Federal Home Loan Bank Liabilities, 18366-18375 [2011-7832]

Agencies

• Federal Housing Finance Board
• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Rules and Regulations]
[Pages 18366-18375]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-7832]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 965, 966, 969, and 987

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1270

RIN 2590-AA36


Federal Home Loan Bank Liabilities

AGENCY: Federal Housing Finance Board, Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is re-organizing and 
re-adopting existing Federal Housing Finance Board (Finance Board) 
regulations dealing with consolidated obligations (COs), as well as 
related regulations addressing other authorized Federal Home Loan Bank 
(Bank) liabilities and book-entry procedures for COs, as new part 1270 
of the FHFA regulations. The final rule amends these regulations to 
reflect statutory amendments made to section 11(c) of the Federal Home 
Bank Act (Bank Act) with regard to the issuance of COs. Otherwise, FHFA 
is re-adopting most of the regulatory provisions addressed in this 
rulemaking without substantive change.

DATES: This rule will become effective on May 4, 2011.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Chief Economist, 
Federal Home Loan Bank and System Analysis, 202-408-2845, Federal 
Housing Finance Agency, 1625 Eye Street, NW., Washington, DC 20006; or 
Thomas E. Joseph, Senior Attorney-Advisor, 202-414-3095, Office of 
General Counsel, Federal Housing Finance Agency, Fourth Floor, 1700 G 
Street, NW., Washington, DC 20552. The telephone number for the 
Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Creation of the Federal Housing Finance Agency and Recent 
Legislation

    Effective July 30, 2008, the Housing and Economic Recovery Act of 
2008 (HERA), Public Law 110-289, 122 Stat. 2654, created FHFA as a new 
independent agency of the Federal Government, and transferred to FHFA 
the supervisory and oversight responsibilities of the Office of Federal 
Housing Enterprise Oversight (OFHEO) over the Federal National Mortgage 
Association, and the Federal Home Loan Mortgage Corporation 
(collectively, the Enterprises), the oversight responsibilities of the 
Finance Board over the Banks and the Office of Finance (OF) (which acts 
as the Banks' fiscal agent) and certain functions of the Department of 
Housing and Urban Development. See id. at section 1101, 122 Stat. 2661-
62. FHFA is responsible for ensuring that the Enterprises and the Banks 
operate in a safe and sound manner, including that they maintain 
adequate capital and internal controls, that their activities foster 
liquid, efficient, competitive and resilient national housing finance 
markets, and that they carry out their public policy missions through 
authorized activities. See id. at section 1102, 122 Stat. 2663-64. The 
Enterprises, the Banks, and the OF continue to operate under 
regulations promulgated by OFHEO and the Finance Board until such 
regulations are superseded by regulations issued by FHFA. See id. at 
sections 1301, 1302, 1311, 1312, 122 Stat. 2794-95, 2797-98.

[[Page 18367]]

B. The Bank System Generally

    The twelve Banks are instrumentalities of the United States 
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12 
U.S.C. 1423 and 1432(a). The Banks are cooperatives; only members of a 
Bank may purchase the capital stock of a Bank, and only members or 
certain eligible housing associates (such as state housing finance 
agencies) may obtain access to secured loans, known as advances, or 
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a), 
and 1430b. Each Bank is managed by its own board of directors and 
serves the public interest by enhancing the availability of residential 
mortgage and community lending credit through its member institutions. 
See 12 U.S.C. 1427. Any eligible institution (generally a federally 
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock. See 12 U.S.C. 
1424; 12 CFR part 1263.
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    \1\ The twelve Banks are located in: Boston, New York, 
Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des Moines, 
Dallas, Topeka, San Francisco, and Seattle.
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C. Consolidated Obligations

    COs, consisting of bonds and discount notes, are the principal 
funding source for the Banks. Although each Bank is primarily liable 
for the portion of COs corresponding to the proceeds received by that 
Bank, each Bank is also jointly and severally liable with the other 
eleven Banks for the payment of principal and interest on all COs. See 
12 CFR 966.9. In addition to issuing COs, the Banks are authorized to 
raise funds and incur liabilities by accepting deposits from members, 
other Banks and instrumentalities of the United States, purchasing 
Federal funds and entering into repurchase agreements. See 12 CFR 
965.2.
    Prior to June 2000, COs had for many years been issued on behalf of 
the Banks by the Finance Board, as the Banks' regulator, under 
authority in section 11(c) of the Bank Act. Until the passage of HERA, 
section 11(c) of the Bank Act authorized the Banks' regulator to issue 
bonds which were the joint and several obligations of all the Banks. 
See 12 U.S.C. 1431(c)(2007).
    In June 2000, the Finance Board published a final rule which 
altered how COs were issued and transferred authority for issuance of 
the Bank COs to the Banks pursuant to authority under section 11(a) of 
the Bank Act. See 65 FR 36290 (June 7, 2000) (adopting among other 
parts 12 CFR parts 966 and 985). Section 11(a) of the Bank Act allows 
each Bank to issue debt subject to any conditions and requirements 
established by the Banks' regulator. See 12 U.S.C. 1431(a). Under the 
rules published in June 2000, the Banks were allowed to issue debt 
subject to requirements that all such debt be the joint and several 
obligations of all twelve Banks and be issued through the OF as their 
agent. See 12 CFR 966.2(b). The Finance Board retained the option to 
issue COs itself under section 11(c) of the Bank Act at any point, 
although it did not do so. See 12 CFR 966.2(a).
    In 2008, HERA amended section 11 of the Bank Act to remove the 
authority of the regulator to issue COs and to allow the Banks to issue 
such debt through OF as the Banks' agent. See section 1204(3), Public 
Law 110-289, 122 Stat. 2786. As a consequence, the Banks are now able 
to issue COs pursuant to section 11(c) of the Bank Act on which the 
Banks are jointly and severally liable by statute.\2\
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    \2\ As amended by HERA, section 11(c) of the Bank Act provides, 
in relevant part, that the Office of Finance, as agent for the 
Banks, may issue consolidated * * * Bank bonds which shall be the 
joint and several obligations of all the * * * Banks, and shall be 
secured and be issued upon such terms and conditions as such Office 
may prescribe. 12 U.S.C. 1431(c).
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    On November 8, 2010, FHFA published a proposed rule that would 
amend its regulations to reflect the changes to the CO provisions and 
make other organizational and conforming changes to the rules dealing 
with COs and Bank liabilities. See Proposed Rule: Federal Home Loan 
Bank Liabilities, 75 FR 68534 (Nov. 8, 2010). FHFA is now adopting 
these rule changes. These amendments to FHFA regulations, however, will 
affect neither current operations and processes for issuing COs nor the 
Banks' joint and several liability for payment of principal and 
interest on outstanding COs.

