Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Liquidity and Funding, 80817-80829 [2011-32698]
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Federal Register / Vol. 76, No. 248 / Tuesday, December 27, 2011 / Proposed Rules
5. Section 114.10 is revised to read as
follows:
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§ 114.10 Corporations and labor
organizations making independent
expenditures and electioneering
communications.
[FR Doc. 2011–32632 Filed 12–23–11; 8:45 am]
BILLING CODE 6715–01–P
(a) General. Corporations and labor
organizations may make independent
expenditures, as defined in 11 CFR
100.16, and electioneering
communications, as defined in 11 CFR
100.29.
(b) Reporting independent
expenditures and electioneering
communications. (1) Corporations and
labor organizations that make
independent expenditures aggregating
in excess of $250 with respect to a given
election in a calendar year shall file
reports as required by 11 CFR 104.4(a)
and 11 CFR 109.10(b) through (e).
(2) Corporations and labor
organizations that make electioneering
communications aggregating in excess
of $10,000 in a calendar year shall file
the statements required by 11 CFR
104.20(b).
(c) Solicitation; disclosure of use of
contributions for political purposes.
Whenever a corporation or labor
organization solicits donations that may
be used for political purposes, the
solicitation shall inform potential
donors that their donations may be used
for political purposes, such as
supporting or opposing candidates.
(d) Non-authorization notice.
Corporations or labor organizations
making independent expenditures or
electioneering communications shall
comply with the requirements of 11 CFR
110.11.
(e) Segregated bank account. A
corporation or labor organization may,
but is not required to, establish a
segregated bank account into which it
deposits only funds donated or
otherwise provided by individuals, as
described in 11 CFR part 104, from
which it makes disbursements for
electioneering communications.
(f) Activities prohibited by the Internal
Revenue Code. Nothing in this section
shall be construed to authorize any
organization exempt from taxation
under 26 U.S.C. 501(a) to carry out any
activity that it is prohibited from
undertaking by the Internal Revenue
Code, 26 U.S.C. 501 et seq.
§§ 114.14 and 114.15
[Removed].
6. Sections 114.14 and 114.15 are
removed.
Dated: December 15, 2011.
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On behalf of the Commission.
Cynthia L. Bauerly,
Chair, Federal Election Commission.
FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052–AC54
Funding and Fiscal Affairs, Loan
Policies and Operations, and Funding
Operations; Liquidity and Funding
Farm Credit Administration.
Proposed rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we or us)
proposes to amend its liquidity
regulation. The purpose of the proposed
rule is to strengthen liquidity risk
management at Farm Credit System
(FCS or System) banks, improve the
quality of assets in the liquidity reserve,
and bolster the ability of System banks
to fund their obligations and continue
their operations during times of
economic, financial, or market
adversity.
SUMMARY:
Comments should be received on
or before February 27, 2012.
ADDRESSES: We offer a variety of
methods for you to submit your
comments. For accuracy and efficiency,
commenters are encouraged to submit
comments by email or through the
FCA’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 regcomm@fca.gov.
• FCA Web site: https://www.fca.gov.
Select ‘‘Public Comments’’ and follow
the directions for ‘‘Submitting a
Comment.’’
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Gary K. Van Meter, Director,
Office of Regulatory Policy, Farm Credit
Administration, 1501 Farm Credit Drive,
McLean, VA 22102–5090.
