Federal Home Loan Bank Liabilities, 68534-68543 [2010-28178]

Agencies

• Federal Housing Finance Board
• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 75, Number 215 (Monday, November 8, 2010)]
[Proposed Rules]
[Pages 68534-68543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28178]


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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: Notice of proposed rulemaking; request for comment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to re-
organize and re-adopt 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 proposed rule would also make changes 
to the regulations governing COs to reflect recent statutory amendments 
which removed authority from FHFA to issue COs on which the Banks are 
jointly and severally liable and provided this authority to the Banks 
themselves. Otherwise, FHFA is proposing to re-adopt most of the 
regulatory provisions addressed in this rulemaking without substantive 
amendment.

DATES: Comments on the proposed rule must be received on or before 
January 7, 2011. For additional information, see SUPPLEMENTARY 
INFORMATION.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AA36 by any of 
the following methods:
     E-mail: Comments to Alfred M. Pollard, General Counsel may 
be sent by e-mail to RegComments@FHFA.gov. Please include ``RIN 2590-
AA36'' in the subject line of the message.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comments to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at RegComments@FHFA.gov to ensure timely receipt by the 
agency. Please include ``RIN 2590-AA36'' in the subject line of the 
message.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA36, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA36, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.

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. Comments

    FHFA invites comments on all aspects of the proposed rule, and will 
adopt a final regulation with appropriate changes after taking all 
comments into consideration. Copies of all comments will be posted on 
the Internet Web site at https://www.fhfa.gov. In addition, copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m., at the 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. To make an appointment to inspect comments, 
please call the Office of General Counsel at (202) 414-6924.

II. 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.

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

[[Page 68535]]

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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    As government-sponsored enterprises (GSEs), the Banks are granted 
certain privileges under Federal law. In light of those privileges and 
their status as GSEs, the Banks typically can borrow funds at spreads 
over the rates on U.S. Treasury securities of comparable maturity lower 
than most other entities. The Banks pass along a portion of their GSE 
funding advantage to their members--and ultimately to consumers--by 
providing advances and other financial services at rates that would not 
otherwise be available to their members.

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 themselves 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\ To reflect this 
statutory change, FHFA is proposing to amend the regulations governing 
the issuance of COs, as well as make other changes to existing 
regulations.
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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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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). The Director also 
may consider any other differences that are deemed appropriate. In 
preparing this proposed rule, FHFA considered the differences between 
the Banks and the Enterprises as they relate to the above factors. FHFA 
requests comments from the public about whether differences related to 
these factors should result in any revisions to the proposal.

III. Analysis of the Proposed Rule

    FHFA is proposing to amend the existing regulations previously 
adopted by the Finance Board that address COs to reflect changes made 
by HERA to section 11 of the Bank Act. At the same time, FHFA is 
proposing to combine 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. See 12 CFR parts 965, 966, 969 and 987. Most 
of the existing provisions would be carried over to new part 1270 
without change, other than for technical changes necessary to conform 
cross-references to other FHFA regulations and to reflect the fact that 
FHFA is now regulator for the Banks. Changes to the regulations that 
FHFA is proposing are discussed in more detail below.

Proposed Subpart A of Part 1270

    FHFA is proposing to consolidate relevant definitions from parts 
965, 966, 969 and 987 of the Finance Board regulations into proposed 
subpart A of part 1270. To the extent necessary, FHFA is also proposing 
to include in this subpart, relevant definitions from part 900 of the 
Finance Board regulations. Definitions contained in part 900 apply to 
all Finance Board regulations but would not apply to proposed part 1270 
of the FHFA regulations. See 12 CFR part 900. No substantive changes 
would be made to most of these definitions.
    FHFA is, however, proposing to adopt a new definition for 
``consolidated obligations'' that varies slightly from the one that is 
currently set forth in part 900. The proposed changes reflect the fact 
that HERA amended section 11 of the Bank Act so that the Banks, and not 
FHFA, are now authorized to issue COs while recognizing that some 
outstanding COs may have been issued by the Finance Board under the 
prior statutory provisions. The proposed definition is the same as one 
FHFA adopted in other regulations. See, e.g., 12 CFR 1229.1.
    FHFA is also proposing to amend slightly the definition for the 
``Office of Finance'' that now appears in the part 987 regulations 
concerning book-entry procedures for COs. The Finance Board first 
adopted the definition for OF in the book-entry procedure rules in 1998 
to reflect the fact that OF would act as agent for the Finance Board in 
issuing COs, but at other times, would act as agent for the Banks in 
other functions such as payment on the COs. See 63 FR 8057, 8058 (Feb. 
18, 1998). In 2002, the Finance Board adopted a technical

