Source: https://regulations.justia.com/regulations/fedreg/2016/12/12/2016-29613.html
Timestamp: 2018-12-19 08:08:54
Document Index: 145971089

Matched Legal Cases: ['art 615', 'art 615', 'art 615', 'art 615', 'art 621', 'art 615']

Order Excluding Farm Credit System Institutions From the Commodity Exchange Act's Definition of “Commodity Trading Advisor”, 89447-89449 [2016-29613] :: Commodity Futures Trading Commission :: Agencies And Commissions :: Regulation Tracker :: Justia
Justia Regulation Tracker Agencies And Commissions Commodity Futures Trading Commission Order Excluding Farm Credit System Institutions From the Commodity Exchange Act's Definition of “Commodity Trading Advisor”, 89447-89449 [2016-29613]
Order Excluding Farm Credit System Institutions From the Commodity Exchange Act's Definition of “Commodity Trading Advisor”, 89447-89449 [2016-29613]
Download as PDF Federal Register / Vol. 81, No. 238 / Monday, December 12, 2016 / Notices Number 0648–0690 (Vessel Monitoring System Requirements in the Eastern Pacific Highly Migratory Species Fisheries) into this information collection. This collection applies to owners and operators of U.S. commercial fishing vessels that fish in the West Coast exclusive economic zone and the eastern Pacific Ocean waters of the Inter-American Tropical Tuna Commission (IATTC) Convention Area for highly migratory species (HMS) as defined by the Fishery Management Plan (FMP) for United States (U.S.) West Coast Fisheries for Highly Migratory Species, as well as a broader group of tuna and tuna-like species covered by the IATTC. These vessel owners and operators are required to submit information about their intended and actual fishing activities. These submissions would allow the National Marine Fisheries Service (NMFS) and the Pacific Fisheries Management Council to monitor the fisheries. Submissions include pre-trip reporting requirements and vessel monitoring systems (VMS). Pre-trip reporting requirements are essential for effectively and efficiently assigning available observer coverage to selected HMS vessels. Data collected by observers are critical to evaluate that the objectives of the HMS FMP are being achieved and for evaluating the impacts of potential changes in fishery management. VMS units facilitate enforcement of management measures associated with HMS fisheries, provide timely information on associated fleet activities and enable confirmation of reported vessel fishing activity locations, which help validate logbook record accuracy. II. Method of Collection VMS installation/activation and on/ off reports are submitted electronically, VMS position reports are submitted via automated electronic transmission and pre-trip notifications are made by telephone. mstockstill on DSK3G9T082PROD with NOTICES III. Data OMB Control Number: 0648–0498. Form Number(s): None. Type of Review: Regular submission (revision and extension of a current information collection). Affected Public: Business or other forprofit organizations. Estimated Number of Respondents: 34. Estimated Time per Response: Vessel monitoring system (VMS) activation reports, 15 minutes; pre-trip reports, 5 minutes; maintenance and repair, 60 minutes. VerDate Sep<11>2014 18:59 Dec 09, 2016 Jkt 241001 Estimated Total Annual Burden Hours: 45. Estimated Total Annual Cost to Public: $22,187 (reporting costs for vessels 24 meters or more is covered by vessel owner/operators). IV. Request for Comments Comments are requested on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden (including hours and cost) of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval of this information collection; they also will become a matter of public record. Dated: December 7, 2016. Sarah Brabson, NOAA PRA Clearance Officer. [FR Doc. 2016–29688 Filed 12–9–16; 8:45 am] BILLING CODE 3510–22–P COMMODITY FUTURES TRADING COMMISSION Order Excluding Farm Credit System Institutions From the Commodity Exchange Act’s Definition of ‘‘Commodity Trading Advisor’’ Commodity Futures Trading Commission. ACTION: Notice and order. AGENCY: Pursuant to the authority under section 1a(12)(B)(vii) of the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’), the Commodity Futures Trading Commission (‘‘Commission’’) is issuing an order (‘‘Order’’) excluding institutions in the Farm Credit System (‘‘FCS’’) from the definition of ‘‘commodity trading advisor’’ (‘‘CTA’’). The Commission finds that FCS institutions are primarily engaged in lending to U.S. farmers, ranchers, and agricultural cooperatives, and that any commodity trading advice provided by FCS institutions to their clientele is solely incidental to that lending conduct, as required by CEA section 1a(12)(C). Therefore, the