D. Considerations of Differences Between the Banks and the Enterprises

    Section 1201 of HERA requires the Director, when promulgating 
regulations relating to the Banks, to consider the following 
differences between the Banks and the Enterprises: cooperative 
ownership structure; mission of providing liquidity to members; 
affordable housing and community development mission; capital 
structure; and joint and several liability. See section 1201 Public Law 
110-289, 122 Stat. 2782-83 (amending 12 U.S.C. 4513). Section 1201 
specifically provides, however, that its requirements shall not apply 
if the Director is reissuing any regulation, advisory document or 
examination guidance previously issued by the Finance Board. This rule 
falls within that exception because FHFA is reissuing previous Finance 
Board regulations (including the related Finance Board interpretation 
of its rules with respect to the prohibition on the direct placement of 
COs), updated only as necessary to conform with statutory changes made 
by HERA. Nevertheless, as noted in the preamble to the proposed rule, 
FHFA considered the differences between the Banks and the Enterprises 
as they relate to the above factors in developing the proposal. 75 FR 
at 68535. FHFA also requested comments from the public about whether 
differences related to these factors should have resulted in any 
revisions to the proposal, but no specific comments were received in 
response to that request.

II. Analysis of the Final Rule

A. The Proposed Rule

    FHFA proposed amending existing regulations previously adopted by 
the Finance Board that address COs to reflect changes made by HERA to 
section 11 of the Bank Act. See 75 FR at 68536-537. At the same time, 
FHFA proposed combining the CO regulations with related regulations 
addressing Banks' authorized sources of funds, deposits from Bank 
members and book-entry procedures for COs into a single new part 1270 
of the FHFA regulations. As proposed, most of these existing Finance 
Board provisions would have been carried over to new part 1270 without 
change, other than for certain necessary technical and conforming 
changes. Id.
    In the preamble to the proposed rule, FHFA also noted that section 
939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) requires federal agencies to review regulations that 
require the use of an assessment of the credit-worthiness of a security 
or money market instrument, or any references to, or requirements in, 
such regulations regarding credit ratings issued by nationally 
recognized statistical rating organizations (NRSROs), and to remove 
such references or requirements. See id. (citing section 939A, Public 
Law 111-203, 124 Stat. 1376, 1887 (July 21, 2010)). FHFA further noted 
that the Dodd-Frank provision requires the agency to the extent 
feasible to adopt uniform standards of credit-worthiness in its 
regulations, taking into account the entities regulated by it and the 
purpose for which such regulated entities would rely on the credit-
worthiness standard. Id. Because the

[[Page 18368]]

proposed rule provisions carried over a number of references to or 
requirements based on credit ratings issued by NRSROs, FHFA requested 
comments on what credit-worthiness standards could be used in the Bank 
liability rule, and more generally across its regulations, to replace 
these references or requirements.

B. Comments

    FHFA received five comments on the proposed rule. The comments 
mainly responded to FHFA's request for information on potential 
standards to replace regulatory references or requirements that cite 
credit ratings. Overall, these comments did not address specific 
provisions in the proposed Bank liabilities rule, or suggest changes to 
those provisions in proposed part 1270 that referenced credit ratings. 
Instead, the comments identified and discussed broader principles that 
FHFA should apply in developing new credit-worthiness standards for its 
regulations more generally.
    FHFA has considered these comments. However, given the requirements 
in section 939A of Dodd-Frank that the agency adopt uniform standards 
of credit-worthiness across its regulations to the extent feasible, 
FHFA recently issued an advance notice of proposed rulemaking and 
request for comment (ANPR) that sought comments on a wider range of 
issues related to implementation of section 939A of the Dodd-Frank Act 
than had been raised as part of the Bank liabilities proposed 
rulemaking. See Advance Notice of Proposed Rulemaking: Alternatives to 
Use of Credit Ratings in Regulations Governing the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation and 
the Federal Home Loan Banks, 76 FR 5292 (Jan. 31, 2011). Rather than 
make changes at this time to proposed provisions in part 1270 that 
continue to reference specific credit rating requirements, FHFA has 
determined to carry over these part 1270 provisions as proposed on a 
temporary basis, pending completion of the ANPR process. FHFA believes 
that this approach will best allow it to implement the Dodd-Frank 
requirements that it adopt uniform standards of credit-worthiness in 
its regulations while not further delaying amending the Bank liability 
regulations to conform to statutory changes made by HERA in 2008.
    FHFA, however, will propose changes to relevant part 1270 
provisions as well as to other regulations as part of a future 
rulemaking or rulemakings designed to remove references to, or 
requirements based on, specific credit ratings, as required by the 
Dodd-Frank Act. FHFA will consider the relevant comments received on 
the Bank liabilities rules along with any additional comments received 
on the ANPR in developing any proposed amendments needed to define and 
implement new uniform credit-worthiness standards in its regulations.
    In addition to the comments addressing credit-worthiness standards, 
one comment stated that the meaning of the phrase ``joint and several 
liability'' was unclear. However, Sec.  1270.10, as proposed, carried 
over a long-standing Finance Board provision that addressed joint and 
several liability and implemented the Banks' collective responsibility 
for payment on all COs. As this provision makes clear, each Bank 
individually and collectively has an obligation to make full and timely 
payment on all COs and to give priority for the payment of COs over the 
redemption of the stock of, or of any payment to, shareholders. Thus, 
FHFA believes the concept of ``joint and several liability'' was 
adequately addressed by the proposed rule language, and no changes to 
the proposal are necessary with regard to this point.
    Thus, after considering the comments, FHFA has decided to adopt 
part 1270, as proposed, without making any substantive changes.

