66718 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

presented for evidentiary purposes (see

28 U.S.C. 1733).

§ 1707.209 Procedure when a decision is

not made prior to the time a response is

required.

If a response to a demand or request

is required before the General Counsel

can make the determination referred to

in § 1707.201, the General Counsel,

when necessary, will provide the court

or other competent authority with a

copy of this part, inform the court or

other competent authority that the

demand or request is being reviewed,

and seek a stay of the demand or request

pending a final determination.

§ 1707.210 Procedure in the event of an

adverse ruling.

If the court or other competent

authority fails to stay the demand, the

employee upon whom the demand is

made, unless otherwise advised by the

General Counsel, will appear at the

stated time and place, produce a copy

of this part, state that the employee has

been advised by counsel not to provide

the requested testimony or produce

documents, and respectfully decline to

comply with the demand, citing United

States ex rel. Touhy v. Ragen, 340 U.S.

462 (1951). A written response may be

offered to a request, or to a demand, if

permitted by the court or other

competent authority.

Subpart C—Schedule of Fees

§ 1707.301 Fees.

(a) Generally. The General Counsel

may condition the production of records

or appearance for testimony upon

advance payment of a reasonable

estimate of the costs to DNFSB.

(b) Fees for records. Fees for

producing records will include fees for

searching, reviewing, and duplicating

records, costs of attorney time spent in

reviewing the demand or request, and

expenses generated by materials and

equipment used to search for, produce,

and copy the responsive information.

Costs for employee time will be

calculated on the basis of the hourly pay

of the employee (including all pay,

allowance, and benefits). Fees for

duplication will be the same as those

charged by DNFSB in its Freedom of

Information Act fee regulations at 10

CFR part 1703.

(c) Witness fees. Fees for attendance

by a witness will include fees, expenses,

and allowances prescribed by the

court’s rules. If no such fees are

prescribed, witness fees will be

determined based upon the rule of the

Federal district court closest to the

location where the witness will appear.

Such fees will include cost of time spent

by the witness to prepare for testimony,

in travel, and for attendance in the legal

proceeding.

(d) Payment of fees. You must pay

witness fees for current DNFSB

employees and any records certification

fees by submitting to the General

Counsel a check or money order for the

appropriate amount made payable to the

Treasury of the United States. In the

case of testimony by former DNFSB

employees, you must pay applicable

fees directly to the former employee in

accordance with 28 U.S.C. 1821 or other

applicable statutes.

(e) Certification (authentication) of

copies of records. The Defense Nuclear

Facilities Safety Board may certify that

records are true copies in order to

facilitate their use as evidence. If you

seek certification, you must request

certified copies from DNFSB at least 45

days before the date they will be

needed. The request should be sent to

the General Counsel. You will be

charged a certification fee of $15.00 for

each document certified.

(f) Waiver or reduction of fees. The

General Counsel, in his or her sole

discretion, may, upon a showing of

reasonable cause, waive or reduce any

fees in connection with the testimony,

production, or certification of records.

(g) De minimis fees. Fees will not be

assessed if the total charge would be

$10.00 or less.

Subpart D—Penalties

§ 1707.401 Penalties.

(a) An employee who discloses

official records or information or gives

testimony relating to official

information, except as expressly

authorized by DNFSB or as ordered by

a Federal court after DNFSB has had the

opportunity to be heard, may face the

penalties provided in 18 U.S.C. 641 and

other applicable laws. Additionally,

former DNFSB employees are subject to

the restrictions and penalties of 18

U.S.C. 207 and 216.

(b) A current DNFSB employee who

testifies or produces official records and

information in violation of this part

shall be subject to disciplinary action.

[FR Doc. 01–31533 Filed 12–26–01; 8:45 am]

BILLING CODE 3670–01–P

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 930 and 932

[No. 2001–28]

RIN 3069–AB11

Unsecured Credit Limits for Federal

Home Loan Banks

AGENCY: Federal Housing Finance

Board.

ACTION: Final rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is amending the

unsecured credit provision of its rules,

which was adopted as part of its capital

rule on December 20, 2000 and governs

the amount of unsecured credit that a

Federal Home Loan Bank (Bank) can

extend to a particular counterparty. The

unsecured credit limits adopted in

December were generally stricter than

the limits under which the Banks

operated with the Finance Board’s

Financial Management Policy (FMP).

The amendments adopted herein will

require the Banks to base the credit limit

on the long-term credit rating of the

counterparty. They also will set the

amount of unsecured credit that a Bank

can extend to a government-sponsored

enterprise (GSE) at the level allowed

under the FMP, and adjust the limits for

sales of overnight federal funds and the

limits for unsecured credit that can be

extended to groups of affiliated

counterparties. The amendments also

address how the unsecured credit limits

should be applied to certain housing

finance agency bonds, and clarify how

a Bank should calculate its credit

exposures from on- and off-balance

sheet items and derivative contracts.

The Finance Board also is adding to

§ 932.9 a requirement that a Bank report

promptly non-compliance with the

unsecured credit limits set forth in the

rule as well as making other technical

or clarifying changes to the rule.

EFFECTIVE DATE: The final rule is

effective on March 27, 2002.

FOR FURTHER INFORMATION CONTACT:

James L. Bothwell, Managing Director,

(202) 408–2821; Scott L. Smith, Acting

Director, (202) 408–2991; or Julie Paller,

Senior Financial Analyst, (202) 408–

2842, Office of Policy, Research and

Analysis; or Thomas E. Joseph, Senior

Attorney-Advisor, (202) 408–2512,

Office of General Counsel, Federal

Housing Finance Board, 1777 F Street,

NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Introduction

On December 20, 2000, in accordance

with the Gramm-Leach-Bliley Act, Pub.

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66719

1Further, the Finance Board recognizes that given

the large number of amendments adopted by this

rulemaking, it would serve no purpose to require

the Banks to implement § 932.9, as adopted in

December 2000, on January 28, 2002, and then

implement this amended version of the rule soon

thereafter. It is more reasonable to continue to apply

the current unsecured credit restrictions of section

VI of the FMP to the Banks until section VI of the

FMP is superceded by the amended version § 932.9.

2The Finance Board is also extending the

effective date for the liquidity requirements set

forth in § 932.8 so that both the amended unsecured

credit limits and the new liquidity requirements

will take effect on the same day.

L. No. 106–102, 133 Stat. 1338

(November 12, 1999) (GLB Act), the

Finance Board adopted a final rule to

implement the new capital structure

that the GLB Act established for the

Banks. 66 FR 8262 (January 30, 2001).

As part of the final capital rule, the

Finance Board adopted § 932.9 of its

rules, 12 CFR 932.9, which set new

limits on a Bank’s unsecured credit

exposures to a single counterparty or a

group of affiliated counterparties. Id. at

8318–19. These new limits represented

a revision and codification of the

unsecured credit guidelines of section

VI of the FMP, Finance Board Res. No.

96–45 (July 3, 1996), as amended by

Finance Board Res. No. 96–90

(December 6, 1996), Finance Board Res.

No. 97–05 (January 14, 1997), and

Finance Board Res. No. 97–86

(December 17, 1997). Given concerns

raised by the Banks about the unsecured

limits adopted in December 2000, the

Finance Board delayed the effective date

of these requirements on the condition

that the FMP restrictions remained in

effect, and, on March 7, 2001, published

a proposed rule requesting comment on

potential amendments to the unsecured

credit requirements. See 66 FR 13688

(Mar. 7, 2001).

After considering comments on this

rule proposal, the Finance Board

believed more changes were needed

than those it had previously considered

and, as a consequence, published for

comment in the Federal Register a new

set of proposed amendments to § 932.9

on August 8, 2001 (the proposed rule).

See 66 FR 41474 (Aug. 8, 2001). The

Finance Board also again extended the

effective date for compliance with

§ 932.9 subject to the condition that

section VI of the FMP remained in

effect. Id. at 41475. The comment period

on the second proposed rule closed on

September 7, 2001. After considering

the comments received, the Finance

Board has made a number of changes to

the rule proposed in August 2001, and

is adopting an amended version of

§ 932.9, as discussed below.

II. Discussion of the Comments

Received

The Finance Board received seven

comment letters on the proposed rule,

all of which were from Banks. Two

commenters submitted follow-up

comment letters to the Finance Board,

after the close of the comment period.

Nevertheless, these follow-up letters

were considered in developing this rule.

The comments requested both changes

to the proposed rule and amendments

and clarifications of how the proposed

rule would be applied. The Finance

Board agrees with many of the

comments made, and as a result has

made a number of changes to the

proposed rule. The Finance Board

addresses the comments received on its

proposed changes to § 932.9 below.

Effective Date of Rule

Four of the commenters requested

that the Finance Board delay the

effective date of § 932.9, which had been

scheduled to take effect on October 1,

2001 or on the date the proposed rule

was adopted in final form, whichever

was earlier. See Fin. Brd. Res. No. 2001–

11 (June 5, 2001). The commenters

suggested that the effective date of the

rule be set at various dates that ranged

from three to six months after a final

rule had been published. The

commenters stated that the extension

was necessary to give the Banks

sufficient time to conform

recordkeeping and reporting systems to

whatever limits were ultimately adopted

by the Finance Board.

The Finance Board generally agrees

with these comments. On September 26,

2001, it extended the effective date of

§ 932.9 until January 28, 2002 to provide

sufficient time to complete the

rulemaking process. See Fin. Brd. Res.

No. 2001–20 (Sept. 26, 2001). However,

given the date of approval of these final

rule amendments, the Banks will have

less than ninety days to prepare for

implementing the amended version of

§ 932.9 adopted herein if the January 28,

2002 date for complying with § 932.9 is

not changed.1 Thus, the Finance Board

is also adopting separate from these rule

amendments, a resolution that delays

the date for complying with § 932.9

until the effective date of these final rule

amendments. This new effective date

will be 90 days from the date this final

rule is published in the Federal

Register.2 The delay in the effective date

is conditioned upon the Banks’

continued compliance with the

unsecured credit limits in section VI of

the FMP. The Finance Board believes

that this time frame should be sufficient

for the Banks to conform their

recordkeeping and reporting systems to

the rule as amended.

