Daily Rules, Proposed Rules, and Notices of the Federal Government
The objective of this final rule is to ensure that Farmer Mac has appropriate Board policies and operational procedures in place to manage its non-program investment portfolio safely and soundly with appropriate consideration of its public mission as a Government-sponsored enterprise (GSE). This final rule will:
• Revise the permissible purposes of non-program investments;
• Revise board policy requirements, including stress-testing requirements;
• Modify the non-program investment portfolio limit;
• Reduce the regulatory burden associated with investments that fail to meet eligibility criteria after purchase; and
• Reorganize the regulations to make them easier to follow.
On May 19, 2010, we published an Advanced Notice of Proposed Rulemaking that considered revisions to Farmer Mac's non-program investment and liquidity requirements.
This first phase of final regulations will substantively revise the following regulations:
These revisions will help ensure that Farmer Mac maintains safe and sound non-program investment management practices in accordance with clearly articulated board-established guidance. They also streamline the process for handling investments that fail to meet the eligibility criteria after purchase and modify the allowable purposes of Farmer Mac's non-program investments to include investments that would complement Farmer Mac's program activities.
We are also making minor technical changes to the following provisions:
In addition, we are deleting existing § 652.40, entitled “Stress Tests for
Lastly, we are finalizing the proposed reorganization of the investment management and liquidity regulations to make the sequence of the issues covered more logical.
We intend to address in one or more future rulemakings regulations covering all the areas of the proposed rule not covered in this final rule, including liquidity management and requirements and investment eligibility (including revised creditworthiness requirements). The regulations that we proposed to revise but that we are not issuing as final at this time (except to renumber them and, in some instances, to make minor technical changes) include:
The FCA is an independent agency in the executive branch of the Federal Government that serves as the regulator of Farmer Mac, as well as of the other institutions of the Farm Credit System (System) including, in pertinent part, Farm Credit banks and direct lender associations. The FCA regulates Farmer Mac through the Office of Secondary Market Oversight (OSMO). Farmer Mac is a stockholder-owned instrumentality of the United States, chartered by Congress to establish a secondary market for agricultural real estate, rural housing mortgage loans, and rural utilities loans. Farmer Mac also provides a secondary market for USDA-guaranteed farm program and rural development loans.
A guiding principle for FCA in establishing regulations governing Farmer Mac is to maintain an appropriate balance between the Corporation's mission achievement and risk. We aim to ensure continuity of operations so that Farmer Mac can fulfill its mission during stressful economic conditions that may require sufficient access to secondary sources of liquidity. This final rule is intended to provide a high degree of certainty that Farmer Mac will be able to continue to serve its customers under a wide range of market or economic conditions without the need to issue debt to the Department of Treasury or seek any other form of Government financial assistance.
We received comment letters from Farmer Mac and from the Farm Credit Council (Council), which, in addition to submitting a comment letter directly responding to the NPRM, also asked us to consider, wherever applicable, comments it had submitted on FCA's similar proposed rule pertaining to System banks and associations.
In addition to its comments on specific proposed regulation provisions, the Council generally encouraged us to adapt this rule to more closely mirror the requirements for System banks and associations. Although the two final rules continue to differ where appropriate, changes were made to both this rule and the System banks and associations rule to make the requirements more similar.
We will address each specific comment received in our discussion of the regulation provision to which the comment relates. Some of the minor changes we proposed received no comment. Unless otherwise discussed in this preamble, we are finalizing those provisions as proposed without further explanation. Interested persons are directed to our NPRM for a discussion of those changes. Throughout this regulation, we make minor technical, clarifying, and non-substantive language changes that we do not specifically discuss in this preamble.
We are finalizing the rule's reorganization much the way we proposed it. We provide the following table to orient the reader to the reorganization. The left column of the table contains the existing rule's section headings, and the right column contains the proposed reorganization of section sequence and heading changes.
Generally, the reorganization is meant to address sequentially and as completely as possible the three major categories of management governed in the rule: Investment management; interest rate risk management; and liquidity management.
