees that its role is to

implement the minimum capital

standard set forth in the 1992 Act.

Nevertheless, Congress specifically

authorized OFHEO to adjust the capital

ratios that are applied to certain offbalance sheet obligations, the credit risk

of which differs from that of mortgagebacked securities (MBS). Additionally,

in implementing the 1992 Act, OFHEO

must define those terms not defined

therein. OFHEO believes that the final

regulation effectively implements the

minimum capital standard in a manner

completely consistent with the specific

provisions and overall intent of the 1992

Act.

Secondly, Freddie Mac stated that

Congress recognized that the minimum

capital standard would create marginal

capital requirements and that marginal

capital requirements tend to induce

changes in the Enterprises’ behavior.7

Therefore, Freddie Mac explained,

Congress cautioned OFHEO against

creating ‘‘perverse incentives’’ that may

induce Freddie Mac to make

inappropriate changes in the conduct of

its businesses.8 Freddie Mac further

noted that, in the context of OFHEO’s

risk-based capital standard, ‘‘OFHEO

has expressed a policy of designing the

[risk-based] capital regulation to reflect

closely the relative risks inherent in the

Enterprises’ different activities, rather

than setting out to encourage or

discourage particular activities by

means of a [risk-based] capital

regulation that rewards or punishes an

Enterprise that engages in such

activities.’ Freddie Mac urged OFHEO to

apply this policy to its design of the

Minimum Capital regulation.

As recognized by Freddie Mac,

congressional concern regarding the

creation of perverse incentives was

expressed in the context of the

discussion of risk-based capital and the

appropriate level of detail of the stress

test.9 OFHEO has stated that, where

feasible, it will endeavor to avoid the

creation of perverse incentives in its

risk-based capital regulation for the

Enterprises. However, this concept has

little relevance to the minimum capital

standard. The minimum capital

requirement is computed on the basis of

simple leverage ratios.

The proposed regulation deviates

from the specific statutory ratios in only

one area—by adjusting the statutory

ratio of 0.45 percent for certain offbalance sheet obligations relative to the

credit risk of MBS. The proposed

regulation establishes different

minimum capital ratios for

collateralized and uncollateralized

exposure for interest rate and foreign

exchange rate contracts. Although

OFHEO considered using a single

capital ratio applied to all interest rate

and foreign exchange rate contracts,

thus treating contracts as one broad risk

category, OFHEO believes that making a

distinction between collateralized and

uncollateralized exposure provides the

Enterprises with better risk management

incentives.

Section 1750.1 General

Section 1750.1 of the proposed

Minimum Capital regulation provides in

part that:

The board of directors of each Enterprise

is responsible for ensuring that the Enterprise

maintains capital at a level that is sufficient

to ensure the continued financial viability of

the Enterprise and in excess of the minimum

capital level contained in this Subpart A.

Freddie Mac recommended that the

phrase ‘‘is sufficient to ensure the

continued financial viability of the

Enterprise’’ be deleted from section

1750.1 because it appears to establish a

new or additional capital standard not

provided for in the 1992 Act. Freddie

Mac stated that, in light of the

comprehensive guidance in the 1992

Act as to how to determine the levels of

capital that the Enterprises are required

to hold, it would be inappropriate for

OFHEO, by regulation, to amend the

minimum capital standard of the 1992

Act by adding a financial viability

standard.

OFHEO disagrees with Freddie Mac’s

view because OFHEO has the duty and

authority to ensure the safe and sound

financial operation of the Enterprises,

and none of the capital levels specified

in the 1992 Act represent the amount

needed by an Enterprise to operate

safely and soundly under all

circumstances. The language in

proposed section 1750.1 is consistent

with OFHEO’s authority under section

1313(a) of the 1992 Act,10 which

provides that the duty of the Director is

to ensure that the Enterprises are

adequately capitalized and operating

safely. OFHEO’s specific authority to

issue the Minimum Capital regulation is

derived from section 1313(b) of the 1992

Act,11 which provides the Director with

the authority to issue regulations to

carry out (a) part 1 of subtitle A of the

1992 Act (which establishes OFHEO

and sets forth OFHEO’s authorities), (b)

subtitle B (which sets forth the required

capital levels for the Enterprises and

OFHEO’s special enforcement powers

with respect to capital levels), (c)

subtitle C (which sets forth OFHEO’s

enforcement provisions), and (d) ‘‘other

matters relating to safety and

soundness.’’ As explained in section

1302 of the 1992 Act,12 Congress finds

that—

* * * an entity regulating such enterprises

should have the authority to establish capital

standards, require financial disclosure,

prescribe adequate standards for books and

records and other internal controls, conduct

examinations when necessary, and enforce

compliance with the standards and rules that

it establishes * * *.

Section 1750.1 is also consistent with

the manner in which the capitalization

provisions of the 1992 Act are designed

to operate. The capitalization provisions

in the 1992 Act are structured in the

following way. The 1992 Act provides

for both ‘‘mandatory’’ and

‘‘discretionary’’ capital classifications.13

The 1992 Act also sets forth certain

supervisory actions that are specific to

each capital classification.14

Under the discretionary capital

classification criteria, the Director may

reclassify an Enterprise at a lower

capital level than it would be classified

under the mandatory classification

criteria. The Director may do so if the

Enterprise is engaging in conduct that

could result in a rapid depletion of core

capital or the value of the property

subject to mortgages held or securitized

by the Enterprise has decreased

significantly.15

When the Enterprise is placed in a

lower capital classification as a result of

either a mandatory or discretionary

classification, it is required to increase

its capital pursuant to a mandatory

capital restoration plan.16 The Director’s

discretionary classification authority

thus could have the effect of requiring
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35609

17Section 1365 (12 U.S.C. 4615).

18 138 Cong. Rec. S9353–54 (July 1, 1992). This

colloquy was with respect to section 202, Minimum

Capital Levels, of S. 2733. Although the 1992 Act

was a compromise between S. 2733 and H.R. 2900,

section 202 of S. 2733 is substantially similar to

section 1362 of the 1992 Act. Therefore, the

colloquy with respect to section 202, cited above,

is relevant to the discussion of section 1362 of the

1992 Act.

19 138 Cong. Rec. H11,102 (Oct. 3, 1992)

(discussion by Mr. Gonzalez, Mr. Frank, and Mr.

Leach). In response to Mr. Gonzalez’ explanation,

Mr. Leach stated that ‘‘I fully share with you the

interpretation that would imply that the Director

could go above the 2.5-percent requirement that is

currently in statute [sic] * * *.’’ Id.

20See sections 1371, 1372, and 1376 (12 U.S.C.

4631, 4632, and 4636).

an Enterprise that is engaging in certain

types of risky activities to increase the

amount of capital it holds, pursuant to

a mandatory capital restoration plan,

even though it meets or exceeds the

minimum capital or risk-based capital

requirement.17

The discretionary classification

authority reflects the statutory scheme

that the minimum capital ratios in the

1992 Act establishes a ‘‘floor’’ on

capital, not a ‘‘ceiling.’’ The legislative

history of the 1992 Act indicates that

there was some confusion regarding this

issue that was resolved in favor of the

‘‘floor’’ approach. For example, during

Senate consideration of the bill, Senator

Metzenbaum stated to the Chairman of

the Committee:

[You] said on this floor that the Director [of

OFHEO] did indeed have the authority to set

the required ratios above the minimum levels

* * * if necessary to protect the health and

security of an enterprise and that it is

important that the Director act in those

circumstances. Since that time, I have

learned that some Senators may have a

different view about the Director’s authority.

I would like to be assured by the chairman

of the committee and the manager of this bill

that the director has authority to raise capital

standards, if necessary.

Senator Riegle, in replying, explained

that:

[T]he Director is given the duty to ensure

that the enterprises are adequately

capitalized and operating safely in

accordance with this act and the Charter

Acts. Under section 103(a)(1) of the bill, the

Director is authorized to issue regulations

concerning the financial health and security

of the enterprises, including the

establishment of capital standards. There is

no way the Director can discharge these

responsibilities unless he or she has the

authority to prescribe capital standards to be

met by the enterprises.

* * * * *

Unless the legislation specifically and

affirmatively prohibits the Director from

establishing required capital ratios, it must be

assumed that the Director has that authority

in order to discharge his or her duties

assigned under section 102 * * *. The only

constraint on the Director’s authority is that

the required capital ratios cannot be set

below the minimum levels contained in

section 202.

* * * * *

If the Director believed that the minimum

statutory ratios * * * should be raised, he or

she would obviously have to seek a change

in the law. A Director might believe an

increase in the statutory minimum ratios

* * * to be necessary if he or she concluded

that they were clearly inadequate under all

foreseeable circumstances. If the Congress

were to so raise the statutory minimum ratios

* * * it would establish a new and higher

floor applicable to the Director’s

discretionary authority to prescribe capital

ratios. However, there is nothing in the

legislation that would preclude the Director

from setting the required rated * * * without

further legislation. If the circumstances that

gave rise to the need for higher ratios

changed, the Director could then reduce the

required capital ratios, but not lower than the

minimum ratios * * *.18

In the House of Representatives, the

issue of whether the minimum capital

ratios constituted a floor or a ceiling was

raised during the consideration of the

conference report. In a discussion

between the Chairman and Ranking

Member of the Committee, the two

members agreed that the duty of the

Director to ensure that the Enterprises

are adequately capitalized and operating

safely in accordance with the 1992 Act

authorizes the Director to require a

higher ratio than the minimum ratio

specified in the statute.19

Freddie Mac further questioned why

the board of directors of each Enterprise

is held responsible for maintaining

capital at a level that is sufficient to

ensure the continued viability of the

Enterprise. Freddie Mac stated that the

board of directors has a fiduciary duty

to protect the interests of the

Enterprise’s shareholders, and that

maintaining an adequate level of capital

under varying circumstances would be

one aspect of the overall set of

responsibilities represented within that

duty. Furthermore, Freddie Mac stated

that the fiduciary duties of corporate

directors are derived principally from

state common law, so the adoption of a

viability standard and corresponding

responsibility could interfere with the

subtleties and complexities of that law.

OFHEO believes that to the extent

there is any conflict between state law

and the 1992 Act, the conflict would be

resolved in favor of the 1992 Act and

implementing regulations. The

Enterprises are federally-chartered

entities subject to federal statutory and

regulatory requirements. The 1992 Act

imposes capital requirements on the

Enterprises and makes clear that the

board of directors of each Enterprise is

responsible for the financial safety and

soundness of the Enterprise.

Specifically, the Director is authorized

to take enforcement actions, e.g., cease

and desist orders and civil money

penalties, against directors of an

Enterprise for actions that deplete the

core capital of the Enterprise, cause a

loss to the Enterprise, or violate an order

or regulation of OFHEO.20 In exercising

its enforcement powers, OFHEO will be

cognizant of all of the relevant federal

and, if applicable, state requirements.

However, to the extent there are any

applicable state law requirements

relating to the fiduciary responsibilities

of the directors, they would not override

the obligations created by the 1992 Act

or the Minimum Capital regulation.

Freddie Mac also recommended that

the phrase ‘‘in excess of the minimum

capital level’’ be replaced by ‘‘is equal

to or exceeds the minimum capital

level’’ in order to reflect accurately the

minimum capital standard set forth in

the 1992 Act. OFHEO agrees and has

revised section 1750.1 accordingly.

OFHEO has also substituted, where

appropriate, the word ‘‘requirement’’ for

‘‘level’’ to ensure consistency of terms

throughout the Minimum Capital

regulation.

Section 1750.1 of the proposed

regulation also contains a sentence that

reads: ‘‘The regulation contained in this

Subpart A establishes the minimum

capital requirements for each

Enterprise.’’ Freddie Mac recommended

an editorial change that would clarify

that the regulation sets forth the

‘‘methodology’’ for computing the

minimum capital requirement for each

Enterprise. OFHEO agrees with the need

for this change and the final regulation

has been revised accordingly.

Section 1750.2 Definitions

Proposed Section 1750.2 defines

various terms used in the Minimum

Capital regulation. OFHEO received

comments on the definitions of the

following terms: commitment, core

capital, foreign exchange rate contract,

interest rate contract, multifamily credit

enhancement, off-balance sheet

obligation, other off-balance sheet

obligations, and qualifying collateral.

The comments are discussed below.