Commission concludes that FCS institutions are not 89447 entities within the intent of the statutory CTA definition, and that the issuance of this Order excluding them from the definition is appropriate. DATES: Effective date: December 12, 2016. FOR FURTHER INFORMATION CONTACT: Amanda Olear, Associate Director, Division of Swap Dealer and Intermediary Oversight, (202) 418–5283, aolear@cftc.gov, or Elizabeth Groover, Special Counsel, Division of Swap Dealer and Intermediary Oversight, (202) 418–5985, egroover@cftc.gov. SUPPLEMENTARY INFORMATION: I. Background On October 28, 2016, the Farm Credit Council (‘‘Farm Credit’’ or ‘‘Council’’) petitioned the Commission for an order excluding FCS institutions from the CTA definition in the CEA. The Council is the national trade association for the FCS, a federally-chartered network of borrower-owned lending institutions comprised of cooperatives and related service organizations.1 Farm Credit’s petition states that the FCS institutions should be excluded from the CTA definition because (1) the FCS institutions are not within the intent of the CTA definition because they are in the business of banking and lending, and (2) certain services provided by them, which could constitute commodity trading advice, are solely incidental to their primary lending business.2 FCS institutions are important lenders to U.S. farmers, ranchers and agricultural cooperatives. The FCS institutions include the FCS Banks (CoBank, AgriBank, AgFirst Farm Credit Bank, and Farm Credit Bank of Texas), as well as Agricultural Credit Associations, Federal Land Credit Associations, and Production Credit Associations (together, the ‘‘Associations’’).3 The FCS Banks make SUMMARY: PO 00000 Frm 00023 Fmt 4703 Sfmt 4703 1 Petition for Order to Exclude Farm Credit System Institutions from the Commodity Trading Advisor Definition in Accordance with Section 1a(12)(B)(vii) of the Commodity Exchange Act, Farm Credit Council (Oct. 28, 2016) (‘‘Petition’’), at 1. 2 Id. at 3. 3 An Agricultural Credit Association (ACA) can make short-, intermediate-, and long-term loans, as each ACA contains two subsidiaries: A Federal Land Credit Association (FLCA) that can only make long-term real estate loans, and a Production Credit Association (PCA) that makes short- and intermediate-term loans. Although legally separated, the ACA and its FLCA and PCA subsidiaries operate an integrated lending business with loans made through the subsidiary possessing the appropriate authority. The ACA, PCA, and FLCA are jointly and severally liable on the full amount of the indebtedness to the relevant FCS Bank under the FCS Bank’s General Financing E:\FR\FM\12DEN1.SGM Continued 12DEN1 89448 Federal Register / Vol. 81, No. 238 / Monday, December 12, 2016 / Notices mstockstill on DSK3G9T082PROD with NOTICES loans to affiliated Associations in their geographic areas, which, in turn, make loans to farmers, ranchers, and other eligible borrowers.4 Although FCS institutions do not take deposits, they provide loans, leases, and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agricultural cooperatives, rural utilities, and other eligible borrowers in all 50 states, the District of Columbia, and Puerto Rico.5 The Farm Credit Administration (‘‘FCA’’) is responsible for regulating and supervising the FCS institutions. The FCA is defined as an ‘‘appropriate federal banking agency’’ under the CEA6 and is one of the ‘‘Prudential Regulators’’ charged with implementing certain key regulatory requirements promulgated by the Dodd-Frank Act.7 The Petition states that the FCA regulates FCS institutions like banks, and that such regulation appropriately mitigates the risks of FCS institutions.8 In particular, the FCA promulgates policies and regulations intended to: Protect the safety and soundness of the FCS institutions; implement the FCA’s statutory authority in the Farm Credit Act of 1971; 9 establish minimum requirements for lending, related services, investments, capital, liquidity, and mission; and ensure adequate financial disclosure and appropriate governance of the FCS institutions.10 Consequently, the FCS institutions are subject to investment guidelines,11 capital requirements,12 liquidity Agreement. Additionally, the ACA, PCA, and FLCA agree to guarantee each other’s debts and obligations, pledge their respective assets as security for the guarantee, and share common capital. Petition, at 2. 4 Id. Additionally, CoBank also lends directly to agricultural cooperatives, rural utilities, and other eligible borrowers. Id. 5 Petition, at 3. 6 7 U.S.C. 1a(2). 7 Public Law 111–203, 124 Stat. 1376 (2010). 