We received no comments on our proposal to delete the first sentence of this section as unnecessary, and we adopt the revision as proposed.
Many of the definitions we proposed relate to revisions to regulations that will not be finalized until a later installment of this rulemaking, and we will not finalize those definitions until we finalize the regulations to which they relate. We received no comments
We proposed technical clarifications to the definitions of “Government agency” and “Government-sponsored agency.” We are finalizing definitions for these terms with additional technical clarifications.
The Council commented that our existing definition of non-program investments, which we did not propose to revise, is overly broad and allows for the holding of investments beyond the regulatory objectives of ensuring safety and soundness and continuity of funding as outlined in § 652.1. It suggested that we modify the definition to clarify that non-program investments are those held for the investment purposes authorized by revised and renumbered § 652.25. We note that as proposed and as discussed above, this final rule deletes the sentence in § 652.1 to which the comment refers. Moreover, the definition of non-program investments does not itself allow for the holding of investments. Rather, Farmer Mac may hold non-program investments only for the permissible investment purposes. Accordingly, we do not change this definition.
Farmer Mac commented that several of the proposed changes to the rule go well beyond establishing a framework for safety and soundness and instead impose FCA's judgment on proper business operations. Our general response is that we revised some of the proposed requirements in the final rule to make them less prescriptive but that we retain some of the proposed requirements, with clarifications. We respond to the comments on specific provisions below.
The Council requested that FCA follow a similar structure and approach for Farmer Mac as it proposed for the System banks and associations in their investment management rule. In the final rule, we revise the structure and approach of this rule. In addition, the structure and approach of the rule governing System banks and associations has also been revised. We believe the structure and approach of the two rules are now more similar; although, where appropriate, differences still exist.
The Council commented that the proposed requirement that the board must annually review and “affirmatively validate” the sufficiency of its investment policies is overly prescriptive, burdensome, and unclear. We agree that a requirement of annual board review is sufficient and delete “affirmatively validate” from the final rule. With the exception of a few minor technical, clarifying, and non-substantive changes, this paragraph is unchanged from the existing rule.
The Council commented that the requirement (an existing requirement for Farmer Mac that had been proposed for System banks and associations) that Farmer Mac must document in its “records or minutes” any analyses used in formulating investment policies or amendments is burdensome and does not enhance the investment management process. We agree that specifying minutes as a possible location for this documentation is unnecessary. Accordingly, we are deleting “or minutes” from the final rule.
We are moving the requirement (most of which is contained in existing § 652.10(f)(1)) that Farmer Mac's investment policies must fully address the extent of pre-purchase analysis that management must perform for various types, classes, and structure of investments from proposed § 652.10(f)(1)(i) to this paragraph because it is a more logical location.
With these exceptions, we are adopting § 652.10(b) as proposed, including several minor technical and clarifying changes. A discussion of these minor changes may be found in the preamble to the proposed rule.
Proposed § 652.10(c) would have required Farmer Mac's investment policies to ensure that the Corporation maintains prudent diversification of its investment portfolio and that its asset allocations and investment portfolio strategies do not expose its capital or earnings to excessive risk of loss. In final § 652.10(c), we revise this requirement to provide that Farmer Mac's investment policies must include concentration limits to ensure prudent diversification of credit, market, and liquidity risks in its investment portfolio. We believe this language is more specific, better reflects requirements that are necessary for safety and soundness, and provides consistency with the rule governing System banks and associations. We emphasize, however, that the objective of this requirement remains ensuring that Farmer Mac's asset allocations and investment portfolio strategies do not expose its capital or earnings to excessive risk of loss.
In addition, our proposed rule, as well as our existing rule, provides that risk limits must be based on Farmer Mac's objectives, capital position, and risk tolerance. In the final rule, we further specify that risk limits must be based on all relevant factors, including Farmer Mac's objectives, capital position, earnings, and quality and reliability of risk management systems.