General Approach

The proposed rule would have

required a Bank to determine the

applicable maximum capital exposure

limits for a particular counterparty

based on the long-term credit rating

received by that counterparty from an

organization regarded as a Nationally

Recognized Statistical Rating

Organization (NRSRO) by the Securities

and Exchange Commission, except in

certain limited circumstances. The

proposed amendment represented a

change from the approach adopted in

December 2000 which required a Bank

to determine the maximum capital

exposure limit for a short-term credit

based on an NRSRO’s short-term credit

rating for the counterparty and to

determine the maximum capital

exposure limit for a long-term credit

based on an NRSRO’s long-term credit

rating for the counterparty. Under the

proposed rule (as under the rule

adopted in December 2000), the

unsecured credit limit for a particular

counterparty (subject to certain

exceptions set forth in the rule) would

equal the maximum capital exposure

limit for that counterparty multiplied by

the lesser of the Bank’s total capital or

the counterparty’s Tier 1 or total capital.

Two commenters objected to the

reliance on long-term credit ratings, as

proposed. The commenters argued that

short-term credit exposures presented a

markedly different credit risk to a Bank

than would a long-term exposure to the

same counterparty, and that by

disregarding short-term ratings, the

Finance Board was ignoring important

information about a counterparty

embodied in that rating. The

commenters also believed that the

proposed approach would greatly

restrict the amount of unsecured credit

a Bank could provide from levels

permitted under the FMP or under

§ 932.9 as adopted in December 2000.

One commenter stated that this

reduction would force the Banks to seek

lower-rated counterparties and increase

the term of their lending, thereby raising

overall credit risk. The other commenter

stated the proposed change, if adopted,

would reduce the amount of unsecured

credit that a Bank would have available

to its members, which may result in

membership becoming less attractive to

some institutions.

Given these concerns, one commenter

urged the Finance Board not to adopt

the proposed change and continue to

base unsecured credit limits for shortterm exposures on short-term credit

ratings. The other commenter suggested

the Finance Board provide the Banks

the option of using short-term credit

66720 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

3See also, Basel Committee, ‘‘Consultative

Document: The new Basel Capital Accord’’ 14–15

(Jan. 2001) (‘‘if there is a long-term issue or issuer

assessment [i.e., rating], that assessment should be

used not only for long-term claims but also for

short-term claims, regardless of the availability of

a short-term assessment * * *).

ratings. The second commenter also

urged the Finance Board to develop new

short- and long-term limits and a new

total limit which would be the sum of

the short- and long-term limits plus

capacity for additional overnight

lending.

A third commenter believed that it

was inappropriate to use the

counterparty’s capital as a basis for

setting the unsecured credit limits

because this approach could result in

unduly large Bank System-wide

unsecured credit exposures to a

counterparty in relation to that

counterparty’s total assets. The

commenter urged the Finance Board to

set the unsecured credit limits at the

lesser of a percentage of a Bank’s total

capital or a counterparty’s total assets.

The Finance Board has considered

these comments but has decided not to

make any changes to the proposed rule

in response. In the SUPPLEMENTARY

INFORMATION section of the Federal

Register proposing release for this rule,

the Finance Board noted three reasons

to require the Banks to determine the

applicable maximum capital exposure

limit based solely a counterparty’s longterm credit rating. First, the Finance

Board stated that the reliance on longterm credit ratings was consistent with

the approach being suggested by the

Basel Committee on Banking

Supervision (Basel Committee) for

establishing risk-weightings under its

standardized approach in the proposed

New Capital Accord, which generally

proposes using long-term ratings

assigned by rating agencies (i.e.,

NRSROs) and disregarding the maturity

of a credit in setting risk weightings. See

66 FR at 41479–80 (citing Basel

Committee, ‘‘A New Capital Adequacy

Framework’’ 26–36 (June 1999); and

Basel Committee, ‘‘Overview of the New

Basel Accord’’ 13–14 (Jan. 2000)).3

Second, the Finance Board noted that

parties that would be assigned the same

short-term credit rating may have

markedly different maximum 30-day

default rates, depending on a party’s

long-term credit rating, so that use of

long-term ratings would assure more

restrictive limits were imposed on

borrowers with the higher maximum 30-

day default rate. 66 FR at 41480. Finally,

the Finance Board stated that exclusive

reliance on long-term credit ratings for

determining the maximum exposure

limits would simplify the Banks’

monitoring of their counterparties’

ratings. Id.

The comments received do not alter

the Finance Board’s basic reasoning for

proposing exclusive use of long-term

credit ratings to determine the

maximum capital exposure limit

applicable to a counterparty. In this

regard, the Finance Board emphasizes

that its approach is consistent with the

standardized approach being proposed

by the Basel Committee in the New

Capital Accord for establishing risk

weightings. The Basel Committee

decided generally to ignore maturity of

claims in establishing risk weighting in

large part because of ‘‘the difficulties in

pursuing greater precision in

differentiating among the maturities of

claims through capital charges’’ and the

‘‘broad brush’’ nature of the proposed

capital requirements. See Basel

Committee, ‘‘A New Capital Adequacy

Framework’’ at 33. The same reasoning

can be applied to the unsecured credit

limits being adopted herein, especially

given that the credit limits are designed

to provide a broad framework to prevent

concentration of credit in single

counterparties or groups of affiliated

counterparties and not to differentiate

with precision the risks of lending to

particular counterparties. See 66 FR at

8302 (explaining reasoning for adopting

§ 932.9).

The Finance Board also disagrees

with the suggestions of the one

commenter that the unsecured credit

limits will create more risk by lowering

the quality of the Bank’s credit

portfolios. The unsecured credit limits

adopted herein are themselves

restrictive as to the amounts of credit

that can be lent to lower rated

counterparties. At the same time, before

undertaking any significant lending or

investment activity that was not allowed

under the FMP, a Bank will first have

to demonstrate pursuant to part 980 of

the Finance Board rules, 12 CFR part

980, that it is able to undertake the new

lending in a safe and sound manner. In

addition, the lending undertaken by a

Bank will eventually be subject to the

capital requirements of part 932 of the

Finance Board rules, helping to assure

a Bank holds sufficient capital if it is

indeed engaging in lending to lower

quality counterparties. Even before the

requirements of part 932 become

effective, however, a Bank will be

subject to the capital requirements set

forth in § 956.4 of the Finance Board

rules, 12 CFR 956.4, if the Bank

undertakes unsecured transactions with

any counterparty rated below the

second highest credit rating by an

NRSRO. Further, with regard to the

second commenter’s concern about

unsecured lending to members, the

unsecured credit rules will not in any

way limit a Bank’s ability to continue to

provide liquidity to members using

short-term advances.

The Finance Board also continues to

believe that it is appropriate to base the

unsecured credit limits on the lesser of

the capital of the Bank or the capital of

the counterparty rather than adopt the

commenter’s suggestion of using a

percentage of a counterparty’s assets.

The approach adopted herein addresses

the Finance Board’s concerns with

potential concentrations of unsecured

credit as a percentage of Bank capital on

both the individual Bank and Bank

System level. See 66 FR at 8302. The

approach also is relatively

straightforward to implement so the

Finance Board sees no reason to alter it

in response to the commenter’s

concerns.

Further, basing the limit on a

percentage of counterparty assets rather

than counterparty capital would result

in higher limits as a percentage of

counterparty capital for counterparties

with lower capital ratios. For example,

two counterparties with the same credit

rating and same amount of total assets

would be subject to the same limit. If

one of the two has a lower capital ratio

than the other, however, the Bank’s

lending to the less capitalized

counterparty could equal a higher

percentage of that counterparty’s capital

(i.e., the limit as a percentage of capital

would be higher). Because capital serves

as a cushion against loss, this

methodology suggested by the

commenter would allow the Bank a

higher exposure relative to capital to the

less-capitalized counterparty and

provide less protection against potential

losses. Thus, the Finance Board believes

that limiting extensions of unsecured

credit to a percent of capital is the more

appropriate methodology.

Overnight Federal Funds Transactions

The proposed rule would have

amended § 932.9 to require a Bank to

meet two unsecured credit limits for

each private counterparty. The first, the

term limit, would have applied to all

unsecured credit transactions except

sales of federal funds with a maturity of

one day or less or sales of federal funds

subject to a continuing contract

(together ‘‘overnight federal funds’’).

The term limit for a particular

counterparty equaled the maximum

capital exposure limit times the lesser of

the Bank’s total capital or the

appropriate measure of the

counterparty’s capital. The second limit,

the overall limit, would have applied to

all transactions with a particular

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66721

4The Office of the Comptroller of the Currency

sets forth its lending limits at 12 CFR part 32.

counterparty including any overnight

federal funds transactions. The overall

limit for a particular counterparty

equaled twice the counterparty’s term

limit.

The Finance Board received two

comments on this proposed

amendment. One commenter felt that

the special treatment afforded overnight

Federal Funds transactions by the

proposed amendment offered only

limited relief to, what the commenter

believed were, the unnecessarily

restrictive limits of § 932.9. This

commenter urged the Finance Board to

exclude all overnight federal funds

transactions from the unsecured credit

limits, or in the alternative, to allow a

flat 15 percent of capital add-on to the

term limit for overnight federal funds

transactions for counterparties with the

highest short-term rating and at least the

third highest long-term rating. The

commenter argued that the ‘‘funding

advantage’’ that may be enjoyed by the

Banks, which the commenters viewed as

the reason the Finance Board failed to

exclude all overnight federal funds

transactions from the rule, was a myth,

noting that if such an advantage existed,

depository institutions would get most

of their funds from the Banks. The

commenter also pointed out that given

the low spread on advances, the Banks

needed to maintain leverage through

short-term investments such as selling

overnight federal funds. More generally,

the commenter believed that the

Finance Board’s ‘‘conservative’’

approach to the unsecured credit limits

was inconsistent with the GLB Act

because the GLB Act made clear that the

Finance Board’s responsibility was

safety and soundness regulation and not

management of the Banks. The other

commenter on the proposed amendment

recommended that the Finance Board

apply the proposed special limits only

to overnight investment transactions

between a Bank and a member

institution, and that the Finance Board

include in the overall limit all types of

unsecured overnight transactions, not

just overnight federal funds

transactions.

As the Finance Board has previously

stated, it adopted the unsecured credit

limits as a safety and soundness

regulation to prevent undue

concentrations of credit in a single

counterparty or groups of affiliated

counterparties. See 66 FR at 8301–02.

