Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Farmer Mac Investments and Liquidity Management, 71798-71821 [2011-29690]

Agencies

• Farm Credit Administration

[Federal Register Volume 76, Number 223 (Friday, November 18, 2011)]
[Proposed Rules]
[Pages 71798-71821]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29690]



[[Page 71797]]

Vol. 76

Friday,

No. 223

November 18, 2011

Part IV





Farm Credit Administration





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12 CFR Part 652





Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; 
Farmer Mac Investments and Liquidity Management; Proposed Rule

Federal Register / Vol. 76 , No. 223 / Friday, November 18, 2011 / 
Proposed Rules

[[Page 71798]]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC56


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Farmer Mac Investments and Liquidity Management

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) 
proposes to amend our regulations governing the Federal Agricultural 
Mortgage Corporation (Farmer Mac or the Corporation) in the areas of 
non-program investments and liquidity. We are proposing to modify the 
specific requirements supporting our objective to ensure that Farmer 
Mac maintains adequate liquidity to withstand stressful conditions in 
accordance with board-established risk tolerance and holds only high-
quality, liquid investments in its liquidity reserve. We also propose 
to expand the allowable purposes of Farmer Mac's non-program 
investments to include investments that would add value to Farmer Mac's 
operations by complementing its program activities. Further, we request 
comments on the best approach for compliance with section 939A of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act or DFA), which requires us to remove all references to and 
requirements relating to credit ratings and to substitute other 
appropriate standards of creditworthiness. Finally, we propose 
significant reorganizing of sections to make the flow of the issues 
covered more logical.

DATES: You may send us comments by January 17, 2012.

ADDRESSES: We offer a variety of methods for you to submit comments on 
this proposed rule. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through the Agency's Web 
site. As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     Email: Send us an email at reg-comm@fca.gov.
     FCA Web site: https://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Laurie A. Rea, Director, Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our Web site at https://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove email addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: 

Joseph T. Connor, Associate Director for Policy and Analysis, Office of 
Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4280, TTY (703) 883-4434;

 or

Jennifer A. Cohn, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of this proposed rule is to ensure the safety and 
soundness and continuity of Farmer Mac operations for the purpose of 
furthering its public mission. To achieve this objective FCA is 
proposing to:
     Revise the permissible purposes of non-program 
investments;
     Modify the type, quality, maximum remaining term and 
maximum amount of non-program investments \1\ that may be held by 
Farmer Mac;
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    \1\ Section 652.5 defines ``non-program investments'' as 
investments other than those in (1) ``qualified loans'' as defined 
in section 8.0(9) of the Farm Credit Act of 1971, as amended (Act), 
or (2) securities collateralized by ``qualified loans.'' Section 
8.0(9) is codified at 12 U.S.C. 2279aa.
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     Strengthen diversification requirements, including 
portfolio limits on specific types of investments and counterparty 
exposure limits;
     Revise board policy and stress testing requirements;
     Modify the non-program investment portfolio limit;
     Revise the computation, and level of the minimum, 
liquidity reserve requirement;
     Reduce the regulatory burden associated with investments 
that fail to meet eligibility criteria after purchase or are otherwise 
unsuitable;
     Seek public input on approaches to remove reliance on 
credit ratings in compliance with section 939A of the Dodd-Frank Act; 
and
     Reorganize the regulations to make the flow of the issues 
covered more logical by delineating more clearly among sections 
governing investment management, interest rate risk management, and 
liquidity risk management.

II. Introduction

    On May 19, 2010, we published an advance notice of proposed 
rulemaking (ANPRM) that considered revisions to Farmer Mac's non-
program investment and liquidity requirements.\2\ The 45-day comment 
period ended on July 6, 2010. After considering the comments we 
received on this ANPRM, we now propose revisions to these requirements.
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    \2\ 75 FR 27951.
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III. Background

    Congress established Farmer Mac in 1988 as part of its effort to 
resolve the agricultural crisis of the 1980s. Congress expected that 
establishing a secondary market for agricultural and rural housing 
mortgages would increase the availability of competitively priced 
mortgage credit to America's farmers, ranchers, and rural homeowners.
    A guiding principle for FCA in establishing regulations governing 
Farmer Mac is to maintain an appropriate balance between the 
Corporation's mission achievement and risk. Specifically, the intent of 
this regulation is to allow Farmer Mac to sufficient flexibility to 
fully serve its customers and provide an appropriate return for 
investors while ensuring that it engages in safe and sound operations. 
We believe achieving an appropriate balance between mission achievement 
and risk should provide a high degree of certainty that Farmer Mac will 
continue to make its products available to serve customers without the 
need to issue debt to the Department of Treasury or seek any other form 
of government financial assistance.\3\
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    \3\ Under certain specific adverse circumstances, Farmer Mac is 
authorized to issue debt to the Department of the Treasury to meet 
obligations on guarantees. See section 8.13 of the Act (12 U.S.C. 
2279aa-13).
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    Existing FCA regulations currently authorize Farmer Mac to invest 
in non-program investments for three purposes;

[[Page 71799]]

to manage short-term surplus funds, to comply with interest rate risk 
requirements, and to comply with liquidity reserve requirements.\4\ 
Liquidity is a firm's ability to meet its obligations as they come due 
without substantial negative impact on its operations or financial 
condition. The availability of an appropriately sized portfolio 
comprised of highly liquid assets is necessary for the Corporation to 
conduct its business and to achieve its statutory purposes. Moreover, 
we believe that Farmer Mac's liquidity reserve portfolio, while it must 
be low risk, can appropriately include investments that provide a 
positive return on the portfolio and still fulfill the investment 
purposes authorized by regulation under most market conditions.
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    \4\ 12 CFR 652.25.
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    Liquidity risk is the risk that the Corporation could become unable 
to meet expected obligations and reasonably estimated unexpected 
obligations as they come due without substantial adverse impact on its 
operations or financial condition. Reasonably estimated liquidity risk 
should consider scenarios of debt market disruptions, asset market 
disruptions such as industry sector security price risk scenarios, and 
other contingent liquidity events. Contingent liquidity events include 
significant changes in overall economic conditions, events that would 
impact the market's perception of Farmer Mac (such as reputation risks 
and legal risks), and a broad and significant deterioration in the 
agriculture sector and its potential impact on Farmer Mac's need for 
cash to fulfill obligations under the terms of products such as Long-
Term Standby Purchase Commitments and AgVantage Plus bond guarantees.
    While the management of Farmer Mac's non-program investment 
portfolio and its liquidity risk are closely linked, they are not 
synonymous. Management of the non-program investment portfolio includes 
market risk, credit risk, and cash management, as well as earnings 
performance.\5\ Moreover, as discussed below, we propose to permit 
investments that complement program activities, even if those 
investments may not contribute significantly to liquidity risk 
management. The inclusion of investments of this nature highlights the 
distinction between investment management and liquidity risk 
management.
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    \5\ We view the management of non-program investment earnings 
performance as including both the avoidance of underperforming 
appropriate benchmarks for this portfolio as well as avoiding 
performance that is excessive relative to appropriate benchmarks--as 
excessive returns can reasonably be viewed as indications of 
excessive liquidity risk. We discuss this concept at length in our 
ANPRM, at 75 FR 27952-53. We continue to study this concept but do 
not propose regulatory guidance regarding the establishment of such 
benchmarks at this time.
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IV. General Discussion of Letters Commenting on the ANPRM