You may review copies of comments
we receive at our office in McLean,
Virginia, or from our Web site at
https://www.fca.gov. Once you are in the
Web site, select ‘‘Public Commenters,’’
then ‘‘Public Comments,’’ and follow
DATES:
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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:
David J. Lewandrowski, Senior Policy
Analyst, Office of Regulatory Policy,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA, (703) 883–
4498, TTY (703) 883–4434; or
Richard A. Katz, Senior Counsel,
Office of General Counsel, Farm Credit
Administration, McLean, VA 22102–
5090, (703) 883–4020, TTY (703) 883–
4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the proposed rule
are to:
• Improve the capacity of FCS banks
to pay their obligations and fund their
operations by maintaining adequate
liquidity to withstand various market
disruptions and adverse financial or
economic conditions;
• Strengthen liquidity management at
all FCS banks;
• Enhance the marketability of assets
that System banks hold in their liquidity
reserve;
• Require that cash and highly liquid
investments comprise the first 30 days
of the 90-day liquidity reserve;
• Establish a supplemental liquidity
buffer that a bank can draw upon during
an emergency and that is sufficient to
cover the bank’s liquidity needs beyond
the 90-day liquidity reserve; and
• Strengthen each bank’s Contingency
Funding Plan (CFP).
II. Background
The FCS is a nationwide network of
borrower-owned financial cooperatives
that lend to farmers, ranchers, aquatic
producers and harvesters, agricultural
cooperatives, rural utilities, farm-related
service businesses, and rural
homeowners. By law, FCS institutions
are instrumentalities of the United
States,1 and Government-sponsored
enterprises (GSEs).2 According to
section 1.1(a) of the Farm Credit Act of
1971, as amended, (Act), Congress
established the System for the purpose
1 See sections 1.3(a), 2.0(a), 2.10(a), 3.0, 4.25, and
8.1(a)(1) of the Act; 12 U.S.C. 2011(a), 2071(a),
2091(a), 2121, 2211, and 2279aa–1.
2 See Public Law 101–73, sec. 1404(e)(1)(A), 103
Stat. 183, 552–53 (Aug. 9, 1989).
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of furnishing ‘‘sound, adequate, and
constructive credit and closely related
services’’ to farmers, ranchers, aquatic
producers and harvesters, their
cooperatives, and certain farm-related
businesses necessary to fund efficient
agricultural operations in the United
States.
In many respects, the FCS is different
from other lenders. In contrast to
commercial banks and most other
financial institutions, the System lends
mostly to agriculture and in rural areas.
Unlike most other lenders, FCS banks
and associations are cooperatives that
are owned and controlled by their
agricultural borrowers, and their
common equity is not publicly traded.
The System funds its operations
differently than most commercial
lenders. FCS banks issue System-wide
debt securities, which are the System’s
primary source for funding loans to
agricultural producers, their
cooperatives, and other eligible
borrowers.3 Although section 4.2(a) of
the Act authorizes FCS banks to borrow
from commercial banks and other
lending institutions, lines of credit with
non-System lenders are a negligible
source of FCS funding. FCS banks and
associations are not depository
institutions.
The System’s ability to finance
agriculture, rural housing, and rural
utilities in both good and bad economic
times primarily depends on continuing
access to the debt markets. During
normal economic conditions, access to
debt markets provides the System with
funds it needs to operate. However, if
access to the debt markets becomes
impeded for any reason, Farm Credit
banks must rely on assets to continue
operations and pay maturing
obligations. Liquidity is the ability to
convert assets into cash quickly and at
a price that is close to their book value.
In contrast to commercial banks,
savings associations, and credit unions,
the FCS does not have guaranteed
access to a government provider of
liquidity in an emergency.4 If market
access is impeded, FCS banks must rely
on their liquidity reserves more heavily
than other federally regulated lending
3 Farm Credit banks (which are the four Farm
Credit Banks and the Agricultural Credit Bank)
issue and market System-wide debt securities
through the Federal Farm Credit Banks Funding
Corporation (Funding Corporation). The Funding
Corporation, which is established pursuant to
section 4.9 of the Act, is owned by all Farm Credit
banks.
4 The Federal Reserve Banks, the Federal Home
Loan Banks, and National Credit Union
Administration Central Liquidity Facility serve as a
source of liquidity for commercial banks, savings
associations, and credit unions both in ordinary
times and during emergencies.