Other banking regulators have similar

limits in effect.4 These types of

regulations also are consistent with

practices for sound management of

credit risk as articulated by the Basel

Committee. See Basel Committee,

‘‘Principles for Management of Credit

Risk’’ 10 (Sept. 2000). Thus, the Finance

Board is confident that these regulations

are consistent with its obligations and

authority to ensure that the Banks

operate in a financially safe and sound

manner, and are not inconsistent with

the GLB Act or the Bank Act more

generally. See 12 U.S.C. 1422a(a)3 and

1422b.

Further, as noted in the

SUPPLEMENTARY INFORMATION section of

the preamble of the proposed rule, the

Finance Board considered excluding

overnight federal funds transactions

from its unsecured credit limits because

other banking regulators excluded these

transactions from their lending limits.

See 66 FR at 41476. The Finance Board

also noted that the Banks have different

incentives than commercial depository

institutions to lend into the federal

funds markets. The differing incentives

include both the funding advantage

enjoyed by GSEs in borrowing and the

more varied lending and investment

opportunities available to commercial

banking enterprises which reduces these

institutions’ incentives to engage in

federal funds lending. Id. The Finance

Board also emphasized that overnight

federal funds transactions are currently

subject to the unsecured credit limits of

the FMP and that completely excluding

overnight federal funds transactions

from the restrictions of § 932.9 would

have represented a significant loosening

of its restrictions, which was not the

purpose of adopting these limits. Given

these considerations, the Finance Board

concluded that it was not appropriate to

completely exclude overnight federal

funds transactions from the unsecured

credit limits, and instead, proposed the

overall limit discussed above.

The Finance Board continues to

believe that its initial reasoning remains

sound. In particular, the Finance Board

believes there is a basis for concluding

that Banks have a financial incentive to

lend to the federal funds markets, and

that to permit such lending without

limits would be imprudent. The Finance

Board also believes that the rule as

adopted provides the Banks with

sufficient flexibility to invest funds to

both meet their liquidity needs and to

counter cyclical fluctuations in their

business. Based on the same reasoning

discussed above, the Finance Board also

sees no compelling reasons to extend

the treatment offered to overnight

federal funds transactions to other types

of overnight transactions in which a

Bank may engage or to limit the

additional lending capacity for

overnight federal funds transactions just

to transactions with members. Such

restrictions would unnecessarily limit a

Bank’s investment opportunities with

little apparent gain from a safety and

soundness perspective. Moreover,

nothing would prevent a Bank from

implementing internal policies that

would achieve this goal so long as the

policies were consistent with § 932.9

and other Finance Board regulations.

Affiliated Counterparties

In response to concerns that the

unsecured credit limits were too

restrictive, the Finance Board proposed

to amend § 932.9 so that the unsecured

credit limit applicable to groups of

affiliated counterparties would equal 30

percent of the Banks total capital. 66 FR

at 41482. The Finance Board explained

that the proposed aggregate limit on

extensions of unsecured credit to

affiliated counterparties would have

allowed the Banks to extend somewhat

larger amounts of credit to large

financial conglomerates than did the

provisions in § 932.9 as adopted in

December 2000. Id. at 41480.

The Finance Board also proposed

amending the definition of ‘‘affiliated

counterparty.’’ Id. at 41481. The Finance

Board believed that new definition was

more understandable and was more

consistent with the meaning of the

phrase ‘‘corporate group’’ as used in

regulations issued by the Office of the

Comptroller of the Currency (OCC),

which addressed lending to affiliated

counterparties. Id. at 41480. The effects

of the proposed definition would have

generally been to raise the threshold for

control when defining an affiliate from

(either direct or indirect) ownership of

25 percent of the voting securities or

interests of an entity to 50 percent of

such securities or interests. The Finance

Board did not believe the change would

generally alter the number or groupings

of affiliated counterparties covered by

the restrictions in § 932.9. Id.

The Finance Board received only one

comment on the proposed changes to

the unsecured credit limits applicable to

extensions to a Bank’s unsecured

lending to groups of affiliated

counterparties. The commenter urged

the Finance Board to raise the limit from

30 percent of a Bank’s total capital to 50

percent of a Bank’s total capital because,

as the commenter believed, there was

only an indirect link between affiliates

related by a common holding company

and failure of one affiliate would

seldom cause another affiliate to fail.

The commenter also recommended that

counterparties related by a common

holding company and special

bankruptcy-remote subsidiaries should

66722 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

5The cited regulations generally restrict an

institution’s aggregate extension of credit, including

any lending that is fully secured by readily

marketable financial instruments or bullion in

which the lender holds a perfected security interest,

to a corporate group to an amount not to exceed 50

percent of a bank’s capital and surplus. The Finance

Board’s limit, though lower, would not apply to

extensions of credit which are backed by collateral

held by a Bank in accordance with the requirements

of § 932.9.

6Mortgage-backed securities issued by other

federal housing GSEs and purchased by the Banks

were previously, and are not now, considered a

form of unsecured credit by the Finance Board.

not be considered affiliates for purposes

of § 932.9.

The Finance Board considered this

comment but has not altered the

proposed unsecured lending limits for

groups of affiliated counterparties or the

proposed definition of affiliated

counterparty as a result. The Finance

Board disagrees with the commenter’s

suggestion that there is only minimal

risk that the failure of one affiliated

counterparty would affect the financial

standing of other affiliates. As the

Finance Board previously pointed out,

applying credit exposure limits to

groups of affiliated counterparties is

consistent with sound principles of risk

management and with practices of other

regulators. See 66 FR at 41477. The

Finance Board believes that the new

limit suggested by the commenter

would be too lenient and allow Banks

too great an exposure to groups of

affiliated counterparties. The limit

adopted herein on extensions of credit

to groups of affiliated counterparties,

however, is consistent with limits

adopted by other bank regulators.5 See

12 CFR 932.5(d) and 12 CFR 560.93(c).

As already stated, the Finance Board

also believes that the definition of

‘‘affiliated counterparty,’’ as proposed

and as adopted herein, is consistent

with similar terms used by other

banking regulators.

GSE Limits

The Finance Board proposed raising

the limit on extensions of unsecured

credit to a GSE to 100 percent of the

lesser of a Bank’s or GSE’s total capital.

Id. at 41482. This change basically

would have re-instituted the limit on

extensions of unsecured credit to GSEs

that had been in effect under the FMP.6

Id. at 41475–76. As the Finance Board

explained, the proposal resulted from

Banks’ concerns that the limits as

adopted in December 2000 may have

disrupted the Banks’ investment

strategies. At the same time, the Finance

Board did not believe the proposal

raised any safety and soundness

concerns. Id. The proposed amendment

also would have required a Bank to treat

a GSE like other private counterparties

should any NRSRO have assigned a

credit rating to, or downgraded a credit

rating of, any long-term senior

unsecured credit obligation issued by a

GSE to below the highest investment

grade or placed a GSE on a credit watch

for such a downgrade. Id. at 41482. This

trigger provision was proposed to assure

the preferential GSE limit was not

applied to an entity undergoing obvious

financial difficulty. Id. at 41475.

The Finance Board received two

comments on this proposed rule. The

first commenter believed the trigger

provision would have resulted in too

drastic a cut in future credit to a

troubled GSE and recommended that

the deadline for applying the lower

limits applied to a GSE after a

downgrade in its credit rating be keyed

to the extent of the downgrade (e.g., six

months if downgraded to the second

highest investment grade credit rating,

three months if downgraded to the third

highest investment grade credit rating,

etc.). The commenter argued that

reducing future extensions of credit to a

GSE in times of financial difficulty

could increase the risk of default by that

entity. The second commenter requested

that the Finance Board clarify that the

preferential unsecured lending limit for

GSEs would not be applied to

subordinated debt issued by the GSE.

The Finance Board does not believe

that any change in the proposed trigger

provision is necessary in response to the

comment and is adopting it as proposed.

The commenter’s suggestion, if adopted,

could leave the Banks with the risk of

maintaining the liquidity of other GSEs

in the unlikely occurrence that another

GSE experienced severe financial

difficulties. More importantly, to the

extent that special action were needed

to help a GSE, or any other large

financial institution, such action would

have to be coordinated with other

financial regulators, and the Finance

Board would have to take appropriate

action at that time (e.g., waiver of the

trigger provision) to allow the Banks to

adjust their lending positions

accordingly. At the same time, the

Finance Board would expect that a Bank

would take steps to reduce its exposure

to a GSE (or any other counterparty) as

soon as the GSE’s potential financial

difficulties became apparent. Thus, the

reduction in extensions of unsecured

credit may be spread over time, and the

reduction in unsecured credit triggered

when the credit rating downgrade

actually occurs may not be as drastic as

the commenter suggested.

The Finance Board agrees with the

second commenter, however, and has

altered the final rule to make clear that

the special unsecured credit limits

applicable to GSEs do not apply to

subordinated debt. GSE subordinated

debt is generally perceived as providing

an indication of the entity’s financial

standing, independent of any implied

government guarantee. As such, the risk

of holding GSE subordinated debt

would be similar to the risks associated

with holding non-GSE debt. The

amendments to § 932.9 adopted by the

Finance Board will restrict a Bank’s

holding of GSE debt to the level

calculated using the maximum capital

exposure limit associated with the

credit rating assigned to the GSE’s

subordinated debt. This rule would

apply even if the GSE’s subordinated

debt received the highest investment

grade rating from an NRSRO. Further, a

Bank’s holdings of a GSE’s subordinated

debt would be included in the total

amount of unsecured credit extended to

that GSE for purposes of applying the

preferential lending limit for GSEs (i.e.,

100 percent of the lesser of the Bank’s

or the GSE’s total capital).

The Finance Board also recognizes

that the commenter’s concerns with

regard to GSE subordinated debt would

also apply to the subordinated debt of

any other counterparty. Thus, the

Finance Board is also adopting new

§ 932.9(a)(4)(iii) as part of these final

rule amendments. This provision

imposes a special sub-limit on any debt

issued by a counterparty if that debt

obligation received an issue rating from

an NRSRO that is lower than the

counterparty’s long-term credit rating.

This sub-limit would be calculated

using the rating assigned to the lowerrated debt obligation for purposes of

determining the maximum capital

exposure limit. Because the lower credit

rating assigned to a particular obligation

would indicate that holding that

obligation is more risky than holding

other obligations of the issuercounterparty, it is appropriate to limit

the Bank’s holdings of that specific

obligation. Generally, the Finance Board

believes that an issue rating will be

lower than the issuer’s long-term rating

only in cases where the issue in

question is subordinated debt.