    We received four comment letters on the ANPRM, one each from the 
Farm Credit Council (Council), AgFirst Farm Credit Bank (AgFirst), Farm 
Credit West ACA (Farm Credit West), and Farmer Mac. We discuss in this 
preamble those comments that pertain to changes we are proposing or to 
certain provisions where we propose no changes. Some of the questions 
in our ANPRM, however, were very general and theoretical and discussed 
potential policy options that we have elected not to propose in this 
rulemaking. We do not discuss comments submitted in response to those 
questions, but we will consider them in future rulemakings as 
appropriate.
    The Council commented generally that Farmer Mac's liquidity 
requirements should be commensurate with its funding risk and 
equivalent to the liquidity standards required for Farm Credit System 
(System) lenders engaged in similar activities. The Council's letter 
also included detailed comments to many of the specific questions 
raised in the ANPRM, and it identified specific instances where the 
Council believes the Farmer Mac regulations should be more closely 
aligned with those governing the System. Ag First's and Farm Credit 
West's letters concurred with the opinions expressed in the Council's 
comment letter, and Ag First's letter also included several specific 
comments.
    In response to commenters, we agree, in general that the liquidity 
requirements governing Farmer Mac and the System should be consistent, 
and alignment is appropriate in certain areas. However, we also believe 
that Farmer Mac's business model, which focuses on secondary market 
activities (as opposed to the wholesale and retail lending models of 
FCS banks), combined with the other differences in their authorizing 
statutes, provide ample justification for differences in certain areas 
of their regulatory structures. We address the Council's and AgFirst's 
specific comments, including specific areas of alignment and 
differentiation, below in the section-by-section discussion.
    In its comment letter, Farmer Mac agreed that the ANPRM identified 
important questions relating to liquidity. It believes, however, that a 
number of these questions relate specifically to policies and 
procedures that should be set at its board level. It therefore reserved 
specific comments until FCA issues a proposed rule, and it instead 
submitted two conceptual level comments for FCA's consideration.
    Farmer Mac first suggested that ``any proposed regulation should 
establish broad guidelines that lead to prudent risk management rather 
than being prescriptive.'' Farmer Mac stated that in an economic 
environment that could change from 1 minute to the next, its ability to 
respond quickly to market forces and adjust its use of a range of asset 
classes is critical. It expressed concern that rigid and narrow 
eligibility criteria and amounts for its liquidity portfolio could lead 
to limited options and thus result in greater concentrations of 
relatively higher risk asset classes or particular assets. It 
recognized the FCA's regulatory responsibility to ensure safety and 
soundness, but it believes the onus of establishing appropriate 
specific policies and procedures should be left to its board and 
management.
    We agree that Farmer Mac's board of directors is ultimately 
accountable and responsible for effective implementation of prudent 
policies and practices. Nonetheless, as the Corporation's prudential 
regulator, we are charged with establishing an appropriate regulatory 
and supervisory framework to promote the long-term viability and safety 
and soundness of the Corporation as well as achievement of its public 
mission.
    Farmer Mac encouraged FCA to consider the 2010 Interagency Policy 
Statement on Funding and Liquidity Risk Management adopted by the other 
Federal banking regulatory agencies.\6\ Farmer Mac stated that this 
policy outlines a comprehensive yet flexible regulatory policy for 
funding and liquidity risk that promotes safety and soundness and yet 
allows for differences in board-approved policies across financial 
institutions as well as across market and economic environments. Farmer 
Mac further stated that regulations should allow for adherence in a 
variety of market situations to ensure real safety and soundness and, 
for this reason, regulations that establish guidelines or parameters, 
together with an examination process that tests board-approved policies 
and procedures,

[[Page 71800]]