Existing § 652.10(c)(1)(ii) requires Farmer Mac's board (or a designated subcommittee) to review annually the criteria for selecting securities firms and the board to approve any changes to the criteria. It also requires that the board (or subcommittee) review annually the existing relationships with securities firms and be notified before any changes to securities firms are made.
In our NPRM, we proposed clarifying changes to these requirements but did not intend a significant change in the meaning. Both Farmer Mac and the Council objected to the existing requirement that the board must review existing relationships and be notified before changes are made to these relationships. The Council commented that this requirement is confusing, creates an excessive burden, and results in an unnecessary distraction for the board.
We agree that as long as Farmer Mac's board (or a designated committee) reviews the selection criteria on an annual basis, and the board approves any changes to the criteria, the board does not need to be involved in the approval of relationships. Accordingly, we have deleted the existing and proposed requirement that the board (or a subcommittee) must review existing relationships and be notified before changes are made to these relationships.
We adopt several other minor technical, clarifying, and non-substantive changes in this paragraph.
Existing § 652.10(e)(2) requires Farmer Mac to establish and maintain a separation of duties and supervision between personnel who execute investment transactions and personnel who approve, revaluate, and oversee investments. Proposed § 651.10(e)(2) would have added to the list of
Both Farmer Mac and the Council objected to this proposed revision as overly prescriptive. Rather than itemizing all of the possible personnel functions, final § 652.10(e)(2) provides that Farmer Mac must establish and maintain a separation of duties between personnel who supervise or execute investment transactions and personnel who supervise or engage in all other investment-related functions. These other investment-related functions include those itemized in the list in the proposed rule, as well as any other functions that are investment related. This regulation does not prohibit one person from performing or supervising more than one investment-related function (other than executing, or supervising the execution of, investment transactions), if appropriate controls are in place as warranted by the complexity and risk of Farmer Mac's investment operations.
Proposed section 652.10(e)(4) would have added a new requirement that Farmer Mac must implement an effective internal audit program to review, at least annually, its investment controls, processes, and compliance with FCA regulations and other regulatory guidance. The internal audit program would have had to specifically include a review of its process for ensuring all investments were eligible and suitable for purchase under its board's investment policies.
Both Farmer Mac and the Council commented that this requirement was too prescriptive and eliminated the flexibility that is necessary for Farmer Mac's internal auditors to establish their own risk-based approach to audits. Final § 652.10(e)(4) requires Farmer Mac to implement an effective internal audit program to review, at least annually, its investment management functions, controls, processes, and compliance with FCA regulations. The scope of the annual review must be appropriate for the size, risk, and complexity of the investment portfolio.
We made a number of minor technical and non-substantive changes throughout this paragraph to clarify the requirements and to more closely match up with the language of the rule governing the System banks and associations. We do not identify these minor changes here. Below we discuss our responses to the comments we received, including the changes we make in response to those comments.
Proposed § 652.10(f)(1)(i) would have required Farmer Mac, before it purchased an investment, to conduct sufficient due diligence to determine whether the investment was eligible and suitable under its board-approved investment policies and to document this determination.
This proposed requirement is retained in new § 652.10(f)(1)(i), with minor clarifications. Since we had used the term “suitable” to mean an investment complied with Farmer Mac's board-approved investment policies, we simplify the regulation by eliminating that term and instead requiring Farmer Mac to determine whether an investment complies with those policies. We also clarify that Farmer Mac must determine whether an investment is for an authorized purpose.
The Council commented that eligibility and the other pre-purchase assessments are often established for a class or segment of securities by specifying the criteria (credit risk, liquidity, market risk, etc.) that make a class of securities eligible and suitable per se, and it requested clarification that these pre-purchase assessments may be defined for segments or classes of securities that meet appropriate criteria rather on a security-by-security basis. We note that the regulation does not prohibit Farmer Mac from establishing criteria for various classes or segments of investments; nonetheless, Farmer Mac must continue to adequately document its evaluation and assessments of investments being purchased.
We also added a sentence to § 652.10(f)(1)(i) specifically authorizing Farmer Mac, with board approval, to hold investments that do not comply with its investment policies. This addition recognizes that such decisions are within the discretion of the board's business judgment. We emphasize that this provision does not authorize the board to approve investments that do not comply with our regulatory eligibility requirements and purpose limitations.