8 Petition, at 3. In fact, Farm Credit believes that FCS institutions are, in fact, banks that would otherwise be excluded from the CTA definition by CEA section 1a(12)(B)(i). However, Farm Credit states that it petitioned for this Order to achieve greater certainty for the FCS institutions because the term ‘‘bank’’ is not defined in the CEA or the Commission’s regulations. Id. 9 12 U.S.C. 2001–2279cc. 10 2015 Annual Report on the Farm Credit System, Farm Credit Administration, Regulator of the FCS, p. 5 (‘‘FCA Annual Report’’). See also id. at 41–44. 11 12 CFR part 615, subpart E. 12 12 CFR part 615, subparts H and K. The FCA published final rules in July 2016 that are intended to ensure that FCS capital requirements are appropriate for the FCS’ cooperative structure, and comparable to the Basel III framework and the standardized approach adopted by the federal banking regulatory agencies. See Regulatory Capital Rules: Regulatory Capital, Implementation of Tier 1/Tier 2 Framework, 81 FR 49720 (July 28, 2016). VerDate Sep<11>2014 18:59 Dec 09, 2016 Jkt 241001 requirements,13 guidelines for the use of derivatives,14 risk management standards,15 periodic reporting obligations,16 as well as the FCA’s examination authority.17 FCS institutions use derivatives to manage their own risks, and also to offer their eligible borrowers or their affiliated Associations’ eligible borrowers the ability to hedge the risks, including interest rate risk, associated with their loans through the use of overthe-counter (‘‘OTC’’) swaps.18 The use of derivatives is specifically permitted and overseen by the FCA and is subject to certain conditions, in order to protect the FCS institution eligible borrowers and to preserve the ‘‘safety and soundness’’ of the FCS as a whole.19 The Petition states that swaps offered to FCS institution eligible borrowers are intended to assist them in hedging their interest rate and other risks arising from FCS institution loans, and that FCS institutions do not enter into swaps with persons unless they are eligible borrowers of an FCS institution.20 In connection with the lendingrelated swap transactions, FCS institutions sometimes provide eligible 13 12 CFR part 615, subpart E. C. Baer, Director, Office of Examination, FCA to All Farm Credit Banks, ‘‘Guidelines for Utilizing Derivative Products,’’ Bookletter, BL–023 (Oct. 31, 1995) (‘‘FCA Guidelines for Utilizing Derivatives’’), available at http://ww3.fca.gov/ readingrm/Handbook/_layouts/15/WopiFrame.aspx ?sourcedoc=/readingrm/Handbook/FCA%20 Bookletters/BL-023.docx&action=default. These Guidelines are designed to complement existing FCA regulations pertaining to risk management, investment practices, and asset and liability management practices. Id. at 3. 15 12 CFR part 615, subpart G. 16 12 CFR part 621, subpart D. 17 FCA Annual Report, p. 5. 18 Petition, at 2. The Petition states that FCS institutions also use derivatives to manage interest rate, liquidity, and balance sheet risks, but because FCS institutions primarily enter into such transactions with registered swap dealers, the Council does not view such activity as raising CTA concerns. Id. 19 Petition, at 5. The Petition specifically cites detailed FCA policies mandating counterparty credit risk management, as well as the ‘‘comprehensive safety and soundness regulation and oversight by the FCA.’’ Petition, at 5–6. As a result, all of the FCS institutions’ derivatives activity, whether with swap dealers or eligible borrowers, falls within the definition of ‘‘hedging or mitigating commercial risk’’ in Commission regulations. Id. at 6. This is consistent with the FCA’s historic position related to the use of derivatives by FCS institutions, as stated in the FCA Guidelines for Utilizing Derivatives: ‘‘The FCA considers any speculative use of derivatives an unsafe and unsound banking practice.’’ FCA Guidelines for Utilizing Derivatives, at 1. 20 Petition, at 2. Further, the Petition states that FCS institutions are prohibited from engaging in speculative derivatives activity, and that approved swap transactions with eligible borrowers are limited to those that enable eligible borrowers to hedge risk or that are necessary for the financing of individual transactions. Id. at 6. 