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institutions 5 because they do not have
an assured lender of last resort.6
The liquidity of System banks has
drawn more scrutiny from the FCA,
credit rating agencies, and investors as
economic and financial turmoil have
roiled the markets with greater
frequency and magnitude in recent
years. As a result, the FCA proposes to
amend its liquidity regulations so that
FCS banks are better able to withstand
uncertainty and instability in the
financial markets.7
Liquidity is important for the
financial system as a whole. Recent
market disruptions have raised concerns
among regulators, credit rating agencies,
investors, and other market participants
about the ability of financial institutions
to maintain sufficient liquidity to meet
their immediate funding needs during
times of economic and financial
turmoil.8 The experience of these crises
demonstrates why sound liquidity risk
management is important to the safety
and soundness of individual financial
institutions and the financial system as
a whole.
5 Section 1101 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act amended
section 13(3) of the Federal Reserve Act, 12 U.S.C.
343(3), to allow the Board of Governors of the
Federal Reserve System, in consultation with the
Secretary of the Treasury, to establish by regulation,
policies and procedures that would govern
emergency lending under a program or facility for
the purpose of providing liquidity to the financial
system. Under section 13(3) of the Federal Reserve
Act, as amended, the Board of Governors of the
Federal Reserve System must establish procedures
that prohibit insolvent and failing entities from
borrowing under the emergency program or facility.
Pursuant to section 13(3) of the Federal Reserve
Act, as amended, the Board of Governors of the
Federal Reserve System, with the approval of the
Secretary of the Treasury could authorize the
Federal Reserve Banks to serve as an emergency
source of liquidity for the FCS, but it is not
obligated to do so. See Public Law 11–203, title XI,
sec. 1101(a), 124 Stat. 2113 (Jul. 21, 2010).
6 If market access is completely impeded, the
Farm Credit Insurance Fund would also be
available to ensure the payments of maturing
insured debt obligations. See 12 U.S.C. 2277a–
9(c)(1).
7 The FCA has broad authority under various
provisions of the Act to supervise and regulate
liquidity management at FCS banks. Section 5.17(a)
of the Act authorizes the FCA to: (1) Approve the
issuance of FCS debt securities under section 4.2(c)
and (d) of the Act; (2) establish standards regarding
loan security requirements at FCS institutions, and
regulate the borrowing, repayment, and transfer of
funds between System institutions; (3) prescribe
rules and regulations necessary or appropriate for
carrying out the Act; and (4) exercise its statutory
enforcement powers for the purpose of ensuring the
safety and soundness of System institutions.
8 For example, financial institutions collectively
had difficulty maintaining sufficient short-term
liquidity in the aftermath of the attacks on
September 11, 2001, and again in September and
October of 2008 after several large financial
institutions collapsed. During these crises, the
Federal Reserve injected additional liquidity into
the financial system in the United States.
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Regulatory agencies, in particular,
have responded by formulating more
comprehensive supervisory approaches
toward liquidity risk management at
financial institutions. For example, the
Basel Committee on Banking
Supervision (Basel Committee) issued in
September 2008, the Principles for
Sound Liquidity Risk Management and
Supervision, which contains 17
principles detailing international
supervisory guidance for sound
liquidity risk management. In
December, 2010, the Basel Committee
issued Basel III: International
framework for liquidity risk
measurement, standards, and
monitoring (Basel III Liquidity
Framework). On March 22, 2010, the
five Federal agencies that regulate
depository institutions (Federal banking
agencies) 9 published their Interagency
Policy Statement on Funding and
Liquidity Risk Management 10, which
sets forth the supervisory expectations
for depository institutions. The purpose
of all these documents is to guide the
supervisory efforts of Federal and
international regulators of depository
institutions into the future.
The FCA has considered the guidance
of both the Basel Committee and the
Federal banking agencies as part of its
efforts to develop revised liquidity
regulations. Many of the core concepts
that the Basel Committee and the
Federal banking agencies articulated
about liquidity are appropriate for our
proposed rule. However, the corporate,
funding, and lending structures of the
FCS are fundamentally different from
those of depository institutions and,
therefore, the FCA has modified and
adapted the guidance of international
regulators and Federal banking agencies
concerning liquidity risk management
so they are relevant to the System’s
unique circumstances, needs, and
structure. The FCA also added other
requirements that are tailored to the
System’s unique nature.