C. Analysis of the Final Rule

    The main purpose for this rulemaking is to update Finance Board 
regulations to reflect amendments made by HERA to section 11 of the 
Bank Act with regard to Bank authority to issue COs and to combine 
certain parts of the former Finance Board regulations into new part 
1270. 75 FR at 68535. As already discussed, because the Finance Board 
had previously delegated responsibility to the Banks themselves to 
issue COs in 2000, the changes made by HERA to section 11 of the Bank 
Act--or the related regulatory amendments now being adopted--do not 
alter the current processes or practices for issuing COs. Otherwise, as 
FHFA noted when it proposed new part 1270, most of the provisions in 
new part 1270 are being carried over from existing regulations, without 
substantive change. Id.
Subpart A of Part 1270
    As adopted, the final rule will consolidate relevant definitions 
from parts 965, 966, 969 and 987 of the Finance Board regulations into 
subpart A of part 1270. To the extent necessary, relevant definitions 
from part 900 of the Finance Board regulations are also being 
incorporated into this subpart.\3\ FHFA is not altering the definitions 
from those proposed in November 2010. See 75 FR at 68535-536.
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    \3\ Definitions contained in part 900 apply to all Finance Board 
regulations but would not apply to part 1270 of the FHFA 
regulations. See 12 CFR part 900. No substantive changes are being 
made to most of these definitions. Included in the definitions being 
carried over from part 900 of the Finance Board regulations is one 
for ``SBIC.'' FHFA inadvertently failed to include a definition for 
``SBIC'' in proposed Sec.  1270.1, but the definition being adopted 
here is exactly the same as the one that had been in part 900 of the 
Finance Board rules and that had long been applicable to the 
relevant provisions that are being adopted in the new part 1270 
rules.
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    Therefore, FHFA is adopting a definition in Sec.  1270.1 for 
``consolidated obligations'' that varies slightly from the one that had 
been set forth in part 900 of the Finance Board regulations. The new 
definition reflects the amendments made by HERA to section 11 of the 
Bank Act while recognizing that some outstanding COs may have been 
issued by the Finance Board under the prior statutory provisions. Id. 
This definition is the same as one FHFA adopted in other regulations. 
See, e.g., 12 CFR 1229.1. FHFA is also adopting the proposed definition 
for the ``Office of Finance.'' As explained in the preamble of the 
proposed rule, this definition is based on one that previously had been 
set forth in part 987 of the Finance Board regulations concerning book-
entry procedures but has been somewhat modified because a reference to 
the OF in part 1270 could be made in circumstances, or to address OF 
duties, other than those related to book-entry procedures. See 75 FR at 
68535-536.
Subpart B of Part 1270
    Subpart B of part 1270 combines provisions now found in the Finance 
Board regulations part 965, Sources of Funds, and part 969, Deposits. 
In this respect, Sec.  965.2 of the Finance Board regulations is being 
relocated to new Sec.  1270.2, and Sec.  1270.3 combines in a single 
section the authorizations and requirements that previously had been 
found in Sec.  965.3 and Sec.  969.2 of the Finance Board regulations. 
No substantive changes are being made to any of the previous Finance 
Board regulations that will be carried over to subpart B of part 1270.
Subpart C of Part 1270
    Subpart C of part 1270 incorporates Sec.  966.2 through Sec.  
966.10 of the Finance Board regulations, addressing COs, as new 
Sec. Sec.  1270.4 through 1270.11.\4\ FHFA

[[Page 18369]]

is not amending most of these provisions in any substantive fashion.
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    \4\ As already noted, relevant definitions previously found in 
Sec.  966.1 of the Finance Board regulations are incorporated in 
subpart A of part 1270.
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    As it proposed, however, FHFA is amending language now found in 
Sec.  1270.4, which addresses issuance of COs, to reflect the 
amendments made by HERA to section 11(c) of the Bank Act. As such, FHFA 
is removing provisions of the former Sec.  966.2(a) that had reserved 
to the Banks' regulator the right to issue COs. Similarly, Sec.  
1270.4(a), as adopted, provides that the Banks shall issue COs pursuant 
to authority in section 11(c) of the Bank Act, rather than under 
section 11(a) of the Bank Act, as had been stated in Sec.  966.2(b) of 
the Finance Board rules. Certain other changes made to language that 
had been in the old Finance Board regulations are editorial or are 
technical and conforming in nature, given amendments made by HERA to 
the Bank Act. See 75 FR at 68536.
    Section 1270.4(a) as adopted continues to require the Banks to 
issue COs subject to the provisions of part 1270 and any other relevant 
rules, regulations, terms, and conditions as the FHFA Director may 
prescribe. This provision also makes clear that the Banks remain 
jointly and severally liable on all COs. The negative pledge 
requirement previously found in Sec.  966.2(c) of the Finance Board 
regulations is being carried over without substantive change as new 
Sec.  1270.4(b). The final rule also removes, as unnecessary, the 
provision previously found in Sec.  966.4(b) that referred to 
consolidated notes. See 12 CFR 966.4(b). This change has no effect on 
the Banks' authority to issue COs. Prior Sec.  966.4(a), which provided 
that all COs be issued in pari passu, is being re-adopted as new Sec.  
1270.4(a)(3).
    Finally, FHFA is carrying over as Sec.  1270.9(c) the prohibition 
on the direct placement of COs previously found in Sec.  966.8(c). As 
it explained in proposing the part 1270 rules, FHFA is amending the 
language in Sec.  1270.9(c) to incorporate the Finance Board's 
Regulatory Interpretation 2005-RI-01, which clarified that the Banks 
could not purchase COs as part of an initial issuance regardless of 
whether the purchase was directly from the OF or indirectly from one of 
the firms that formed OF's approved underwriter network.\5\ See 75 FR 
at 68536 (citing Regulatory Interpretation 2005-RI-01 (Mar. 30, 2005)). 
As a result, the Finance Board's previous regulatory interpretation on 
this issue is hereby rescinded as of the effective date of this rule.
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    \5\ As FHFA noted when it proposed the new language for Sec.  
1270.9(c), the adoption of Sec.  1270.9(c) will not affect the 
validity of the waiver of this restriction issued by the Finance 
Board in December 2005 to allow, subject to certain conditions, the 
direct placement of COs with a Bank when necessary to assure that 
the Federal Reserve Bank of New York has sufficient funds to pay all 
principal and interest that come due on a given day on COs or on a 
portion of COs. See Fed. Hsing, Fin. Brd. Res. 2005-22 (Dec. 14, 
2005). See also 75 FR at 68536, n.4.
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Subpart D of Part 1270
    FHFA is moving regulations governing book-entry procedures for COs 
previously found in Sec.  987.2 through Sec.  987.10 of the Finance 
Board rules to new subpart D of part 1270 as Sec. Sec.  1270.12 through 
1270.20.\6\ Any changes being adopted to these provisions are technical 
and conforming in nature, such as amendments to remove and update 
references to the Finance Board and to make other changes made 
necessary by the transfer and combination of these regulations into new 
part 1270. FHFA is not making any substantive amendments to these 
provisions.
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    \6\ As already noted, relevant definitions previously found in 
Sec.  987.1 of the Finance Board regulations are incorporated in 
subpart A of part 1270.
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III. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for review.

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, FHFA certifies that this final rule will not have 
significant economic impact on a substantial number of small entities.

List of Subjects

12 CFR Parts 965, 969

    Federal home loan banks.

12 CFR Part 966

    Federal home loan banks, Government securities.

12 CFR Part 987

    Accounting, Government securities.

12 CFR Part 1270

    Accounting, Federal home loan banks, Government securities.

Authority and Issuance

    Accordingly, for reasons stated in the preamble and under the 
authority of 12 U.S.C. 1431, 1432, 1435, 4511, 4512, 4513, and 4526, 
FHFA is amending subchapters H and K of chapter IX and subchapter D of 
chapter XII of title 12 of the Code of Federal Regulations as follows:

CHAPTER IX--FEDERAL HOUSING FINANCE BOARD

SUBCHAPTER H--FEDERAL HOME LOAN BANK LIABILITIES

PART 965--[REMOVED]

0
1. Remove part 965.

PART 966--[REMOVED]

0
2. Remove part 966.

PART 969--[REMOVED]

0
3. Remove part 969.