Measurement of Derivatives Exposure

The Finance Board proposed

amending § 932.9 to require a Bank to

measure the unsecured credit exposure

arising from a derivative contract in

accordance with §§ 932.4(g) and

932.4(h) of the Finance Board rules. 12

CFR 932.4(g) and 932.4(h). As adopted

in December 2000, § 932.9 contained no

provision indicating how a Bank should

measure its unsecured credit exposure

to a counterparty, and this change

would have conformed the

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66723

measurement for derivative contracts

with that undertaken when calculating

a Bank’s credit risk capital charges for

derivative contracts under § 932.4 of the

Finance Board rules.

Four commenters pointed out that

when read strictly this provision as

proposed would not take account of

collateral held against derivative

exposure. These commenters pointed

out that the proper measure of the

unsecured credit exposure from a

derivative contract should be the net

marked-to-market value of the contract

less the collateral posted by the

counterparty. Two of these commenters

also specifically stated that it was

inappropriate to include the potential

future credit exposure (PFE) of a

contract in the calculation of the Bank’s

extension of unsecured credit to a

counterparty. The two commenters

pointed out that the exposure of a Bank

upon default of a counterparty would be

the marked-to-market value of the

contract at the time of default. Further,

these commenters stated risk

management techniques, such as the

right to value derivatives and call for

additional collateral at any time,

mitigate the need to include PFE in

exposure calculations. One of these two

commenters also requested that the

Finance Board specify the frequency

with which a Bank must measure its

credit exposure from a derivative

contract and recommended a frequency

of once a month, which would coincide

with minimum requirements in

agreements for measuring exposure and

settling collateral.

The Finance Board did not intend that

derivative exposure against which

collateral is properly held be included

in the amount of unsecured credit

extended to a counterparty, but agrees

that the proposed wording in § 932.9(f)

did not make this clear. Thus, this

provision, as adopted, has been

reworded to make clear that any portion

of a derivative exposure against which

the Bank holds collateral shall not be

counted toward the total amount of

unsecured credit extended to a

counterparty. To be counted, however,

this collateral must be held in

accordance with § 932.4(e)(2)(ii)(B) of

the Finance Board’s rules, which among

other things requires the value of the

collateral to be appropriately discounted

to protect the Bank against a price

decline during the holding period and

to account for the potential cost of

liquidation of the collateral.

The Finance Board, however, believes

that it is appropriate to continue to

include a derivative contract’s PFE in

the calculation of extension of

unsecured credit. Such practice appears

to be standard for derivative dealers

when setting counterparty credit limits.

See e.g., Bank for International

Settlements, ‘‘OTC Derivatives:

Settlement Procedures and Counterparty

Risk Management’’ 15–16 (Sept. 1998).

The Finance Board believes that it is

also appropriate here since the value of

certain derivative contracts may be fast

changing and the use of collateral may

reduce losses but generally does not

eliminate credit risk. Id. at 4. Thus, as

adopted, § 932.9(f) requires a Bank to

include both the current credit exposure

and the PFE in its calculation of the

amount of unsecured credit extended to

a counterparty. This provision, both as

proposed and as adopted, allows a

Bank, however, to calculate its exposure

on a net basis for derivative contracts

subject to a qualifying bilateral netting

contract, as that phrase is defined under

§ 932.4(h)(3).

The Finance Board has also decided

not to place in the rule a minimum

frequency for calculating exposures

under a derivative contract. Instead,

Banks should establish clear policies to

govern such calculations, and these

policies will be reviewed by the Finance

Board in the course of Bank

examinations. In setting this policy, a

Bank should consider the complexity of

its derivative holdings and the volatility

of the value of those holdings as well as

other relevant factors. The Finance

Board generally believes, however, that

a Bank should value its derivative

contracts more frequently than once a

month for purposes of applying § 932.9.

Requests for Additions to the Rule

Two commenters asked that the

Finance Board add a provision to the

rule to clarify the status of bonds issued

by state and local housing finance

agencies (HFAs). Both commenters

pointed out that investment in HFA

bonds helped Banks achieve their

housing finance missions and provided

Banks with investment flexibility and

that treating HFAs like other

counterparties severely restricts the

Banks’ investment in HFA bonds

because HFAs often have low capital.

These commenters also noted that HFA

bonds were considered outside the

scope of the unsecured credit limits of

section VI of the FMP. As a follow up

to its comment letter, one commenter

sent an additional letter stating that they

believe that most HFA bonds were

secured by mortgage collateral and

therefore should have been exempt from

the unsecured credit limits, but

provided no justification or legal

rationale to support such a conclusion.

Another commenter requested that the

Finance Board add a provision that if a

third-party guaranteed repayment by the

counterparty, the unsecured credit

limits should be applied to the

guarantor and not to the counterparty

itself, as has been required under the

FMP.

The Finance Board has considered

these comments and has made changes

in the final rule as a result. With regard

to the HFA obligations, the Finance

Board believes that generally these

obligations should be subject to the

unsecured credit limitations. While the

structure of the HFA obligations held by

the Banks may vary widely, it does not

appear that these obligations are usually

secured in the sense that the HFA

provides the Bank with collateral that

the Bank holds in accordance with the

principles set forth in § 932.4(e)(2)(ii)(B)

or in the same sense that a Bank secures

an advance. Nevertheless, given that the

structure of these transactions may vary,

the Finance Board is willing to consider

on a case-by-case basis that a specific

HFA transaction may be considered

secured and therefore should be

excluded from the limits of § 932.9.

The Finance Board agrees with the

commenters, however, that application

of the proposed limits in § 932.9 may

restrict the Banks’ ability to purchase

the HFA obligation and be detrimental

to the Banks’ housing finance mission.

Investments in HFA obligations are also

subject to other Finance Board

regulations. Thus, the Finance Board is

adopting new § 932.9(a)(3) which sets a

special limit for certain HFA

obligations. As is explained more fully

in the next section of this preamble, this

special limit for qualified HFA

obligations will be calculated based

upon the Bank’s total capital and the

maximum capital exposure limit

associated with the rating of the

instrument purchased by the Bank. To

qualify for treatment under § 932.9(a)(3),

the HFA obligation must either be an

acquired member asset, as defined in

§ 955.2 of the Finance Board rules, or be

the type of obligation excluded by

§ 956.3(a)(4)(iii) from the general

prohibition against the Banks’ investing

in whole mortgages or loans (or interests

therein). The Finance Board believes

that the approach adopted in these

amendments will provide the Banks

with sufficient capacity to invest in

HFA obligations in support of their

housing finance mission while still

preventing undue concentrations of

these instruments on the Banks’ books.

More generally, the Finance Board

recognizes that, given the comment

concerning the status of HFA bonds,

there may be some confusion

concerning the intended scope of this

rule. This is especially true where a

66724 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

bond or other debt securities may be

backed by a pledge of specific property

or by revenues, such as may occur with

certain HFA bonds, so that the debt

security may be considered secured in

some context. In developing this rule,

however, the Finance Board has viewed

the purchase of a debt security or other

debt obligation generally to be an

unsecured extension of credit, unless

the Bank, itself, holds or controls

collateral against its exposure from the

debt obligation, in accordance with the

requirements of § 932.4(e)(2)(ii)(B). To

make this view clear, the Finance Board

has adopted new § 932.9(f)(2). New

§ 932.9(f) also makes clear that the

Finance Board continues to exempt

mortgage-backed securities from the

unsecured credit limits and that loans

purchased as acquired member assets

(AMA) and identified in §§ 955.2(a)(1)

and (2), 12 CFR 955.2(a)(1) and (2), are

also exempt.

The AMA exemption under new

§ 932.9(f)(2) does not extend to HFA

bonds purchased under the AMA.

Generally, a member or housing

associate does not need to provide

added credit enhancements and

collateralize that credit enhancement for

HFA bonds as it would for mortgages

purchased under the AMA program. See

12 CFR 955.3(b)(3). This is because the

HFA bonds purchased under the AMA

program are already enhanced by

collateral (not held by the Bank) and

rated sufficiently high that additional

enhancement or collateral is not

required. Further, the unsecured credit

provision for HFA bonds already takes

account of this higher rating by allowing

the maximum capital exposure limits to

be determined based on the issue rating

of the HFA bond itself rather than on

the rating of the HFA. The new

provision also makes clear that the

Finance Board is willing to consider on

a case-by-case basis that any debt

obligation or debt security purchased by

the Bank should not be subject to the

limits of § 932.9 because the Bank’s

credit exposure is adequately secured.

The Finance Board also agrees with

the commenter that where a third-party

has provided an unconditional and

irrevocable guarantee covering a credit

extended by the Bank, the Bank’s

exposure will ultimately be to the

guarantor. Given this fact, the Finance

Board has modified proposed § 932.9(a)

to make clear that if repayment of a

credit is guaranteed unconditionally

and irrevocably by a third-party, the

resulting unsecured credit exposure

would be treated as if it were to the

third-party guarantor. This means that

in calculating the unsecured credit

limits for these guaranteed transactions,

a Bank would consider the credit rating

and capital of the third-party guarantor

and would aggregate the credit exposure

arising from the guarantee with any

other unsecured credit extended to the

third-party guarantor. The Finance

Board recognizes that for regulatory or

other reasons, a third-party may not

provide, or be able to provide, an

irrevocable guarantee, but may provide

some other form of support or credit

enhancement. While the rule as adopted

only allows unconditional, irrevocable

guarantees to be attributed to the thirdparty guarantor, the Finance Board

would be willing to consider allowing

this treatment to be extended on a caseby-case basis to other specific support

arrangements, if a Bank can demonstrate

that the support or credit enhancement

provided by the third-party provides a

level of protection equivalent to an

irrevocable guarantee.

Requests for Clarification

One commenter requested

clarification as to whether the phrase

‘‘affiliated counterparties’ combined

* * * capital’’ as used in the reporting

requirements of proposed

§ 932.9(e)(1)(ii) meant the consolidated

capital of the affiliated group or the

combined capital of only those affiliated

counterparties’ to which a Bank had

actually extended credit. The Finance

Board believes that the phrase

‘‘affiliated counterparties’ combined

* * * capital’’ should be interpreted to

mean the consolidated capital of the

holding company for the affiliated

group. Use of this figure would help

avoid double counting of capital of

affiliated members of a group.