Commitment

Freddie Mac recommended that, for

the purpose of the minimum capital

requirement computation, the term

‘‘commitment’’ should be defined as a

legally binding agreement that obligates

an Enterprise to purchase mortgages that
35610 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

21 ‘‘Comments of the Federal Home Loan

Mortgage Corporation on the Advance Notice of

Proposed Rulemaking on Risk-Based Capital of the

Office of Federal Housing Enterprise Oversight,’’

139–146 (May 9, 1995) (available at OFHEO).

22See Restatement (Second) of Contracts section

204 (1981).

23S. Rep. No. 282, 102d Cong., 2d Sess. 11 (1992). 24 12 U.S.C. 4502(4). 25 12 U.S.C. 4612(a)(3).

specify all the terms of the transaction,

including price, volume, and fees.

Freddie Mac referenced its comments

to OFHEO’s ANPR on risk-based

capital.21 In those comments, Freddie

Mac stated that, as a matter of general

contract law, an agreement is legally

binding only if all of its key terms are

included and agreed upon. Therefore,

any definition of a contractual

commitment should include a

requirement that it be a binding

contractual obligation of the Enterprise

to purchase mortgages and specify price,

volume, and fees.

OFHEO agrees that for purposes of the

Minimum Capital regulation the term

‘‘commitment’’ should mean any legally

binding agreement that obligates an

Enterprise to purchase or securitize

mortgages, and has defined the term as

such. However, OFHEO does not believe

it necessary or appropriate to restrict the

definition of the term ‘‘commitment’’ by

reference to price, volume, and fees

because agreements may be legally

binding even when there is a lack of

specificity on all terms.22 It would not

be possible for OFHEO to reflect the

complexities of this area of contract law

in a regulatory definition. Moreover, to

do so would be inadvisable in light of

Congress’ specific concerns regarding

the need for capital to support

commitments and other off-balance

sheet obligations.

For example, in discussing the need

for the capital requirements of the 1992

Act, Congress expressed the concern

that off-balance sheet obligations had

not been previously captured under

prior capital standards:

The capital provisions of the GSEs’ charter

Acts limit their debt to 15 times their capital

unless HUD sets a higher ratio * * * This is

unsatisfactory because no capital need be

held against the GSEs’ $750 billion of off

balance sheet guarantees * * *. 23

Recognizing this concern, it would be

inappropriate for OFHEO to promulgate

a narrow definition that could exempt

certain legally binding commitments

from the minimum capital calculation.

OFHEO has made editorial revisions

to the definition of the term

‘‘commitment’’ by substituting the word

‘‘agreement’’ for ‘‘arrangement’’ and by

deleting the phrase ‘‘for portfolio.’’

Core Capital

In drafting the definition of core

capital in the proposed regulation,

OFHEO made minor changes to the

statutory language that were intended to

improve the clarity of the provision.

Freddie Mac commented that since

Congress expressly defined core capital

in section 1303(4) of the 1992 Act,24 the

regulation should use the same statutory

language to avoid confusion. In light of

the comment received, OFHEO wants to

ensure that the regulation does not

create any confusion and has revised the

definition of core capital in the final

regulation to mirror the statutory

definition.

Foreign Exchange Rate Contracts and

Interest Rate Contracts

OFHEO received a comment from

Freddie Mac on the definitions of the

terms ‘‘foreign exchange rate contracts’’

and ‘‘interest rate contracts.’’ Freddie

Mac stated that the definitions of these

terms as they appear in section 1750.2

and Appendix A of the proposed

regulation are not identical. To avoid

any implication that the differences are

intentional, Freddie Mac recommended

that OFHEO define the terms only in

one location, or that OFHEO conform

the language of the two sets of

definitions.

The different ways these terms are

used in the regulation and Appendix A

make it is necessary to include a

definition in the main body of the

regulation as well as a separate

discussion in Appendix A. However, in

light of the comment, OFHEO has made

editorial changes to conform the

definitions of the terms ‘‘foreign

exchange rate contracts’’ and ‘‘interest

rate contracts’’ in section 1750.2 to the

discussion of such terms in Appendix

A.

Multifamily Credit Enhancement

Section 1750.2 of the proposed

regulation defines the term multifamily

credit enhancement to mean ‘‘a

guarantee by an Enterprise of the

payments on a multifamily mortgage

revenue bond issued by a state or local

housing finance agency.’’

Fannie Mae recommended that

OFHEO revise the definition to describe

more fully the routine types of

transactions in which an Enterprise

engages ‘‘to support multifamily bond

issues.’’ Fannie Mae stated that it

normally provides credit enhancement

through a collateral pledge, purchase

agreement, or other contractual

obligation by which the mortgage loan

risk is borne by the Enterprise during a

period in which the bonds are credit

enhanced by a letter of credit or surety

obligation of another party.

Fannie Mae also commented that

under many state laws, other state and

local governmental units or

instrumentalities may issue mortgage

revenue bonds, not only state and local

housing finance agencies. Therefore,

Fannie Mae recommended that the

definition should be expanded to

include any state and local

governmental issuers authorized to

issue such revenue bonds secured by

mortgages.

OFHEO agrees with the comment and

has revised the definition of the term

‘‘multifamily credit enhancement’’ to

describe more fully the routine types of

transactions in which an Enterprise

engages to support multifamily bond

issues.

Off-balance Sheet Obligation and Other

Off-Balance Sheet Obligations

OFHEO received comments from

Freddie Mac on the definitions of the

terms ‘‘off-balance sheet obligation’’ and

‘‘other off-balance sheet obligations.’’

The term ‘‘off-balance sheet obligation’’

is defined in proposed section 1750.2 to

mean—

* * * a binding agreement, contract, or

similar arrangement that requires or may

require future payment(s) in money or kind

by another party to an Enterprise or that

effectively guarantees all or part of such

payment(s) to third parties, where such

agreement or contract is a source of credit

risk that is not included on its balance sheet.

The term ‘‘other off-balance sheet

obligations’’ is defined in proposed

section 1750.2 to mean—

* * * all off-balance sheet obligations of an

Enterprise that are not mortgage-backed

securities or substantially equivalent

instruments.

Freddie Mac noted that section

1362(a)(3) of the 1992 Act 25 requires the

Enterprises to hold 0.45 percent core

capital against other off-balance sheet

obligations (excluding commitments in

excess of 50 percent of the average

dollar amount of commitments

outstanding each quarter over the

preceding four quarters), except as the

Director adjusts the 0.45 percent ratio to

reflect differences between the credit

risk of such obligations and MBS.

Freddie Mac stated that an obligation of

an Enterprise does not subject the

Enterprise directly to credit risk: ‘‘it is

the party holding the obligation that

bears the credit risk of an Enterprise

obligation.’’ However, while the

obligations of an Enterprise create no
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35611

26 Id. 27 60 FR 66042, Dec. 20, 1995.

direct credit risk for the Enterprise,

certain obligations, such as MBS or

commitments to purchase mortgages,

involve identifiable credit risk that is

related in one way or another to those

obligations (the risk of the default on the

associated mortgages). Freddie Mac

believes that this related credit risk is

what Congress intended to capture

when it enacted the minimum capital

requirement applicable to other offbalance sheet obligations. Therefore,

Freddie Mac believes that a definition of

‘‘other off-balance sheet obligations’’

will not capture the related credit risk

that is apparently the focus of the 1992

Act.

To resolve this concern, Freddie Mac

recommended that OFHEO delete the

definition of the term ‘‘off-balance sheet

obligation’’ and take a targeted approach

in the definition of the term ‘‘other offbalance sheet obligations’’ by

identifying only those items that

OFHEO intends to include within the

scope of the term, i.e., commitments,

multifamily credit enhancements, sold

portfolio remittances pending, and

interest rate and foreign exchange rate

contracts. Freddie Mac believes that

because OFHEO has considered no

other items to be other off-balance sheet

obligations, such a definition would

fully implement section 1362(a)(3) of

the 1992 Act.26 Freddie Mac stated that,

to the extent that the Director

determines in the future that other items

should be considered to be other offbalance sheet obligations, the Director

should address such items in a future

rulemaking proceeding to amend the

Minimum Capital regulation. In

connection with this recommendation,

Freddie Mac also recommended that

section 1750.4(a)(7) be deleted. That

section provides for other off-balance

sheet obligations to be included in the

computation of the minimum capital

requirement.

After considering Freddie Mac’s

comments, OFHEO has determined not

to adopt the recommendations with

respect to the definition of the terms

‘‘off-balance sheet obligation’’ and

‘‘other off-balance sheet obligations.’’

The capital provisions of the 1992 Act

require the Enterprises to hold sufficient

capital to ensure against risks of both

on- and off-balance sheet items. For offbalance sheet obligations, the 1992 Act

specifies the ratio of 0.45 percent of the

unpaid principal balance of MBS and

substantially equivalent instruments

issued or guaranteed by the Enterprise.

The Act also specifies a ratio of 0.45

percent of other off-balance sheet

obligations (excluding commitments in

excess of 50 percent of the average

dollar amount of the commitments

outstanding each quarter over the

preceding four quarters), except that the

Director must adjust the 0.45 percent

ratio to reflect differences between the

credit risk of such obligations and MBS.

OFHEO believes that it is appropriate

to provide for a definition of other offbalance sheet obligations, which

ensures that capital will be held against

all off-balance sheet obligations whether

or not they are now used by the

Enterprises or at any time in the future.

The 1992 Act requires that OFHEO

apply a ratio of 0.45 percent to other offbalance sheet obligations until OFHEO

determines whether an adjustment is

necessary. OFHEO has determined the

appropriate ratios for commitments,

multifamily credit enhancements, sold

portfolio remittances pending, interest

rate contracts, and foreign exchange rate

contracts. When an Enterprise begins to

use a new type of obligation, OFHEO

will apply the statutory ratio of 0.45

percent. OFHEO will then analyze the

obligation to determine whether an

adjustment to the 0.45 percent ratio is

necessary, and will amend the

Minimum Capital regulation, as

appropriate.

Freddie Mac believes that the

proposed definitions could create

confusion because they appear to

conflict with how the term ‘‘obligation’’

is used elsewhere in the 1992 Act and

in the Enterprises’ Charter Acts. The

proposed regulation defines the term

‘‘off-balance sheet obligation’’ as a

binding agreement or contract that

requires another party to make future

payments in money or in kind to an

Enterprise (or guarantees of such

payments to a third party). In contrast,

Freddie Mac stated that the term

‘‘obligation’’ used elsewhere in the 1992

Act and the Enterprises’ Charter Acts

applies only to future payments from an

Enterprise to a third party—and not to

future payments from another party to

the Enterprise (or guarantees of such

payments to a third party).

Freddie Mac also stated that the

proposed definition of the term ‘‘other

off-balance sheet obligations’’ could

create confusion as to whether

resecuritizations of MBS, such as real

estate mortgage investment conduits

and other multi-class MBS, are included

in that definition. Freddie Mac believes

that it was the intent of Congress that

such resecuritizations should not be

included and that OFHEO’s interim

procedures do not include

resecuritizations. Also, Freddie Mac

believes that the definition of the term

‘‘other off-balance sheet obligations’’ is

too narrow because commitments,

which Congress expressly considered to

be other off-balance sheet obligations,

would not fall within the proposed

definition of that term.

OFHEO believes that because the term

‘‘obligation’’ may be used differently in

the 1992 Act and the Enterprises’

Charter Acts, it more important to

include a definition of the terms ‘‘offbalance sheet obligation’’ and ‘‘other offbalance sheet obligations’’ for purposes

of the computation of the minimum

capital requirement. However, to

eliminate any confusion regarding the

treatment of commitments, the

definition of the term ‘‘off-balance sheet

obligation’’ has been revised to include

an express reference to commitments.

Also, the definition of the term ‘‘other

off-balance sheet obligations’’ has been

revised to clarify that resecuritizations

of MBS are not included in the

definition.

Qualifying Collateral

Freddie Mac noted that the definition

of the term ‘‘qualifying collateral’’ in

section 1750.2 differs from the

discussion of what constitutes

qualifying collateral in paragraph 5 of

Appendix A. Consistent with this

comment, OFHEO has made conforming

editorial changes to both the definition

in section 1750.2 and the discussion in

Appendix A.

OFHEO has also revised the footnote

in connection with the definition of the

term ‘‘qualifying collateral’’ by defining

the term ‘‘OECD-based group of

counties’’ to conform with the Joint

Final Rule published by the Federal

Reserve System, the Office of the

Comptroller of the Currency, and the

Federal Deposit Insurance

Corporation.27 This final rule was

promulgated after the publication of the

proposed Minimum Capital regulation.