would be the best framework for ensuring that Farmer Mac continues to 
maintain adequate amounts and types of liquidity.
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    \6\ See 75 FR 13656, Mar. 22, 2010. These agencies are the 
Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Federal Reserve), the 
Federal Deposit Insurance Corporation (FDIC), the Office of Thrift 
Supervision (OTS), and the National Credit Union Administration 
(NCUS).
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    In response to Farmer Mac's request that FCA consider the 
Interagency Policy Statement, we note that there are many similarities 
between that Statement and this proposed rule, particularly with 
respect to the definition of highly liquid assets, stress testing 
requirements, and contingency funding plans. In addition, this proposed 
rule has also, where appropriate, drawn on guidance issued to 
international regulators by the Basel Committee on Banking Supervision 
(Basel Committee) on the topic of liquidity risk management.\7\
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    \7\ ``Principles for Sound Liquidity Risk Management and 
Supervision,'' Basel Committee on Banking Supervision, September 
2008, and ``International framework for liquidity risk management, 
standards and monitoring,'' Consultative Document, Basel Committee 
on Banking Supervision, December 2009. These documents can be found 
on the Basel Committee's Web site at https://www.bis.org/bcbs.
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    However, both the Interagency Policy Statement and the guidance 
issued by the Basel Committee apply to a very large and diverse group 
of financial institutions with wide variation in structure, size, and 
complexity of operations. That breadth of covered institutions 
necessitates that any Interagency Policy Statement providing guidance 
to all of them must be general in its content.
    OSMO's role as regulator of one institution provides the 
opportunity to be more specific in its guidance. Nonetheless, we 
generally agree with Farmer Mac's main point to preserve as much of the 
flexibility embedded in the Interagency Policy Statement as is 
appropriate.
    Farmer Mac's second conceptual level comment is that, since its 
liquidity portfolio will continue to be a large part of its balance 
sheet, any new regulatory approach should recognize the tradeoff 
between the need for liquidity and the need for ``asset income'' (i.e., 
earnings). Farmer Mac states that prudent business practices cannot 
ignore the need to provide some return on investments, given the 
necessary size of its portfolio. Farmer Mac believes the need for 
return on its investments is even more critical because of the 
statutory requirements that it hold minimum capital of 275 basis points 
against the investments.\8\ Farmer Mac asserted the importance of 
balancing the costs of ``a strong liquidity position with the economic 
interests of Farmer Mac's customers and other stakeholders that serve 
rural America.'' Farmer Mac suggests this need for regulatory balance 
is even more critical in volatile financial markets, when asset prices 
or expected returns can change suddenly. The Corporation further states 
that regulations that establish ``guidelines'' rather than prescriptive 
``narrow targets or asset classes'' would provide Farmer Mac the 
flexibility to respond appropriately to volatile markets and 
``prudently reduce risk by adjusting policies and changing the asset 
mix to eliminate illiquid assets, while maintaining an appropriate 
return.'' Farmer Mac asserts that ultimately, this will lead to the 
safest and most liquid portfolio possible.
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    \8\ Section 8.33 of the Act (12 U.S.C. 2279bb-2).
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    In response to this point, we agree that our regulations should 
recognize the tradeoff between the need for liquidity and the need for 
a reasonable return on assets. This concept is central to this 
rulemaking and we discussed the policy implications of the risk and 
return tradeoff in detail in the ANPRM.\9\ There, we noted that the 
balance we target in the revised regulations is intended to serve all 
Farmer Mac stakeholders, who include not only customers who serve the 
financing needs of rural America and investors who require a return on 
investment, but also taxpayers. Liquidity risk management is a 
specified purpose of the non-program investment portfolio. Income, 
while acceptable within a reasonable range, is not a purpose of the 
non-program investment portfolio. Accordingly, our guiding principle is 
that high liquidity attributes must generally take precedence over 
earnings generation in Farmer Mac's non-program investment portfolio.
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    \9\ 75 FR 27952-53, May 19, 2010.
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V. Section-by-Section Discussion of Proposed Revisions

    We propose to reorganize the rule considerably and provide the 
following table to orient the reader to the proposed reorganization. 
The left column of the table contains the existing rule's section 
headings and the right column contains the proposed reorganization of 
section sequence and heading changes.

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           Existing regulations                Proposed reorganization
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Sec.   652.1 Purpose.                       Sec.   652.1 Purpose.
Sec.   652.5 Definitions.                   Sec.   652.5 Definitions.
Sec.   652.10 Investment management and     Sec.   652.10 Investment
 requirements.                               management.
Sec.   652.15 Interest rate risk            Sec.   652.15 Non-program
 management and requirements.                investment purposes and
                                             limitation.
Sec.   652.20 Liquidity reserve management  Sec.   652.20 Eligible non-
 and requirements.                           program investments.
Sec.   652.25 Non-program investment        Sec.   652.25 Management of
 purposes and limitation.                    ineligible and unsuitable
                                             investments.
Sec.   652.30 Temporary regulatory waivers  Sec.   652.30 Interest rate
 or modifications for extraordinary          risk management.
 situations.
Sec.   652.35 Eligible non-program          Sec.   652.35 Liquidity
 investments.                                management.
Sec.   652.40 Stress tests for mortgage     Sec.   652.40 Liquidity
 securities.                                 reserve requirement and
                                             supplemental liquidity.
Sec.   652.45 Divestiture of ineligible     Sec.   652.45 Temporary
 non-program investments.                    regulatory waivers or
                                             modifications for
                                             extraordinary situations.
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    We will address each section below in the order it appears in these 
proposed regulations and discuss, where applicable, the rationale for 
the reorganization. Generally, the proposed reorganization is meant to 
address sequentially as completely as possible the three major 
categories of management governed in the rule: Investment management; 
interest rate risk management; and liquidity management.
    Throughout this regulation, we propose minor technical, clarifying, 
and non-substantive language changes that we do not specifically 
discuss in this preamble.

A. Section 652.1--Purpose

    We propose to delete the first sentence of this section as 
unnecessary. There is no need to list the topics of the subpart.

B. Section 652.5--Definitions

    To enhance clarity of the rule, we propose to add a definition of 
``cash'' to

[[Page 71801]]

mean cash balances held at Federal Reserve Banks, proceeds from traded-
but-not-yet-settled debt, and the insured amount of balances held in 
deposit accounts at Federal Deposit Insurance Corporation-insured 
banks.
    We also propose to add definitions for two newly proposed planning 
requirements, the Liability Maturity Management Plan and the 
Contingency Funding Plan, which are discussed below in the discussion 
of Sec.  652.35.
    We propose to delete the definition of ``liquid investments,'' as 
well as the definition of ``marketable'' in current Sec.  652.20(c), 
and to replace those terms with a description of the term ``highly 
marketable'' in Sec.  652.40(c). This term is addressed in the 
discussion of that section.
    We propose to add a definition of ``liquidity reserve.'' This new 
definition is described in the discussion of proposed Sec.  652.40.
    Finally, we are proposing several technical changes. We propose to 
correct an erroneous regulatory reference in the definition of 
affiliate. We propose to clarify the definitions of FCA, Government 
agency, and Government-sponsored agency. And we define OSMO to mean 
FCA's Office of Secondary Market Oversight.