This commenter also requested

clarification whether the Finance Board

expected data as of the month-end or

some other date under the ‘‘monthly’’

reporting that would be required under

§ 932.9(e). This requirement applies to

extensions of credit outstanding at any

time during the month, not just at

month-end, although the Bank does not

have to submit its report to the Finance

Board until after the last business day of

the month. Such report should be

provided promptly after that date.

Another commenter asked for

clarification of the meaning of the

phrase ‘‘net payments due a Bank’’ as

used in proposed § 932.9(f)(1), a

provision which addresses the

measurement of unsecured credit

exposures from on-balance sheet

transactions. The Finance Board notes

that this phrase was used in section VI

of the FMP, and the Finance Board

intends that it has the same meaning as

under the FMP. Thus, the phrase

indicates an amount due to or accrued

by the Bank as of a point in time (i.e.,

the time a Bank measures its exposure

from the on-balance sheet transaction)

and not the future amounts due over the

life of the transaction.

Status of FMP Provisions

One commenter requested that the

Finance Board specifically rescind in

the final version of § 932.9 provisions in

section VI of the FMP concerning

maximum maturities for derivative

contracts and contingent

collateralization of interest rate

exchange agreements. The Finance

Board does not believe a specific

provision needs to be added to § 932.9

as requested by the commenter. Upon

the effective date of § 932.9, the

unsecured credit limitations of section

VI of the FMP will be superseded and

replaced by the rule. Any provision of

section VI of the FMP which has not

been adopted as part of § 932.9, such as

the two cited by the commenter, will no

longer apply to the Banks.

Another commenter asked the

Finance Board to clarify whether

restrictions contained in certain parts of

the FMP would still be applicable after

the effective date of § 932.9.

Specifically, the commenter requested

clarification of the applicability of:

footnote 1 which defines ‘‘eligible

financial institutions’’ and effectively

limits the counterparties to which a

Bank may lend overnight and term

funds; footnote 3 which sets forth

qualifications for issuers of commercial

paper, bank notes and thrift notes that

a Bank may buy; and footnote 6 which

sets forth the criteria for eligible nonmember counterparties for hedging

transactions. Footnotes 1 and 3 appear

in section II.B of the FMP, and footnote

6 is found in section V of the FMP. The

Finance Board believes that because

these provisions restrict, based on credit

ratings, the counterparties to which the

Bank may extend credit or with which

a Bank may transact business which

would create a credit exposure, these

restrictions should be superseded upon

the effective date of § 932.9. Section

932.9 is intended to address concerns

about the credit rating of the Banks’

counterparties. It does so, however, by

limiting the amount of credit a Bank can

extend to parties rated at these various

levels and not by restricting the

counterparties with which the Bank can

transact. The new business activity

requirements of Part 980 of the Finance

Board’s rules would apply to any

investments involving counterparties

the Bank intends to transact with that

were not permitted under the FMP. See

66 FR at 41477–78.

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66725

III. The Final Rule

Except as noted below, the Finance

Board is adopting the amendments to

§ 930.1 and § 932.9 of its rules, generally

as proposed. The notices of proposed

rulemaking published in the Federal

Register on March 7, 2001, 66 FR 13688,

and August 8, 2001, 66 FR 41474,

contain additional explanatory

information about the changes being

adopted herein, and interested parties

should review these document for a

more complete understanding of the

rule provisions discussed below.

Definitions

The Finance Board is amending

§ 930.1 of its rules, as proposed, to

change the definition for ‘‘affiliated

counterparty’’ and to add a new

definition for the phrase ‘‘sales of

federal funds subject to a continuing

contract.’’ The definition of ‘‘affiliated

counterparty’’ being adopted herein

reads as follows:

Affiliated counterparty means a

counterparty of a Bank that controls, is

controlled by or is under common control

with another counterparty of the Bank. For

the purposes of this definition only, direct or

indirect ownership (including beneficial

ownership) of more than 50 percent of the

voting securities or voting interests of an

entity constitutes control.

The amended definition will generally

raise the threshold for control from

direct or indirect ownership of 25

percent of the voting securities or voting

interests of an entity to ownership of 50

percent of such interests, but is not

likely to alter significantly the number

or groupings of counterparties that

would be covered by the affiliated

counterparty limitations. See, 66 FR at

41480.

In addition, the Finance Board is

defining the phrase ‘‘sales of federal

funds subject to a continuing contract’’

as an overnight federal funds loan that

is automatically renewed each day

unless terminated by either the lender

or the borrower. This definition is

consistent with the generally

understood meaning of this phrase, and

makes clear the types of federal funds

transactions that will benefit from

treatment under the overall limit of

§ 932.9(a)(2) of the Finance Board rules.

See Id. at 41478.

Unsecured Extensions of Credit to a

Single Counterparty

The Finance Board is adopting

proposed § 932.9(a) with additional

provisions designed primarily to

address subordinated debt issued by a

counterparty and a Banks’ purchases of

certain obligations issued by HFAs. In

addition, the Finance Board has adopted

a change to the proposed rule that

requires a Bank to attribute the

unsecured credit exposure arising from

a transaction for which repayment is

irrevocably and unconditionally

guaranteed by a third-party to the

guarantor. The Finance Board also has

restructured § 932.9(a) slightly to

accommodate the new provisions.

As adopted, § 932.9(a) of the Finance

Board rules sets forth the limits on a

Bank’s extensions of unsecured credit to

a single, non-GSE counterparty.

Specifically, a Bank must always meet

two limits. Under the first limit, all

unsecured extensions of credit, except

sales of overnight federal funds, by a

Bank to single non-GSE counterparty

can not exceed the term limit set forth

in § 932.9(a)(1). Under the second limit,

which is twice the term limit, all

unsecured extensions of credit

including overnight federal funds

transactions by a Bank to a single

counterparty can not exceed the overall

limit set forth in § 932.9(a)(2). See Id.

The effect of these limits is to allow the

Banks to increase their lending of

overnight federal funds to non-GSE

counterparties beyond the term limit

applicable to other types of unsecured

lending.

Section 932.9(a) also sets out the

criteria for calculating the term limit

and the overall limit applicable to nonGSE counterparties. Under the rule, the

term limit equals the product of the

maximum capital exposure limit

multiplied by the lesser of: (i) The

Bank’s total capital or (ii) the

counterparty’s Tier 1 capital, or, if Tier

1 capital is not available total capital (as

defined by the counterparty’s principal

regulator), or some comparable measure

identified by the Bank. This approach is

the same approach adopted in § 932.9 in

December 2000. See 66 FR at 8301–02.

The overall limit is twice the term limit

calculated for the counterparty.

Further, as adopted, § 932.9(a)

clarifies how a Bank attributes the credit

exposure arising from a transaction that

is subject to an unconditional and

irrevocable guarantee by a third-party.

Under the rule, if repayment of any

unsecured credit is irrevocably and

unconditionally guaranteed by a third

party, the third-party guarantor shall be

considered the counterparty. The Bank

would therefore attribute the credit

exposure to the third-party guarantor

and calculate the applicable unsecured

credit limits based upon the long-term

credit rating of the third-party guarantor

and the lesser of the Bank’s total capital

or the relevant capital measure for the

third-party guarantor. If the third-party

only guarantees a portion of the

repayment of the credit, only that

portion of the credit exposure so

guaranteed shall be attributable to the

third party guarantor, and the remainder

of the exposure shall be attributable to

the direct counterparty and subject to

the limits applicable to the direct

counterparty. As discussed above, the

Finance Board is willing to consider

requests from the Bank on a case-bycase basis that it apply this approach to

other forms of credit enhancement that

may not clearly constitute an

irrevocable unconditional guarantee, but

may nonetheless offer a equivalent level

of support.

As previously discussed, the limits for

qualifying obligations issued by an HFA

also are calculated somewhat

differently, and, as set forth in

§ 932.9(a)(3), the limit for these HFA

obligations will always equal the

product of the applicable maximum

capital exposure limit and the Bank’s

total capital. Furthermore, the

maximum capital exposure limit will be

determined based on the credit rating

assigned to the particular obligation

purchased by the Bank. This approach

could conceivably result in different

limits applying to different classes or

series of obligations issued by the same

HFA (if each class or series received

different issue ratings from the

NRSROs). In such a case, however, the

rule makes clear that limits will not be

separately and independently applied

so that the total amount of unsecured

credit extended to a HFA by a Bank

could never exceed the limit associated

with the highest rated qualifying

obligation purchased by the Bank. For

example, if a Bank purchased two

classes of qualifying obligations from a

HFA with different structures such that

one class was rated in the highest

investment grade category and the other

was rated in the second highest

investment grade category by an

NRSRO, the Bank’s combined total

purchase of both classes of instruments

could not exceed 15 percent of the

Bank’s total capital. At the same time,

the Bank’s purchase of the instrument

rated in the second highest investment

grade category could not exceed 14

percent of the Bank’s total capital.

To qualify for treatment under

§ 932.9(a)(3), the HFA obligation must

either be an acquired member asset, as

defined in § 955.2 of the Finance Board

rules, or be the type of obligation

excluded by § 956.3(a)(4)(iii) from the

general prohibition against the Banks’

investing in whole mortgages or loans

(or interests therein). Any other type of

obligation issued by an HFA or any

other form of unsecured extension of

credit to the HFA would not qualify for

treatment under § 932.9(a)(3), and the

66726 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

7The credit risk percentage requirements are set

forth in § 932.4, Table 1.3 of Part 932 of the Finance

Board rules, 12 CFR 932.4, and are used to calculate

the credit risk component of the Bank’s risk-based

capital requirement.

8The Finance Board addressed its reasons for

relying on long-term credit rating in its response to

comments in Section II above as well as in the

preamble of the August 2001 proposing release for

this rule. See 66 FR at 41479.

9By contrast, a review of Moody’s September

2001 Rating Lists for Banks and Securities Firms

found that the issuer rating (i.e., the long-term

counterparty rating) seldom if every differed from

issue ratings for long-term senior debt. This is

especially true under the rule because the rule

ignores modifiers when determining credit ratings.

limit for that investment would be

calculated under § 932.9(a)(1). Of

course, the Bank would also have to be

authorized to invest in or provide such

other form of unsecured credit under

part 956 of the Finance Board rules or

some other applicable Finance Board

regulation or order.