Section 1750.4 Minimum Capital

Requirement Computation

Section 1750.4(a) of the proposed

regulation provides that the minimum

capital requirement for each Enterprise

is the sum of the following amounts—

—2.50 percent times the aggregate onbalance sheet assets of the Enterprise;

—0.45 percent times the unpaid

principal balance of mortgage-backed

securities and substantially equivalent

instruments that were issued or

guaranteed by the Enterprise;

—0.45 percent of 50 percent of the

average dollar amount of

commitments outstanding each

quarter over the preceding four

quarters;
35612 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

28OFHEO, Annual Report to Congress, 9 (June 15,

1995).

—0.45 percent of the outstanding

principal amount of bonds with

multifamily credit enhancements;

—0.45 percent of the dollar amount of

sold portfolio remittances pending;

—3.00 percent of the credit equivalent

amount of interest rate and foreign

exchange rate contracts except to the

extent of the current market value of

posted qualifying collateral;

—1.50 percent of the credit equivalent

amount of interest rate and foreign

exchange rate contracts equal to the

market value of posted qualifying

collateral; and

—0.45 percent of the outstanding

amount of other off-balance sheet

obligations, excluding commitments,

multifamily credit enhancements,

sold portfolio remittances pending,

and interest rate and foreign exchange

rate contracts, except as adjusted by

the Director to reflect differences in

the credit risk of such obligations in

relation to MBS.

Section 1750.4(b) provides that any

asset or financial obligation that can be

properly classified in more than one of

the enumerated categories shall be

classified in the category that yields the

highest minimum capital amount.

OFHEO received comments with

respect to section 1750.4, as explained

below.

Section 1750.4(a)(6) Ratios With

Respect to Interest Rate and Foreign

Exchange Rate Contracts

Notice of Adjustment

Freddie Mac asserted that OFHEO has

not provided adequate notice to the

Enterprises of the basis, in quantifiable

terms, for the proposed upward

adjustment it makes to the 0.45 percent

ratio with respect to interest rate and

foreign exchange rate contracts.

OFHEO believes that it provided

adequate notice of the basis of the

proposed adjustment in the preamble of

the proposed Minimum Capital

regulation. The preamble explained how

OFHEO analyzed the relative credit risk

of interest rate and foreign exchange rate

contracts as compared with the credit

risk of MBS. However, in light of this

comment, OFHEO believes it

appropriate to summarize its reasons for

adjusting the 0.45 percent ratio.

The source of credit risk of MBS to

the Enterprises is the risk of defaults

and losses on the mortgages underlying

the MBS. The aggregate credit risk

associated with the underlying

mortgages is low because the

Enterprises require very broad

geographic diversification; strict and

consistent mortgage underwriting

standards; minimum initial

collateralization of 125 percent (i.e.,

maximum 80 percent loan-to-value

ratio) or supplemental mortgage

insurance; and increasing levels of

collateralization as loans amortize and

property values increase. Moreover, the

credit risk of MBS is offset by the

continuing source of income provided

by guarantee fees.

Neither Enterprise has experienced a

net credit loss on its MBS. Annual

losses to date have ranged from two

basis points to ten basis points

(expressed as a percentage of the

outstanding portfolio), and have been

easily covered by guarantee fee income,

which has ranged from 20 to 25 basis

points.

The source of credit risk of interest

rate and foreign exchange rate contracts

is the risk of counterparty default. The

credit risk of interest rate and foreign

exchange rate contracts is greater than

that of MBS, even though the

Enterprises attempt to limit the credit

risk of the contracts by restricting their

business to high quality counterparties

and adjusting collateral requirements on

the basis of the counterparty credit

quality and the current replacement cost

of the contracts. The credit risk

associated with interest rate and foreign

exchange rate contracts is a result of the

following characteristics:

• Large swings in market rates, on

which interest rate and foreign exchange

rate contracts are based, may

simultaneously increase exposure to

and risk of default by one or more

counterparties, which are typically

financial firms.

• While losses may be infrequent, the

high level of interdependence of the

world’s major financial institutions,

many of which are important interest

rate and foreign exchange rate contract

counterparties, could cause

disproportionately high losses when

they do occur. This phenomenon is

often referred to as ‘‘systemic risk.’’

• Counterparty risk is concentrated.

The loss resulting from the default of a

single counterparty could be many

times larger than the amount of capital

that would be associated with the

application of a 0.45 percent capital

ratio.

• Interest rate and foreign exchange

rate contract exposures are not as fully

collateralized as are the mortgages

underlying the Enterprises’ MBS.

• The interest rate and foreign

exchange rate contracts markets are

comparatively new; therefore, the

functioning of these markets is less

predictable in terms of operational and

legal risk.

• There is no current stream of fee

income to offset losses on interest rate

and foreign exchange rate contracts

associated with counterparty failures.

OFHEO recognizes that, although the

credit risk characteristics of interest rate

and foreign exchange rate contracts can

be identified, they are difficult to

quantify. However, the 1992 Act does

not require such quantification. Rather,

it requires a reasonable analysis, based

on available information, of the credit

risk of interest rate and foreign exchange

rate contracts relative to that of MBS.

The fact that the Enterprises have not

experienced a net credit loss on their

MBS does not mean that there are no

risks associated with these instruments.

Similarly, the fact that the Enterprises

have not experienced losses associated

with interest rate and foreign exchange

rate contracts does not mean that there

are no risks associated with these

contracts. In these circumstances, it is

appropriate for OFHEO to analyze the

relative risks of these instruments by

comparing their respective credit risk

characteristics. Based on an analysis of

these relative credit risk characteristics,

OFHEO adjusted the 0.45 percent ratio

applicable to MBS upward to reflect the

greater risk of interest rate and foreign

exchange rate contracts. As OFHEO and

the Enterprises accumulate data on the

risk of, and gain experience with the

application of the ratios for, interest rate

and foreign exchange rate contracts,

OFHEO may make adjustments to the

ratios, as appropriate.

Freddie Mac also commented on the

upward adjustment of ratios for interest

rate and foreign exchange rate contracts

in light of OFHEO’s statement in the

Annual Report to Congress that the

credit risk of the Enterprises’ derivatives

(interest rate and foreign exchange rate)

contracts ‘‘is very small relative to the

credit risk the Enterprises face with

regard to mortgages they hold or

guarantee.’’ 28 This statement was in the

context of the notional values of the

contracts. As the Annual Report to

Congress notes two sentences later, the

replacement cost (current credit

exposure) of the contracts is relatively

small. In other words, the replacement

cost, which together with an amount for

potential future credit exposure

constitutes the credit equivalent

amount, is very small in comparison

with the notional amount. We note that

the credit equivalent amount represents

the overall credit risk of interest rate

and foreign exchange rate contracts.

Lowering the Proposed Ratios

Fannie Mae recommended lowering

the proposed ratios from 3.0 percent of
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35613

the credit equivalent amount of

uncollateralized interest rate and foreign

exchange rate contracts and 1.5 percent

of the credit equivalent amount of

collateralized contracts to 2.0 percent

and 0.5 percent respectively. Fannie

Mae believes that the proposed ratios

are unreasonably high in relation to the

historical loss experience for similar

obligations.

Fannie Mae stated that the factors that

determine an adequate amount of

required capital for interest rate and

foreign exchange rate contracts include

the probability of default and the

severity of possible loss. To determine

the probability of default of

collateralized interest rate and foreign

exchange rate contracts, Fannie Mae

analyzed historical default statistics

from Moody’s Investors Service over the

past 25 years for unsecured, 5- to 9-year

term senior debt of corporations with

debt ratings from Aaa to Baa. Fannie

Mae stated that it uses historical data for

unsecured senior debt because data on

interest rate and foreign exchange rate

contracts is limited due to the relative

newness of the market in such contracts.

Fannie Mae believes that their default

rates are functionally equivalent

because interest rate and foreign

exchange rate contracts and unsecured

senior debt represent general corporate

obligations.

Fannie Mae stated that the average

rating of its interest rate and foreign

exchange rate counterparties is Aa or A.

Using the Moody’s Investors Service

historical data, the default rates for

unsecured senior debt in those

categories ranges from 0.3 percent to 1.5

percent. Thus, Fannie Mae suggested

that an appropriate estimate of default

incidence for its interest rate and foreign

exchange rate contracts is between 0.3

and 1.5 percent.

Fannie Mae then stated that the

historical data demonstrates that the

average loss severity from 1974 through

1994 is 51.1 percent for all corporate

unsecured senior debt, and 28.4 percent

for Baa or better corporate unsecured

senior debt. Multiplying the default

incidence by the loss severity yields a

‘‘capital ratio.’’ Thus, according to

Fannie Mae, a default incidence in the

range of 0.3 to 1.5 percent and a severity

level in the range of 28.4 to 51.1 percent

produces a ‘‘capital ratio’’ for

uncollateralized interest rate and foreign

exchange rate contracts in the range of

0.1 to 0.75 percent. The ratio that

Fannie Mae recommended—2.0 percent

for uncollateralized interest rate and

foreign exchange rate contracts—is 22⁄3

times its estimated ‘‘worst case’’ ratio of

0.75 percent. Consequently, Fannie Mae

believes the recommended ratio to be an

adequate and suitable minimum capital

ratio for uncollateralized interest rate

and foreign exchange rate contracts.

Fannie Mae further believes that the

use of collateral significantly reduces

the severity of loss associated with

interest rate and foreign exchange rate

contracts. Fannie Mae asserted that 10

percent is a reasonable estimate of

expected loss severity for collateralized

interest rate and foreign exchange rate

contracts, because Fannie Mae evaluates

the market value of collateral and

exposures at least monthly, Fannie Mae

requires over-collateralization if credit

quality deteriorates below a specific

level, and the loss severity of

uncollateralized exposures is best

represented by the 28.4 percent

historical loss severity experience for

unsecured senior debt. By multiplying

the 10 percent loss severity by the 0.3

to 1.5 percent historical average default

rates, Fannie Mae estimated a ‘‘capital

ratio range’’ of 0.03 percent to 0.15

percent. Thus, Fannie Mae’s

recommendation of a 0.5 percent ratio

for collateralized interest rate and

foreign exchange rate contracts is 31⁄3

times its estimated ‘‘worst case.’’

After carefully considering Fannie

Mae’s arguments, OFHEO has decided

not to reduce the proposed ratio for

interest rate and foreign exchange rate

contracts. Fannie Mae’s analysis

assumes that the default rate for interest

rate and foreign exchange rate contracts

will conform with the historical default

rates for corporate unsecured senior

debt. As Fannie Mae noted, interest rate

and foreign exchange rate contracts are

relatively new instruments and

historical default rates are lacking.

Therefore, OFHEO cannot assume that

the default rates of unsecured senior

debt and interest rate and foreign

exchange rate contracts will prove to be

comparable.

Even assuming the default rates

would be comparable, Fannie Mae’s

proposal does not provide an adequate

capital cushion. Fannie Mae derives

what it calls ‘‘capital ratios’’ based on

more than twenty years’ experience of a

national sample of corporate credits.

These ‘‘capital ratios’’ are in fact average

national loss rates for a period not

marked by extreme economic stress. For

minimum capital purposes, Fannie Mae

proposes to apply rates to both

uncollateralized and collateralized

counterparty exposure that are roughly

three times as high as these capital

ratios. The 1992 Act requires that any

adjustment to the 0.45 percent ratio

reflect the credit risk relative to MBS.

Fannie Mae’s proposed multiples are

not consistent with this requirement. As

the above discussion notes, neither

Enterprise has experienced any net

credit loss on its MBS. However,

ignoring guarantee fee income, annual

losses to date have ranged from two

basis points to ten basis points. Thus the

0.45 percent statutory capital ratio for

MBS ranges from 4.5 to 22.5 times the

historical loss experience for MBS—

higher than the 22⁄3 and 31⁄3 times the

estimated ‘‘worst case’’ loss proposed by

Fannie Mae.

Fannie Mae’s analysis also ignores a

number of factors which increase the

potential loss associated with the credit

exposure of interest rate and foreign

exchange rate contracts that are not

present with MBS. The credit exposures

of interest rate and foreign exchange rate

contracts are highly concentrated, large

swings of interest rates may

simultaneously increase both the credit

exposure and the default risk, and

systemic problems could cause

disproportionately high losses when

they do occur.