Existing § 652.10(f)(1) requires Farmer Mac to verify the value of a security that it plans to purchase, other than a new issue, with a source that is independent of the broker, dealer, counterparty, or other intermediary to the transaction. We proposed to relocate this requirement to § 652.10(f)(1)(ii) but proposed no substantive changes to the requirement.
Both Farmer Mac and the Council objected to this existing requirement. The Council commented that verifying value from an independent source is not realistic for investments of tranches of collateralized mortgage obligations (CMOs), including planned amortization class (PAC) bonds, purchased in the primary market. The Council stated that these securities are generally unique in nature and their value, when newly created, will be impossible to verify with a third party prior to purchase.
In response, we reiterate that the third-party, pre-purchase valuation requirement explicitly excludes new issues. Accordingly, Farmer Mac need not seek third-party, pre-purchase valuation for new issues.
Proposed § 652.10(f)(1)(iii) would have contained extensive risk-assessment evaluation and documentation requirements. Both Farmer Mac and the Council objected to these requirements. The Council commented that the detail and prescriptiveness of this paragraph was unnecessary, burdensome, and redundant to the proposed investment policy requirements. The Council also stated that the proposed rule governing System banks and associations, while still excessive, was more “streamlined” and consistent with the overall objectives of the regulations.
In response, we have revised the requirements of final § 652.10(f)(1)(iii) to be much less detailed than those in the NPRM as well as more similar, but not identical, to those in the final rule governing System banks and associations. The final rule specifies the risks that must be assessed but, other than stress-testing requirements, which are discussed below, it does not specify how these risks must be assessed. We explain in this preamble our expectations for how Farmer Mac should assess its risk. These expectations were stated as requirements in the proposed rule.
In its assessment of credit risk, Farmer Mac should consider the nature and type of underlying collateral, credit enhancements, complexity of the structure, and any other available indicators of the risk of default.
In its assessment of liquidity risk, Farmer Mac should consider the investment structure, depth of the market, and ability to liquidate the
In its assessment of market risk, Farmer Mac should consider how various market stress scenarios including, at a minimum, potential changes in interest rates and market conditions (such as changes in market perceptions of creditworthiness), are likely to affect the cash flow and price of the instrument.
The proposed rule would have required Farmer Mac, in conducting its market risk assessment, to use reasonable and appropriate methodologies for stress testing for the type or class of instrument to ensure the investment complies with risk limits established in its investment and interest rate risk policies. Although we intended that this stress-testing requirement would encompass structured instruments and those with uncertain cash flows, such as mortgage-backed securities and asset-backed securities, the proposed rule did not expressly specify what types or classes of instruments must be stress tested.
The Council commented that this proposal was more lenient than the provisions that were proposed for System banks and associations, which would have expressly required stress testing of all instruments prior to purchase. In response to the Council's comment, and to clarify our intentions in our proposed regulation, final § 651.10(f)(1)(iii) expressly requires Farmer Mac to stress test all investments that are structured or that have uncertain cash flows, including specifically mortgage-backed securities and asset-backed securities, prior to their purchase. The stress test must be commensurate with the risk and complexity of the investment.
Existing § 652.10(f)(2) requires Farmer Mac, at least monthly, to determine the fair market value of each security in its portfolio and the fair market value of its whole investment portfolio. In doing so, Farmer Mac must also evaluate the credit quality and price sensitivity to the change in market interest rates of each security in its portfolio and its whole investment portfolio. We had proposed to delete the entire second sentence. Final § 652.10(f)(3) requires Farmer Mac to establish and maintain processes to monitor and evaluate changes in the credit quality of each security in its portfolio and its whole investment portfolio on an ongoing basis. We delete the price sensitivity evaluation requirement because that is addressed in our final interest rate risk management regulation at § 652.30(c)(3).