[[Page 68536]]

amendment to the part 987 definition to remove references to the OF 
acting as agent for the Finance Board in recognition of the fact that 
the Finance Board in 2000 had delegated authority to issue COs to the 
Banks themselves. See Final Rule: Technical Amendments to Federal 
Housing Finance Board Regulations, 67 FR 12841, 12855 (Mar. 20, 2002). 
The definition proposed in this rulemaking would combine the definition 
of ``OF'' used in part 1273 of the FHFA regulations, which establishes 
OF, with the substance of the definition now in part 987. See 12 CFR 
1273.1. The proposed changes to the definition would recognize that 
under proposed part 1270, a reference to ``OF'' could be made in 
circumstances, or to address duties, other than those related to book-
entry procedures.

Proposed Subpart B of Part 1270

    Proposed subpart B would combine 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 
would be relocated to proposed Sec.  1270.2, and proposed Sec.  1270.3 
would combine in a single section the authorizations and requirements 
now set forth in Sec.  965.3 and Sec.  969.2 of the Finance Board 
regulations. 12 CFR 965.2, 965.3 and 969.2. No substantive changes are 
being proposed to any of the provisions which would be relocated to 
subpart B of part 1270 by this proposed rule.

Proposed Subpart C of Part 1270

    Under the proposed rule, Sec.  966.2 through Sec.  966.10 of the 
Finance Board regulations, addressing COs, would be incorporated into 
subpart C of part 1270 as proposed Sec. Sec.  1270.4 through 
1270.11.\3\ 12 CFR 966.2 through 966.10. FHFA is not proposing to amend 
most of these provisions in any substantive fashion.
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    \3\ As already noted, relevant definitions now found in Sec.  
966.1 of the Finance Board regulations would be incorporated in 
subpart A of part 1270 under this proposed rule. 12 CFR 966.1.
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    FHFA is proposing amendments in Sec.  1270.4 which would address 
issuance of COs, however. First, the provision now found in Sec.  
966.2(a) which reserves to the Banks' regulator the right to issue COs 
under section 11(c) of the Bank Act, would be deleted to conform the 
rule to the HERA amendments, which removed this authority for FHFA and 
provided the authority to the Banks instead. Similarly, proposed Sec.  
1270.4(a) would provide 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 is stated in current Sec.  966.2(b). New 
language in proposed Sec.  1270.4(a) would also reflect other changes 
made by HERA to the Bank Act and update references to reflect FHFA's 
role as regulator and the fact that the FHFA Director's principal 
duties and authority for oversight of the Bank System are found in 
sections 1311, 1312, and 1313 of the Federal Housing Enterprises 
Financial Safety and Soundness Act, as amended. 12 U.S.C. 4511, 4512 
and 4513.
    Proposed Sec.  1270.4(a) would continue 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. The proposed provision also would continue to make clear 
that the Banks are jointly and severally liable on all COs issued under 
the rule. The negative pledge requirement now found in Sec.  966.2(c) 
of the Finance Board regulations would also be carried over without 
substantive change under the proposed rule as new Sec.  1270.4(b).
    The proposed rule would also remove, as unnecessary, the current 
provision found in Sec.  966.4(b) that refers to consolidated notes. 
See 12 CFR 966.4(b). This change has no effect on the Banks' authority 
to issue COs. Current Sec.  966.4(a), which provides that all COs shall 
be issued in pari passu, would be carried over as new Sec.  
1270.4(a)(3). See 12 CFR 966.4(a).
    Finally, FHFA is proposing to amend language in Sec.  1270.9(c) 
which would carry over the current prohibition on the direct placement 
of COs found in Sec.  966.8(c). 12 CFR 966.8(c). The proposed language 
would incorporate into the rule the regulatory interpretation issued in 
2005 by the Finance Board which clarified that the prohibition on the 
direct placement of COs meant that the Banks cannot purchase COs as 
part of an initial issuance of COs regardless of whether the purchase 
was directly from the OF or indirectly from one of the firms that form 
OF's approved underwriter network. See Regulatory Interpretation 2005-
RI-01 (Mar. 30, 2005). As explained in the RI, the Finance Board did 
not believe that such purchases would further the mission of the Banks. 
The proposed change in language is to make clear that FHFA agrees with 
this view and intends this interpretation of the prohibition in 
existing Sec.  966.8(c) to be incorporated into the new provision.\4\
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    \4\ The proposed change would not affect the validity of the 
waiver of this requirement 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 portion of COs. See 
Fed. Hsing, Fin. Brd. Res. 2005-22 (Dec. 14, 2005).
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Proposed Subpart D of Part 1270