Furthermore, Fannie Mae predicates

its proposal on its current risk

management practices, with respect to

counterparty creditworthiness and

collateral requirements and their

enforcement. OFHEO believes that a

minimum capital requirement

establishes an essential amount of

capital that an Enterprise with given

levels of business must hold to address

broad categories of risk, not specific

exposures. Accordingly, it should not

attempt to reflect the quality of current

risk management practices. For

example, Fannie Mae’s analysis assumes

that it will continue to manage credit

risk by doing business with

counterparties with Aa and A ratings

and that such counterparties are not

subject to sudden declines in ratings.

Fannie Mae also assumes that, if ratings

decline, it will require and be able to

obtain more collateral.

Even if these assumptions were valid,

OFHEO believes that they cannot be the

basis of a minimum capital requirement.

The minimum capital requirement is

not intended to be a risk-based capital

requirement. The 1992 Act separately

provides for a risk-based capital

requirement in which credit, interest,

and operational and management risk

are calculated using a stress test. The

1992 Act requires that the 0.45 percent

ratio for other off-balance sheet

obligations be adjusted to reflect

differences in the credit risk of the

obligation and MBS. OFHEO believes

that the adjustment should be for

differences in risk associated with the

inherent risk characteristics of different

instruments, not the risk characteristics

of counterparties to these obligations or
35614 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

29See section 1302 (12 U.S.C. 4501).

30Section 1302(7) (12 U.S.C. 4501(7)).

31 ‘‘Comments of the Federal Home Loan

Mortgage Corporation on the Advance Notice of

Proposed Rulemaking on Risk-Based Capital of the

Office of Federal Housing Enterprise Oversight,’’ 72

(May 9, 1995)(available at OFHEO).

current risk management practices for

these obligations.

Right to Raise the Ratio

America’s Community Bankers

recommended that OFHEO explicitly

reserve the right to raise the ratio for

uncollateralized interest rate and foreign

exchange rate contracts to 4.0 percent

depending on the specific counterparty

risks involved. As discussed above,

OFHEO believes that counterparty

credit ratings are not the appropriate

focus of minimum capital ratios and

that it has required an adequate amount

of capital for uncollateralized interest

rate and foreign exchange rate contracts.

If OFHEO’s experience with the

application of the ratio for interest rate

and foreign exchange rate contracts

proves otherwise, OFHEO will raise the

ratio. In addition, as discussed in

connection with the comments on

section 1750.1, if the business practices

of an Enterprise were to endanger the

capital adequacy of the Enterprise,

OFHEO would take any actions

necessary to ensure the financial safety

and soundness of the Enterprise’s

operations.

Avoid Changing the Capital Calculation

Mortgage Bankers Association of

America (MBA) stated that the proposed

change from the interim guidelines in

the calculation of the capital ratio for

interest rate and foreign exchange rate

contracts does not appear to be so

significant as to cause the Enterprises to

increase current guarantee fees, which

would ultimately harm consumers in

the form of higher interest rates or fees.

MBA understands that the Enterprises

currently have sufficient capital to meet

the higher capital ratios that would

result from the proposal. Nevertheless,

MBA urged OFHEO to remain cautious

and avoid changing the capital

calculation of interest rate and foreign

exchange rate contracts if the

calculation influences the Enterprises’

selection of funding and hedging

instruments in a way that affects their

ability to manage risks, is detrimental to

their housing mission, or increases the

cost of credit to consumers.

MBA recognizes that OFHEO does not

wish to jeopardize the Enterprises’

ability to meet their housing mission

and goals, but must ensure the safety

and soundness of the Enterprises. MBA

believes that OFHEO should strive to

strike a balance and avoid imposing

inefficient capital requirements that

inhibit the management of risk.

OFHEO agrees that the capital

requirements should ensure the safety

and soundness of the Enterprises while

not jeopardizing the Enterprises’ ability

to meet their housing mission and goals.

Consistent with that approach, OFHEO

does not believe that the change in the

calculation of the capital ratio for

interest rate and foreign exchange rate

contracts will adversely affect the

Enterprises’ ability to manage risk or

increase the cost of mortgage credit to

consumers. Furthermore, mindful of the

need to strike a balance among

competing interests, OFHEO believes

that it is in the best long-term interests

of consumers and the Enterprises that

the Enterprises have an adequate

cushion of minimum capital to ensure

against loss. While a decrease in capital

requirements could result in a reduction

in mortgage credit costs for consumers

in the short-term, the decrease would

not be beneficial in the long-term if it

jeopardized the financial viability of the

Enterprises.

This view is consistent with the

congressional findings set forth in the

1992 Act that recognize the Enterprises’

important housing mission and the need

to provide long-term safeguards in the

form of capital requirements to reduce

the risk of failure.29 The congressional

findings also recognize the Enterprises’

obligation to facilitate the financing of

affordable housing while maintaining a

strong financial condition and a

reasonable economic return.30

‘‘Pro Rata’’ Capital Charge

The Office of Thrift Supervision asked

whether the proposed regulation would

provide a reduced ‘‘pro rata’’ capital

charge for partially collateralized

interest rate and foreign exchange rate

contracts. In response to this comment,

OFHEO notes that section 1750.4(a)(6)

provides a ratio of 3.00 percent of the

credit equivalent amount of interest rate

and foreign exchange rate contracts,

except to the extent of the current

market value of posted qualifying

collateral; and 1.50 percent of the

market value of qualifying collateral

posted to secure interest rate and foreign

exchange rate contracts, not to exceed

the credit equivalent amount of such

contracts. Thus, an interest rate or

foreign exchange rate contract partially

collateralized with qualifying collateral

will have a reduced capital charge to the

extent of the qualifying collateral.

Enterprises’ Right to Require Collateral

Fannie Mae and Freddie Mac both

stated that the market widely perceives

an agreement with a Aaa rated

counterparty that agrees to post

collateral if it is downgraded to be as

safe as, or safer than, a comparable

agreement with a lesser-rated

counterparty that posts collateral. They

claimed that the proposed regulation

would run counter to well-established

market practices by rewarding an

Enterprise with a lower capital

requirement if its Aaa rated

counterparties are downgraded and post

collateral under their collateral

agreements, or if the Enterprise avoids

Aaa rated counterparties in favor of

lesser-rated counterparties.

Freddie Mac recommended the

following standard: The same minimum

capital ratio would apply for

collateralized agreements and for

uncollateralized agreements where the

counterparty holds the highest credit

rating of any entity effectively

recognized by the Division of Market

Regulation of the Securities and

Exchange Commission as a nationally

recognized statistical rating organization

for the purposes of capital rules for

broker-dealers, and has entered into a

binding agreement to post qualifying

collateral if and when the counterparty

no longer holds the highest rating of

such an entity. As an alternative,

Freddie Mac recommended treating the

contract as fully collateralized for

purposes of computing the minimum

capital requirement where a Aaa rated

counterparty has agreed to post

collateral when it is downgraded.

OFHEO has considered Fannie Mae’s

and Freddie Mac’s recommendations,

but has decided not to adopt them. The

Enterprises’ recommendations rely

heavily on the credit ratings of

counterparties and current Enterprise

practice. In fact, Freddie Mac has noted

elsewhere that credit enhancements in

which the counterparty is required to

post collateral only when its credit

rating or capital begins to deteriorate

‘‘present some management-andoperations risk because the

arrangements need to be monitored and

the collateral needs to be posted in a

timely fashion.’’ 31

OFHEO believes that reliance on the

credit ratings of counterparties and

current Enterprise practice should not

be the basis for establishing minimum

capital ratios. Even though the 1992 Act

requires that credit risk be taken into

account when adjusting the ratio for

certain off-balance sheet obligations, the

minimum capital requirement

essentially is computed on the basis of

simple leverage ratios. Categories of

obligations that are assigned a specific

ratio include obligations with a mixture
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35615

of greater and lesser risk, depending on

borrower or counterparty

characteristics.

Consistent with the concepts

underlying ‘‘minimum’’ as opposed to

‘‘risk-based’’ capital, when developing

the proposed regulation, OFHEO

considered whether the minimum

capital ratio should be the same for

interest rate and foreign exchange rate

contracts regardless of whether

collateral was posted. In adopting the

proposed regulation, OFHEO

determined that a lower minimum

capital ratio for the collateralized

portion of an obligation was

appropriate. This determination was

made based on the recognition that a

collateralized position affords the

Enterprises greater certainty of

collection than an uncollateralized

position in the event of a decline in the

financial condition of a counterparty. In

contrast, the value of a promise by a

counterparty to post collateral in the

event that it is downgraded is subject to

the diminished capacity of a

counterparty during times of financial

stress to identify and pledge adequate

liquid assets to secure its contractual

obligations.

OFHEO also recognizes that the value

of a promise by a counterparty to post

collateral when it is downgraded is

influenced by the speed of the rating

agency’s ability to recognize changes in

credit conditions. Recent incidents,

such as the default of Barings from

trading losses, illustrate how rapidly the

financial health of a well-respected

entity can deteriorate. When a decline

occurs very rapidly, a promise to post

collateral to secure counterparty

obligations may be of little value.

Finally, as a point of comparison,

OFHEO notes that the risk-based capital

standards for banks and thrifts do not

treat agreements to post collateral as the

equivalent of collateral and do not

incorporate counterparty credit ratings

into the determination of risk weights

assigned to different counterparties.

Section 1750.4(a)(7) Ratio With

Respect to Other Off-Balance Sheet

Obligations

Section 1750.4(a)(7) of the proposed

regulation provides the amount of other

off-balance sheet obligations that is to be

included in the computation of the

minimum capital requirement. The

amount is—

0.45 percent of the outstanding

amount of other off-balance sheet

obligations, excluding commitments,

multifamily credit enhancements, sold

portfolio remittances pending, and

interest rate contracts and foreign

exchange rate contracts except as

adjusted by the Director to reflect

differences in the credit risk of such

obligations in relation to mortgagebacked securities.

Freddie Mac recommended that

proposed section 1750.4(a)(7) be deleted

in connection with its comments that (1)

the definition of the term ‘‘off-balance

sheet obligation’’ be deleted and (2) the

definition of the term ‘‘other off-balance

sheet obligations’’ be defined in terms of

commitments, multifamily credit

enhancements, sold portfolio

remittances pending, and interest rate

and foreign exchange rate contracts.

(See the full discussion under section

1750.2, above.) If section 1750.4(a)(7) is

retained, Freddie Mac recommended

that OFHEO delete the phrase ‘‘the

outstanding amount.’’ Freddie Mac

believes that the phrase could create

confusion if, in the future, OFHEO

determines that an item should be

treated as an ‘‘other off-balance sheet

obligation,’’ and OFHEO also

determines that the appropriate measure

of credit risk should be something other

than an ‘‘outstanding amount.’’

OFHEO agrees with Freddie Mac;

however, rather than deleting the phrase

‘‘outstanding amount,’’ OFHEO has

substituted the phrase ‘‘credit

equivalent amount, or other appropriate

measure, as determined by the

Director.’’ This revision will clarify that,

depending on the specific

characteristics of the obligation, the

computation of the minimum capital

requirement may be based on the credit

equivalent amount or other measures

that the Director determines are

appropriate.

OFHEO also has made a clarifying

editorial revision to proposed section

1750.4(a)(6)(ii) with respect to the

computation of the minimum capital

amount for interest rate and exchange

rate contracts.

Section 1750.4(b) Capital Treatment of

On-Balance Sheet and Off-Balance

Sheet Items

Section 1750.4(b) of the proposed

regulation provides that, for purposes of

the minimum capital requirement

computation, any asset or financial

obligation that is properly classifiable in

more than one category of items must be

classified in the category that yields the

highest requirement.

Freddie Mac expressed the concern

that the proposed regulation would

require capital charges for foreign

exchange rate contracts to be computed

as if such contracts were reflected on

the balance sheet, even if they are not.

Freddie Mac also recommended that

OFHEO clarify that the regulation will

not require an Enterprise to make

adjustments to a balance sheet that has

been prepared in accordance with

generally accepted accounting

principles (GAAP).

As noted by Freddie Mac, the

Enterprises are required to prepare their

balance sheets in accordance with

GAAP. Consistent with that

requirement, the Minimum Capital

regulation does not require an

Enterprise to adjust its balance sheet

prepared in accordance with GAAP. The

requirements of the Minimum Capital

regulation relate only to the

computation of the minimum capital

requirement.