C. Section 652.10--Investment Management

    Section 652.10 would continue to require Farmer Mac to establish 
and follow certain fundamental practices to effectively manage risks in 
its investment portfolio. The recent crisis and its lingering effects 
have re-emphasized the importance of sound investment management, and 
we believe that strengthened regulation would further insure the safe 
and sound management of investments. Accordingly, we are proposing the 
revisions discussed herein. In addition, we propose minor technical, 
clarifying, and non-substantive language changes to this section that 
we do not specifically discuss in this preamble.
    We propose to revise the section heading to delete ``and 
requirements'' as it should be understood that the regulations contain 
requirements.
1. Section 652.10(a)--Responsibilities of the Board of Directors
    In Sec.  652.10(a), we propose to add the requirement that the 
Farmer Mac board of directors affirmatively validate the sufficiency of 
investment policies to ensure the board's full and in-depth 
understanding of, and control over, the policies.
2. Section 652.10(b)--Investment Policies--General Requirements
    Section 652.10(b) lists the items that the board's investment 
policy must address, and it includes every requirement of Sec.  652.10. 
Because we propose to change some of those requirements, we also 
propose to change the listing, to clarify our expectations as to the 
appropriate content of the board's policies. We discuss below the 
requirements we propose to revise.
    In addition, we propose to move existing Sec.  652.10(c)(2), which 
requires that Farmer Mac's records or minutes must document any 
analyses used in formulating policies or amendments of policies, to 
Sec.  652.10(b). With this move, this requirement would no longer be 
limited to policies governing market risk; it would apply to all 
investment management policies.
3. Section 652.10(c)--Investment Policies--Risk Tolerance
    Our proposed changes in this section add greater specificity to our 
expectations regarding our existing requirements. These proposed 
changes are intended to provide clarity to our expectations but are not 
intended to fundamentally change the requirements.
    Proposed Sec.  652.10(c)(1) requires Farmer Mac's investment 
policies to establish risk limits for credit risk. Policies would have 
to include credit quality standards, limits on counterparty risk, and 
risk diversification standards that appropriately limit concentrations 
based on geographical area, industry sectors, or asset classes or 
obligations with similar characteristics. Policies would also have to 
address management of relationship brokers, dealers and investment 
bankers, as well as collateral management related to margin 
requirements on repurchase agreements.
    Proposed Sec.  652.10(c)(2) requires Farmer Mac's investment 
policies to establish risk limits for market risk as the value of its 
holdings may decline in response to changes in interest rates or market 
conditions. Exposure to market risk is measured by assessing the effect 
of changing rates and prices on either the earnings or economic value 
of an individual instrument, a portfolio, or the entire Corporation.
4. Section 652.10(e)--Internal Controls
    In Sec.  652.10(e)(2), we propose adding to the list of personnel 
whose duties and supervision must be separated from personnel who 
execute investment transactions. These additional personnel are those 
who post accounting entries, reconcile trade confirmations, and report 
compliance with investment policy. We believe this additional 
separation is a best practice that Farmer Mac must have in place to 
ensure controls are sufficient and appropriate.
    In Sec.  652.10(e)(4), we propose to require Farmer Mac to 
implement an effective internal audit program to review, at least 
annually, its investment controls, processes, and compliance with FCA 
regulations and other regulatory guidance. The internal audit program 
would specifically have to include a review of Farmer Mac's process for 
ensuring all investments are eligible and suitable for purchase under 
its board's investment policies. We believe this requirement provides 
important guidance on Agency expectations regarding internal oversight 
of these operations.
5. Section 652.10(f)--Due Diligence
    Proposed Sec.  652.10(f) would cover the pre-purchase analysis, 
ongoing value determination, quarterly stress testing, and pre-sale 
value verification that Farmer Mac must perform on each non-program 
investment that it purchases. This provision would combine in one 
location requirements that are now primarily in existing Sec.  
652.10(f) and Sec.  652.40 and in other provisions as well. It would 
also contain a more detailed description of the due diligence 
procedures that are required for investments, but we do not intend to 
change the fundamental intent of the provision.
a. Section 652.10(f)(1)--Pre-Purchase Analysis
    Proposed Sec.  652.10(f)(1) would require Farmer Mac to satisfy 
certain requirements for each investment that it wishes to purchase. 
Proposed Sec.  652.10(f)(1)(i) sets forth pre-purchase requirements 
regarding the objective, eligibility, and suitability of investments. 
This provision would require Farmer Mac, before it purchases an 
investment, to document the Corporation's investment objective.\10\
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    \10\ A similar requirement is currently contained in Sec.  
652.15(d)(5), and we therefore propose to delete that provision.
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    Proposed Sec.  652.10(f)(1)(i) would also require Farmer Mac to 
conduct sufficient due diligence to determine whether the investment is 
eligible under Sec.  652.35 and suitable under its board-approved 
investment policies and to document the investment's eligibility and 
suitability. ``Suitability'' is a term that is new to our regulations. 
A non-program investment is ``suitable'' if it is eligible under Sec.  
652.35(a) and conforms to Farmer Mac board policy. A non-

[[Page 71802]]