SUBCHAPTER K--OFFICE OF FINANCE

PART 987--[REMOVED]

0
4. Remove part 987.

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER D--FEDERAL HOME LOAN BANKS

0
5. Add part 1270 to subchapter D to read as follows:

PART 1270--LIABILITIES

Subpart A--Definitions

Sec.
1270.1 Definitions.
Subpart B--Sources of Funds
1270.2 Authorized liabilities.
1270.3 Deposits from members.
Subpart C--Consolidated Obligations
1270.4 Issuance of consolidated obligations.
1270.5 Leverage limit and credit rating requirements.
1270.6 Transactions in consolidated obligations.
1270.7 Lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.
1270.8 Administrative provision.
1270.9 Conditions for issuance of consolidated obligations.
1270.10 Joint and several liability.
1270.11 Savings clause.
Subpart D--Book-Entry Procedure for Consolidated Obligations
1270.12 Law governing rights and obligations of Banks, FHFA, Office 
of Finance, United States and Federal Reserve Banks; rights of any 
Person against Banks, FHFA, Office of Finance, United States and 
Federal Reserve Banks.

[[Page 18370]]

1270.13 Law governing other interests.
1270.14 Creation of Participant's Security Entitlement; security 
interests.
1270.15 Obligations of the Banks and the Office of Finance; no 
Adverse Claims.
1270.16 Authority of Federal Reserve Banks.
1270.17 Liability of Banks, FHFA, Office of Finance and Federal 
Reserve Banks.
1270.18 Additional requirements; notice of attachment for Book-entry 
consolidated obligations.
1270.19 Reference to certain Department of Treasury commentary and 
determinations.
1270.20 Consolidated obligations are not obligations of the United 
States or guaranteed by the United States.

    Authority: 12 U.S.C. 1431, 1432, 1435, 4511, 4512, 4513, and 
4526.

Subpart A--Definitions


Sec.  1270.1  Definitions.

    As used in this part, unless the context otherwise requires or 
indicates:
    Adverse Claim means a claim that a claimant has a property interest 
in a Book-entry consolidated obligation and that it is a violation of 
the rights of the claimant for another Person to hold, transfer, or 
deal with the Security.
    Bank, written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act.
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    Book-entry consolidated obligation means a consolidated obligation 
maintained in the book-entry system of the Federal Reserve Banks.
    Consolidated obligation means any bond, debenture or note on which 
the Banks are jointly and severally liable and which was issued under 
section 11 of the Bank Act (12 U.S.C. 1431) and in accordance with any 
implementing regulations, whether or not such instrument was originally 
issued jointly by the Banks or by the Federal Housing Finance Board on 
behalf of the Banks.
    Deposits in banks or trust companies means:
    (1) A deposit in another Bank;
    (2) A demand account in a Federal Reserve Bank;
    (3) A deposit in, or a sale of Federal funds to:
    (i) An insured depository institution, as defined in section 
2(9)(A) of the Bank Act (12 U.S.C. 1422(9)(A)), that is designated by a 
Bank's board of directors;
    (ii) A trust company that is a member of the Federal Reserve System 
or insured by the FDIC, and is designated by a Bank's board of 
directors; or
    (iii) A U.S. branch or agency of a foreign bank, as defined in the 
International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.), 
that is subject to the supervision of the Federal Reserve Board, and is 
designated by a Bank's board of directors.
    Director, written in title case, means the Director of FHFA or his 
or her designee.
    Entitlement Holder means a Person or a Bank to whose account an 
interest in a Book-entry consolidated obligation is credited on the 
records of a Securities Intermediary.
    Federal Reserve Bank means a Federal Reserve Bank or branch, acting 
as fiscal agent for the Office of Finance, unless otherwise indicated.
    Federal Reserve Bank Operating Circular means the publication 
issued by each Federal Reserve Bank that sets forth the terms and 
conditions under which the Federal Reserve Bank maintains Book-entry 
Securities accounts and transfers Book-entry Securities.
    Federal Reserve Board means the Board of Governors of the Federal 
Reserve System.
    FHFA means the Federal Housing Finance Agency.
    Funds account means a reserve and/or clearing account at a Federal 
Reserve Bank to which debits or credits are posted for transfers 
against payment, Book-entry Securities transaction fees, or principal 
and interest payments.
    Non-complying Bank means a Bank that has failed to provide the 
liquidity certification as required under Sec.  1270.10(b)(1).
    NRSRO means a credit rating organization registered with the 
Securities and Exchange Commission as a nationally recognized 
statistical rating organization.
    Office of Finance means the Office of Finance, a joint office of 
the Banks established under part 1273 of this chapter and referenced in 
the Bank Act and the Safety and Soundness Act, including the Office of 
Finance acting as agent of the Banks in all matters relating to the 
issuance of Book-entry consolidated obligations and in the performance 
of all other necessary and proper functions relating to Book-entry 
consolidated obligations, including the payment of principal and 
interest due thereon.
    Participant means a Person or a Bank that maintains a Participant's 
Securities Account with a Federal Reserve Bank.
    Participant's Securities Account means an account in the name of a 
Participant at a Federal Reserve Bank to which Book-entry consolidated 
obligations held for a Participant are or may be credited.
    Person means and includes an individual, corporation, company, 
governmental entity, association, firm, partnership, trust, estate, 
representative, and any other similar organization, but does not mean 
or include a Bank, the Director, FHFA, the Office of Finance, the 
United States, or a Federal Reserve Bank.
    Repurchase agreement means an agreement in which a Bank sells 
securities and simultaneously agrees to repurchase those securities or 
similar securities at an agreed upon price, with or without a stated 
time for repurchase.
    Revised Article 8 means Uniform Commercial Code, Revised Article 8, 
Investment Securities (with Conforming and Miscellaneous Amendments to 
Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text. Copies of this 
publication are available from the Executive Office of the American Law 
Institute, 4025 Chestnut Street, Philadelphia, PA 19104, and the 
National Conference of Commissioners on Uniform State Laws, 676 North 
St. Clair Street, Suite 1700, Chicago, IL 60611.
    Safety and Soundness Act means the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) as 
amended.
    SBIC means a small business investment company formed pursuant to 
section 301 of the Small Business Investment Act (15 U.S.C. 681).
    Securities Intermediary means:
    (1) A Person that is registered as a ``clearing agency'' under the 
Federal securities laws; a Federal Reserve Bank; any other person that 
provides clearance or settlement services with respect to a Book-entry 
consolidated obligation that would require it to register as a clearing 
agency under the Federal securities laws but for an exclusion or 
exemption from the registration requirement, if its activities as a 
clearing corporation, including promulgation of rules, are subject to 
regulation by a Federal or State governmental authority; or (2) A 
Person (other than an individual, unless such individual is registered 
as a broker or dealer under the Federal securities laws), including a 
bank or broker, that in the ordinary course of its business maintains 
securities accounts for others and is acting in that capacity.
    Security Entitlement means the rights and property interest of an 
Entitlement Holder with respect to a Book-entry consolidated 
obligation.
    Transfer Message means an instruction of a Participant to a Federal 
Reserve Bank to effect a transfer of a Book-entry consolidated 
obligation, as set forth in Federal Reserve Bank Operating Circulars.