Final § 652.10(f)(4)(i) requires Farmer Mac to stress test its entire investment portfolio, including stress tests of all investments individually and stress tests of the portfolio as a whole, at the end of each quarter. The stress test must enable Farmer Mac to determine that its investment securities, both individually and on a portfolio-wide basis, do not expose its capital, earnings, or liquidity to risks that exceed the risk tolerance specified in its investment policies. These requirements combine and clarify the existing § 652.40(a) requirement that Farmer Mac be able to identify individual securities that expose it to a high level of risk with the portfolio-wide stress testing required by proposed § 652.10(f)(3)(i).
The Council commented that the stress-testing requirements in proposed § 652.10(f)(3)(ii) differed in subtle but important ways from what was proposed for System banks and associations, and it stated that this inconsistency was not supported by any business difference between Farmer Mac and System banks and associations. The Council did not, however, either specify the differences or explain why the differences were important. We have made a few minor changes in the final rule. We believe the final rule is substantially similar to the final rule governing the System banks and associations; any differences are not intended to be material.
Farmer Mac commented that the board reporting requirements in proposed § 652.10(g) go beyond establishing a framework for safety and soundness and instead effectively supplant Farmer Mac's business judgment with FCA's, but the Corporation provided no specific comments on the requirements. The Council, commenting on the proposed rule governing System banks and associations—which was somewhat more detailed than the proposed rule governing Farmer Mac—stated that the board reporting requirements were exceedingly prescriptive and limiting of the board's authority to direct management, and it requested that the provisions be generalized and simply require that the board receive a quarterly report containing information on the investment portfolio as the board deems appropriate.
We are finalizing § 651.10(g) as proposed. We believe this level of reporting is necessary to ensure the board has the information it needs about Farmer Mac's investments.
We are finalizing our proposal to renumber existing § 652.25 as § 652.15.
We proposed in § 652.15(a) to add a new permissible purpose for Farmer Mac's non-program investments—investments that complement program business activities. In the preamble to the proposed rule, we stated that this purpose would recognize that certain investments, such as investments with a rural focus that are backed by the full faith and credit of the United States Government, could advance Farmer Mac's mission by complementing its program business activities. We believe that even if an investment is not held for the purposes of complying with interest rate risk management requirements, complying with liquidity requirements, or managing surplus short-term funds, mission advancement could nevertheless be an appropriate purpose for which to hold investments.
Section 8.3(c)(12) of the Act permits Farmer Mac to “purchase or sell any securities or obligations * * * necessary and convenient to the business of the Corporation.” We believe this proposed broadening of investment purposes is compatible with Farmer Mac's statutory mandate and consistent with congressional intent.
We emphasized in the preamble to the proposed rule that this provision would not add any new eligible investments to our authorized list; Farmer Mac would still need to seek FCA's prior approval for any investments not explicitly authorized on the list of eligible investments.
In addition, we stated in the preamble to the proposed rule that neither the proposed purpose nor any of the three existing purposes authorize Farmer Mac to accumulate investment portfolios for arbitrage activities or to engage in trading for speculative or primarily capital gains purposes. We stated that realizing gains on sales before investments mature is not a regulatory violation as long as the profits are incidental to the specified permissible investment purposes. And we emphasized that Farmer Mac's internal controls must ensure that eligible investments clearly fulfill one or more of the authorized investment purposes.
The Council strongly objected to the proposed purpose, stating that FCA “specifically states” that the purpose will allow Farmer Mac to use non-program investments as a business strategy to enhance returns for investors.
We adopt this provision as proposed. We specifically state that this new purpose is to advance Farmer Mac's mission by complementing Farmer Mac's program business activities—not to enhance returns to investors. Positive returns are permissible only if they are incidental to this purpose or to one of the three existing purposes. FCA will use its supervisory authorities to ensure that all investments held for this purpose actually do complement Farmer Mac's program business activities and that the risk and return characteristics of such investments are appropriate.