program investment is unsuitable if it is eligible but does not conform 
to Farmer Mac board policy.
    Finally, proposed Sec.  652.10(f)(1)(i) would require Farmer Mac's 
investment policies to fully address the extent of pre-purchase 
analysis that management must perform for various types, classes, and 
structure of investments.
    In proposed Sec.  652.10(f)(1)(ii), we would retain from existing 
Sec.  652.10(f)(1) the requirement that prior to purchase, Farmer Mac 
must verify the value of an investment (unless it is a new issue) with 
a source that is independent of the broker, dealer, counterparty, or 
other intermediary to the transaction.
    In proposed Sec.  652.10(f)(1)(iii), we would require Farmer Mac to 
document its risk assessment of each investment, including, at a 
minimum, an evaluation of credit risk, market risk, and liquidity risk. 
In its evaluation of credit risk, Sec.  652.10(f)(1)(iii)(A) would 
require Farmer Mac to consider, as applicable, the nature and type of 
underlying collateral, credit enhancements, complexity of the 
structure, and any other available indicators of the risk of default.
    In its evaluation of market risk, Sec.  652.10(f)(1)(iii)(B) would 
require Farmer Mac to consider how various market stress scenarios 
including, at a minimum, potential changes in interest rates and market 
conditions (such as changes in market perceptions of creditworthiness), 
are likely to affect the cash flow and price of the instrument, using 
reasonable and appropriate methodologies for stress testing for the 
type or class of instrument to ensure the investment complies with risk 
limits established in its investment and interest rate risk policies.
    We note that in our existing regulations, the pre-purchase stress 
testing requirement is combined with a quarterly portfolio stress 
testing requirement in Sec.  652.40, which is a standalone stress 
testing regulation. With the intent of improving the organization of 
the regulations, we have moved the pre-purchase and quarterly stress 
testing requirements into the paragraph covering due diligence in our 
investment management regulation (Sec.  652.10) and have separated the 
two stress tests in that paragraph to make clearer the difference in 
stress tests to evaluate individual securities prior to purchase and 
quarterly stress tests conducted on the investment portfolio.\11\
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    \11\ In the proposal, the quarterly stress testing requirement 
would be located at Sec.  652.10(f)(3). We would delete Sec.  652.40 
as a stand-alone stress testing regulation. In addition, the 
proposed regulation would impose stress testing in Sec.  
652.30(c)(3), as part of interest rate risk management, and in Sec.  
652.35(e)(3)(v), as part of the contingency funding plan (CFP). We 
expect that Farmer Mac will integrate these stress testing 
requirements to the extent appropriate.
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    Existing Sec.  652.40 imposes stress testing requirements only on 
mortgage securities and requires consideration of interest rate risk 
scenarios only. The pre-purchase stress testing requirements in 
proposed Sec.  652.10(f)(1)(iii)(B) would apply to all non-program 
investments, including Treasury securities, and they would more broadly 
include market stress scenarios such as changes in market conditions, 
including market perceptions of creditworthiness, as well as stressed 
interest rate scenarios. We believe that all investments must be stress 
tested to provide for a comprehensive and internally consistent 
analytical framework from which to evaluate the risks in the investment 
portfolio. In addition, we believe that a broader consideration of 
changes in market conditions is necessary because of the potential for 
a direct impact on liquidity of adverse changes in those conditions.
    In its response to a question in our ANPRM about stress testing, 
the Council stated that stress testing should be an integral part of 
managing liquidity and that regulatory requirements should focus on 
requiring entities to regularly test various stress scenarios unique to 
their own balance sheet and potential liabilities. The Council further 
stated that an institution with a relatively low level of liquidity 
risk might appropriately accept relatively more risk in its liquidity 
portfolio, while the opposite might be true for an institution with 
more liquidity risk. We agree generally with these statements and 
consider them to be generally consistent with our proposals in the area 
of stress testing.
    In its evaluation of liquidity risk, Sec.  652.10(f)(1)(iii)(C) 
would require Farmer Mac to consider the investment structure, the 
depth of the market, and Farmer Mac's ability to liquidate the position 
under a variety of economic scenarios and market conditions.
b. Section 652.10(f)(2)--Ongoing Value Determination
    Proposed Sec.  652.10(f)(2) retains the requirement from the 
existing provision that at least monthly, Farmer Mac must determine the 
fair market value of each investment in its non-program investment 
portfolio and the fair market value of its entire non-program 
investment portfolio.
c. Section 652.10(f)(3)--Quarterly Stress Testing
    As discussed above, we propose moving our non-program investment 
quarterly stress-testing requirements into Sec.  652.10(f)(3), as part 
of our due diligence requirements, and removing existing Sec.  652.40 
as a standalone stress testing regulation. As with the pre-purchase 
stress testing discussed above, the proposed rule would impose the 
quarterly stress testing requirement on all non-program investments, 
including Treasury securities.
    Existing Sec.  652.40 is limited to interest rate stress scenarios. 
Proposed Sec.  652.10(f)(3)(ii) recognizes that there are stress 
scenarios other than interest rate risk that could also impact the 
value or marketability of investments including, at a minimum, changes 
in market conditions (including market perceptions of 
creditworthiness).
    The revisions would also include a change to the requirement that 
all stress testing assumptions be supported by verifiable information; 
we propose to qualify this requirement with ``to the maximum extent 
practicable'' to recognize that modeling treatments could require 
assumptions for which insufficient supporting data or information 
exists, thus requiring management to apply reasonable judgment. 
Moreover, Farmer Mac would be required to document the basis for all 
assumptions used.
6. Section 652.10(g)--Reports to the Board of Directors
    We propose revisions to Sec.  652.10(g), which specifies 
information that executive management must report to the board or a 
board committee each quarter. The requirements would be fundamentally 
unchanged but the language would be modified to add clarifying detail 
to FCA expectations. The following would have to be reported:
     Plans and strategies for achieving the board's objective 
for the investment portfolio;
     Whether the investment portfolio effectively achieves the 
board's objectives;
     The current composition, quality, and liquidity profile of 
the investment portfolio;
     The performance of each class of investments and the 
entire investment portfolio, including all gains and losses incurred 
during the quarter on individual securities sold before maturity and 
why they were liquidated;
     Potential risk exposure to changes in market interest 
rates as identified through quarterly stress testing and any

[[Page 71803]]

other factors that may affect the value of the investment holdings;
     How investments affect Farmer Mac's capital, earnings, and 
overall financial condition; and
     Any deviations from the board's policies. These deviations 
must be formally approved by the board of directors.

D. Section 652.15--Non-Program Investment Purposes and Limitation

    We propose to renumber existing Sec.  652.25 as Sec.  652.15. We 
propose in paragraph (a) to add a new permissible purpose for non-
program investments--investments that complement program business 
activities. This purpose would recognize that certain investments, such 
as investments with a rural focus that are backed by the full faith and 
credit of the United States Government, could advance Farmer Mac's 
mission. This provision would not add any new eligible investments to 
our authorized list; Farmer Mac would still need to seek FCA's prior 
approval for any investments not explicitly authorized on the list of 
eligible investments.
    Section 8.3(c)(12) of the Act permits Farmer Mac to ``purchase or 
sell any securities or obligations * * * necessary and convenient to 
the business of the Corporation.'' We believe this proposed broadening 
of investment purposes is compatible with Farmer Mac's statutory 
mandate and consistent with congressional intent.
    Neither the proposed purpose nor any of the three existing purposes 
authorize Farmer Mac to accumulate investment portfolios for arbitrage 
activities or to engage in trading for speculative or primarily capital 
gains purposes. Realizing gains on sales before investments mature is 
not a regulatory violation as long as the profits are incidental to the 
specified permissible investment purposes. Farmer Mac must ensure that 
its internal controls, required under Sec.  652.10(e), ensure that 
eligible investments purchased under Sec.  652.20(a) clearly fulfill 
one or more of the purposes authorized under Sec.  652.15(a).
    In addition, we propose to change the current regulatory maximum 
non-program investment parameters in paragraph (b) to delete the 
alternate maximum of a fixed $1.5 billion. While we continue to believe 
that excessive or inappropriate use of non-program investments is not 
consistent with the Corporation's statutory mission and status as a 
Government-sponsored enterprise (GSE), we believe the maximum 
investment parameter of 35 percent of program volume alone is 
sufficient and that there is no longer a need for the $1.5 billion 
ceiling on that maximum calculation. This proposed change is based on 
Farmer Mac's growth since the $1.5 billion ceiling was established in 
2005.
    We also propose to permit Farmer Mac to exclude investments pledged 
to meet margin requirements for derivative transactions (collateral) 
when calculating the 35-percent investment limit under paragraph 
(b).\12\ We note that investments that are pledged as collateral do not 
count toward Farmer Mac's compliance with its liquidity reserve 
requirement.\13\ We propose this change because the Dodd-Frank Act may 
result in additional margin requirements for Farmer Mac and we do not 
want to discourage the use of derivatives as an appropriate risk 
management tool.
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    \12\ Paragraph (b) permits Farmer Mac to hold eligible non-
program investments, for specified purposes, up to 35 percent of 
program volume.
    \13\ Under existing Sec.  652.20(b), all investments held for 
the purpose of meeting the liquidity reserve requirement must be 
free of liens or other encumbrances. As discussed below, we propose 
a more detailed version of this requirement at Sec.  652.40(b).
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E. Section 652.20--Eligible Non-Program Investments