[[Page 18371]]

Subpart B--Sources of Funds


Sec.  1270.2  Authorized liabilities.

    As a source of funds for business operations, each Bank is 
authorized to incur liabilities by:
    (a) Accepting proceeds from the issuance of consolidated 
obligations issued in accordance with this part;
    (b) Accepting time or demand deposits from members, other Banks or 
instrumentalities of the United States, and cash accounts from 
associates or members pursuant to Sec. Sec.  1266.17(b)(2)(i)(B), 
1266.17(d) and 1269.4(a)(1) of this chapter, or Sec.  1270.3 of this 
part, or from other institutions for which the Bank is providing 
correspondent services pursuant to section 11(e) of the Bank Act (12 
U.S.C. 1431(e));
    (c) Purchasing Federal funds; and
    (d) Entering into repurchase agreements.


Sec.  1270.3  Deposits from members.

    (a) Banks may accept demand and time deposits from members, 
reserving the right to require notice of intention to withdraw any part 
of time deposits. Rates of interest paid on all deposits shall be set 
by the Bank's board of directors (or, between regular meetings thereof, 
by a committee of directors selected by the board) or by the Bank 
President, if so authorized by the board. Unless otherwise specified by 
the board, a Bank President may delegate to any officer or employee of 
the Bank any authority he possesses under this section.
    (b) Each Bank shall at all times have at least an amount equal to 
the current deposits received from its members invested in:
    (1) Obligations of the United States;
    (2) Deposits in banks or trust companies; or
    (3) Advances with a remaining maturity not to exceed five years 
that are made to members in conformity with part 1266 of this chapter.

Subpart C--Consolidated Obligations


Sec.  1270.4  Issuance of consolidated obligations.

    (a) Consolidated obligations issued by the Banks--(1) Subject to 
the provisions of this part and such other rules, regulations, terms, 
and conditions as the Director may prescribe, the Banks may issue joint 
debt under section 11(c) of the Bank Act (12 U.S.C. 1431(c)), which 
shall be consolidated obligations, on which the Banks shall be jointly 
and severally liable in accordance with Sec.  1270.10 of this part.
    (2) Consolidated obligations shall be issued only through the 
Office of Finance, as agent of the Banks pursuant to this part and part 
1273 of this chapter.
    (3) All consolidated obligations shall be issued in pari passu.
    (b) Negative pledge requirement. Each Bank shall at all times 
maintain assets described in paragraphs (b)(1) through (b)(6) of this 
section free from any lien or pledge, in an amount at least equal to a 
pro rata share of the total amount of currently outstanding 
consolidated obligations and equal to such Bank's participation in all 
such consolidated obligations outstanding, provided that any assets 
that are subject to a lien or pledge for the benefit of the holders of 
any issue of consolidated obligations shall be treated as if they were 
assets free from any lien or pledge for purposes of compliance with 
this paragraph (b). Eligible assets are:
    (1) Cash;
    (2) Obligations of or fully guaranteed by the United States;
    (3) Secured advances;
    (4) Mortgages as to which one or more Banks have any guaranty or 
insurance, or commitment therefor, by the United States or any agency 
thereof;
    (5) Investments described in section 16(a) of the Bank Act (12 
U.S.C. 1436(a)); and
    (6) Other securities that have been assigned a rating or assessment 
by an NRSRO that is equivalent to or higher than the rating or 
assessment assigned by that NRSRO to consolidated obligations 
outstanding.


Sec.  1270.5  Leverage limit and credit rating requirements.

    (a) Bank leverage--(1) Except as provided in paragraph (a)(2) of 
this section, the total assets of any Bank that is not subject to the 
capital requirements set forth in part 932 of this title shall not 
exceed 21 times the total of paid-in capital stock, retained earnings, 
and reserves (excluding loss reserves and liquidity reserves for 
deposits pursuant to section 11(g) of the Bank Act (12 U.S.C. 1431(g)) 
of that Bank.
    (2) The aggregate amount of assets of any Bank that is not subject 
to the capital requirements set forth in part 932 of this title may be 
up to 25 times the total paid-in capital stock, retained earnings, and 
reserves of that Bank, provided that non-mortgage assets, after 
deducting the amount of deposits and capital, do not exceed 11 percent 
of such total assets. For the purposes of this section, the amount of 
non-mortgage assets equals total assets after deduction of:
    (i) Advances;
    (ii) Acquired member assets, including all United States 
government-insured or guaranteed whole single-family or multi-family 
residential mortgage loans;
    (iii) Standby letters of credit;
    (iv) Intermediary derivative contracts;
    (v) Debt or equity investments:
    (A) That primarily benefit households having a targeted income 
level, a significant proportion of which must benefit households with 
incomes at or below 80 percent of area median income, or areas targeted 
for redevelopment by local, state, tribal or Federal government 
(including Federal Empowerment Zones and Enterprise and Champion 
Communities), by providing or supporting one or more of the following 
activities:
    (1) Housing;
    (2) Economic development;
    (3) Community services;
    (4) Permanent jobs; or
    (5) Area revitalization or stabilization;
    (B) In the case of mortgage- or asset-backed securities, the 
acquisition of which would expand liquidity for loans that are not 
otherwise adequately provided by the private sector and do not have a 
readily available or well established secondary market; and
    (C) That involve one or more members or housing associates in a 
manner, financial or otherwise, and to a degree to be determined by the 
Bank;
    (vi) Investments in SBICs, where one or more members or housing 
associates of the Bank also make a material investment in the same 
activity;
    (vii) SBIC debentures, the short term tranche of SBIC securities, 
or other debentures that are guaranteed by the Small Business 
Administration under title III of the Small Business Investment Act of 
1958, as amended (15 U.S.C. 681 et seq.);
    (viii) Section 108 Interim Notes and Participation Certificates 
guaranteed by the Department of Housing and Urban Development under 
section 108 of the Housing and Community Development Act of 1974, as 
amended (42 U.S.C. 5308);
    (ix) Investments and obligations issued or guaranteed under the 
Native American Housing Assistance and Self-Determination Act of 1996 
(25 U.S.C. 4101 et seq.).
    (x) Securities representing an interest in pools of mortgages (MBS) 
issued, guaranteed, or fully insured by the Government National 
Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage 
Corporation (Freddie Mac), or the Federal National Mortgage Association 
(Fannie Mae), or Collateralized Mortgage Obligations (CMOs), including 
Real Estate Mortgage Investment Conduits (REMICs), backed by such 
securities;

[[Page 18372]]