As stated above, Farmer Mac may hold only investments that are already on the list of eligible investments unless it seeks FCA's prior approval. In determining whether to grant approval, FCA will consider the risk of the investment and whether it actually does complement Farmer Mac's program business activities; where appropriate, we may impose conditions on the approval. Although System banks do not have such a purpose authorized by regulation, FCA has approved many mission-related investments for System banks and associations. We further emphasize that Farmer Mac's investments held for any of the four permissible purposes will be subject to the 35-percent investment limit in § 652.15(b). We believe this limitation will help ensure that Farmer Mac's mission achievement continues to be centered on providing a source of liquidity and credit support for agriculture and rural lenders directly through its secondary market and guarantee programs. Investments that complement program business activities should have an agricultural or rural focus.
We adopt as final our proposal to change the current regulatory maximum non-program investment parameters in paragraph (b) to delete the alternate maximum of a fixed $1.5 billion. While we continue to believe that excessive or inappropriate use of non-program investments is not consistent with the Corporation's statutory mission and status as a Government-sponsored enterprise (GSE), we believe the maximum investment parameter of 35 percent of program volume alone is sufficient and that there is no longer a need for the $1.5-billion ceiling on that maximum calculation. This change is based on Farmer Mac's growth since the $1.5 billion ceiling was established in 2005. We received no comment on this proposal.
Also in paragraph (b), we adopt as final our proposal to permit Farmer Mac to exclude investments pledged to meet margin requirements for derivative transactions (collateral) when calculating the 35-percent investment limit under paragraph (b).
The Council requested that we also exclude various other investments from the investment limit calculation. The Council requested that we exclude securities purchased and designated for the primary purpose of posting collateral for derivative positions, even if the collateral is returned or the securities are never posted. The Council stated that including these securities in the limit would require Farmer Mac to maintain a cushion under the limit to accommodate the possibility of return, thereby limiting the amount of other investments it can hold to manage its liquidity position and derivative counterparty exposures.
Both Farmer Mac and the Council asked that Treasury securities also be excluded from the 35-percent limit. Farmer Mac stated that the proposed rule would require it to hold significant amounts of Treasury securities to meet FCA's liquidity requirements, thereby utilizing a large portion of its liquidity and investment portfolio capacity. The Council stated that the 35-percent limit creates an economic constraint and disincentive to holding Treasury securities, even though they are the most liquid and marketable investment.
Finally, the Council also requested that investment securities pledged in secured borrowing relationships be excluded from the 35-percent limit. The Council cited State Ag-Linked lending programs and repurchase agreements as examples of these secured borrowing relationships. Under both arrangements, according to the Council, the pledging of securities acts as an alternative means of obtaining cash for operations. Under § 652.35(b) (renumbered from § 652.20(b)), these investments may not be counted in the liquidity reserve because they are not unencumbered. The Council asserts that excluding securities pledged in secured borrowing relationships from the 35-percent limit would be consistent with use of the securities as an alternative method to secure financing and their treatment under the FCA regulatory liquidity measurement.
We decline to exclude these investments from the investment limit. We view these types of transactions as part of Farmer Mac's normal cash management operations. Thus, under normal conditions, we expect Farmer Mac to manage the level of its investments within FCA's portfolio size limits to ensure regulatory compliance. If, in unusual business environments, Farmer Mac were to experience the unexpected need for a significant increase in pledgeable assets, and that increase could result in a short-term need for regulatory flexibility regarding the 35-percent maximum limit, § 652.45 of this regulation provides for FCA discretion to allow that flexibility.
As proposed, we renumber existing § 652.35, Eligible Non-Program Investments, as § 652.20. We delete the reference to divestiture that was contained in § 652.35(a)(5), because we no longer require divestiture of investments that were eligible when purchased, and the treatment of investments that were ineligible when purchased is specified in § 652.25(a). We also delete the references to stress-testing mortgage securities that were contained in § 652.35(a)(6), because new § 652.10(f) sets forth stress-testing requirements for investments. We are reprinting this provision because of these changes, but we are making no other changes to the provision.