    Under the current rule, Farmer Mac may purchase and hold the 
eligible non-program investments listed in Sec.  652.35(a). This list 
permits Farmer Mac to invest, within limits, in an array of highly 
liquid investments while providing a regulatory framework that can 
readily accommodate innovations in financial products and analytical 
tools.
    The recent financial crisis resulted in substantial turmoil in the 
financial markets. Based on this experience, we now propose amendments 
that would clarify the characteristics of eligible investments, 
eliminate certain investments, and reduce portfolio limits where 
appropriate. In addition, we ask questions about the most effective way 
to comply with section 939A of the DFA. As discussed in greater detail 
below, that provision requires each Federal agency to revise all 
regulations that refer to or require reliance on credit ratings to 
assess creditworthiness of an instrument to remove the reference or 
requirement and to substitute other appropriate creditworthiness 
standards. We also propose to renumber this regulation as Sec.  652.20.
1. Section 652.20(a)
    We propose revisions to the language in the introductory paragraph 
of paragraph (a). The existing language authorizes Farmer Mac to hold 
only the types, quantities, and qualities of investments that are 
listed. Like our existing regulation, our proposal would permit 
institutions to purchase only those investments that satisfy the 
eligibility criteria in Sec.  652.35 (which would be renumbered as 
Sec.  652.20). An investment that does not satisfy the eligibility 
criteria would not be eligible for purchase and would be subject to the 
divestiture requirements of proposed Sec.  652.25(a) if it were 
purchased.\14\
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    \14\ In this context, ``purchase'' would include an acquisition 
such as a swap of one security in exchange for another. This 
interpretation is consistent with our interpretation of the existing 
rule.
---------------------------------------------------------------------------

    In a change from our existing approach, however, eligibility would 
be determined only at the time of purchase. An investment that 
satisfies the eligibility criteria at the time of purchase but that 
subsequently failed to satisfy the eligibility criteria would not 
become ineligible and would not have to be divested. Instead, Farmer 
Mac would be permitted to retain the investment subject to certain 
requirements. As discussed below, in our discussion of our proposed 
amendments to Sec.  652.25, we believe this change would reduce 
regulatory burden without creating safety and soundness concerns.
    In addition, existing Sec.  652.35(a) states that all investments 
must be denominated in United States dollars. We propose to relocate 
this language to paragraph (b) of redesignated Sec.  652.20.
    The table in Sec.  652.35(a) currently provides that a specified 
nationally recognized statistical rating organizations (NRSRO) credit 
rating is a criterion for eligibility for a number of asset classes, 
including municipal securities, money market instruments, mortgage 
securities, asset-backed securities, and corporate debt securities. 
Section 939A of the Dodd-Frank Act requires us to remove this criterion 
and to substitute other appropriate creditworthiness standards. Below, 
we discuss possible approaches as to how we can comply with this 
requirement. We do not propose any revisions to this criterion at this 
time.
    Finally, we discuss general comments on the table, received in 
response to the ANPRM. In the ANPRM, we asked, ``Would the experience 
gained during the financial markets crisis of 2008 and 2009 justify 
adjustments to many of the portfolio limits in Sec.  652.35 to add 
conservatism to them and improve diversification of the portfolio?'' We 
also invited comment on appropriate changes within each asset class 
regarding final maturity limit, credit rating requirement, portfolio

[[Page 71804]]

concentration limit, and other restrictions.
    The Council suggested making ``limited changes'' to the portfolio 
limits, stating that the financial markets, and specifically the market 
for mortgage securities, have arguably suffered through severe crisis 
and System entities have emerged in a solid financial position. The 
Council believes that existing limits, particularly on non-Agency 
mortgage securities, arguably prevented System entities from focusing 
on higher return sectors that would have resulted in larger losses. The 
Council suggested that the Farmer Mac regulations should be ``closely 
aligned with existing limits for other Farm Credit entities.''
    In our discussion below, we discuss the revisions we propose by 
eligible asset class, and we respond to the Council's general comments 
above as well as their specific comments on particular asset classes.
a. Section 652.20(a)(1)--Obligations of the United States
    Existing Sec.  652.35(a)(1)(which would become Sec.  652.20(a)(1)) 
permits Farmer Mac to invest in Treasuries and other obligations 
(except mortgage securities) fully insured or guaranteed by the United 
States Government or a Government agency without limitation.\15\ We 
note that Ginnie Mae securities fall under this provision.
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    \15\ The proposed rule would make a minor, non-substantive 
change to the language in this provision to reflect the slightly 
revised definition of ``Government agency'' we propose in Sec.  
652.5. We intend no change in meaning with this proposed revision.
---------------------------------------------------------------------------