In addition to the guidance of the
Basel Committee and other Federal
regulators, both the FCA and the System
have implemented various measures to
improve liquidity management so FCS
banks are in a better position to
withstand financial and economic
shocks. More specifically, System banks
agreed to a common framework that
stipulated the days of liquidity coverage
that they would maintain, and
9 The five agencies are the Office of the
Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the National
Credit Union Administration, and the now-defunct
Office of Thrift Supervision.
10 See 75 FR 13656 (Mar. 22, 2010).
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established the parameter for the quality
of investments held in their liquidity
reserves.
The FCA also took action to improve
the ability of FCS banks to maintain
sufficient liquidity to outlast episodes of
market turbulence. On November 13,
2008, the FCA Board passed a Market
Emergency Standby Resolution that
waives the 90-day liquidity reserve
requirement in § 615.5134 for a limited
period of time if a crisis shuts, or
severely restricts access to, debt
markets. On May 5, 2009, the FCA
issued a letter to FCS banks and the
Funding Corporation that required the
standing monthly collateral certification
of all banks to include detailed
information about days of liquidity in a
specified format. This directive also
required reporting of days of liquidity
for each FCS bank and the FCS in
aggregate, and detailed information
about the type and remaining term of
the investments from which those days
of liquidity are derived.
FCS banks withstood recent economic
and financial turmoil with their
liquidity intact. Both the FCA and FCS
have gained valuable experience and
insights into the effects that sudden and
severe stress have on liquidity at
individual FCS institutions and the
financial system as a whole. The FCA
has identified several vulnerabilities
that need to be addressed:
(1) Banks must ensure that the
liquidity reserve is managed primarily
as an emergency source of funding;
(2) Board policies need to provide
clearer guidance to the asset-liability
committee (ALCO) for monitoring,
measuring, and managing liquidity risk;
(3) Risk analyses need to address how
investments that the bank purchases
and hold actually achieve its primary
liquidity objective.
(4) Contingency funding plans need to
provide orderly and effective
procedures that would allow the bank to
maintain sufficient liquidity to fund its
operations during each phase of an
emerging crisis;
(5) Discounts that FCS banks apply to
the market values of assets in the
liquidity reserve pursuant to current
§ 615.5134(c) need to be increased for
certain types of investments;
(6) Counterparty risk needs to be
reduced; and
(7) Liquidity policies need to take into
account the continuing uncertainty as to
whether the Federal Reserve System
would provide a line of credit to FCS
banks under section 13(3) of the Federal
Reserve Act during a systemic liquidity
crisis.
As our colleagues at international
financial regulators and the Federal
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banking agencies are doing, we are
drawing conclusions from the lessons
that we learned during recent crises. As
a result, we are revising our regulatory
and supervisory approaches towards
liquidity so that System institutions are
in a better position to withstand
whatever future crises may arise. As
part of our ongoing efforts to limit the
adverse effect of rapidly changing
economic, financial, and market
conditions on the liquidity of any FCS
bank,11 we now propose amendments to
§ 615.5134 that would redress these
vulnerabilities.
III. Section-by Section Analysis of the
Proposed Rule
A. Section 615.5134(a)—Liquidity Policy
The board of directors is responsible
for ensuring that the bank always has
readily available funds to continue
operations and pay maturing
obligations. The board discharges this
responsibility by adopting policies and
procedures for management to follow. A
provision in the existing investment
management regulation,
§ 615.5133(c)(3), requires FCS banks to
address liquidity risk in their
investment policies. However, the only
affirmative requirement that
§ 615.5133(c)(3) imposes on FCS banks
is that their investment policies must
describe the liquidity characteristics of
eligible investments that they hold to
meet their liquidity needs and
institutional objectives. Although the
existing regulation gives FCS banks
ample flexibility to formulate liquidity
policies that meet their particular needs
and objectives, the FCA is proposing to
add a new paragraph (a) to § 615.5134
that for the first time, would require
each FCS bank to address other specific
issues in its liquidity policies. The
banks have the option of either
incorporating these new liquidity
policies in their investment
management policies required under
§ 615.5133, or in a separate document.