As proposed, we delete existing § 652.45 and replace it with new § 652.25. Existing § 652.45(a)(2) requires Farmer Mac to dispose of an investment that is ineligible
New § 652.25(b) no longer requires Farmer Mac to divest of (or to receive approval of a divestiture plan for) an investment that was eligible
The proposed rule would have required Farmer Mac to notify the OSMO “promptly” if an investment no longer satisfied the eligibility criteria. Farmer Mac commented that the term “prompt” leaves significant room for interpretation as to practical application, and it requested a specific timeframe. The Council commented that it was unsure what “prompt” meant in the context of the rule, and it stated that notification is redundant and unnecessary given the requirements of the regulation and the ongoing nature of FCA's examination function. If FCA retained this requirement, the Council suggested a 60-calendar-day notice period.
In response to these comments, we make the notification period 15 calendar days after Farmer Mac determines that the investment no longer satisfies the eligibility criteria. We believe this notification period is adequate, since the timeframe does not begin until Farmer Mac makes the determination. Moreover, notification can be as simple as a telephone call or an email.
The proposed rule would also have required notification to the OSMO when an investment that satisfied the regulatory eligibility criteria was not suitable because it did not satisfy the risk tolerance established in the institution's required board policy, and the investment would have been subject to the same specified requirements discussed below. We are deleting this notification requirement from the final rule because we do not want to create a disincentive for Farmer Mac to establish a risk tolerance that is stricter than FCA's regulatory eligibility criteria. Under the final rule, Farmer Mac does not have to notify the OSMO when an investment that satisfies FCA's regulatory eligibility criteria does not satisfy its own risk tolerance, nor is the investment subject to the other specified requirements discussed below.
As we proposed, final § 652.25(a) provides that an investment that does not satisfy the regulatory eligibility criteria at the time of purchase is ineligible. Under the final rule (as under the existing regulation), Farmer Mac may not purchase ineligible investments. If Farmer Mac does purchase an ineligible investment, it must notify the OSMO within 15 calendar days after determining that the investment was ineligible and must divest of the investment no later than 60 calendar days after the determination unless we approved, in writing, a plan that authorizes divestiture over a longer period of time.
Although it is not stated in the regulation, we clarify here that an acceptable divestiture plan would have to require Farmer Mac to dispose of the investment as quickly as possible without substantial financial loss. The plan would also have to contain sufficient analysis to support continued retention of the investment, including its effect on the institution's capital, earnings, liquidity, and collateral position. Our decision would not be based solely on financial loss and would include consideration of all circumstances surrounding the purchase. Until Farmer Mac divests of the investment, it would be subject to the same specified requirements discussed below.
Furthermore, we emphasize that any purchase of an ineligible investment would indicate weaknesses in Farmer Mac's internal controls and due diligence and would trigger increased FCA oversight if it occurs. We expect such a purchase to occur rarely, if ever. For this reason, we are retaining the divestiture requirement from the existing and proposed rules, despite the Council's request that we treat investments that are ineligible when purchased in the same manner as we treat investments that are eligible when purchased but that subsequently fail to meet the eligibility criteria. Furthermore, in response to the Council's comment that this provision essentially authorizes Farmer Mac to purchase ineligible investments that could be held for 60 calendar days, we emphasize that this provision does not authorize such a purchase. As stated, if Farmer Mac makes such a purchase, it should expect increased FCA oversight of its internal controls and due diligence process, as well as other enforcement actions as appropriate.
The specified requirements that apply to investments retained by Farmer Mac that are ineligible or that no longer satisfy the eligibility requirements are specified in § 652.25(c). We believe these specified requirements are warranted by safety and soundness concerns.
Section 652.25(c)(1) contains reporting requirements. Each quarter, Farmer Mac is required to report to FCA and to its board on the status of all such investments. The report must demonstrate the effect that the investments may have on the Corporation's capital, earnings, and liquidity position. Additionally, the report must address how the Corporation plans to reduce its risk exposure from these investments or exit the position.
Section 652.25(c)(2) provides that the investments may not be used to satisfy Farmer Mac's liquidity requirement(s) in § 652.40 and that they must continue to be included in the investment portfolio limit calculation established in § 652.15(b).