    In the ANPRM, we asked, ``Given that Farmer Mac might not always 
hold the `on the run' (i.e., highest liquidity) issuance of Treasury 
securities, would imposing maximum maturity limitations enhance the 
resale value of these investments in stressful conditions?'' In its 
comments, the Council stated that ``Treasury securities with longer 
dated maturities have the potential to provide less liquidity due to 
sensitivities to changes in interest rates.''
    We propose no change to this regulation. Although we agree with the 
Council that the value of longer term Treasuries can vary due to 
interest rate risk, we deal with interest rate risk in a separate 
section of these regulations. In this section, our concern is focused 
on differences in liquidity due to differences in trading volume and 
bid/ask spreads between on-the-run and off-the-run Treasury securities.
b. Section 652.20(a)(2)--Obligations of Government-Sponsored Agencies
    Existing Sec.  652.35(a)(2)(which would become Sec.  652.20(a)(2)) 
permits Farmer Mac to invest in obligations of Government-sponsored 
agencies,\16\ including Government-sponsored agency securities and 
other obligations fully insured or guaranteed by Government-sponsored 
agencies (but not mortgage securities). The only limitation currently 
imposed on these non-mortgage security investments is found in Sec.  
652.35(d)(1), which precludes Farmer Mac from investing more than 100 
percent of its regulatory capital in any one Government-sponsored 
agency.\17\
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    \16\ Section 652.5 defines Government-sponsored agency as an 
agency, instrumentality, or corporation chartered or establish to 
serve public purposes specified by the United States Congress but 
whose obligations are not explicitly guaranteed by the full faith 
and credit of the United States, including but not limited to any 
Government-sponsored enterprise. We propose a minor, technical 
change in this definition.
    \17\ In light of the proposed changes to this provision, we 
propose to delete the Sec.  652.35(d)(1) limitation. We discuss that 
proposal below.
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    In the ANPRM we asked, ``In light of the recent financial 
instability of Government-sponsored agencies such as Fannie Mae and 
Freddie Mac, would it be appropriate to revise this section to put 
concentration limits on exposure to these entities in Sec.  
652.35(a)(2)?'' The Council stated that it is appropriate to maintain 
portfolio limits on securities issued by the Federal National Mortgage 
Corporation (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac) and even Government National Mortgage Corporation (Ginnie 
Mae) securities, which enjoy explicit government backing. The Council 
noted that the Federal government is currently contemplating regulatory 
GSE reform through the legislative process in this area.
    We do not propose concentration limits on exposures to Government-
sponsored agencies based on historical experience, including that 
observed in recent years, that the value of GSE debt has not declined 
materially even when the GSE has been under significant stress.
    Our proposal would limit investments in Government-sponsored agency 
obligations to senior debt securities. We believe counterparty 
exposures to Government-sponsored agencies should be confined only to 
the highest quality investments and should not include subordinated 
debt or hybrid equity issuances.
c. Section 652.20(a)(3)--Municipal Securities
    Existing Sec.  652.35(a)(3) (which would become Sec.  652.20(a)(3)) 
authorizes investments in municipal securities. Currently, revenue 
bonds are limited to 15 percent or less of Farmer Mac's total 
investment portfolio, while general obligations have no such 
limitations. The maturity limit is also longer for general obligations.
    In the ANPRM we asked whether it would be ``more appropriate for 
our regulation to limit both sub-categories [of municipal securities] 
equally?'' The Council stated that historically, general obligation 
bonds have been less risky than revenue bonds because of the taxing 
authority of the underlying issuer but also stated that in the recent 
economic downturn, the safety of many of these general obligation 
issues have been called into question due to the financial strains on 
many State and local governments. Accordingly, the Council commented 
that all municipal securities should carry similar limits.
    We agree. We also believe, in light of the ongoing financial strain 
at the municipal level, that additional limitations on municipal 
securities, whether general obligations or revenue bonds, are 
warranted. Accordingly, we propose to authorize investment in municipal 
securities only if the securities have a maximum remaining maturity of 
10 years or less at the time of purchase and the investments do not 
exceed 15 percent of the total non-program investment portfolio.
d. Section 652.20(a)(4)--International and Multilateral Development 
Bank Obligations
    Section 652.35(a)(4) (which would become Sec.  652.20(a)(4)) 
currently authorizes investments in obligations of international and 
multilateral development banks, provided the United States is a voting 
shareholder. Examples of eligible banks include the International Bank 
for Reconstruction and Development (World Bank), Inter-American 
Development Bank, and the North American Development Bank. Other highly 
rated banks working in concert with the World Bank to promote 
development in various countries are also eligible, subject to the 
shareholder-voting requirement above. There is no maturity limit or 
portfolio limit.
    We propose to revise this provision to authorize investment in such 
obligations with similar constraints as those applied to municipal 
securities. The nature of the obligations in this asset class is 
similar to municipal obligations in that the ultimate creditors

[[Page 71805]]