Under GAAP, it is possible that some

assets or obligations may properly be

reflected either on or off the balance

sheet. OFHEO believes that, for

minimum capital purposes, it is

appropriate to classify any asset or

obligation that may be properly

reflected either on or off the balance

sheet in the category that yields the

highest minimum capital requirement.

The purpose of capital is to serve as a

cushion to absorb losses and thereby

reduce the risk of failure of the

Enterprise. The minimum capital

requirement represents a level of capital

for an Enterprise which, if not met, will

result in the institution being classified

as ’significantly undercapitalized.’’

Consequently, it would be inappropriate

for the Minimum Capital regulation to

permit an Enterprise to determine its

minimum capital requirement by

favoring one accounting treatment over

another. The purpose of section

1750.4(b) is to avoid such a

circumstance.

In addition, Freddie Mac commented

on the relationship between section

1750.4(b) and paragraph 4 of Appendix

A, suggesting that they articulated

inconsistent requirements with respect

to interest rate and foreign exchange rate

contracts. In that regard, Freddie Mac

recommended that OFHEO treat all

foreign exchange rate contracts as other

off-balance sheet obligations, and then

subtract from the computed minimum

capital requirement the amount, if any,

that is attributable to the contracts as

on-balance sheet assets.

OFHEO does not believe there is any

inconsistency between section 1750.4(b)

and paragraph 4 of Appendix A. The

scope of the two provisions is different

and, to the extent they deal with the

same issue, they address different

aspects of the issue. As explained above,

section 1750.4(b) provides that an

Enterprise’s assets or obligations that

may be properly classified in more than

one of the on- or off-balance sheet

categories will be classified according to

the category that yields the highest
35616 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

minimum capital requirement. The

scope of section 1750.4(b) encompasses

not only interest rate and foreign

exchange rate contracts, but also any

other assets or obligations that could be

classified in more than one category.

In contrast, paragraph 4 of Appendix

A, Avoidance of Double Counting, is

restricted in scope to interest rate and

foreign exchange rate contracts and only

addresses the issue of double counting.

The purpose of paragraph 4 is to ensure

that the capital amount for such

contracts is not double counted if the

proper accounting treatment results in a

portion of the credit exposure of the

contract(s) being reflected on and off the

balance sheet. To that end, paragraph 4

provides that the amount of credit

exposure arising from interest rate and

foreign exchange rate contracts may

need to be excluded from on-balance

sheet assets in calculating the minimum

capital requirement.

Section 1750.5 Notice of Capital

Classification

Section 1750.5 outlines the

procedures that OFHEO will follow

when notifying each Enterprise of its

capital classification.

Freddie Mac noted that while the

proposed regulation sets forth a process

that could result in a final capital

classification not being issued until a

full 150 days after the end of a quarter,

it hopes that a process of less than 90

days would continue to be the norm.

Section 1750.3 provides that an

Enterprise has 30 days after the end of

each quarter to file a minimum capital

report. Section 1750.5 provides that

within 60 days of receiving the

minimum capital report, OFHEO will

provide each Enterprise with a notice of

proposed capital classification. The

Enterprise has 30 days in which to

respond to the proposed capital

classification. The Enterprise’s response

period may be extended up to 30

additional calendar days, or shortened,

at the sole discretion of the Director.

The Director, after taking into

consideration the Enterprise’s response,

has up to 30 calendar days following the

end of the response period in which to

issue a final notice of capital

classification.

The time periods specified in the

regulation are designed to establish the

longest possible timeframes for actions

by the Enterprises and OFHEO in the

capital classification process. OFHEO

would expect that under most

circumstances the total elapsed time for

a capital classification will be

substantially less than the maximum

period contemplated in the regulation.

In that regard, the timing of the

submission of the Enterprise’s minimum

capital report and its response to the

proposed classification will have a

significant impact on the time period for

receipt of the final capital classification.

Appendix A

Appendix A provides the

methodology for computing the

minimum capital component for interest

rate and foreign exchange rate contracts.

The Office of Thrift Supervision

questioned whether OFHEO had

considered whether the proposed

treatment of interest rate and foreign

exchange rate contracts, including the

bilateral netting provisions, adds

unnecessary complexity to the

minimum capital standard in light of

the sophisticated risk-based capital

regulation that OFHEO is developing.

Although the minimum capital

standard is a minimum leverage ratio

standard, Congress has required that

OFHEO consider the credit risk of offbalance sheet obligations and adjust the

0.45 percent ratio to reflect the

difference between the credit risk of

interest rate and foreign exchange rate

contracts and MBS. Thus, OFHEO

believes that the adjusted ratios should

be applied to the credit equivalent

amount of interest rate and foreign

exchange rate contracts because the

credit equivalent amount best represents

the dollar amount at risk. OFHEO also

believes that bilateral netting, that is,

the offsetting of positive and negative

mark-to-market values in the

determination of a current credit

exposure used in the calculation of a

credit equivalent amount, provides a

more accurate representation of the

dollar amount at risk. Consequently,

OFHEO believes that the more complex

treatment with respect to interest rate

and foreign exchange rate contracts is

appropriate.

Paragraph 5. Collateral

Freddie Mac noted that the definition

of the term ‘‘qualifying collateral’’ in

section 1750.2 differs from the

discussion of what constitutes

qualifying collateral in paragraph 5 of

Appendix A. OFHEO does not intend

that there be any difference and has

revised the discussion in Appendix A to

conform with the definition set forth in

section 1750.2. (See the full discussion

of this comment under section 1750.2,

Qualifying collateral, above.)

Additionally, OFHEO has renumbered

paragraphs 1 and 2 of Appendix A of

the proposed regulation to ensure ease

of reading and reference.

IV. Section-by-Section Analysis

Section 1750.1 General

This section states that the regulation

sets forth the methodology for

computing the minimum capital

requirement for each Enterprise. It

further states that the board of directors

of each Enterprise is responsible for

ensuring that the Enterprise maintains

capital at a level that is sufficient to

ensure the continued financial viability

of the Enterprise and that equals or

exceeds the minimum capital

requirement.

Section 1750.2 Definitions

Section 1750.2 provides definitions

for the terms used in the regulation.

The term ‘‘affiliate’’ is defined as to

mean any entity that controls, is

controlled by, or is under common

control with, an Enterprise, except as

otherwise provided by the Director.

The term ‘‘commitment’’ is defined to

mean any contractual, legally binding

agreement that obligates an Enterprise to

purchase or to securitize mortgages.

The term ‘‘core capital’’ is defined to

mean the sum of (as determined in

accordance with generally accepted

accounting principles) the par or stated

value of outstanding common stock; the

par or stated value of outstanding

perpetual, noncumulative preferred

stock; paid-in capital; and retained

earnings. This definition does not

include debt instruments or any

amounts an Enterprise could be

required to pay at the option of an

investor to retire capital instruments.

The amount of retained earnings

includable in the calculation of core

capital is the net of the carrying value

of Treasury stock. Treasury stock is

stock that an Enterprise has issued and

subsequently acquired, but has not

retired or resold. Carrying value is

typically the amount the Enterprise paid

for the Treasury stock.

The term ‘‘Director’’ is defined to

mean the Director of OFHEO.

The term ‘‘Enterprise’’ is defined to

mean the Federal National Mortgage

Association and any affiliate thereof or

the Federal Home Loan Mortgage

Corporation and any affiliate thereof.

The term ‘‘foreign exchange rate

contracts’’ is defined to mean crosscurrency interest rate swaps, forward

foreign exchange contracts, currency

options purchased (including currency

options purchased over-the-counter),

and any other instrument that gives rise

to similar credit risks. The definition

clarifies that the term ‘‘foreign exchange

rate contracts’’ does not mean foreign

exchange rate contracts with an original

maturity of 14 calendar days or less and
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35617

32The OECD-based group of countries comprises

full members of the Organization for Economic

Cooperation and Development (OECD) regardless of

entry date, as well as countries that have concluded

special lending arrangements with the International

Monetary Fund (IMF) associated with the IMF’s

General Arrangements to Borrow, but excludes any

country that has rescheduled its external sovereign

debt within the previous 5 years. A rescheduling of

external sovereign debt generally would include

any renegotiation of terms arising from a country’s

mobility or unwillingness to meet its external debt

service obligations, but generally not include any

renegotiation to allow the borrower to take

advantage of a decline in interest rate or other

change in market conditions.

As of November 1995, the OECD countries

included the following countries: Australia,

Austria, Belgium, Canada, Denmark, Finland,

France, Germany, Greece, Iceland, Ireland, Italy,

Japan, Luxembourg, Mexico, the Netherlands, New

Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, Turkey, the United Kingdom, and the

United States; and Saudi Arabia has concluded

special lending arrangements with the IMF

associated with the IMF’s General Arrangements to

Borrow.

foreign exchange rate contracts traded

on exchanges that require daily payment

of variation margins.

The term ‘‘interest rate contracts’’ is

defined to mean single currency interest

rate swaps, basis swaps, forward rate

agreements, interest rate options

purchased (including caps, collars, and

floors purchased), over-the-counter

options purchased, and any other

instrument that gives rise to similar

credit risks (including when-issued

securities and forward deposits

accepted). The definition of the term

‘‘interest rate contracts’’ does not

include instruments traded on

exchanges that require daily payment of

variation margins.

The term ‘‘mortgage-backed security’’

is defined to mean a security,

investment, or substantially equivalent

instrument that represents an interest in

a pool of loans secured by mortgages or

deeds of trust where the principal or

interest payments to the investor in the

security or substantially equivalent

instrument are guaranteed or effectively

guaranteed by an Enterprise.

The term ‘‘multifamily credit

enhancement’’ is defined to mean any

guarantee, pledge, purchase

arrangement, or other obligation or

commitment provided or entered into

by an Enterprise with respect to

multifamily mortgages to provide credit

enhancement, liquidity, interest rate

support, and other guarantees and

enhancements for revenue bonds issued

by a state or local governmental unit

(including a housing finance agency) or

other bond issuer.

The term ‘‘1992 Act’’ is defined to

mean the Federal Housing Enterprises

Financial Safety and Soundness Act of

1992, found at Title XIII of the Housing

and Community Development Act of

1992, Pub. L. No. 102–550.

The term ‘‘notional amount’’ is

defined to mean the face value of the

underlying financial instrument(s) on

which an interest rate or foreign

exchange rate contract is based.

The term ‘‘off-balance sheet

obligation’’ is defined to mean a binding

agreement, contract, or similar

arrangement that requires or may

require future payment(s) in money or

kind by another party to an Enterprise,

or that effectively guarantees all or part

of such payment(s) to third parties

(including commitments), where such

agreement or contract is a source of

credit risk that is not included on its

balance sheet.

The term ‘‘OFHEO’’ is defined to

mean the Office of Federal Housing

Enterprise Oversight.

The term ‘‘other off-balance sheet

obligations’’ is defined to mean all offbalance sheet obligations of an

Enterprise that are not mortgage-backed

securities or substantially equivalent

instruments and that are not

resecuritized MBS such as real estate

mortgage investment conduits or similar

resecuritized instruments.

The term ‘‘perpetual, noncumulative

preferred stock’’ is defined to mean

preferred stock that does not have a

maturity date, provides the issuer the

ability and the legal right to eliminate

dividends and does not permit the

accruing or payment of impaired

dividends, and that cannot be redeemed

at the option of the holder. It is further

defined as preferred stock that has no

other provisions that will require future

redemption of the issue, in whole or in

part, or that will reset the dividend

periodically based, in whole or in part,

on the Enterprise’s current credit

standing, such as auction rate, money

market, or remarketable preferred stock,

or that may cause the dividend to

increase to a level that could create an

incentive for the issuer to redeem the

instrument, such as exploding rate

stock. For purposes of minimum capital,

perpetual, noncumulative preferred

stock must provide capital that is

available to absorb losses of the

Enterprise from any source.

The term ‘‘qualifying collateral’’ is

defined to mean cash on deposit;

securities issued or guaranteed by the

central governments of the OECD-based

group of countries,32 United States

Government agencies, or United States

Government-sponsored agencies; and

securities issued by multilateral lending

institutions or regional development

banks.

Section 1750.3 Procedures and Timing

Section 1750.3 provides that each

Enterprise must file with the Director a

minimum capital report each quarter, or

at such other times as the Director

requires, in his or her sole discretion.

The report must contain the information

that responds to all of the items required

by OFHEO in written instructions to the

Enterprise, including, but not limited to

an estimate of the minimum capital

requirement; an estimate of core capital

overage or shortfall relative to the

estimated minimum capital

requirement; and such other

information as may be required by the

Director.