14 David PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 borrowers with information about the financial instrument to be used, i.e., an interest rate swap, through presentations or in writing.21 The Petition further states that such information generally is generic and not intended as commodity trading advice.22 Additionally, an eligible borrower in this context acknowledges that the FCS institution is not its advisor, and that the borrower is not relying on the information as FCS institution advice.23 Nevertheless, because the FCS institution is providing information about a commodity interest transaction to an eligible borrower, Farm Credit and FCS institutions are concerned that the provision of such information could be construed as the provision of commodity trading advice requiring registration as a CTA with the Commission.24 Therefore, Farm Credit filed the Petition seeking an Order excluding the FCS institutions from the CEA’s CTA definition to clarify their registration and compliance obligations with respect to the CEA and the regulations promulgated thereunder.25 Farm Credit’s Petition argues that issuing such an Order is appropriate because FCS institutions are not within the intent of the CTA definition, and because any provision of information about commodity interests to eligible borrowers is solely incidental to the FCS institutions’ primary business of lending.26 II. Legal Authority and Analysis CEA section 1a(12)(A) defines ‘‘commodity trading advisor’’ as any person who for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in any commodity interest transactions; 27 any person who for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i) of CEA section 1(a)(12)(A); 28 any person who is 21 Petition, 22 Id. at 2–3. at 3. 23 Id. 24 Petition, 25 Id. at 2–3. at 3. 26 Id. 27 7 U.S.C. 1a(12)(A)(i). Specifically, such transactions include any contract for sale of a commodity for future delivery, security futures product, or swap; any agreement, contract, or transaction described in 7 U.S.C. 2(c)(2)(i) or 7 U.S.C. 2(c)(2)(D)(i); any commodity option authorized under section 6c of this title; or any leverage transaction authorized under section 23 of this title. 7 U.S.C. 1a(12)(A)(i)(I)–(IV). 28 7 U.S.C. 1a(12)(A)(ii). E:\FR\FM\12DEN1.SGM 12DEN1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 238 / Monday, December 12, 2016 / Notices registered with the Commission as a commodity trading advisor; 29 or any person who the Commission, by rule or regulation, may include if the Commission determines that the rule or regulation will effectuate the purposes of the CEA.30 CEA section 1a(12)(B) excludes certain types of persons and entities from the CTA definition, and permits the Commission to further exclude, such other persons not within the intent of the CTA definition as the Commission may specify by rule, regulation, or order.31 Additionally, CEA section 1a(12)(C) states that these exclusions, including any additional exclusion adopted through rule, regulation or order by the Commission, shall apply only if the furnishing of such services by persons referred to in CEA section 1a(12)(B) is solely incidental to the conduct of their business or profession.32 Therefore, the Commission must consider whether the potential CTA activity is solely incidental to the primary business purposes and conduct of the FCS institutions, and whether FCS institutions may be properly excluded from the CTA definition. The Commission agrees with the Petition that the provision of general information about interest rate swaps to eligible borrowers of FCS institutions is solely incidental to the FCS institutions’ main business and mission, i.e., agricultural lending. This conclusion is supported by the fact that the information is provided solely to eligible borrowers of the FCS institutions, and also by the strict limitations on the swap activities of FCS institutions—FCS institutions may only enter into swaps with an eligible borrower to hedge the risk(s) inherent in the underlying financing transaction between that borrower and an FCS institution.33 Additionally, the Petition states that FCS institutions do not incur significant costs in providing the information to eligible borrowers, do not charge eligible borrowers for the information, do not solicit eligible borrowers, do not require eligible borrowers to hedge their loan risks through an FCS institution, and do not hold themselves out to the public as an entity providing CTA services.34 Under these circumstances, the Commission concludes that the provision of information related to a swap transaction to eligible borrowers of FCS 29 7 U.S.C. 1a(12)(A)(iii). U.S.C. 1a(12)(A)(iv). 31 7 U.S.C. 1a(12)(B); 7 U.S.C. 1a(12)(B)(vii). 32 7 U.S.C. 1a(12)(C). 33 Petition, at 6. 34 Id. at 9. 