The maximum capital exposure limits

are set forth in Table 4. Each maximum

capital exposure limit corresponds to a

different investment grade rating so that

more restrictive maximum capital

exposure limits are imposed on lowerrated, and therefore potentially riskier,

counterparties. The applicable

maximum capital exposure limit for a

counterparty rated at the highest

investment grade by an NRSRO is set at

15 percent. This level is broadly

consistent with federal lending limits

pertaining to commercial banks as set

forth by statute and regulation. The

maximum capital exposure limits

corresponding to credit ratings below

the highest investment grade, however,

are calibrated to the 15 percent

maximum capital exposure limit based

upon the ratio of the average credit risk

percentage requirement (over all

maturity bucket groupings) for the

highest investment grade to the average

credit risk percentage requirement for

each investment grade.7 A more

complete explanation of the derivation

of the maximum capital exposure limits

is found in the SUPPLEMENTARY

INFORMATION section of the Federal

Register release proposing this rule. See

66 FR at 41478–80.

As set forth in § 932.9(a)(4)(i), a Bank

will determine the maximum capital

exposure limit applicable to a

counterparty based on the

counterparty’s long-term credit rating,

subject to two exceptions.8 Under the

first exception, a short-term credit rating

will be used to determine the applicable

maximum credit exposure limit if

NRSROs have provided a short-term

credit rating for a counterparty but have

not provided a long-term rating for that

counterparty. See Infra § 932.9(a)(4)(ii).

If a short-term credit rating for a

counterparty is used, however, the

highest short-term investment grade

rating is deemed to correspond to the

maximum capital exposure limit

assigned to the third highest long-term

investment grade rating in Table 4 (i.e.,

nine percent), and the second and third

highest short-term investment grade

ratings would correspond to the

maximum capital exposure limit

assigned to the fourth highest long-term

investment grade rating in Table 4 (i.e.,

3 percent). This treatment of the shortterm investment grade credit ratings is

more fully discussed in the proposing

release. 66 FR at 41480.

The second exception to exclusive use

of long-term credit ratings is set forth in

§ 932.9(a)(4)(iii), and has been added by

the Finance Board in adopting this final

rule. This provision states that if a Bank

purchases a debt obligation from a

counterparty that has an investment

rating from an NRSRO that is lower than

the counterparty’s long-term rating, the

amount of the lower-rated obligation

held by the Bank can not exceed a

special sub-limit. Specifically, this sublimit equals the maximum capital

exposure limit from Table 4

corresponding to the rating assigned the

lower-rated debt obligation multiplied

by the lesser of the Bank’s total capital

or the counterparty’s applicable capital

measurement. While the Bank’s

purchases of the lower-rate obligation

could not exceed the sub-limit, the total

amount of unsecured credit extended by

the Bank to the counterparty (including

amounts of the lower rated obligation)

would be restricted by the term limit

and overall limit calculated using the

counterparty’s long-term credit rating.

As already noted, the Finance Board

recognized the need to adopt this

provision when considering comments

that the special unsecured credit limits

for GSEs should not be applied to

subordinated debt issued by the GSE

because the same concerns arise

whether a GSE or a non-GSE

counterparty issues subordinated debt.9

Section 932.9(a)(5) establishes the

criteria that a Bank will use to

determine a counterparty’s long-term

credit rating. The same criteria should

be used whenever § 932.9 requires a

Bank to determine the short-term rating

of a counterparty or the issue rating of

a specific obligation. This criteria is

generally the same as that adopted in

§ 932.9 in December 2000, and has been

altered only to remove provisions that

are no longer necessary given other

changes adopted in this final rule. See

Id. at 41481. In determining a

counterparty’s long-term credit rating,

the rule requires a Bank to use the most

recent rating issued by an NRSRO, and

if more than one NRSRO has rated the

counterparty, to use the lowest rating

from among those ratings. A Bank

should also ignore modifiers (e.g., +, ¥,

or 1, 2, 3), so that, for example, ratings

of A+ or A¥would both correspond to

the same maximum capital exposure

limit in Table 4 (i.e., third highest

investment grade or 9 percent). Further,

if a counterparty is placed on a credit

watch by an NRSRO, the rule states that

the credit rating from that NRSRO at the

next lower grade shall be used. In cases

where a counterparty is not rated by an

NRSRO, the rule allows a Bank to

determine the applicable credit rating

using standards available from an

NRSRO or similar standards.

Affiliated Counterparties

The Finance Board is adopting the

unsecured credit limit on groups of

affiliated counterparties in § 932.9(b), as

proposed. See Id. at 41480 (discussing

proposed affiliated counterparty limit).

Under § 932.9(b), the aggregate limit on

the extension of unsecured credit to a

group of affiliated counterparties would

equal 30 percent of the FHLBank’s total

capital. In calculating the amounts of

unsecured credit extended to a group of

affiliated counterparties, a Bank should

include the amounts of sales of

overnight federal funds to those

affiliated counterparties. The rule also

makes clear that unsecured credit

limitations on individual counterparties

continue to apply to each counterparty

within a group of affiliated

counterparties.

GSE Limits

The Finance Board is adopting the

special limit for GSEs generally as

proposed, see id. at 41475–76, 41478,

but, as already explained above, has

added a provision to establish a lower,

sub-limit for GSE subordinated debt

held by a Bank. In adopting the final

version of § 932.9(c), the Finance Board

also has made some technical and

conforming changes to the proposed

rule.

Section 932.9(c) establishes the credit

limits that a Bank should impose on its

unsecured lending to GSEs. Under

§ 932.9(c)(1), a Bank’s unsecured credit

exposure to a GSE may not exceed 100

percent of the lesser of either the Bank’s

total capital or the GSE’s total capital (as

defined by the GSE’s principal

regulator, or some similar measure of

the GSE’s capital identified by the

Bank). In applying this limit, a Bank

must include in its calculation of the

total amount of unsecured credit

extended to a GSE all forms of

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66727

10The finance Board has already stated that

§ 932.9 will not require a Bank to unwind existing

positions that do not conform to its new limits,

provided that the credit was extended in

accordance with the FMP prior to the effective date

of this rule. See 66 FR at 41477–78.

unsecured lending, including sales of

overnight federal funds and a Bank’s

purchases of the GSE’s subordinated

debt. In addition, § 932.9(c)(2) requires

that a Bank’s total purchase of a GSE’s

subordinated debt not exceed a special

sub-limit, which equals the maximum

capital exposure limit corresponding to

the credit rating assigned to the

subordinated debt multiplied by the

lesser of the Bank’s total capital or the

applicable capital measurement of the

GSE. For example, if a GSE’s

subordinated debt were rated AA and

the GSE’s total capital were larger than

the Bank’s total capital, the sub-limit on

purchases of the GSE’s subordinated

debt would equal 14 percent of the

Bank’s total capital. A Bank must

calculate and apply the sub-limit on

subordinated debt even if the

subordinated debt is rated at the highest

investment grade.

Section 932.9(c)(3) requires a Bank to

treat GSEs like private counterparties in

the event any NRSRO assigns a credit

rating to, or downgrades the credit

rating of, any long-term, senior debt

obligation issued by a GSE to below the

highest investment grade, or places the

GSE on a credit watch for a potential

downgrade. In this case, the Bank must

calculate the maximum amount of its

unsecured extensions of credit to that

GSE in accordance with paragraph (a)(1)

of the proposed rule. After a GSE’s

credit rating is downgraded or the GSE

is placed on a watch list for a potential

downgrade, § 932.9(d) applies to a

Bank’s extensions of unsecured credit to

that GSE.

Section 932.9(c)(4) exempts a Bank’s

unsecured lending to another Bank from

all the unsecured credit limits of this

rule, although a Bank still must report

its credit exposure to another Bank to

the extent required by § 932.9(e). In

adopting § 932.9(c)(4), the Finance

Board is incorporating into the

unsecured credit rule a similar interBank exclusion that was contained in

the FMP’s unsecured credit provision.

See Id. at 41476, 41478.

Transition Provision for Downgrades

The Finance Board has adopted the

transition provision of § 932.9(d), as

proposed. See Id. at 41480–81. This

provision provides that in the event a

lower maximum credit limit is imposed

on a counterparty (including on a GSE)

because an NRSRO has downgraded the

credit rating applicable to a

counterparty or has placed a

counterparty on a credit watch for a

potential downgrade, a Bank is not

required to unwind or liquidate any

transaction or position that was entered

into prior to the date of the downgrade

or the placement on credit watch so

long as the transaction or position

complied with the limits at the time it

was entered.10 However, any new

unsecured extensions of credit to the

counterparty would have to comply

with the new lower maximum exposure

limit. The rule makes clear that a

renewal of an existing unsecured

extension of credit, including any

decision not to terminate a sale of

federal funds subject to a continuing

contract, would be considered a new

extension of unsecured credit.

Reporting Requirements

The Finance Board is adopting the

reporting requirements contained in

§ 932.9(e), generally as proposed. These

requirements are in substance the same

as those that were contained in

§ 932.9(c) of the version of the

unsecured credit rule adopted by the

Finance Board in December 2000.

However, in adopting the final version

of § 932.9, the Finance Board has added

new provision to § 932.9(e) which

requires the Banks promptly to report

any positions in excess of the term limit,

the overall limit or the special GSE limit

set forth in the rule.

Under this provision, the Banks must

report monthly to the Finance Board the

amount of unsecured credit to a single

counterparty, or group of affiliated

counterparty, that exceeds five percent

of either a Bank’s total capital or the

counterparty’s, or the affiliated

counterparties’ combined, Tier 1 capital,

or if Tier 1 capital is not available the

counterparty’s total capital (as defined

by the counterparty’s principal

regulator) or some other comparable

measure identified by the Bank. As

discussed above, the consolidated

capital of the holding company of the

group of affiliated counterparties would

be considered the combined capital of

that affiliated group. In addition, the

Banks must report monthly to the

Finance Board the amount of the Bank’s

total combined secured and unsecured

extensions of credit to a single

counterparty or group of affiliated

counterparties that exceed five percent

of a Bank’s total assets.

These reporting obligations apply to

all extensions of credit by a Bank

(including extensions of credit to other

Banks), except those arising from a

Bank’s purchase of obligations of, or

guaranteed by, the United States. As

discussed above Banks must report

promptly after the last business day of

the month any extensions of credit in

excess of the limits set forth in

§§ 932.9(e)(1) and (e)(2) that occurred

during that month.