Proposed § 615.5134(a) addresses the
board’s responsibility for establishing
and implementing liquidity policies for
11 The FCA has periodically amended its liquidity
regulations over the past 18 years. The FCA
originally adopted § 615.5134 in 1993, and
subsequently amended it 1999 and 2005. See 58 FR
63056 (Nov. 30, 1993); 64 FR 28896 (May 28, 1999);
70 FR 51590 (Aug. 31, 2005). Originally, § 615.5134
required each FCS bank to maintain 15 days of
liquidity, and to separately identify investments
held for the purpose of meeting its liquidity reserve
requirement. In 1999, the FCA repealed the
provision requiring FCS banks to separately identify
investments held for liquidity. In 2005, the FCA
expanded the liquidity reserve requirement to 90
days, increased the limit on investments from 30 to
35 percent of total outstanding loans, and for the
first time, required all FCS banks to develop CFPs
for liquidity.
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the bank. Proposed § 615.5134(a)(1)
would require the board of directors of
each FCS bank to adopt written
liquidity policies that are consistent
with the investment management
policies that the board adopts under
§ 615.5133. The guidance that the FCA
has provided to FCS banks about
investment management policies and
practices in § 615.5133 also applies to
their liquidity policies.12 The FCA
expects the bank’s liquidity policies to
be consistent with, and fit into its
overall investment strategy. Liquidity
risk management is critically important
to the long-term viability of the bank,
and for this reason, it must be integrated
into the bank’s overall investment
management and risk management
processes.13
In discharging its responsibility, the
board must establish appropriate
strategies, policies, procedures, and
limits that will enable the bank to
monitor, measure, manage, and mitigate
liquidity risk.14 The board’s policy
should provide adequate guidance to
management as it develops and
implements strategies for managing
liquidity risk. At a minimum, the policy
should provide clear direction to
management about limiting and
controlling risk exposures, and keeping
them within the board’s risk tolerance
levels. Additionally, these policies
should establish parameters that enable
management to determine whether
particular investments belong in the
liquidity reserve given their potential
suitability for managing interest rate
risks.
Proposed § 615.5134(a)(1) would also
require the board to: (1) Review its
liquidity policies at least once every
year; (2) affirmatively validate the
sufficiency of its liquidity policies; and
(3) make any revisions it deems
necessary. The purpose of this provision
is to compel every FCS bank board to
ascertain whether its policies enable the
bank to respond promptly and
effectively to events that may occur and
threaten its liquidity. More specifically,
the board should determine, as part of
its review, whether its current policies
enable the bank to consistently maintain
sufficient liquidity for its ongoing
funding needs, thus covering both
12 The FCA recently proposed substantive
amendments to § 615.5133. The preamble to the
proposed rule discusses the FCA’s expectations
concerning proper investment practices at FCS
banks and associations. See 76 FR 51289 (Aug. 18,
2011). The FCA incorporates by reference its
guidance about proper investment management
practices in the preamble to § 615.5133 into this
preamble.
13 See Interagency Policy Statement on Funding
and Liquidity Risk Management, supra at 13661.
14 Id.
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expected and unexpected deviations in
the availability of funds to meet cash
demands.15 A bank’s viability often
depends on effective liquidity risk
management (that is fully integrated
into its overall risk management
strategies and processes), and the
annual review should determine
whether the policies achieve these
objectives.16 As part of its review, the
bank board should consider whether it
needs to adjust its liquidity policies
based both on past experiences and on
expected trends in the economy,
agriculture, and financial markets.