30 7 VerDate Sep<11>2014 18:59 Dec 09, 2016 Jkt 241001 institutions is solely incidental to the FCS institutions’ lending activity with such eligible borrowers. Further, the primary business activity of FCS institutions is engaging in direct lending to farmers, ranchers, and other eligible borrowers under the regulation and supervision of the FCA. This lending activity is generally comparable to the lending activities of banking institutions, which are excluded from the CTA definition under section 1a(12)(B) of the CEA.35 The Commission believes that it is reasonable under the facts and circumstances discussed above to conclude that granting FCS institutions an exclusion from CTA registration is consistent with the intent of section 1a(12) of the CEA. III. Conclusion and Order The Commission finds that under the circumstances set forth above it is appropriate to exercise the statutory authority afforded to it under CEA section 1a(12)(B)(vii) to exclude FCS institutions from the CTA definition. Accordingly, the Commission is issuing this Order excluding FCS institutions from the CTA definition in CEA section 1a(12)(A). This Order is based upon the representations made by the petitioner. The Commission reserves authority, in its discretion, to revisit the Order. Issued in Washington, DC, on December 6, 2016, by the Commission. Robert N. Sidman, Deputy Secretary of the Commission. [FR Doc. 2016–29613 Filed 12–9–16; 8:45 am] BILLING CODE 6351–01–P DEPARTMENT OF ENERGY President’s Council of Advisors on Science and Technology Office of Science, Department of Energy. ACTION: Notice of partially-closed meeting. AGENCY: This notice sets forth the schedule and summary agenda for a partially-closed meeting of the President’s Council of Advisors on Science and Technology (PCAST), and describes the functions of the Council. The Federal Advisory Committee Act requires that public notice of these meetings be announced in the Federal Register. DATES: January 6, 2017, 9:00 a.m. to 12:00 p.m. ADDRESSES: The meeting will be held at the National Academy of Sciences, 2101 SUMMARY: 35 See PO 00000 7 U.S.C. 1a(12)(B)(i). Frm 00025 Fmt 4703 Sfmt 4703 89449 Constitution Avenue NW., Washington, DC in the Lecture Room. FOR FURTHER INFORMATION CONTACT: Information regarding the meeting agenda, time, location, and how to register for the meeting is available on the PCAST Web site at: http:// whitehouse.gov/ostp/pcast. A live video webcast and an archive of the webcast after the event are expected to be available at http://whitehouse.gov/ostp/ pcast. The archived video will be available within one week of the meeting. Questions about the meeting should be directed to Ms. Jennifer Michael at jmichael@ostp.eop.gov, (202) 456–4444. Please note that public seating for this meeting is limited and is available on a first-come, first-served basis. SUPPLEMENTARY INFORMATION: The President’s Council of Advisors on Science and Technology (PCAST) is an advisory group of the nation’s leading scientists and engineers, appointed by the President to augment the science and technology advice available to him from inside the White House, cabinet departments, and other Federal agencies. See the Executive Order at http://www.whitehouse.gov/ostp/pcast. PCAST is consulted about and provides analyses and recommendations concerning a wide range of issues where understandings from the domains of science, technology, and innovation may bear on the policy choices before the President. PCAST is co-chaired by Dr. John P. Holdren, Assistant to the President for Science and Technology, and Director, Office of Science and Technology Policy, Executive Office of the President, The White House; and Dr. Eric S. Lander, President, Broad Institute of the Massachusetts Institute of Technology and Harvard. Type of Meeting: Open and Closed. Proposed Schedule and Agenda: The President’s Council of Advisors on Science and Technology (PCAST) is scheduled to meet in open session on January 6, 2017 from 9:00 a.m. to 12:00 p.m. Open Portion of Meeting: During this open meeting, PCAST is scheduled to discuss its study semiconductors as well as its review on the National Nanotechnology Initiative, and other science and technology topics. Additional information and the agenda, including any changes that arise, will be posted at the PCAST Web site at: http:// whitehouse.gov/ostp/pcast. Closed Portion of the Meeting: PCAST may hold a closed meeting of approximately one hour with the President on January 6, 2017, which must take place in the White House for E:\FR\FM\12DEN1.SGM 12DEN1
[Pages 89447-89449]
[FR Doc No: 2016-29613]
Order Excluding Farm Credit System Institutions From the
Commodity Exchange Act's Definition of ``Commodity Trading Advisor''
SUMMARY: Pursuant to the authority under section 1a(12)(B)(vii) of the
Commodity Exchange Act (``CEA'' or ``Act''), the Commodity Futures
Trading Commission (``Commission'') is issuing an order (``Order'')
excluding institutions in the Farm Credit System (``FCS'') from the
definition of ``commodity trading advisor'' (``CTA''). The Commission
finds that FCS institutions are primarily engaged in lending to U.S.