This section further provides that the

report must be submitted not later than

April 30, July 30, October 30, and

January 30 of each year, and that it must

be in writing and in such other format

as may be required by the Director.

In the event an Enterprise makes an

adjustment to its financial statements

for a quarter or a date for which the

information was requested which would

cause an adjustment to a minimum

capital report, section 1750.3 requires

that the Enterprise file an amended

minimum capital report not later than 3

business days after the date of such

adjustment.

Finally, section 1750.3 provides that

each minimum capital report or any

amended minimum capital report must

contain a declaration by an officer

authorized by the board of directors of

the Enterprise to make such a

declaration, including, but not limited

to, a president, vice president, or

treasurer, that the report is true and

correct to the best of such officer’s

knowledge and belief.

Section 1750.4 Minimum Capital

Requirement Computation

Section 1750.4 sets forth the

methodology for computing the

minimum capital requirement. The

minimum capital requirement is the

sum of the following amounts:

—2.50 percent times the aggregate onbalance sheet assets of the Enterprise;

—0.45 percent times the unpaid

principal balance of mortgage-backed

securities and substantially equivalent

instruments that were issued or

guaranteed by the Enterprise;

—0.45 percent of 50 percent of the

average dollar amount of

commitments outstanding each

quarter over the preceding four

quarters;

—0.45 percent of the outstanding

principal amount of bonds with

multifamily credit enhancements;

—0.45 percent of the dollar amount of

sold portfolio remittances pending;
35618 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

33 12 U.S.C. 4618.

—3.00 percent of the credit equivalent

amount of interest rate contracts and

foreign exchange rate contracts,

except to the extent of the current

market value of posted qualifying

collateral, computed in accordance

with Appendix A; 1.50 percent of the

market value of qualifying collateral

posted to secure interest rate and

foreign exchange rate contracts, not to

exceed the credit equivalent amount

of such contracts, computed in

accordance with Appendix A; and

—0.45 percent of the outstanding

amount, credit equivalent amount, or

other measure determined appropriate

by the Director, of other off-balance

sheet obligations (excluding

commitments, multifamily credit

enhancements, sold portfolio

remittances pending, and interest rate

contracts and foreign exchange rate

contracts), except as adjusted by the

Director to reflect differences in the

credit risk of such obligations in

relation to mortgage-backed securities.

In the event that any asset or financial

obligation is properly classifiable in

more than one of the above categories,

section 1750.4 provides that, for

minimum capital purposes, the asset or

financial obligation must be classified in

the category that yields the highest

minimum capital requirement.

The section further explains that the

term ‘‘preceding four quarters’’ means

the last day of the quarter just ended (or

the date for which the minimum capital

report is filed, if different), and the three

preceding quarter-ends.

Section 1750.5 Notice of Capital

Classification

Section 1750.5 states that not later

than 60 calendar days after the date for

which the minimum capital report is

filed, OFHEO will provide each

Enterprise with a notice of proposed

capital classification in accordance with

section 1368 of the 1992 Act.33 The

notice of proposed capital classification

includes the proposed minimum capital

requirement and the summary

computation of the proposed minimum

capital requirement.

Each Enterprise has a period of 30

calendar days following receipt of a

notice of proposed capital classification

to submit a response. The response

period may be extended for up to 30

additional calendar days at the sole

discretion of the Director. The Director

may shorten the response period with

the consent of the Enterprise or without

such consent if the Director determines

that the condition of the Enterprise

requires a shorter response period.

Section 1750.5 further provides that

the Director must take into

consideration any response to the notice

of proposed capital classification

received from the Enterprise and must

issue a notice of final capital

classification for each Enterprise not

later than 30 calendar days following

the end of the response period.

Appendix A to Subpart A of Part 1750—

Minimum Capital Components for

Interest Rate and Foreign Exchange Rate

Contracts

Calculation of Credit Equivalent

Amounts

Appendix A provides that the

minimum capital components for

interest rate and foreign exchange rate

contracts are computed on the basis of

the credit equivalent amounts of such

contracts. The credit equivalent amount

of an off-balance sheet interest rate or

foreign exchange rate contract that is not

subject to a qualifying bilateral netting

contract in accordance with Appendix

A is equal to the sum of the current

exposure (sometimes referred to as the

replacement cost) of the contract and an

estimate of the potential future credit

exposure over the remaining life of the

contract.

The current exposure is determined

by the mark-to-market value of the

contract. If the mark-to-market value is

positive, then the current exposure is

the mark-to-market value. If the mark-tomarket value is zero or negative, then

the current exposure is zero. Mark-tomarket values are measured in United

States dollars, regardless of the currency

or currencies specified in the contract,

and should reflect changes in the

relevant rates as well as counterparty

credit quality.

The potential future credit exposure

of a contract, including a contract with

a negative mark-to-market value, is

estimated by multiplying the notional

principal amount of the contract by a

credit conversion factor. The effective

rather than the apparent or stated

notional amount must be used in this

calculation. The credit conversion

factors for interest rate contracts are 0.0

percent for interest rate contracts with a

remaining maturity of 1 year or less; 0.5

percent for interest rate contracts with a

remaining maturity of over 1 year; 1.0

percent for foreign exchange rate

contracts with a remaining maturity of

1 year or less; and 5.0 percent for

foreign exchange rate contracts with a

remaining maturity of over 1 year.

Because foreign exchange rate

contracts involve an exchange of

principal upon maturity, and foreign

exchange rates are generally more

volatile than interest rates, higher

conversion factors have been

established for foreign exchange rate

contracts than for interest rate contracts.

No potential future credit exposure is

calculated for single currency interest

rate swaps in which payments are made

based upon two floating rate indexes,

so-called floating/floating or basis

swaps. The credit exposure on these

contracts is evaluated solely on the basis

of their mark-to-market values.

Avoidance of Double Counting

Appendix A provides that, in certain

cases, credit exposures arising from the

interest rate and foreign exchange rate

contracts covered by this Appendix A

may already be reflected, in part, on the

balance sheet. To avoid double counting

such exposures in the assessment of

capital adequacy, counterparty credit

exposures arising from the types of

instruments covered by this Appendix

A may need to be excluded from

balance sheet assets in calculating the

minimum capital requirement.

Collateral

Appendix A provides that the

sufficiency of collateral for off-balance

sheet items is determined by the market

value of the collateral in relation to the

credit equivalent amount. Collateral

held against a netting contract is not

recognized for minimum capital

standard purposes unless it is legally

available to support the single legal

obligation created by the netting

contract. Excess collateral held against

one contract or a group of contracts for

which a recognized netting agreement

exists may not be considered.

The only forms of collateral that are

formally recognized by the minimum

capital standard framework are cash on

deposit; securities issued or guaranteed

by the central governments of the

OECD-based group of countries, United

States Government agencies, or United

States Government-sponsored agencies;

and securities issued by multilateral

lending institutions or regional

development banks.

Netting

For purposes of Appendix A, netting

refers to the offsetting of positive and

negative mark-to-market values in the

determination of a current exposure to

be used in the calculation of a credit

equivalent amount. Any legally

enforceable form of bilateral netting

(that is, netting with a single

counterparty) of interest rate and foreign

exchange rate contracts is recognized for

purposes of calculating the credit

equivalent amount if it meets the

following requirements. Netting is
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35619

34 60 FR 46170 (Sept. 5, 1995).

accomplished under a written netting

contract that creates a single legal

obligation, covering all included

individual contracts, with the effect that

the Enterprise would have a claim to

receive, or obligation to pay, only the

net amount of the sum of the positive

and negative mark-to-market values on

included individual contracts in the

event that a counterparty, or a

counterparty to whom the contract has

been validly assigned, fails to perform

due to default, insolvency, liquidation,

or similar circumstances.

The Enterprise must obtain a written

and reasoned legal opinion(s)

representing that in the event of a legal

challenge—including one resulting from

default, insolvency, liquidation, or

similar circumstances—the relevant

court and administrative authorities

would find the Enterprise’s exposure to

be such a net amount under—

—the law of the jurisdiction in which

the counterparty is chartered or the

equivalent location in the case of

noncorporate entities, and if a branch

of the counterparty is involved, then

also under the law of the jurisdiction

in which the branch is located;

—the law that governs the individual

contracts covered by the netting

contract; and

—the law that governs the netting

contract.

The Enterprise must establish and

maintain procedures to ensure that the

legal characteristics of netting contracts

are kept under review in the event of

possible changes in relevant law.

Furthermore, the Enterprise must

maintain in its files documentation

adequate to support the netting of rate

contracts, including a copy of the

bilateral netting contract and necessary

legal opinions.

A contract containing a walkaway

clause is not eligible for netting for

purposes of calculating the credit

equivalent amount. A walkaway clause

is a provision in a netting contract that

permits a non-defaulting counterparty to

make lower payments than it would

make otherwise under the contract, or

no payment at all, to a defaulter or to

the estate of a defaulter, even if the

defaulter or the estate of the defaulter is

a net creditor under the contract.

By netting individual contracts for the

purpose of calculating its credit

equivalent amount, the Enterprise

represents that it has met the

requirements of Appendix A, and that

all the appropriate documents are in the

Enterprise’s files and available for

inspection by OFHEO. OFHEO may

determine that an Enterprise’s files are

inadequate or that a netting contract, or

any of its underlying individual

contracts, may not be legally enforceable

under any one of the bodies of law

described in Appendix A. If such a

determination is made, the netting

contract may be disqualified from

recognition for minimum capital

standard purposes or underlying

individual contracts may be treated as

though they are not subject to the

netting contract.

The credit equivalent amount of

interest rate and foreign exchange rate

contracts that are subject to a qualifying

bilateral netting contract is calculated

by adding the current exposure of the

netting contract and the sum of the

estimates of the potential future credit

exposures on all individual contracts

subject to the netting contract, estimated

in accordance with Appendix A.

Offsetting contracts in the same

currency maturing on the same date will

have lower potential future exposure as

well as lower current exposure.

Therefore, for purposes of calculating

potential future credit exposure to a

netting counterparty for foreign

exchange rate contracts, and other

similar contracts in which notional

principal is equivalent to cash flows,

total notional principal is defined as the

net receipts falling due on each value

date in each currency.

The current exposure of the netting

contract is determined by summing all

positive and negative mark-to-market

values of the individual contracts

included in the netting contract. If the

net sum of the mark-to-market values is

positive, then the current exposure of

the netting contract is equal to that sum.

If the net sum of the mark-to-market

values is zero or negative, then the

current exposure of the netting contract

is zero. OFHEO may determine that a

netting contract qualifies for netting

treatment even though certain

individual contracts may not qualify. In

such instances, the nonqualifying

contracts should be treated as

individual contracts that are not subject

to the netting contract.

In the event a netting contract covers

contracts that are normally excluded

from the minimum capital requirement

computation—for example, foreign

exchange rate contracts with an original

maturity of 14 calendar days or less, or

instruments traded on exchanges that

require daily payment of variation

margin—an Enterprise may elect

consistently either to include or exclude

all mark-to-market values of such

contracts when determining net current

exposure.

As stated in the preamble to the

proposed regulation, in developing

Appendix A, OFHEO considered

provisions of the regulations of the

federal banking agencies with respect to

the calculation of the credit equivalent

amount for interest rate and foreign

exchange rate contracts. Subsequent to

the publication of the proposed

Minimum Capital regulation, the federal

banking agencies amended their

regulations with respect to interest rate

and foreign exchange rate contracts.34

The amendments increase the number

of credit conversion factors that are used

to measure the potential future credit

exposure of interest rate and foreign

exchange rate contracts. They also

change the way the potential future

credit exposure is calculated when the

interest rate and foreign exchange rate

contracts are subject to a qualifying

bilateral netting agreement, resulting in

a reduction in the amount of capital

required for the netted interest rate and

foreign exchange rate contracts.

OFHEO is analyzing those

amendments and considering whether

to conform Appendix A to the final

regulations of the federal banking

agencies. Based on the results of that

analysis, OFHEO will publish a

proposal, as appropriate.

Regulatory Impact

Executive Order 12606, The Family

This regulation does not have

potential for significant impact on

family formulation, maintenance, and

general well-being, and thus is not

subject to review under Executive Order

12606.

Executive Order 12612, Federalism

This regulation has no federalism

implications that warrant the

preparation of a Federalism Assessment

in accordance with Executive Order

12612.