    (xi) Other MBS, CMOs, and REMICs rated in the highest rating 
category by an NRSRO;
    (xii) Asset-backed securities collateralized by manufactured 
housing loans or home equity loans and rated in the highest rating 
category by an NRSRO; and
    (xiii) Marketable direct obligations of state or local government 
units or agencies, rated in one of the two highest rating categories by 
an NRSRO, where the purchase of such obligations by a Bank provides to 
the issuer the customized terms, necessary liquidity, or favorable 
pricing required to generate needed funding for housing or community 
development.
    (b) Credit ratings--(1) The Banks, collectively, shall obtain from 
an NRSRO and, at all times, maintain a current credit rating on the 
Banks' consolidated obligations.
    (2) Each Bank shall operate in such a manner and take any actions 
necessary, including without limitation reducing Bank leverage, to 
ensure that the Banks' consolidated obligations receive and continue to 
receive the highest credit rating from any NRSRO by which the 
consolidated obligations have then been rated.
    (c) Individual Bank credit rating. Each Bank shall operate in such 
a manner and take any actions necessary to ensure that the Bank has and 
maintains an individual issuer credit rating of at least the second 
highest credit rating from any NRSRO providing a rating, where such 
rating is a meaningful measure of the individual Bank's financial 
strength and stability, and is updated at least annually by an NRSRO, 
or more frequently as required by FHFA, to reflect any material changes 
in the condition of the Bank.


Sec.  1270.6  Transactions in consolidated obligations.

    The general regulations of the Department of the Treasury now or 
hereafter in force governing transactions in United States securities, 
except 31 CFR part 357 regarding book-entry procedure, are hereby 
incorporated into this subpart C of this part, so far as applicable and 
as necessarily modified to relate to consolidated obligations, as the 
regulations of FHFA for similar transactions on consolidated 
obligations. The book-entry procedure for consolidated obligations is 
contained in subpart D of this part.


Sec.  1270.7  Lost, stolen, destroyed, mutilated or defaced 
consolidated obligations.

    United States statutes and regulations of the Department of the 
Treasury now or hereafter in force governing relief on account of the 
loss, theft, destruction, mutilation or defacement of United States 
securities, so far as applicable and as necessarily modified to relate 
to consolidated obligations, are hereby adopted as the regulations of 
FHFA for the issuance of substitute consolidated obligations or the 
payment of lost, stolen, destroyed, mutilated or defaced consolidated 
obligations.


Sec.  1270.8  Administrative provision.

    The Secretary of the Treasury or the Acting Secretary of the 
Treasury is hereby authorized and empowered, as the agent of FHFA and 
the Banks, to administer Sec. Sec.  1270.6 and 1270.7, and to delegate 
such authority at their discretion to other officers, employees, and 
agents of the Department of the Treasury. Any such regulations may be 
waived on behalf of FHFA and the Banks by the Secretary of the 
Treasury, the Acting Secretary of the Treasury, or by an officer of the 
Department of the Treasury authorized to waive similar regulations with 
respect to United States securities, but only in any particular case in 
which a similar regulation with respect to United States securities 
would be waived. The terms ``securities'' and ``bonds'' as used in this 
section shall, unless the context otherwise requires, include and apply 
to coupons and interim certificates.


Sec.  1270.9  Conditions for issuance of consolidated obligations.

    (a) The Office of Finance board of directors shall authorize the 
offering for current and forward settlement (up to 12 months) or the 
reopening of consolidated obligations, as necessary, and authorize the 
maturities, rates of interest, terms and conditions thereof, subject to 
the provisions of 31 U.S.C. 9108.
    (b) Consolidated obligations may be offered for sale only to the 
extent that Banks are committed to take the proceeds.
    (c) Consolidated obligations shall not be purchased by any Bank as 
part of an initial issuance whether such consolidated obligation is 
purchased directly from the Office of Finance or indirectly from an 
underwriter.
    (d) If the Banks issue consolidated obligations denominated in a 
currency other than U.S. Dollars or linked to equity or commodity 
prices, then any Bank accepting proceeds from those consolidated 
obligations shall meet the following requirements with regard to such 
consolidated obligations:
    (1) The relevant foreign exchange, equity price or commodity price 
risks associated with the consolidated obligation must be hedged in 
accordance with Sec.  956.6 of this title;
    (2) If there is a default on the part of a counterparty to a 
contract hedging the foreign exchange, equity or commodity price risk 
associated with a consolidated obligation, the Bank shall enter into a 
replacement contract in a timely manner and as soon as market 
conditions permit.


Sec.  1270.10  Joint and several liability.

    (a) In general--(1) Each and every Bank, individually and 
collectively, has an obligation to make full and timely payment of all 
principal and interest on consolidated obligations when due.
    (2) Each and every Bank, individually and collectively, shall 
ensure that the timely payment of principal and interest on all 
consolidated obligations is given priority over, and is paid in full in 
advance of, any payment to or redemption of shares from any 
shareholder.
    (3) The provisions of this part shall not limit, restrict or 
otherwise diminish, in any manner, the joint and several liability of 
all of the Banks on any consolidated obligation.
    (b) Certification and reporting--(1) Before the end of each 
calendar quarter, and before declaring or paying any dividend for that 
quarter, the President of each Bank shall certify in writing to FHFA 
that, based on known current facts and financial information, the Bank 
will remain in compliance with the liquidity requirements set forth in 
section 11(g) of the Act (12 U.S.C. 1431(g)), and any regulations (as 
the same may be amended, modified or replaced), and will remain capable 
of making full and timely payment of all of its current obligations, 
including direct obligations, coming due during the next quarter.
    (2) A Bank shall immediately provide written notice to FHFA if at 
any time the Bank:
    (i) Is unable to provide the certification required by paragraph 
(b)(1) of this section;
    (ii) Projects at any time that it will fail to comply with 
statutory or regulatory liquidity requirements, or will be unable to 
timely and fully meet all of its current obligations, including direct 
obligations, due during the quarter;
    (iii) Actually fails to comply with statutory or regulatory 
liquidity requirements or to timely and fully meet all of its current 
obligations, including direct obligations, due during the quarter; or
    (iv) Negotiates to enter or enters into an agreement with one or 
more other Banks to obtain financial assistance to meet its current 
obligations, including