farmers, ranchers, and agricultural cooperatives, and that any
commodity trading advice provided by FCS institutions to their
clientele is solely incidental to that lending conduct, as required by
CEA section 1a(12)(C). Therefore, the Commission concludes that FCS
institutions are not entities within the intent of the statutory CTA
definition, and that the issuance of this Order excluding them from the
FOR FURTHER INFORMATION CONTACT: Amanda Olear, Associate Director,
Division of Swap Dealer and Intermediary Oversight, (202) 418-5283,
aolear@cftc.gov, or Elizabeth Groover, Special Counsel, Division of
Swap Dealer and Intermediary Oversight, (202) 418-5985,
egroover@cftc.gov.
On October 28, 2016, the Farm Credit Council (``Farm Credit'' or
``Council'') petitioned the Commission for an order excluding FCS
institutions from the CTA definition in the CEA. The Council is the
national trade association for the FCS, a federally-chartered network
of borrower-owned lending institutions comprised of cooperatives and
related service organizations.\1\ Farm Credit's petition states that
the FCS institutions should be excluded from the CTA definition because
(1) the FCS institutions are not within the intent of the CTA
definition because they are in the business of banking and lending, and
(2) certain services provided by them, which could constitute commodity
trading advice, are solely incidental to their primary lending
business.\2\
\1\ Petition for Order to Exclude Farm Credit System
Institutions from the Commodity Trading Advisor Definition in
Accordance with Section 1a(12)(B)(vii) of the Commodity Exchange
Act, Farm Credit Council (Oct. 28, 2016) (``Petition''), at 1.
FCS institutions are important lenders to U.S. farmers, ranchers
and agricultural cooperatives. The FCS institutions include the FCS
Banks (CoBank, AgriBank, AgFirst Farm Credit Bank, and Farm Credit Bank
of Texas), as well as Agricultural Credit Associations, Federal Land
Credit Associations, and Production Credit Associations (together, the
``Associations'').\3\ The FCS Banks make
[[Page 89448]]
loans to affiliated Associations in their geographic areas, which, in
turn, make loans to farmers, ranchers, and other eligible borrowers.\4\
Although FCS institutions do not take deposits, they provide loans,
leases, and related services to farmers, ranchers, rural homeowners,
aquatic producers, timber harvesters, agricultural cooperatives, rural
utilities, and other eligible borrowers in all 50 states, the District
of Columbia, and Puerto Rico.\5\
\3\ An Agricultural Credit Association (ACA) can make short-,
intermediate-, and long-term loans, as each ACA contains two
subsidiaries: A Federal Land Credit Association (FLCA) that can only
make long-term real estate loans, and a Production Credit
Association (PCA) that makes short- and intermediate-term loans.
Although legally separated, the ACA and its FLCA and PCA
subsidiaries operate an integrated lending business with loans made
through the subsidiary possessing the appropriate authority. The
ACA, PCA, and FLCA are jointly and severally liable on the full
amount of the indebtedness to the relevant FCS Bank under the FCS
Bank's General Financing Agreement. Additionally, the ACA, PCA, and
FLCA agree to guarantee each other's debts and obligations, pledge
their respective assets as security for the guarantee, and share
common capital. Petition, at 2.
\4\ Id. Additionally, CoBank also lends directly to agricultural
cooperatives, rural utilities, and other eligible borrowers. Id.
The Farm Credit Administration (``FCA'') is responsible for
regulating and supervising the FCS institutions. The FCA is defined as
an ``appropriate federal banking agency'' under the CEA\6\ and is one
of the ``Prudential Regulators'' charged with implementing certain key
regulatory requirements promulgated by the Dodd-Frank Act.\7\ The
Petition states that the FCA regulates FCS institutions like banks, and
that such regulation appropriately mitigates the risks of FCS
institutions.\8\ In particular, the FCA promulgates policies and
regulations intended to: Protect the safety and soundness of the FCS
institutions; implement the FCA's statutory authority in the Farm
Credit Act of 1971; \9\ establish minimum requirements for lending,
related services, investments, capital, liquidity, and mission; and
ensure adequate financial disclosure and appropriate governance of the
FCS institutions.\10\ Consequently, the FCS institutions are subject to
investment guidelines,\11\ capital requirements,\12\ liquidity
requirements,\13\ guidelines for the use of derivatives,\14\ risk
management standards,\15\ periodic reporting obligations,\16\ as well
as the FCA's examination authority.\17\
\8\ Petition, at 3. In fact, Farm Credit believes that FCS
institutions are, in fact, banks that would otherwise be excluded
from the CTA definition by CEA section 1a(12)(B)(i). However, Farm
Credit states that it petitioned for this Order to achieve greater
certainty for the FCS institutions because the term ``bank'' is not
defined in the CEA or the Commission's regulations. Id.