Executive Order 12866, Regulatory

Planning and Review

This regulation has been reviewed by

the Office of Management and Budget

pursuant to Executive Order 12866.

Executive Order 12988, Civil Justice

Reform

This proposed regulation meets the

applicable standards of sections 3(a) and

(b) of Executive Order 12988.

Unfunded Mandates Reform Act of 1995

The regulation does not require the

preparation of an assessment statement

in accordance with the Unfunded

Mandates Reform Act of 1995.

Assessment statements are not required

for regulations that incorporate

requirements specifically set forth in
35620 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

law. As explained in the preamble, this

regulation implements the minimum

capital standard contained in the 1992

Act. In addition, this regulation does not

include a federal mandate that may

result in the expenditure by State, local,

and tribal governments, in the aggregate,

or by the private sector, of $100,000,000

or more (adjusted annually for inflation)

in any 1 year.

Regulatory Flexibility Act

This regulation is applicable only to

the Enterprises, which are not small

entities for purposes of the Regulatory

Flexibility Act, and does not have a

significant effect on a substantial

number of small entities. Therefore, the

General Counsel of OFHEO has certified

that the final regulation will not have

significant economic impact on a

substantial number of small entities.

Paperwork Reduction Act

This regulation contains no

information collection requirements that

require the approval of the Office of

Management and Budget pursuant to the

Paperwork Reduction Act of 1980, 44

U.S.C. 3501 et seq.

List of Subjects in 12 CFR Part 1750

Banks, banking, Federal Home Loan

Mortgage Corporation, Federal National

Mortgage Association, Mortgages,

Securities.

Accordingly, for the reasons set forth

in the preamble, OFHEO amends

Chapter XVII of Title 12 of the Code of

Federal Regulations by adding Part 1750

to read as follows:

PART 1750—CAPITAL

Subpart A—Minimum Capital

Sec.

1750.1 General.

1750.2 Definitions.

1750.3 Procedure and timing.

1750.4 Minimum capital requirement

computation.

1750.5 Notice of capital classification.

Appendix A to Subpart A of Part

1750—Minimum Capital Components

for Interest Rate and Foreign Exchange

Rate Contracts

Subpart B—[Reserved]

Authority: 12 U.S.C. 4513, 4514, 4612,

4614, 4618.

Subpart A—Minimum Capital

§ 1750.1 General.

The regulation contained in this

subpart A sets forth the methodology for

computing the minimum capital

requirement for each Enterprise. The

board of directors of each Enterprise is

responsible for ensuring that the

Enterprise maintains capital at a level

that is sufficient to ensure the continued

financial viability of the Enterprise and

that equals or exceeds the minimum

capital requirement contained in this

subpart A.

§ 1750.2 Definitions.

For purposes of this subpart A, the

following definitions shall apply:

Affiliate means any entity that

controls, is controlled by, or is under

common control with, an Enterprise,

except as otherwise provided by the

Director.

Commitment means any contractual,

legally binding agreement that obligates

an Enterprise to purchase or to

securitize mortgages.

Core Capital—(1) Means the sum of

(as determined in accordance with

generally accepted accounting

principles)—

(i) The par or stated value of

outstanding common stock;

(ii) The par or stated value of

outstanding perpetual, noncumulative

preferred stock;

(iii) Paid-in capital; and

(iv) Retained earnings; and

(2) Does not include debt instruments

or any amounts the Enterprise could be

required to pay at the option of an

investor to retire capital instruments.

Director means the Director of

OFHEO.

Enterprise means the Federal National

Mortgage Association and any affiliate

thereof or the Federal Home Loan

Mortgage Corporation and any affiliate

thereof.

Foreign exchange rate contracts—

(1) Means cross-currency interest rate

swaps, forward foreign exchange

contracts, currency options purchased

(including currency options purchased

over-the-counter), and any other

instrument that gives rise to similar

credit risks; and

(2) Does not mean foreign exchange

rate contracts with an original maturity

of 14 calendar days or less and foreign

exchange rate contracts traded on

exchanges that require daily payment of

variation margins.

Interest rate contracts—

(1) Means single currency interest rate

swaps, basis swaps, forward rate

agreements, interest rate options

purchased (including caps, collars, and

floors purchased), over-the-counter

options purchased, and any other

instrument that gives rise to similar

credit risks (including when-issued

securities and forward deposits

accepted); and

(2) Does not mean such instruments

traded on exchanges that require daily

payment of variation margins.

Mortgage-backed security means a

security, investment, or substantially

equivalent instrument that represents an

interest in a pool of loans secured by

mortgages or deeds of trust where the

principal or interest payments to the

investor in the security or substantially

equivalent instrument are guaranteed or

effectively guaranteed by an Enterprise.

Multifamily credit enhancement

means any guarantee, pledge, purchase

arrangement, or other obligation or

commitment provided or entered into

by an Enterprise with respect to

multifamily mortgages to provide credit

enhancement, liquidity, interest rate

support, and other guarantees and

enhancements for revenue bonds issued

by a state or local governmental unit

(including a housing finance agency) or

other bond issuer.

1992 Act means the Federal Housing

Enterprises Financial Safety and

Soundness Act of 1992, found at Title

XIII of the Housing and Community

Development Act of 1992, Pub. L. 102–

550, 12 U.S.C. 4501 et seq.

Notional amount means the face value

of the underlying financial

instrument(s) on which an interest rate

or foreign exchange rate contract is

based.

Off-balance sheet obligation means a

binding agreement, contract, or similar

arrangement that requires or may

require future payment(s) in money or

kind by another party to an Enterprise,

or that effectively guarantees all or part

of such payment(s) to third parties

(including commitments), where such

agreement or contract is a source of

credit risk that is not included on its

balance sheet.

OFHEO means the Office of Federal

Housing Enterprise Oversight.

Other off-balance sheet obligations

means all off-balance sheet obligations

of an Enterprise that are not mortgagebacked securities or substantially

equivalent instruments and that are not

resecuritized mortgage-backed

securities, such as real estate mortgage

investment conduits or similar

resecuritized instruments.

Perpetual, noncumulative preferred

stock means preferred stock that—

(1) Does not have a maturity date;

(2) Provides the issuer the ability and

the legal right to eliminate dividends

and does not permit the accruing or

payment of impaired dividends;

(3) Cannot be redeemed at the option

of the holder; and

(4) Has no other provisions that will

require future redemption of the issue,

in whole or in part, or that will reset the

dividend periodically based, in whole

or in part, on the Enterprise’s current

credit standing, such as auction rate,
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35621

1The OECD-based group of countries comprises

full members of the Organization for Economic

Cooperation and Development (OECD) regardless of

entry date, as well as countries that have concluded

special lending arrangements with the International

Monetary Fund (IMF) associated with the IMF’s

General Arrangements to Borrow, but excludes any

country that has rescheduled its external sovereign

debt within the previous 5 years. A rescheduling of

external sovereign debt generally would include

any renegotiation of terms arising from a country’s

mobility or unwillingness to meet its external debt

service obligations, but generally not include any

renegotiation to allow the borrower to take

advantage of a decline in interest rate or other

change in market conditions. As of November 1995,

the OECD countries included the following

countries: Australia, Austria, Belgium, Canada,

Denmark, Finland, France, Germany, Greece,

Iceland, Ireland, Italy, Japan, Luxembourg, Mexico,

the Netherlands, New Zealand, Norway, Portugal,

Spain, Sweden, Switzerland, Turkey, the United

Kingdom, and the United States; and Saudi Arabia

has concluded special lending arrangements with

the IMF associated with the IMF’s General

Arrangements to Borrow.

money market, or remarketable

preferred stock, or that may cause the

dividend to increase to a level that

could create an incentive for the issuer

to redeem the instrument, such as

exploding rate stock.

Qualifying collateral means cash on

deposit; securities issued or guaranteed

by the central governments of the

OECD-based group of countries,1 United

States Government agencies, or United

States Government-sponsored agencies;

and securities issued by multilateral

lending institutions or regional

development banks.

§ 1750.3 Procedure and timing.

(a) Each Enterprise shall file with the

Director a minimum capital report each

quarter or at such other times as the

Director requires, in his or her sole

discretion. The report shall contain the

information that responds to all of the

items required by OFHEO in written

instructions to the Enterprise, including,

but not limited to:

(1) Estimate of the minimum capital

requirement;

(2) Estimate of core capital overage or

shortfall relative to the estimated

minimum capital requirement;

(3) Such other information as may be

required by the Director.

(b) The quarterly minimum capital

report shall be submitted not later than

April 30, July 30, October 30, and

January 30 of each year.

(c) Each minimum capital report shall

be submitted in writing and in such

other format as may be required by the

Director.

(d) In the event an Enterprise makes

an adjustment to its financial statements

for a quarter or a date for which the

information was requested, which

would cause an adjustment to a

minimum capital report, the Enterprise

shall file with the Director an amended

minimum capital report not later than 3

business days after the date of such

adjustment.

(e) Each minimum capital report or

any amended minimum capital report

shall contain a declaration by an officer

authorized by the board of directors of

the Enterprise to make such a

declaration, including, but not limited

to a president, vice president, or

treasurer, that the report is true and

correct to the best of such officer’s

knowledge and belief.

§ 1750.4 Minimum capital requirement

computation.

(a) The minimum capital requirement

for each Enterprise shall be computed

by adding the following amounts:

(1) 2.50 percent times the aggregate

on-balance sheet assets of the

Enterprise;

(2) 0.45 percent times the unpaid

principal balance of mortgage-backed

securities and substantially equivalent

instruments that were issued or

guaranteed by the Enterprise;

(3) 0.45 percent of 50 percent of the

average dollar amount of commitments

outstanding each quarter over the

preceding four quarters;

(4) 0.45 percent of the outstanding

principal amount of bonds with

multifamily credit enhancements;

(5) 0.45 percent of the dollar amount

of sold portfolio remittances pending;

(6)(i) 3.00 percent of the credit

equivalent amount of interest rate

contracts and foreign exchange rate

contracts, except to the extent of the

current market value of posted

qualifying collateral, computed in

accordance with appendix A to this

subpart;

(ii) 1.50 percent of the market value

of qualifying collateral posted to secure

interest rate and foreign exchange rate

contracts, not to exceed the credit

equivalent amount of such contracts,

computed in accordance with appendix

A to this subpart; and

(7) 0.45 percent of the outstanding

amount, credit equivalent amount, or

other measure determined appropriate

by the Director, of other off-balance

sheet obligations (excluding

commitments, multifamily credit

enhancements, sold portfolio

remittances pending, and interest rate

contracts and foreign exchange rate

contracts), except as adjusted by the

Director to reflect differences in the

credit risk of such obligations in relation

to mortgage-backed securities.

(b) Any asset or financial obligation

that is properly classifiable in more than

one of the categories enumerated in

paragraphs (a) (1) through (7) of this

section shall be classified in the

category that yields the highest

minimum capital requirement.

(c) As used in this section, the term

‘‘preceding four quarters’’ means the last

day of the quarter just ended (or the date

for which the minimum capital report is

filed, if different), and the three

preceding quarter-ends.

§ 1750.5 Notice of capital classification.

(a) Pursuant to section 1364 of the

1992 Act (12 U.S.C. 4614), OFHEO is

required to determine the capital

classification of each Enterprise on a not

less than quarterly basis.

(b) The determination of the capital

classification shall be made following a

notice to, and opportunity to respond

by, the Enterprise.

(1) Not later than 60 calendar days

after the date for which the minimum

capital report is filed, OFHEO will

provide each Enterprise with a notice of

proposed capital classification in

accordance with section 1368 of the

1992 Act (12 U.S.C. 4618). The notice

shall contain the following

information—

(i) The proposed capital classification;

(ii) The proposed minimum capital

requirement; and

(iii) The summary computation of the

proposed minimum capital requirement.

(2) Each Enterprise shall have a

period of 30 calendar days following

receipt of a notice of proposed capital

classification to submit a response

regarding the proposed capital

classification. The response period may

be extended for up to 30 additional

calendar days at the sole discretion of

the Director. The Director may shorten

the response period with the consent of

the Enterprise, or without such consent

if the Director determines that the

condition of the Enterprise requires a

shorter period.

(3) The Director shall take into

consideration any response to the notice

of proposed capital classification

received from the Enterprise and shall

issue a notice of final capital

classification for each Enterprise not

later than 30 calendar days following

the end of the response period in

accordance with section 1368 of the

1992 Act (12 U.S.C. 4618).

Appendix A to Subpart A of Part

1750—Minimum Capital Components

for Interest Rate and Foreign Exchange

Rate Contracts

1. The minimum capital components for

interest rate and foreign exchange rate

contracts are computed on the basis of the

credit equivalent amounts of such contracts.