[[Page 18373]]

direct obligations, due during the quarter; the notice of which shall 
be accompanied by a copy of the agreement, which shall be subject to 
the approval of FHFA.
    (c) Consolidated obligation payment plans--(1) A Bank promptly 
shall file a consolidated obligation payment plan for FHFA approval:
    (i) If the Bank becomes a non-complying Bank as a result of failing 
to provide the certification required in paragraph (b)(1) of this 
section;
    (ii) If the Bank becomes a non-complying Bank as a result of being 
required to provide the notice required pursuant to paragraph (b)(2) of 
this section, except in the event that a failure to make a principal or 
interest payment on a consolidated obligation when due was caused 
solely by a temporary interruption in the Bank's debt servicing 
operations resulting from an external event such as a natural disaster 
or a power failure; or
    (iii) If FHFA determines that the Bank will cease to be in 
compliance with the statutory or regulatory liquidity requirements, or 
will lack the capacity to timely and fully meet all of its current 
obligations, including direct obligations, due during the quarter.
    (2) A consolidated obligation payment plan shall specify the 
measures the non-complying Bank will undertake to make full and timely 
payments of all of its current obligations, including direct 
obligations, due during the applicable quarter.
    (3) A non-complying Bank may continue to incur and pay normal 
operating expenses incurred in the regular course of business 
(including salaries, benefits, or costs of office space, equipment and 
related expenses), but shall not incur or pay any extraordinary 
expenses, or declare, or pay dividends, or redeem any capital stock, 
until such time as FHFA has approved the Bank's consolidated obligation 
payment plan or inter-Bank assistance agreement, or ordered another 
remedy, and all of the non-complying Bank's direct obligations have 
been paid.
    (d) FHFA payment orders; Obligation to reimburse--(1) FHFA, in its 
discretion and notwithstanding any other provision in this section, may 
at any time order any Bank to make any principal or interest payment 
due on any consolidated obligation.
    (2) To the extent that a Bank makes any payment on any consolidated 
obligation on behalf of another Bank, the paying Bank shall be entitled 
to reimbursement from the non-complying Bank, which shall have a 
corresponding obligation to reimburse the Bank providing assistance, to 
the extent of such payment and other associated costs (including 
interest to be determined by FHFA).
    (e) Adjustment of equities--(1) Any non-complying Bank shall apply 
its assets to fulfill its direct obligations.
    (2) If a Bank is required to meet, or otherwise meets, the direct 
obligations of another Bank due to a temporary interruption in the 
latter Bank's debt servicing operations (e.g., in the event of a 
natural disaster or power failure), the assisting Bank shall have the 
same right to reimbursement set forth in paragraph (d)(2) of this 
section.
    (3) If FHFA determines that the assets of a non-complying Bank are 
insufficient to satisfy all of its direct obligations as set forth in 
paragraph (e)(1) of this section, then FHFA may allocate the 
outstanding liability among the remaining Banks on a pro rata basis in 
proportion to each Bank's participation in all consolidated obligations 
outstanding as of the end of the most recent month for which FHFA has 
data, or otherwise as FHFA may prescribe.
    (f) Reservation of authority. Nothing in this section shall affect 
the Director's authority to adjust equities between the Banks in a 
manner different than the manner described in paragraph (e) of this 
section, or to take enforcement or other action against any Bank 
pursuant to the Director's authority under the Safety and Soundness Act 
or the Bank Act, or otherwise to supervise the Banks and ensure that 
they are operated in a safe and sound manner.
    (g) No rights created--(1) Nothing in this part shall create or be 
deemed to create any rights in any third party.
    (2) Payments made by a Bank toward the direct obligations of 
another Bank are made for the sole purpose of discharging the joint and 
several liability of the Banks on consolidated obligations.
    (3) Compliance, or the failure to comply, with any provision in 
this section shall not be deemed a default under the terms and 
conditions of the consolidated obligations.


Sec.  1270.11  Savings clause.

    Any agreements or other instruments entered into in connection with 
the issuance of consolidated obligations prior to the amendments made 
to this part shall continue in effect with respect to all consolidated 
obligations issued under the authority of section 11 of the Bank Act 
(12 U.S.C. 1431) and pursuant to this part. References to consolidated 
obligations in such agreements and instruments shall be deemed to refer 
to all joint and several obligations of the Banks.

Subpart D--Book-Entry Procedure for Consolidated Obligations


Sec.  1270.12  Law governing rights and obligations of Banks, FHFA, 
Office of Finance, United States and Federal Reserve Banks; rights of 
any Person against Banks, FHFA, Office of Finance, United States and 
Federal Reserve Banks.

    (a) Except as provided in paragraph (b) of this section, the rights 
and obligations of the Banks, FHFA, the Director, the Office of 
Finance, the United States and the Federal Reserve Banks with respect 
to: A Book-entry consolidated obligation or Security Entitlement and 
the operation of the Book-entry system, as it applies to consolidated 
obligations; and the rights of any Person, including a Participant, 
against the Banks, FHFA, the Director, the Office of Finance, the 
United States and the Federal Reserve Banks with respect to: A Book-
entry consolidated obligation or Security Entitlement and the operation 
of the Book-entry system, as it applies to consolidated obligations; 
are governed solely by regulations of FHFA, including the regulations 
of this part 1270, the applicable offering notice, applicable 
procedures established by the Office of Finance, and Federal Reserve 
Bank Operating Circulars.
    (b) A security interest in a Security Entitlement that is in favor 
of a Federal Reserve Bank from a Participant and that is not recorded 
on the books of a Federal Reserve Bank pursuant to Sec.  1270.14(c)(1), 
is governed by the law (not including the conflict-of-law rules) of the 
jurisdiction where the head office of the Federal Reserve Bank 
maintaining the Participant's Securities Account is located. A security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank from a Person that is not a Participant, and that is not 
recorded on the books of a Federal Reserve Bank pursuant to Sec.  
1270.14(c)(1), is governed by the law determined in the manner 
specified in Sec.  1270.13.
    (c) If the jurisdiction specified in the first sentence of 
paragraph (b) of this section is a State that has not adopted Revised 
Article 8, then the law specified in the first sentence of paragraph 
(b) of this section shall be the law of that State as though Revised 
Article 8 had been adopted by that State.


Sec.  1270.13  Law governing other interests.

    (a) To the extent not inconsistent with this part 1270, the law 
(not including the conflict-of-law rules) of a Securities 
Intermediary's jurisdiction governs:

[[Page 18374]]