are a diverse group of governments with varying credit characteristics. 
While we view this asset class as generally strong credits, we do not 
believe its strength is equivalent to U.S. Treasuries, and therefore 
some limits are appropriate. On that basis, we propose a 10-year limit 
on their maximum maturity remaining at purchase and a portfolio 
concentration limit of 15 percent of Farmer Mac's total non-program 
investment portfolio.
e. Section 652.20(a)(5)--Money Market Instruments
    Existing Sec.  652.35(a)(5) (which would become Sec.  652.20(a)(5)) 
permits institutions to invest in repurchase agreements that satisfy 
specified conditions. If the counterparty defaults, the regulation 
requires the institution to divest non-eligible securities in 
accordance with the divestiture requirements of Sec.  652.45. Under our 
proposal, as discussed above, an eligible investment could not become 
ineligible, and would not be required to be divested. Accordingly, we 
propose to delete this divestiture requirement.
f. Section 652.20(a)(6)--Mortgage Securities
    Existing Sec.  652.35(a)(6) (which would become Sec.  652.20(a)(6)) 
requires stress testing of all mortgage securities. As discussed above, 
proposed Sec.  652.10(f) would require stress testing on all 
investments held in Farmer Mac's portfolio. Accordingly, we propose to 
delete the specific stress-testing requirement for mortgage securities.
    The first asset class listed in existing Sec.  652.25(a)(6) is 
mortgage securities that are issued or guaranteed by the United States 
or a Government agency. We propose to revise this asset class 
description to refer to mortgage securities that are fully guaranteed 
or fully insured by a Government agency. The deletion of ``United 
States'' is a technical, non-substantive change, because we propose to 
include ``United States'' in the definition of ``Government agency'' in 
Sec.  652.5. The addition of the word ``fully'' makes clear that this 
asset class includes only mortgage securities that are fully backed by 
the full faith and credit of the United States. If the United States 
Government issues a mortgage security that is not fully guaranteed or 
fully insured by the full faith and credit of the United States 
Government, it is not eligible under this asset class.
    The third asset class listed in existing Sec.  652.35(a)(6) 
authorizes investments in non-Government agency or Government-sponsored 
agency securities that comply with 15 U.S.C. 77d(5) or 15 U.S.C. 
78c(8)(41). These types of mortgage securities are typically issued by 
private sector entities and are mostly comprised of securities that are 
collateralized by ``jumbo'' mortgages with principal amounts that 
exceed the maximum limits of Fannie Mae or Freddie Mac programs. We 
propose technical, non-substantive changes to the language describing 
this asset class, for clarity. Furthermore, in this preamble we refer 
to these securities using the shorthand reference non-Agency mortgage 
securities.
    In the ANPRM, we invited comment on whether it is appropriate to 
continue to include non-Agency mortgage securities collateralized by 
``jumbo'' mortgages as an eligible liquidity investment. The Council 
commented that while these are not as liquid as agency collateralized 
mortgage obligations, and despite the fact that this sector is 
currently under stress, it believes the sector can provide viable 
diversification and should develop stronger credit quality over time 
with improved underwriting and increased credit enhancements. We do not 
propose to remove this asset class from the list of eligible 
investments at this time, but we will continue to evaluate the 
appropriateness of including this asset class.
    However, to reduce credit default risk that may be associated with 
certain positions in non-Agency mortgage securities, we propose to 
require that a position in such a security would be eligible only if it 
is the senior-most position at the time of purchase. The FCA considers 
a position in a non-Agency mortgage security to be the senior-most 
position only if it currently meets both of the following criteria:
     No other remaining position in the securitization has 
priority in liquidation. Remaining positions that are the last to 
experience losses in the event of default and which share those losses 
pro rata meet this criterion.
     No other remaining position in the securitization has a 
higher priority claim to any contractual cash flows. Remaining 
positions that have the first priority claim to contractual cash flows 
(including planned amortization classes), as well as those that share 
on a pro rata basis a first priority claim to cash flows meet this 
criterion.
    The tranche that is the senior-most position at the time Farmer Mac 
is considering purchase is not necessarily the same tranche that was in 
the senior-most position at the time of issue. Farmer Mac should be 
careful not to be misled by the labeling of tranches as ``super 
senior'' or ``senior'' in a prospectus (or on market reporting 
services). Farmer Mac may purchase non-Agency mortgage-backed 
securities (MBS) only if the securities satisfy the above two criteria 
at the time of purchase.
    Further, the existing rule's concentration limit for non-Agency 
mortgage securities is 15 percent when combined with another asset 
class--commercial mortgage-backed securities. However, because of our 
belief that commercial mortgage-backed securities pose undue risk due 
to the nature of the underlying collateral and the particularly weak 
performance of this asset class during the financial crisis, we propose 
to delete these securities as an eligible asset class. Given the 
existing rule's combined portfolio concentration limit of 15 percent 
for these two asset classes, we propose to set the portfolio 
concentration limit for non-Agency securities at 10 percent.
g. Section 652.20(a)(7)--Asset-Backed Securities
    Existing Sec.  652.35(a)(7) (which would become Sec.  652.20(a)(7)) 
authorizes Farmer Mac to invest in asset-backed securities (ABS) 
secured by credit card receivables; automobile loans; home equity 
loans; wholesale automobile dealer loans; student loans; equipment 
loans; and manufactured loans. The maximum weighted average life (WAL) 
\18\ for fixed rate or floating rate ABS at their contractual interest 
rate caps is 5 years, and all ABS combined are limited to 25 percent of 
Farmer Mac's non-program investment portfolio.
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    \18\ Generally, the WAL is the average amount of time required 
for each dollar of invested principal to be repaid, based on the 
cashflow structure of an ABS and an assumed level of prepayments. 
Nearly all ABS are priced and traded on the basis of their WAL, not 
their final maturity dates.
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    In its comment letter, AgFirst noted that the existing 25-percent 
portfolio limit is higher than the 20 percent permitted for other 
System institutions.\19\ AgFirst stated that there should be movement 
toward consistency. AgFirst further stated that ABS suffered from 
severe market deterioration during the recent credit crisis and that 
bringing the limit down to that in place for other System institutions 
would help reduce concentration risk.
---------------------------------------------------------------------------

    \19\ See Sec.  615.5140(a)(6).
---------------------------------------------------------------------------

    Because we agree with AgFirst's comment, and because of the 
relative lack of liquidity of all ABS in the wake of the recent 
financial crisis, we propose to reduce the portfolio limit to no more 
than 15 percent (combined) of Farmer Mac's total investment portfolio 
and to

[[Page 71806]]

limit any single collateral type to no more than 5 percent.\20\ In 
addition, given the significant instability in the ABS market in recent 
years, we propose a maximum WAL of 7 years for floating rate ABS with 
current coupon rates below their contractual interest rate cap.
---------------------------------------------------------------------------

    \20\ These limits are consistent with those recently proposed 
for the other System institutions. See 76 FR 51289, Aug. 18, 2011.
---------------------------------------------------------------------------

h. Section 652.20(a)(8)--Corporate Debt Securities
    Existing Sec.  652.35(a)(8) (which would become Sec.  652.20(a)(8)) 
authorizes investment in corporate debt securities, limited to 25 
percent of Farmer Mac's total non-program investment portfolio. In its 
comment letter, AgFirst noted that the existing limit is higher than 
the 20 percent permitted for other System institutions.\21\ AgFirst 
stated that there should be movement toward consistency. AgFirst 
further stated that corporate debt securities suffered from severe 
market deterioration during the recent credit crisis and that bringing 
the limit down to that in place for other System institutions would 
help reduce concentration risk.
---------------------------------------------------------------------------

    \21\ See Sec.  615.5140(a)(7).
---------------------------------------------------------------------------

    Because we agree with this comment, we propose to reduce the 
portfolio limit to 20 percent in total. In addition, we propose to 
limit corporate debt securities in any one of the industry sectors 
defined by the Global Industry Classification Standard (GICS) to no 
more than 10 percent of Farmer Mac's total investment portfolio.\22\ 
While financial services sector was not the only industry sector hit 
hard by the recent financial crisis, there were sectors, e.g., 
utilities, that were not as severely impacted. Sector diversification 
limits provide enhanced guidance regard