Credit equivalent amounts are computed for

each of the following off-balance sheet
35622 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations

1A walkaway clause is a provision in a netting

contract that permits a non-defaulting counterparty

to make lower payments than it would make

otherwise under the contract, or no payment at all,

to a defaulter or to the estate of a defaulter, even

if the defaulter or the estate of the defaulter is a net

creditor under the contract.

interest rate and foreign exchange rate

contracts:

a. Interest Rate Contracts

i. Single currency interest rate swaps.

ii. Basis swaps.

iii. Forward rate agreements.

iv. Interest rate options purchased

(including caps, collars, and floors

purchased).

v. Any other instrument that gives rise to

similar credit risks (including when-issued

securities and forward deposits accepted).

b. Foreign Exchange Rate Contracts

i. Cross-currency interest rate swaps.

ii. Forward foreign exchange rate contracts.

iii. Currency options purchased.

iv. Any other instrument that gives rise to

similar credit risks.

2. Foreign exchange rate contracts with an

original maturity of 14 calendar days or less

and foreign exchange rate contracts traded on

exchanges that require daily payment of

variation margins are excluded from the

minimum capital requirement computation.

Over-the-counter options purchased,

however, are included and treated in the

same way as the other interest rate and

foreign exchange rate contracts.

3. Calculation of Credit Equivalent Amounts

a. The minimum capital components for

interest rate and foreign exchange rate

contracts are computed on the basis of the

credit equivalent amounts of such contracts.

The credit equivalent amount of an offbalance sheet interest rate and foreign

exchange rate contract that is not subject to

a qualifying bilateral netting contract in

accordance with this appendix A is equal to

the sum of the current exposure (sometimes

referred to as the replacement cost) of the

contract and an estimate of the potential

future credit exposure over the remaining life

of the contract.

b. The current exposure is determined by

the mark-to-market value of the contract. If

the mark-to-market value is positive, then the

current exposure is the mark-to-market value.

If the mark-to-market value is zero or

negative, then the current exposure is zero.

Mark-to-market values are measured in

United States dollars, regardless of the

currency or currencies specified in the

contract, and should reflect changes in the

relevant rates, as well as counterparty credit

quality.

c. The potential future credit exposure of

a contract, including a contract with a

negative mark-to-market value, is estimated

by multiplying the notional principal amount

of the contract by a credit conversion factor.

The effective rather than the apparent or

stated notional amount must be used in this

calculation. The credit conversion factors are:

Remaining

maturity

Interest rate

contracts

(percent)

Foreign exchange rate

contracts (percent)

1 year or

less ........ 0.0 1.0

Over 1 year 0.5 5.0

d. Because foreign exchange rate contracts

involve an exchange of principal upon

maturity, and foreign exchange rates are

generally more volatile than interest rates,

higher conversion factors have been

established for foreign exchange rate

contracts than for interest rate contracts.

e. No potential future credit exposure is

calculated for single currency interest rate

swaps in which payments are made based

upon two floating rate indexes, so-called

floating/floating or basis swaps. The credit

exposure on these contracts is evaluated

solely on the basis of their mark-to-market

values.

4. Avoidance of Double Counting

In certain cases, credit exposures arising

from the interest rate and foreign exchange

instruments covered by this appendix A may

already be reflected, in part, on the balance

sheet. To avoid double counting such

exposures in the assessment of capital

adequacy, counterparty credit exposures

arising from the types of instruments covered

by this appendix A may need to be excluded

from balance sheet assets in calculating the

minimum capital requirement.

5. Collateral

a. The sufficiency of collateral for offbalance sheet items is determined by the

market value of the collateral in relation to

the credit equivalent amount. Collateral held

against a netting contract is not recognized

for minimum capital standard purposes

unless it is legally available to support the

single legal obligation created by the netting

contract. Excess collateral held against one

contract or a group of contracts for which a

recognized netting agreement exists may not

be considered.

b. The only forms of collateral that are

formally recognized by the minimum capital

standard framework are cash on deposit;

securities issued or guaranteed by the central

governments of the OECD-based group of

countries, United States Government

agencies, or United States Governmentsponsored agencies; and securities issued by

multilateral lending institutions or regional

development banks.

6. Netting

a. For purposes of this appendix A, netting

refers to the offsetting of positive and

negative mark-to-market values in the

determination of a current exposure to be

used in the calculation of a credit equivalent

amount. Any legally enforceable form of

bilateral netting (that is, netting with a single

counterparty) of interest rate and foreign

exchange rate contracts is recognized for

purposes of calculating the credit equivalent

amount provided that the following criteria

are met:

i. Netting must be accomplished under a

written netting contract that creates a single

legal obligation, covering all included

individual contracts, with the effect that the

Enterprise would have a claim to receive, or

obligation to pay, only the net amount of the

sum of the positive and negative mark-tomarket values on included individual

contracts in the event that a counterparty, or

a counterparty to whom the contract has been

validly assigned, fails to perform due to

default, insolvency, liquidation, or similar

circumstances.

ii. The Enterprise must obtain a written

and reasoned legal opinion(s) representing

that in the event of a legal challenge—

including one resulting from default,

insolvency, liquidation, or similar

circumstances—the relevant court and

administrative authorities would find the

Enterprise’s exposure to be such a net

amount under—

A. The law of the jurisdiction in which the

counterparty is chartered or the equivalent

location in the case of noncorporate entities,

and if a branch of the counterparty is

involved, then also under the law of the

jurisdiction in which the branch is located;

B. The law that governs the individual

contracts covered by the netting contract; and

C. The law that governs the netting

contract.

iii. The Enterprise must establish and

maintain procedures to ensure that the legal

characteristics of netting contracts are kept

under review in the event of possible changes

in relevant law.

iv. The Enterprise must maintain in its files

documentation adequate to support the

netting of rate contracts, including a copy of

the bilateral netting contract and necessary

legal opinions.

b. A contract containing a walkaway clause

is not eligible for netting for purposes of

calculating the credit equivalent amount.1

c. By netting individual contracts for the

purpose of calculating its credit equivalent

amount, the Enterprise represents that it has

met the requirements of this appendix A and

all the appropriate documents are in the

Enterprise’s files and available for inspection

by OFHEO. OFHEO may determine that an

Enterprise’s files are inadequate or that a

netting contract, or any of its underlying

individual contracts, may not be legally

enforceable under any one of the bodies of

law described in this appendix A. If such a

determination is made, the netting contract

may be disqualified from recognition for

minimum capital standard purposes or

underlying individual contracts may be

treated as though they are not subject to the

netting contract.

d. The credit equivalent amount of interest

rate and foreign exchange rate contracts that

are subject to a qualifying bilateral netting

contract is calculated by adding the current

exposure of the netting contract and the sum

of the estimates of the potential future credit

exposures on all individual contracts subject

to the netting contract, estimated in

accordance with paragraph 3 of this

appendix A. Offsetting contracts in the same

currency maturing on the same date will

have lower potential future exposure as well

as lower current exposure. Therefore, for

purposes of calculating potential future

credit exposure to a netting counterparty for

foreign exchange rate contracts and other

similar contracts in which notional principal
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Rules and Regulations 35623

is equivalent to cash flows, total notional

principal is defined as the net receipts falling

due on each value date in each currency.

e. The current exposure of the netting

contract is determined by summing all

positive and negative mark-to-market values

of the individual contracts included in the

netting contract. If the net sum of the markto-market values is positive, then the current

exposure of the netting contract is equal to

that sum. If the net sum of the mark-tomarket values is zero or negative, then the

current exposure of the netting contract is

zero. OFHEO may determine that a netting

contract qualifies for minimum capital

standard netting treatment even though

certain individual contracts may not qualify.

In such instances, the nonqualifying

contracts should be treated as individual

contracts that are not subject to the netting

contract.

f. In the event a netting contract covers

contracts that are normally excluded from the

minimum capital requirement computation—

for example, foreign exchange rate contracts

with an original maturity of 14 calendar days

or less, or instruments traded on exchanges

that require daily payment of variation

margin—an Enterprise may elect consistently

either to include or exclude all mark-tomarket values of such contracts when

determining net current exposure.

Subpart B—[Reserved]

Aida Alvarez,

Director, Office of Federal Housing Enterprise

Oversight.

[FR Doc. 96–17120 Filed 7–5–96; 8:45 am]

BILLING CODE 4220–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 73

[Airspace Docket No. 96–AWP–12]

Change Time of Designation for

Restricted Area R–3107, Kaula Rock;

HI

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Final rule.

SUMMARY: This action reduces the time

of designation for Restricted Area 3107

(R–3107), Kaula Rock, HI, to accurately

reflect actual times of use. This

administrative change, initiated by the

U.S. Navy, will not affect the

boundaries, designated altitudes, or

activities conducted within the

restricted area.

EFFECTIVE DATE: 0901 UTC, October 10,

1996.

FOR FURTHER INFORMATION CONTACT:

Steve Brown, Airspace and Rules

Division, ATA–400, Office of Air Traffic

Airspace Management, Federal Aviation

Administration, 800 Independence

Avenue, SW., Washington, DC 20591;

telephone: (202) 267–8783.

SUPPLEMENTARY INFORMATION:

The Rule

This amendment to part 73 of the

Federal Aviation Regulations reduces

the time of designation for R–3107,

Kaula Rock, HI, to accurately reflect

actual times of use. This administrative

change, initiated by the U.S. Navy, will

not affect the boundaries, designated

altitudes, or activities conducted within

the restricted area. Therefore, I find that

notice and public procedure under 5

U.S.C. 553(b) are unnecessary because

this action is a minor technical

amendment in which the public would

not be particularly interested. Section

73.31 of part 73 of the Federal Aviation

Regulations was republished in FAA

Order 7400.8C dated June 29, 1995.

The FAA has determined that this

regulation only involves an established

body of technical regulations for which

frequent and routine amendments are

necessary to keep them operationally

current. It, therefore—(1) is not a

‘‘significant regulatory action’’ under

Executive Order 12866; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

regulatory evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this rule will not have

a significant economic impact on a

substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

Environmental Review

This action reduces the restricted

area’s time of designation. In accordance

with FAA Order 1050.1D, ‘‘Policies and

Procedures for Considering

Environmental Impacts,’’ this action is

not subject to environmental

assessments and procedures and the

National Environmental Policy Act.

List of Subjects in 14 CFR Part 73

Airspace, Navigation (air).

Adoption of the Amendment

In consideration of the foregoing, the

Federal Aviation Administration

amends 14 CFR part 73 as follows:

PART 73—[AMENDED]

1. The authority citation for part 73

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389; 14 CFR 11.69.

§ 73.31 [Amended]

2. Section 73.31 is amended as

follows:

R–3107 Kaula Rock, HI. [Amended]

By removing the current time of

designation and substituting the

following:

Time of designation. 0700–2200 local

time Monday-Friday; 0800–1600 local

time Saturday-Sunday; other times by

NOTAM issued at least 24 hours in

advance.

Issued in Washington, DC, on June 28,

1996.

Nancy B. Kalinowski,

Acting Program Director for Air Traffic

Airspace Management.

[FR Doc. 96–17231 Filed 7–5–96; 8:45 am]

BILLING CODE 4910–13–P

14 CFR Part 97

[Docket No. 28615; Amdt. No. 1739]

RIN 2120–AA65

Standard Instrument Approach

Procedures; Miscellaneous

Amendments

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Final rule.

SUMMARY: This amendment establishes,

amends, suspends, or revokes Standard

Instrument Approach Procedures

(SIAPs) for operations at certain

airports. These regulatory actions are

needed because of the adoption of new

or revised criteria, or because of changes

occurring in the National Airspace

System, such as the commissioning of

new navigational facilities, addition of

new obstacles, or changes in air traffic

requirements. These changes are

designed to provide safe and efficient

use of the navigable airspace and to

promote safe flight operations under

instrument flight rules at the affected

airports.

DATES: An effective date for each SIAP

is specified in the amendatory

provisions.

Incorporation by reference-approved

by the Director of the Federal Register

on December 31, 1980, and reapproved

as of January 1, 1982.

ADDRESSES: Availability of matters

incorporated by reference in the

amendment is as follows:.

For Examination—

1. FAA Rules Docket, FAA

Headquarters Building, 800