    FHFA is proposing to move regulations governing book-entry 
procedures for COs now found in Sec.  987.2 through Sec.  987.10 to 
subpart D of part 1270 as proposed Sec. Sec.  1270.12 through 
1270.20.\5\ Any changes being proposed 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. No substantive changes are being proposed to these 
provisions.
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    \5\ As already noted, relevant definitions now found in Sec.  
987.1 of the Finance Board regulations would be incorporated in 
subpart A of part 1270 under this proposed rule. 12 CFR 987.1.
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Requirements Referencing Credit Ratings

    The recently enacted Dodd-Frank Wall Street Reform and Consumer 
Protection Act provides Federal agencies with one year to review 
regulations that require the use of an assessment of the credit-
worthiness of a security or money market instrument and any references 
to, or requirements in, such regulations regarding credit ratings, and 
to remove such references or requirements. See Sec.  939A, Public Law 
111-203, 124 Stat. 1376 (July 21, 2010). In place of such credit-rating 
based requirements, an agency is instructed to substitute appropriate 
standards for determining credit-worthiness. The new law further 
provides that, to the extent feasible, an agency should adopt a uniform 
standard of credit-worthiness for use in its regulations, taking into 
account the entities regulated by it and the purposes for which such 
regulated entities would rely on the credit-worthiness standard.
    As proposed, the rule would carry over without change a number of 
existing provisions which reference credit ratings or otherwise impose 
specific credit rating requirements. Rather than use this rulemaking to 
suggest specific changes to these provisions, FHFA has determined 
instead to begin soliciting comments on what alternative standards of 
credit-worthiness could appropriately be adopted more generally to 
replace the requirements in its regulations that are based on credit 
ratings. Therefore, FHFA is requesting comments on potential credit-
worthiness standards that could be applied across regulations governing 
the Bank System that could be used to replace the credit-ratings

[[Page 68537]]