    (1) The acquisition of a Security Entitlement from the Securities 
Intermediary;
    (2) The rights and duties of the Securities Intermediary and 
Entitlement Holder arising out of a Security Entitlement;
    (3) Whether the Securities Intermediary owes any duties to an 
adverse claimant to a Security Entitlement;
    (4) Whether an Adverse Claim can be asserted against a Person who 
acquires a Security Entitlement from the Securities Intermediary or a 
Person who purchases a Security Entitlement or interest therein from an 
Entitlement Holder; and
    (5) Except as otherwise provided in paragraph (c) of this section, 
the perfection, effect of perfection or non-perfection, and priority of 
a security interest in a Security Entitlement.
    (b) The following rules determine a ``Securities Intermediary's 
jurisdiction'' for purposes of this section:
    (1) If an agreement between the Securities Intermediary and its 
Entitlement Holder specifies that it is governed by the law of a 
particular jurisdiction, that jurisdiction is the Securities 
Intermediary's jurisdiction.
    (2) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify the governing law as provided in 
paragraph (b)(1) of this section, but expressly specifies that the 
securities account is maintained at an office in a particular 
jurisdiction, that jurisdiction is the Securities Intermediary's 
jurisdiction.
    (3) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraphs (b)(1) or (b)(2) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
office identified in an account statement as the office serving the 
Entitlement Holder's account.
    (4) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraphs (b)(1) or (b)(2) of this section and an account statement 
does not identify an office serving the Entitlement Holder's account as 
provided in paragraph (b)(3) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
chief executive office of the Securities Intermediary.
    (c) Notwithstanding the general rule in paragraph (a)(5) of this 
section, the law (but not the conflict-of-law rules) of the 
jurisdiction in which the Person creating a security interest is 
located governs whether and how the security interest may be perfected 
automatically or by filing a financing statement.
    (d) If the jurisdiction specified in paragraph (b) of this section 
is a State that has not adopted Revised Article 8, then the law for the 
matters specified in paragraph (a) of this section shall be the law of 
that State as though Revised Article 8 had been adopted by that State. 
For purposes of the application of the matters specified in paragraph 
(a) of this section, the Federal Reserve Bank maintaining the 
Securities Account is a clearing corporation, and the Participant's 
interest in a Bank Book-entry Security is a Security Entitlement.


Sec.  1270.14  Creation of Participant's Security Entitlement; security 
interests.

    (a) A Participant's Security Entitlement is created when a Federal 
Reserve Bank indicates by book entry that a Book-entry consolidated 
obligation has been credited to a Participant's Securities Account.
    (b) A security interest in a Security Entitlement of a Participant 
in favor of the United States to secure deposits of public money, 
including, without limitation, deposits to the Treasury tax and loan 
accounts, or other security interest in favor of the United States that 
is required by Federal statute, regulation, or agreement, and that is 
marked on the books of a Federal Reserve Bank is thereby effected and 
perfected, and has priority over any other interest in the Securities. 
Where a security interest in favor of the United States in a Security 
Entitlement of a Participant is marked on the books of a Federal 
Reserve Bank, such Federal Reserve Bank may rely, and is protected in 
relying, exclusively on the order of an authorized representative of 
the United States directing the transfer of the Security. For purposes 
of this paragraph (b), an ``authorized representative of the United 
States'' is the official designated in the applicable regulations or 
agreement to which a Federal Reserve Bank is a party, governing the 
security interest.
    (c)(1) The Banks, FHFA, the Director, the Office of Finance, the 
United States and the Federal Reserve Banks have no obligation to agree 
to act on behalf of any Person or to recognize the interest of any 
transferee of a security interest or other limited interest in a 
Security Entitlement in favor of any Person except to the extent of any 
specific requirement of Federal law or regulation or to the extent set 
forth in any specific agreement with the Federal Reserve Bank on whose 
books the interest of the Participant is recorded. To the extent 
required by such law or regulation or set forth in an agreement with a 
Federal Reserve Bank, or the Federal Reserve Bank Operating Circular, a 
security interest in a Security Entitlement that is in favor of a 
Federal Reserve Bank or a Person may be created and perfected by a 
Federal Reserve Bank marking its books to record the security interest. 
Except as provided in paragraph (b) of this section, a security 
interest in a Security Entitlement marked on the books of a Federal 
Reserve Bank shall have priority over any other interest in the 
Securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest in a Security Entitlement, including a 
security interest in favor of a Federal Reserve Bank, may be perfected 
by any method by which a security interest may be perfected under 
applicable law as described in Sec.  1270.12(b) or Sec.  1270.13. The 
perfection, effect of perfection or non-perfection, and priority of a 
security interest are governed by that applicable law. A security 
interest in favor of a Federal Reserve Bank shall be treated as a 
security interest in favor of a clearing corporation in all respects 
under that law, including with respect to the effect of perfection and 
priority of the security interest. A Federal Reserve Bank Operating 
Circular shall be treated as a rule adopted by a clearing corporation 
for such purposes.


Sec.  1270.15  Obligations of the Banks and the Office of Finance; no 
Adverse Claims.

    (a) Except in the case of a security interest in favor of the 
United States or a Federal Reserve Bank or otherwise as provided in 
Sec.  1270.14(c)(1), for the purposes of this part 1270, the Banks, the 
Office of Finance and the Federal Reserve Banks shall treat the 
Participant to whose Securities Account an interest in a Book-entry 
consolidated obligations has been credited as the person exclusively 
entitled to issue a Transfer Message, to receive interest and other 
payments with respect thereof and otherwise to exercise all the rights 
and powers with respect to the Security, notwithstanding any 
information or notice to the contrary. Neither the Banks, FHFA, the 
Director, the Office of Finance, the United States, nor the Federal 
Reserve Banks are liable to a Person asserting or having an Adverse 
Claim to a Security Entitlement or to Book-entry consolidated 
obligations in a Participant's Securities Account, including any such 
claim arising as a result of the transfer or disposition of a Book-
entry consolidated obligation by a Federal Reserve Bank pursuant to a 
Transfer Message that the Federal

[[Page 18375]]

Reserve Bank reasonably believes to be genuine.
    (b) The obligation of the Banks and the Office of Finance to make 
payments of interest and principal with respect to Book-entry 
consolidated obligations is discharged at the time payment in the 
appropriate amount is made as follows:
    (1) Interest on Book-entry consolidated obligations is either 
credited by a Federal Reserve Bank to a Funds Account maintained at the 
Federal Reserve Bank or otherwise paid as directed by the Participant.
    (2) Book-entry consolidated obligations are paid, either at 
maturity or upon redemption, in accordance with their terms by a 
Federal Reserve Bank withdrawing the securities from the Participant's 
Securities Account in which they are maintained and by either crediting 
the amount of the proceeds, including both principal and interest, 
where applicable, to a Funds Account at the Federal Reserve Bank or 
otherwise paying such principal and interest as directed by the 
Participant. No action by the Participant is required in connection 
with the payment of a Book-entry consolidated obligation, unless 
otherwise expressly required.


Sec.  1270.16   Authority of Federal Reserve Banks.

    (a) Each Federal Reserve Bank is hereby authorized as fiscal agent 
of the Office of Finance: To perform functions with respect to the 
issuance of Book-entry consolidated obligations, in accordance with the 
terms of the applicable offering notice and with procedures established 
by the Office of Finance; to service and maintain Book-entry 
consolidated obligations in accounts established for such purposes; to 
make payments of principal, interest and redemption premium (if any), 
as directed by the Office of Finance; to effect transfer of Book-entry 
consolidated obligations between Participants' Securities Accounts as 
directed by the Participants; and to perform such other duties as 
fiscal agent as may be requested by the Office of Finance.
    (b) Each Federal Reserve Bank may issue Operating Circulars not 
inconsistent with this part 1270, governing the details of its handling 
of Book-entry consolidated obligations, Security Entitlements, and the 
operation of the Book-entry system under this part 1270.


Sec.  1270.17   Liability of Banks