\10\ 2015 Annual Report on the Farm Credit System, Farm Credit
Administration, Regulator of the FCS, p. 5 (``FCA Annual Report'').
See also id. at 41-44.
\12\ 12 CFR part 615, subparts H and K. The FCA published final
rules in July 2016 that are intended to ensure that FCS capital
requirements are appropriate for the FCS' cooperative structure, and
comparable to the Basel III framework and the standardized approach
adopted by the federal banking regulatory agencies. See Regulatory
Capital Rules: Regulatory Capital, Implementation of Tier 1/Tier 2
Framework, 81 FR 49720 (July 28, 2016).
\14\ David C. Baer, Director, Office of Examination, FCA to All
Farm Credit Banks, ``Guidelines for Utilizing Derivative Products,''
Bookletter, BL-023 (Oct. 31, 1995) (``FCA Guidelines for Utilizing
Derivatives''), available at http://ww3.fca.gov/readingrm/Handbook/_layouts/15/WopiFrame.aspx?sourcedoc=/readingrm/Handbook/FCA%20Bookletters/BL-023.docx&action=default. These Guidelines are
designed to complement existing FCA regulations pertaining to risk
management, investment practices, and asset and liability management
practices. Id. at 3.
FCS institutions use derivatives to manage their own risks, and
also to offer their eligible borrowers or their affiliated
Associations' eligible borrowers the ability to hedge the risks,
including interest rate risk, associated with their loans through the
use of over-the-counter (``OTC'') swaps.\18\ The use of derivatives is
specifically permitted and overseen by the FCA and is subject to
certain conditions, in order to protect the FCS institution eligible
borrowers and to preserve the ``safety and soundness'' of the FCS as a
whole.\19\ The Petition states that swaps offered to FCS institution
eligible borrowers are intended to assist them in hedging their
interest rate and other risks arising from FCS institution loans, and
that FCS institutions do not enter into swaps with persons unless they
are eligible borrowers of an FCS institution.\20\
\18\ Petition, at 2. The Petition states that FCS institutions
also use derivatives to manage interest rate, liquidity, and balance
sheet risks, but because FCS institutions primarily enter into such
transactions with registered swap dealers, the Council does not view
such activity as raising CTA concerns. Id.
\19\ Petition, at 5. The Petition specifically cites detailed
FCA policies mandating counterparty credit risk management, as well
as the ``comprehensive safety and soundness regulation and oversight
by the FCA.'' Petition, at 5-6. As a result, all of the FCS
institutions' derivatives activity, whether with swap dealers or
eligible borrowers, falls within the definition of ``hedging or
mitigating commercial risk'' in Commission regulations. Id. at 6.
This is consistent with the FCA's historic position related to the
use of derivatives by FCS institutions, as stated in the FCA
Guidelines for Utilizing Derivatives: ``The FCA considers any
speculative use of derivatives an unsafe and unsound banking
practice.'' FCA Guidelines for Utilizing Derivatives, at 1.
\20\ Petition, at 2. Further, the Petition states that FCS
institutions are prohibited from engaging in speculative derivatives
activity, and that approved swap transactions with eligible
borrowers are limited to those that enable eligible borrowers to
hedge risk or that are necessary for the financing of individual
transactions. Id. at 6.