requirements discussed below, as well as to replace similar 
requirements in other applicable rules. Further, with regard to the 
specific provisions described below, FHFA is also seeking comments on 
whether the provisions could be deleted from a final rule without 
compromising safety or soundness or whether other specific safeguards 
or requirements (but ones which are not necessarily based on credit-
worthiness standards) could provide similar protections as those 
afforded under the proposed provisions.
    First, proposed Sec.  1270.4(b)(6) references assets that have been 
assigned a rating or assessment by a credit rating organization 
registered with the Securities and Exchange Commission as a nationally 
recognized statistical rating organization (NRSRO) that is equivalent 
to or higher than the rating or assessment assigned by the NRSRO to 
outstanding COs. This provision would be carried over as part of the 
``negative pledge requirement'' which states that a Bank must maintain 
certain specific assets free of any lien or pledge in an amount equal 
to the Bank's pro rata share of total outstanding COs. See 12 CFR 
966.2(c). The negative pledge requirement was first adopted in 1946. It 
has been amended only once to any significant degree, in 1992, at which 
time the Finance Board expanded slightly the list of qualifying assets 
to account for certain conservative investment opportunities that arose 
subsequent to 1946. See Proposed Rule: Leverage Ratio on Consolidated 
Federal Home Loan Bank Debt, 57 FR 20061, 20062 (May 11, 1992); Final 
Rule: Leverage Ratio on Consolidated Federal Home Loan Bank Debt, 57 FR 
62183, 62185 (Dec. 30, 1992). The specific provision at issue here was 
added as part of the 1992 amendments. As the Finance Board noted in 
proposing the change, the provision was meant to assure that ``the 
investments [used to meet the negative pledge] have a relatively 
conservative risk profile [by requiring] * * * a rating or assessment 
at least equal to senior [Bank] bonds * * *'' 57 FR at 20062.
    Proposed Sec.  1270.5(a)(2)(xi), (xii), and (xiii) contain 
references to mortgage and community development related investments 
that carry either the highest or the second highest investment grade 
ratings from an NRSRO. These provisions are included in the 
transitional leverage limit which applies until a Bank converts to the 
capital structure required under the Gramm-Leach-Bliley Act (GLB Act) 
and complies with the GLB Act capital requirements in 12 CFR part 932. 
See Final Rule: Federal Home Loan Bank Consolidated Obligations--
Definition of the Term ``Non-Mortgage Assets'', 67 FR 35713 (May 21, 
2002). This proposed leverage requirement currently would apply to only 
one Bank. The specific provisions at issue identify assets that would 
be considered related to the Bank's core mission activities and 
therefore would not be included in calculations of the Bank's non-
mortgage assets. Id. at 35713-14. The calculation of ``non-mortgage 
assets'' is relevant because, under the current and proposed 
regulations, the leverage limit applicable to a Bank would become more 
restrictive if the Bank's non-mortgage assets exceed 11 percent of the 
Bank's total assets.
    FHFA is also proposing to carry over as new Sec.  1270.5(b) and 
Sec.  1270.5(c) current requirements concerning specific credit ratings 
that Banks collectively must maintain for COs and that each Bank must 
maintain individually. These requirements were adopted as a means of 
enhancing protections afforded holders of COs by requiring Banks either 
collectively or individually to take actions to maintain the required 
ratings. See Final Rule: Office of Finance; Authority of Federal Home 
Loan Banks to Issue Consolidated Obligations, 65 FR 36290, 36294 (June 
7, 2000). The Finance Board believed that these requirements provided 
more effective on-going protections to bond holders than the provision 
that they replaced, which had required a written statement from a 
rating agency or an investment bank that a change in the leverage limit 
applicable to the Banks would not adversely affect the ratings or 
creditworthiness of COs, prior to the change becoming effective. Id.

IV. Paperwork Reduction Act

    The proposed 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.

V. Regulatory Flexibility Act

    The proposed 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 proposed rule, 
if promulgated as a 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.

    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 proposes to amend 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]

    1. Remove part 965.

PART 966--[REMOVED]

    2. Remove part 966.

PART 969--[REMOVED]

    3. Remove part 969.

SUBCHAPTER K--OFFICE OF FINANCE

PART 987--[REMOVED]

    4. Remove part 987.

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER D--FEDERAL HOME LOAN BANKS

    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.

[[Page 68538]]

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.
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 Obligations of United States with respect to consolidated 
obligations.

    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 FRB, 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.
    FHFA means the Federal Housing Finance Agency.
    FRB means the Board of Governors of the Federal Reserve System.
    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 or OF means the Office of Finance, a joint office 
of the Banks established under part 1273 of this title and referenced 
in the Bank Act and the Safety and Soundness Act, including OF 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.
    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, 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

[[Page 68539]]

set forth in Federal Reserve Bank Operating Circulars.

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 members 
or associates pursuant to Sec.  950.17(b)(2)(i)(B) and 950.17(d) of 
this title, Sec.  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 950 of this title.

Subpart C--Consolidated Obligations


Sec.  1270.4  Issuance of consolidated obligations.

    (a) Consolidated obligations issued by the Banks--(1) Pursuant to 
the duties and authority of the Director set forth in sections 1311, 
1312, and 1313 of the Safety and Soundness Act (12 U.S.C. 4511, 4512 
and 4513), and 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

[[Page 68540]]

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;
    (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

[[Page 68541]]

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 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.

[[Page 68542]]

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:
    (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