[Federal Register Volume 66, Number 248 (Thursday, December 27, 2001)]
[Rules and Regulations]
[Pages 66718-66730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31570]


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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.

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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 Sec. 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.

[[Page 66719]]

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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 932.9 below.

Effective Date of Rule

    Four of the commenters requested that the Finance Board delay the 
effective date of Sec. 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 Sec. 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 Sec. 932.9 adopted herein if the January 28, 2002 date for 
complying with Sec. 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 Sec. 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.
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    \1\ Further, 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 Sec. 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 Sec. 932.9.
    \2\ The Finance Board is also extending the effective date for 
the liquidity requirements set forth in Sec. 932.8 so that both the 
amended unsecured credit limits and the new liquidity requirements 
will take effect on the same day.
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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 Sec. 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 short-term exposures on short-term credit ratings. The other 
commenter suggested the Finance Board provide the Banks the option of 
using short-term credit

[[Page 66720]]

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 long-term credit rating. First, the 
Finance Board stated that the reliance on long-term 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.
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    \3\ See 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 * * *).
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    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 Sec. 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 
Sec. 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 Sec. 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

[[Page 66721]]

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 Sec. 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.
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    \4\ The Office of the Comptroller of the Currency sets forth its 
lending limits at 12 CFR part 32.
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    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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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

[[Page 66722]]

not be considered affiliates for purposes of Sec. 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.
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    \5\ The 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 Sec. 932.9.
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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.
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    \6\ Mortgage-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.
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    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 Sec. 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 Sec. 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 lower-rated 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 issuer-
counterparty, 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 Sec. 932.9 to require a Bank to 
measure the unsecured credit exposure arising from a derivative 
contract in accordance with Secs. 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, 
Sec. 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

[[Page 66723]]

measurement for derivative contracts with that undertaken when 
calculating a Bank's credit risk capital charges for derivative 
contracts under Sec. 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 Sec. 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 Sec. 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, Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 932.9.
    The Finance Board agrees with the commenters, however, that 
application of the proposed limits in Sec. 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 Sec. 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 Sec. 932.9(a)(3), the HFA 
obligation must either be an acquired member asset, as defined in 
Sec. 955.2 of the Finance Board rules, or be the type of obligation 
excluded by Sec. 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

[[Page 66724]]

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 Sec. 932.4(e)(2)(ii)(B). To make 
this view clear, the Finance Board has adopted new Sec. 932.9(f)(2). 
New Sec. 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 
Secs. 955.2(a)(1) and (2), 12 CFR 955.2(a)(1) and (2), are also exempt.
    The AMA exemption under new Sec. 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 Sec. 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 Sec. 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 third-party guarantor, the Finance Board would 
be willing to consider allowing this treatment to be extended on a 
case-by-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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 
Sec. 932.9 as requested by the commenter. Upon the effective date of 
Sec. 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 Sec. 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 Sec. 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 non-member 
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 Sec. 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.

[[Page 66725]]

III. The Final Rule

    Except as noted below, the Finance Board is adopting the amendments 
to Sec. 930.1 and Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 932.9(a) 
slightly to accommodate the new provisions.
    As adopted, Sec. 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 Sec. 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 
Sec. 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 non-GSE 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 
Sec. 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, Sec. 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-by-case 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 Sec. 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 Sec. 932.9(a)(3), the HFA obligation 
must either be an acquired member asset, as defined in Sec. 955.2 of 
the Finance Board rules, or be the type of obligation excluded by 
Sec. 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 
Sec. 932.9(a)(3), and the

[[Page 66726]]

limit for that investment would be calculated under Sec. 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 lower-rated, 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.
---------------------------------------------------------------------------

    \7\ The credit risk percentage requirements are set forth in 
Sec. 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.
---------------------------------------------------------------------------

    As set forth in Sec. 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 Sec. 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 short-
term investment grade credit ratings is more fully discussed in the 
proposing release. 66 FR at 41480.
---------------------------------------------------------------------------

    \8\ The 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.
---------------------------------------------------------------------------

    The second exception to exclusive use of long-term credit ratings 
is set forth in Sec. 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 sub-limit 
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\
---------------------------------------------------------------------------

    \9\ By 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.
---------------------------------------------------------------------------

    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 Sec. 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 Sec. 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 Sec. 932.9(b), as proposed. See Id. at 
41480 (discussing proposed affiliated counterparty limit). Under 
Sec. 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 
Sec. 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 Sec. 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

[[Page 66727]]

unsecured lending, including sales of overnight federal funds and a 
Bank's purchases of the GSE's subordinated debt. In addition, 
Sec. 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, Sec. 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 Sec. 932.9(e). In adopting Sec. 932.9(c)(4), the Finance 
Board is incorporating into the unsecured credit rule a similar inter-
Bank 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 
Sec. 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.
---------------------------------------------------------------------------

    \10\ The finance Board has already stated that Sec. 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.
---------------------------------------------------------------------------

Reporting Requirements

    The Finance Board is adopting the reporting requirements contained 
in Sec. 932.9(e), generally as proposed. These requirements are in 
substance the same as those that were contained in Sec. 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 Sec. 932.9, 
the Finance Board has added new provision to Sec. 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 Secs. 932.9(e)(1) and (e)(2) that occurred 
during that month.
    New Sec. 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 Secs. 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 non-compliance 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 Sec. 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 Secs. 932.9(e)(1) or (2).

Calculating Extensions of Credit

    The Finance Board has adopted proposed Sec. 932.9(f) as 
Sec. 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

[[Page 66728]]

provision, as adopted, also makes clear that the Bank must hold this 
collateral in accordance with Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 932.4(f); 
unsecured credit exposures from single derivatives contracts should be 
measured in accordance with Sec. 932.4(g); and unsecured credit 
exposures for derivative contracts subject to a qualifying bilateral 
netting contract should be measured in accordance with Sec. 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, Sec. 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 Sec. 932.4(e)(2)(ii)(B) or the 
Finance Board has made a determination on a case-by-case 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 Secs. 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, Sec. 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 Sec. 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 
Sec. 932.9 (including the reporting requirements that are contained in 
Sec. 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 Sec. 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:


Sec. 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 Sec. 932.9 to read as follows:


Sec. 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 third-party 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.

[[Page 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 Sec. 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 
Sec. 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
------------------------------------------------------------------------
                                                              Maximum
                                                              capital
    Long-term credit rating of counterparty category      exposure limit
                                                            (in percent)
------------------------------------------------------------------------
Highest Investment Grade................................              15
Second Highest Investment Grade.........................              14
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 lower-
rated 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

[[Page 66730]]

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 
Sec. 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 
Secs. 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 
Sec. 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 Secs. 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 Sec. 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