In connection with the lending-related swap transactions, FCS
institutions sometimes provide eligible borrowers with information
about the financial instrument to be used, i.e., an interest rate swap,
through presentations or in writing.\21\ The Petition further states
that such information generally is generic and not intended as
commodity trading advice.\22\ Additionally, an eligible borrower in
this context acknowledges that the FCS institution is not its advisor,
and that the borrower is not relying on the information as FCS
institution advice.\23\ Nevertheless, because the FCS institution is
providing information about a commodity interest transaction to an
eligible borrower, Farm Credit and FCS institutions are concerned that
the provision of such information could be construed as the provision
of commodity trading advice requiring registration as a CTA with the
Commission.\24\ Therefore, Farm Credit filed the Petition seeking an
Order excluding the FCS institutions from the CEA's CTA definition to
clarify their registration and compliance obligations with respect to
the CEA and the regulations promulgated thereunder.\25\ Farm Credit's
Petition argues that issuing such an Order is appropriate because FCS
institutions are not within the intent of the CTA definition, and
because any provision of information about commodity interests to
eligible borrowers is solely incidental to the FCS institutions'
primary business of lending.\26\
CEA section 1a(12)(A) defines ``commodity trading advisor'' as any
person who for compensation or profit, engages in the business of
advising others, either directly or through publications, writings, or
electronic media, as to the value of or the advisability of trading in
any commodity interest transactions; \27\ any person who for
compensation or profit, and as part of a regular business, issues or
promulgates analyses or reports concerning any of the activities
referred to in clause (i) of CEA section 1(a)(12)(A); \28\ any person
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registered with the Commission as a commodity trading advisor; \29\ or
any person who the Commission, by rule or regulation, may include if
the Commission determines that the rule or regulation will effectuate
the purposes of the CEA.\30\
\27\ 7 U.S.C. 1a(12)(A)(i). Specifically, such transactions
include any contract for sale of a commodity for future delivery,
security futures product, or swap; any agreement, contract, or
transaction described in 7 U.S.C. 2(c)(2)(i) or 7 U.S.C.
2(c)(2)(D)(i); any commodity option authorized under section 6c of
this title; or any leverage transaction authorized under section 23
of this title. 7 U.S.C. 1a(12)(A)(i)(I)-(IV).
CEA section 1a(12)(B) excludes certain types of persons and
entities from the CTA definition, and permits the Commission to further
exclude, such other persons not within the intent of the CTA definition
as the Commission may specify by rule, regulation, or order.\31\
Additionally, CEA section 1a(12)(C) states that these exclusions,
including any additional exclusion adopted through rule, regulation or
order by the Commission, shall apply only if the furnishing of such
services by persons referred to in CEA section 1a(12)(B) is solely
incidental to the conduct of their business or profession.\32\
Therefore, the Commission must consider whether the potential CTA
activity is solely incidental to the primary business purposes and
conduct of the FCS institutions, and whether FCS institutions may be
properly excluded from the CTA definition.
The Commission agrees with the Petition that the provision of
general information about interest rate swaps to eligible borrowers of
FCS institutions is solely incidental to the FCS institutions' main
business and mission, i.e., agricultural lending. This conclusion is
supported by the fact that the information is provided solely to
eligible borrowers of the FCS institutions, and also by the strict
limitations on the swap activities of FCS institutions--FCS
institutions may only enter into swaps with an eligible borrower to
hedge the risk(s) inherent in the underlying financing transaction
between that borrower and an FCS institution.\33\ Additionally, the
Petition states that FCS institutions do not incur significant costs in
providing the information to eligible borrowers, do not charge eligible
borrowers for the information, do not solicit eligible borrowers, do
not require eligible borrowers to hedge their loan risks through an FCS
institution, and do not hold themselves out to the public as an entity
providing CTA services.\34\ Under these circumstances, the Commission
concludes that the provision of information related to a swap
transaction to eligible borrowers of FCS institutions is solely
incidental to the FCS institutions' lending activity with such eligible
Further, the primary business activity of FCS institutions is
engaging in direct lending to farmers, ranchers, and other eligible
borrowers under the regulation and supervision of the FCA. This lending
activity is generally comparable to the lending activities of banking
institutions, which are excluded from the CTA definition under section
1a(12)(B) of the CEA.\35\ The Commission believes that it is reasonable
under the facts and circumstances discussed above to conclude that
granting FCS institutions an exclusion from CTA registration is
consistent with the intent of section 1a(12) of the CEA.
The Commission finds that under the circumstances set forth above
it is appropriate to exercise the statutory authority afforded to it
under CEA section 1a(12)(B)(vii) to exclude FCS institutions from the
CTA definition. Accordingly, the Commission is issuing this Order
excluding FCS institutions from the CTA definition in CEA section
1a(12)(A). This Order is based upon the representations made by the
petitioner. The Commission reserves authority, in its discretion, to
revisit the Order.
Issued in Washington, DC, on December 6, 2016, by the