New § 932.9(e)(3) requires that a Bank

report promptly to the Finance Board

any time its extensions of unsecured

credit exceed any one or more of the

limits set forth in §§ 932.9(a), (b) or (c).

The Banks should report the name of

the counterparty or group of affiliated

counterparties involved, the date or

dates for which the Bank was not in

compliance, the level of the limit

calculated in accordance with the rule

and the amount by which the Bank’s

extension of unsecured credit exceeded

the limit. The Bank may also include a

brief statement describing any

extenuating circumstances or other

factors that may have led to noncompliance with the limits. The Finance

Board believes that the initial report by

the Bank need only be brief. If

additional information is needed, the

Finance Board will request it from the

Bank depending on the particular

circumstances of the situation. The

Finance Board has not set a specific

deadline for submitting a report

required under § 932.9(e)(3) to provide

some flexibility in this area. By way of

guidance, however, the Finance Board

believes that a report would be prompt

if it occurred within two business days

of when the Bank recognizes that a limit

had been breached.

The Finance Board is adopting this

new provision to help it closely monitor

the effectiveness of these unsecured

credit limits, and the Banks’

concentration of credit. The Finance

Board also believes that it is more

effective and provides an opportunity

for quick action (if needed) to require

that reports be made to the Finance

Board as soon as a Bank finds that it is

not in compliance with the unsecured

credit limits rather than seek such

information on an ad hoc basis or wait

for the monthly credit reporting

required under the rule. The

requirement also closes gaps in the

reporting provision in that a Bank could

be in violation of the unsecured credit

limits with regard to a lower-rated

counterparty but not necessarily be

required to report the credit

concentration under §§ 932.9(e)(1) or

(2).

Calculating Extensions of Credit

The Finance Board has adopted

proposed § 932.9(f) as § 932.9(f)(1) with

one change to make clear that any credit

exposure from a derivative contract

against which the Bank holds collateral

is not counted as unsecured credit. The

66728 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

provision, as adopted, also makes clear

that the Bank must hold this collateral

in accordance with § 932.4(e)(2)(ii)(B) in

order for the value of the collateral to be

subtracted from the credit exposure

arising from the derivative contract. As

discussed in Section II of this preamble,

the Finance Board has also adopted new

§ 932.9(f)(2) to clarify the status of

certain debt securities and debt

obligations purchased by the Bank.

Section 932.9(f) also has been

restructured to accommodate the new

provision. Other parts of § 932.4(f)(1) are

adopted as proposed. See Id. at 41481.

Thus, the amount of unsecured credit

arising from on-balance sheet

transactions will equal the sum of the

book value of the item plus any amounts

accrued by the Bank but not yet paid

with respect to that item. The rule also

requires a Bank to measure exposures

from off-balance sheet and derivative

transactions in accordance with § 932.4

of the Finance Board rules, which sets

forth the requirements for calculating a

Bank’s credit risk-based capital charge.

Thus, unsecured credit exposures

arising from off-balance sheet

transactions should be measured in

accordance with § 932.4(f); unsecured

credit exposures from single derivatives

contracts should be measured in

accordance with § 932.4(g); and

unsecured credit exposures for

derivative contracts subject to a

qualifying bilateral netting contract

should be measured in accordance with

§ 932.4(h). The Banks should include

both the current credit exposure and the

PFE in calculations of exposures arising

from derivative contracts.

As previously discussed, § 932.9(f)(2)

has been adopted to clarify the Finance

Board’s view that any debt obligation or

debt security purchased by the Bank

will be subject to the unsecured credit

limits unless the Bank’s credit exposure

arising from these instruments is

collateralized in accordance with

§ 932.4(e)(2)(ii)(B) or the Finance Board

has made a determination on a case-bycase basis that the debt obligation

should not be subject to the unsecured

credit limits. The new provision

specifically states that MBS are not

subject to the unsecured credit limits

nor are loans identified in §§ 955.2(a)(1)

and (2) and purchased by the Bank as

AMA under authority granted in part

955. HFA bonds purchased under a

Bank’s AMA authority, however, would

be subject to the unsecured credit limits

unless the Finance Board determines

otherwise. Further, § 932.9(f)(2) only

addresses debt obligations or debt

securities purchased by the Bank. Thus,

transactions with members originated

by the Bank such as advances or letters

of credit would be considered secured

and not subject to the rules as long as

collateral is posted and held in

accordance with any applicable Finance

Board rules and Bank policies.

United States Obligations

The Finance Board is adopting

§ 932.9(g), as proposed. See Id. at 41481.

This provision makes clear that

obligations of, or guaranteed by, the

United States are not subject to the any

of requirements of § 932.9 (including the

reporting requirements that are

contained in § 932.9(e)).

IV. Regulatory Flexibility Act

The final rule applies only to the

Banks, which do not come within the

meaning of small entities as defined in

the Regulatory Flexibility Act (RFA).

See 5 U.S.C. 601(6). Therefore, in

accordance with section 605(b) of the

RFA, 5 U.S.C. 605(b), the Finance Board

hereby certifies that this final rule, will

not have a significant economic effect

on a substantial number of small

entities.

V. Paperwork Reduction Act

The final rule does not contain any

collections of information pursuant to

the Paperwork Reduction Act of 1995.

See 44 U.S.C. 3501 et seq. Therefore, the

Finance Board has not submitted any

information to the Office of

Management and Budget for review.

List of Subjects in 12 CFR Parts 930 and

932

Capital, Credit, Federal home loan

banks, Investments, Reporting and

recordkeeping requirements.

Accordingly, the Federal Housing

Finance Board amends title 12, chapter

IX, Code of Federal Regulations as

follows:

PART 930—DEFINITIONS APPLYING

TO RISK MANAGEMENT AND CAPITAL

REGULATIONS

1. The authority citation for part 930

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a),

1426, 1440, 1443, 1446.

2. In § 930.1 revise the definition of

Affiliated counterparty, and add, in

correct alphabetical order the definition

for Sales of federal funds subject to a

continuing contract, to read as follows:

§ 930.1 Definitions.

* * * * *

Affiliated counterparty means a

counterparty of a Bank that controls, is

controlled by or is under common

control with another counterparty of the

Bank. For the purposes of this definition

only, direct or indirect ownership

(including beneficial ownership) of

more than 50 percent of the voting

securities or voting interests of an entity

constitutes control.

* * * * *

Sales of federal funds subject to a

continuing contract means an overnight

federal funds loan that is automatically

renewed each day unless terminated by

either the lender or the borrower.

* * * * *

PART 932—FEDERAL HOME LOAN

BANK CAPITAL REQUIREMENTS

3. The authority citation for part 932

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a),

1426, 1440, 1443, 1446.

4. Revise § 932.9 to read as follows:

§ 932.9 Limits on unsecured extensions of

credit to one counterparty or affiliated

counterparties; reporting requirements for

total extensions of credit to one

counterparty or affiliated counterparties.

(a) Unsecured extensions of credit to

a single counterparty. A Bank shall not

extend unsecured credit to any single

counterparty (other than a GSE) in an

amount that would exceed the limits of

this paragraph. A Bank shall not extend

unsecured credit to a GSE in an amount

that would exceed the limits set forth in

paragraph (c) of this section. If a thirdparty provides an irrevocable,

unconditional guarantee of repayment

of a credit (or any part thereof), the

third-party guarantor shall be

considered the counterparty for

purposes of calculating and applying

the unsecured credit limits of this

section with respect the to guaranteed

portion of the transaction.

(1) Term limits. All unsecured

extensions of credit by a Bank to a

single counterparty that arise from the

Bank’s on- and off-balance sheet and

derivative transactions (but excluding

the amount of sales of federal funds

with a maturity of one day or less and

sales of federal funds subject to a

continuing contract) shall not exceed

the product of the maximum capital

exposure limit applicable to such

counterparty, as determined in

accordance with paragraph (a)(4) of this

section and Table 4 of this part,

multiplied by the lesser of:

(i) The Bank’s total capital; or

(ii) The counterparty’s Tier 1 capital,

or if Tier 1capital is not available, total

capital (as defined by the counterparty’s

principal regulator) or some similar

comparable measure identified by the

Bank.

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations 66729

(2) Overall limits including sales of

overnight federal funds. All unsecured

extensions of credit by a Bank to a

single counterparty that arise from the

Bank’s on- and off-balance sheet and

derivative transactions, including the

amounts of sales of federal funds with

a maturity of one day or less and sales

of federal funds subject to a continuing

contract, shall not exceed twice the

limit calculated pursuant to paragraph

(a)(1) of this section.

(3) Limits for certain obligations

issued by state, local or tribal

governmental agencies. The term limit

set forth in paragraph (a)(1) of this

section when applied to the marketable

direct obligations of state, local or tribal

government unit or agencies that are

acquired member assets identified in

§ 955.2(a)(3) of this chapter or are

otherwise excluded from the prohibition

against investments in whole mortgages

or whole loan or interests in such

mortgages or loans by § 956.3(a)(4)(iii) of

this chapter shall be calculated based on

the Bank’s total capital and the credit

rating assigned to the particular

obligation as determined in accordance

with paragraph (a)(5) of this section. If

a Bank owns series or classes of

obligations issued by a particular state,

local or tribal government unit or

agency or has extended other forms of

unsecured credit to such entity falling

into different rating categories, the total

amount of unsecured credit extended by

the Bank to that government unit or

agency shall not exceed the term limit

associated with the highest-rated

obligation issued by the entity and

actually purchased by the Bank.