Finally, § 652.25(d) reserves FCA's authority to require Farmer Mac to divest of any investment at any time for failure to comply with § 652.15(a) or for safety and soundness purposes. Although we did not propose failure to comply with the permissible investment purposes specified in § 652.15(a) as a basis for requiring divestiture, this change makes explicit our authority to require divestiture of an investment that does not comply with our investment regulations. The timeframe FCA sets would consider the expected loss on the transaction (or transactions) and the effect on Farmer Mac's financial condition and performance. Because the final rule does not require automatic divestiture of any investment that was eligible when purchased, FCA is making express our authority to require divestiture of investments when necessary.
We renumber existing § 652.15 as § 652.30. No comments were received on the proposed revisions to this section, and we finalize them as
As proposed, we renumber existing § 652.20, Liquidity Reserve Management and Requirements, as § 652.35. We are reprinting this provision because of this renumbering, but we are making no other changes to the provision.
As proposed, we remove this standalone section from our regulations and incorporate its requirements into § 652.10(f), as discussed above.
We adopt the proposed revisions to § 652.45. We relocate existing § 652.30, which authorizes FCA to modify or waive regulatory investment management and liquidity management requirements in extraordinary situations, to new § 652.45. We believe this location is more appropriate for this provision.
In addition to the existing specific modifications and waivers the provision authorizes, we amend § 652.45 to authorize FCA to take other actions as deemed appropriate. This added authority will give FCA additional flexibility to address extraordinary situations.
We received no comments on this revision, and the Council was supportive of similar changes in the proposed rule governing System banks.
Farmer Mac has assets and annual income in excess of the amounts that would qualify it as a small entity. Therefore, Farmer Mac is not a “small entity” as defined in the Regulatory Flexibility Act. Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601
Agriculture, Banks, banking, Capital, Investments, Rural areas.
For the reasons stated in the preamble, part 652 of chapter VI, title 12 of the Code of Federal Regulations is amended as follows:
Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.
The purpose of this subpart is to ensure safety and soundness, continuity of funding, and appropriate use of non-program investments considering the Federal Agricultural Mortgage Corporation's (Farmer Mac or Corporation) special status as a Government-sponsored enterprise (GSE). The subpart contains requirements for Farmer Mac's board of directors to adopt policies covering such areas as investment management, interest rate risk, and liquidity reserves. The subpart also requires Farmer Mac to comply with various reporting requirements.
For purposes of this subpart, the following definitions will apply:
(1) The full faith and credit obligations of a state, the District of Columbia, the Commonwealth of Puerto Rico, a territory or possession of the United States, or a political subdivision thereof that possesses general powers of taxation, including property taxation; or
(2) An obligation that is unconditionally guaranteed by an obligor possessing general powers of taxation, including property taxation.
(1) Pass-through securities or participation certificates that represent ownership of a fractional undivided interest in a specified pool of residential (excluding home equity loans), multifamily or commercial mortgages, or
(2) A multiclass security (including collateralized mortgage obligations and real estate mortgage investment conduits) that is backed by a pool of residential, multifamily or commercial real estate mortgages, pass-through mortgage securities, or other multiclass mortgage securities.
(3) This definition does not include agricultural mortgage-backed securities guaranteed by Farmer Mac itself.
(1) “Qualified loans” as defined in section 8.0(9) of the Farm Credit Act of 1971, as amended; or
(2) Securities collateralized by “qualified loans.”
(i) Credit quality standards, limits on counterparty risk, and risk diversification standards that limit concentrations in a single or related counterparty(ies), geographical areas, industry sectors, and asset classes or obligations with similar characteristics.
(ii) Criteria for selecting brokers, dealers, and investment bankers (collectively, securities firms). You must buy and sell eligible investments with more than one securities firm. As part of your review of your investment policies required under paragraph (a) of this section, your board of directors, or a designated committee of the board, must review the criteria for selecting securities firms. Any changes to the criteria must be approved by the board.
(iii) Collateral margin requirements o