(4) Bank determination of applicable

maximum capital exposure limits. (i)

Except as set forth in paragraph (a)(4)(ii)

or (a)(4)(iii) of this section, the

applicable maximum capital exposure

limits are assigned to each counterparty

based upon the long-term credit rating

of the counterparty, as determined in

accordance with paragraph (a)(5) of this

section, and are provided in the

following Table 4 of this part:

TABLE 4.—MAXIMUM LIMITS ON UNSECURED EXTENSIONS OF CREDIT TO A

SINGLE COUNTERPARTY BY

COUNTERPARTY LONG-TERM CREDIT

RATING CATEGORY

Long-term credit rating of

counterparty category

Maximum capital exposure

limit

(in percent)

Highest Investment Grade .... 15

Second Highest Investment

Grade ................................ 14

TABLE 4.—MAXIMUM LIMITS ON UNSECURED EXTENSIONS OF CREDIT TO A

SINGLE COUNTERPARTY BY

COUNTERPARTY LONG-TERM CREDIT

RATING CATEGORY—Continued

Long-term credit rating of

counterparty category

Maximum capital exposure

limit

(in percent)

Third Highest Investment

Grade ................................ 9

Fourth Highest Investment

Grade ................................ 3

Below Investment Grade or

Other ................................. 1

(ii) If a counterparty does not have a

long-term credit rating but has received

a short-term credit rating from an

NRSRO, the maximum capital exposure

limit applicable to that counterparty

shall be based upon the short-term

credit rating, as determined in

accordance with paragraph (a)(5) of this

section, as follows:

(A) The highest short-term investment

grade credit rating shall correspond to

the maximum capital exposure limit

provided in Table 4 of this part for the

third highest long-term investment

grade rating;

(B) The second highest short-term

investment grade rating shall

correspond to the maximum capital

exposure limit provided in Table 4 of

this part for the fourth highest long-term

investment grade rating; and

(C) The third highest short-term

investment grade rating shall

correspond to the maximum capital

exposure limit provided in Table 4 of

this part for the fourth highest long-term

investment grade rating.

(iii) If a specific debt obligation issued

by a counterparty receives a credit

rating from an NRSRO that is lower than

the counterparty’s long-term credit

rating, the total amount of the lowerrated obligation held by the Bank may

not exceed a sub-limit calculated in

accordance with paragraph (a)(1) of this

section, except that the Bank shall use

the credit rating associated with the

specific obligation to determine the

applicable maximum capital exposure

limit. For purposes of this paragraph,

the credit rating of the debt obligation

shall be determined in accordance with

paragraph (a)(5) of this section.

(5) Bank determination of applicable

credit ratings. The following criteria

shall be applied to determine a

counterparty’s credit rating:

(i) The counterparty’s most recent

credit rating from a given NRSRO shall

be considered;

(ii) If only one NRSRO has rated the

counterparty, that NRSRO’s rating shall

be used. If a counterparty has received

credit ratings from more than one

NRSRO, the lowest credit rating from

among those NRSROs shall be used;

(iii) Where a credit rating has a

modifier, the credit rating is deemed to

be the credit rating without the

modifier;

(iv) If a counterparty is placed on a

credit watch for a potential downgrade

by an NRSRO, the credit rating from that

NRSRO at the next lower grade shall be

used; and

(v) If a counterparty is not rated by an

NRSRO, the Bank shall determine the

applicable credit rating by using credit

rating standards available from an

NRSRO or other similar standards.

(b) Unsecured extensions of credit to

affiliated counterparties. (1) In general.

The total amount of unsecured

extensions of credit by a Bank to a group

of affiliated counterparties that arise

from the Bank’s on- and off-balance

sheet and derivative transactions,

including sales of federal funds with a

maturity of one day or less and sales of

federal funds subject to a continuing

contract, shall not exceed thirty percent

of the Bank’s total capital.

(2) Relation to individual limits. The

aggregate limits calculated under this

paragraph shall apply in addition to the

limits on extensions of unsecured credit

to a single counterparty imposed by

paragraph (a) of this section.

(c) Special limits for GSEs. (1) In

general. Unsecured extensions of credit

by a Bank to a GSE that arise from the

Bank’s on- and off-balance sheet and

derivative transactions, including from

the purchase of any subordinated debt

subject to the sub-limit set forth in

paragraph (c)(2) of this section, from any

sales of federal funds with a maturity of

one day or less and from sales of federal

funds subject to a continuing contract,

shall not exceed the lesser of:

(i) The Bank’s total capital; or

(ii) The GSE’s total capital (as defined

by the GSE’s principal regulator) or

some similar comparable measure

identified by the Bank.

(2) Sub-limit for subordinated debt.

The maximum amount of subordinated

debt issued by a GSE and held by a

Bank shall not exceed the term limit

calculated under paragraph (a)(1) of this

section, except that a Bank shall use the

credit rating of the GSE’s subordinated

debt to determine the applicable

maximum capital exposure limit. The

credit rating of the subordinated debt

shall be determined in accordance with

paragraph (a)(5) of this section.

(3) Limits applying to a GSE after a

downgrade. If any NRSRO assigns a

credit rating to any senior debt

obligation issued (or to be issued) by a

66730 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Rules and Regulations

GSE that is below the highest

investment grade or downgrades, or

places on a credit watch for a potential

downgrade of the credit rating on any

senior unsecured obligation issued by a

GSE to below the highest investment

grade, the special limits on unsecured

extensions of credit under paragraph

(c)(1) of this section shall cease to apply,

and instead, the Bank shall calculate the

maximum amount of its unsecured

extensions of credit to that GSE in

accordance with paragraphs (a)(1) and

(a)(2) of this section.

(4) Extensions of unsecured credit to

other Banks. The limits of this section

do not apply to unsecured credit

extended by one Bank to another Bank.

(d) Extensions of unsecured credit

after downgrade or placement on credit

watch. If an NRSRO downgrades the

credit rating applicable to any

counterparty or places any counterparty

on a credit watch for a potential

downgrade, a Bank need not unwind or

liquidate any existing transaction or

position with that counterparty that

complied with the limits of this section

at the time it was entered. In such a

case, however, a Bank may extend any

additional unsecured credit to such a

counterparty only in compliance with

the limitations that are calculated using

the lower maximum exposure limits.

For the purposes of this section, the

renewal of an existing unsecured

extension of credit, including any

decision not to terminate any sales of

federal funds subject to a continuing

contract, shall be considered an

additional extension of unsecured credit

that can be undertaken only in

accordance with the lower limit.

(e) Reporting requirements. (1) Total

unsecured extensions of credit. Each

Bank shall report monthly to the

Finance Board the amount of the Bank’s

total unsecured extensions of credit

arising from on- and off-balance sheet

and derivative transactions to any single

counterparty or group of affiliated

counterparties that exceeds 5 percent of:

(i) The Bank’s total capital; or

(ii) The counterparty’s, or affiliated

counterparties’ combined, Tier 1 capital,

or if Tier 1 capital is not available, total

capital (as defined by each

counterparty’s principal regulator) or

some similar comparable measure

identified by the Bank.

(2) Total secured and unsecured

extensions of credit. Each Bank shall

report monthly to the Finance Board the

amount of the Bank’s total secured and

unsecured extensions of credit arising

from on- and off-balance sheet and

derivative transactions to any single

counterparty or group of affiliated

counterparties that exceeds 5 percent of

the Bank’s total assets.

(3) Extensions of credit in excess of

limits. A Bank shall report promptly to

the Finance Board any extensions of

unsecured credit that exceeds any limit

set forth in paragraphs (a), (b) or (c) of

this section. In making this report, a

Bank shall provide the name of the

counterparty or group of affiliated

counterparties to which the excess

unsecured credit has been extended, the

dollar amount of the applicable limit

which has been exceeded, the dollar

amount by which the Bank’s extension

of unsecured credit exceeds such limit,

the dates for which the Bank was not in

compliance with the limit, and, if

applicable, a brief explanation of any

extenuating circumstances which

caused the limit to be exceeded.

(f) Measurement of unsecured

extensions of credit. (1) In general. For

purposes of this section, unsecured

extensions of credit will be measured as

follows:

(i) For on-balance sheet transactions,

an amount equal to the sum of the book

value of the item plus net payments due

the Bank;

(ii) For off-balance sheet transactions,

an amount equal to the credit equivalent

amount of such item, calculated in

accordance with § 932.4(f) of this part;

and

(iii) For derivative transactions, an

amount equal to the sum of the current

and potential future credit exposures for

the derivative contract, where those

values are calculated in accordance with

§§ 932.4(g) or 932.4(h) of this part, as

applicable, less the amount of any

collateral that is held in accordance

with the requirements of

§ 932.4(e)(2)(ii)(B) of this part against

the credit exposure from the derivative

contract.

(2) Status of debt obligations

purchased by the Bank. Any debt

obligation or debt security (other than

mortgage-backed securities or acquired

member assets that are identified in

§§ 955.2(a)(1) and (2) of this chapter)

purchased by a Bank shall be

considered an unsecured extension of

credit for the purposes of this section,

except:

(i) Any amount owed the Bank against

which the Bank holds collateral in

accordance with § 932.4(e)(2)(ii)(B) of

this part; or

(ii) Any amount which the Finance

Board has determined on a case-by-case

basis shall not be considered an

unsecured extension of credit.

(g) Obligations of the United States.

Obligations of, or guaranteed by, the

United States are not subject to the

requirements of this section.

Dated: December 11, 2001.

By the Board of Directors of the Federal

Housing Finance Board.

J. Timothy O’Neill,

Chairman.

[FR Doc. 01–31570 Filed 12–26–01; 8:45 am]

BILLING CODE 6725–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2001–CE–29–AD; Amendment

39–12562; AD 2001–25–09]

RIN 2120–AA64

Airworthiness Directives; Dornier

Luftfahrt GmbH Model 228–212

Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD) that

applies to all Dornier Luftfahrt GmbH

(Dornier) Model 228–212 airplanes that

have a certain brake assembly installed.

This AD requires you to inspect the

brake housing subassembly for cracks,

nicks, or corrosion (referred to as

damage). This AD also requires you to

replace damaged brake housing

assemblies and modify the torque takeout cavity. This AD is the result of

mandatory continuing airworthiness

information (MCAI) issued by the

airworthiness authority for Germany.

The actions specified by this AD are

intended to detect and correct damage

to the brake housing assembly, which

could result in failure of this assembly.

Such failure could lead to loss of

braking action on landing and possible

loss of control of the airplane.

DATES: This AD becomes effective on

January 18, 2002.

The Director of the Federal Register

approved the incorporation by reference

of certain publications listed in the

regulations as of January 18, 2002.

ADDRESSES: You may get the service

information referenced in this AD from

Dornier Luftfahrt GmbH, Customer

Support, P.O. Box 1103, D–82230

Wessling, Federal Republic of Germany;

telephone: (08153) 300; facsimile:

(08153) 304463. You may view this

information at the Federal Aviation

Administration (FAA), Central Region,

Office of the Regional Counsel,

Attention: Rules Docket No. 2001–CE–

29–AD, 901 Locust, Room 506, Kansas

City, Missouri 64106; or at the Office of