The final provision of proposed
§ 615.5134(a)(1) would require the board
to ensure that adequate and effective
internal controls are in place, and that
management complies with and carries
out the bank’s liquidity policies. Besides
preventing losses caused by fraud or
mismanagement, strong internal
controls will enable FCS banks to
respond more quickly and effectively
when significant market turmoil arises
and impedes access to funding.
The content of the board’s liquidity
policies are the focus of
§ 615.5134(a)(2). This regulatory
provision identifies seven different
issues that, at a minimum, a bank must
address in its liquidity policies. The
bank’s policies should be
comprehensive and commensurate with
the complexity of the bank’s operations
and risk profile.
Proposed § 615.5134(a)(2)(i) would
require policies to address the purpose
and objectives of the liquidity reserve.
This section of the bank’s policies
should distinguish the purpose and
objectives of the liquidity reserve from
the other operations and asset-liability
functions of the bank, including interest
rate management. The board’s
philosophy and position on the purpose
and objectives of the liquidity reserve
are of prime importance to effective
liquidity management at the bank. In
normal times, access to the debt markets
provides the System with ready
liquidity. However, when market access
is impeded, the liquidity reserve should
enable each FCS bank to maintain
sufficient cash flows to pay its
obligations, meet its collateral needs,
and fund operations in a safe and sound
manner.17
In normal times, FCS banks may pay
more attention to the financial
performance of the liquidity reserve
rather than its role as an emergency
source of funding. Incorrectly
prioritizing these two objectives is
problematic because the liquidity
reserve should consist of cash and highquality investments that can be quickly
converted into cash at, or close to, par
value. Cash-like investments pose little
risk to the investor and, therefore, they
usually do not earn the highest rate of
return.
During the crisis in 2008, some FCS
banks experienced losses that were
larger than expected given the primary
purpose of the liquidity reserve is an
emergency source of funding. The FCA
expects FCS banks to select investments
for the liquidity reserve by their
liquidity characteristics, and to match
these assets closely to the bank’s
maturing liabilities. Choosing
investments primarily for their ability to
generate revenue is fundamentally
incompatible with the System’s GSE
status.18 Pursuant to proposed
§ 615.5134(a)(2)(i), the board should
provide guidance to management about
these issues when it addresses the
objectives and purposes of the liquidity
reserve in its policies.
Proposed § 615.5134(a)(2)(ii) would
require the board’s policies to address
the diversification of the liquidity
reserve portfolio. This diversification
requirement would apply to both the
liquidity reserve in proposed
§ 615.5134(e) and the supplemental
liquidity buffer in proposed
§ 615.5134(f). Diversification by tenor,
issuer, issuer type, size, asset type, and
other factors can reduce certain
investment risks. The bank’s
diversification policy should address
the board’s desired mix of cash and
investments that the bank should hold
for liquidity under a variety of
scenarios, including both normal and
adverse conditions. Within the
spectrum of eligible qualified
investments, proposed
§ 615.5134(a)(2)(ii) would require the
policy to establish criteria for
diversifying these assets based on
issuers, maturity, and other factors that
the bank deems relevant. In formulating
these criteria, each bank should
consider, in light of its needs and
circumstances, how diversification
would better enable the liquidity reserve
and supplemental liquidity buffer to
serve as its emergency or supplemental
funding source when market access is
curtailed or fully impeded. The FCA
expects each bank to tailor its policy to
its individual circumstances and
financial conditions, and to revise it in
response to changes in the business
environment.
15 Id.
16 Id.
17 Id
18 See 70 FR 51587 (Aug. 31, 2005); 58 FR 63039
(Nov, 30, 1993).
at 13660.
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Proposed § 615.5134(a)(2)(iii) would
require the board’s policies to establish
maturity limits and credit quality
standards for investments that the bank
is holding in its liquidity reserve. This
aspect of the bank’s policies would help
management to target and match cash
inflows from loans and investments to
outflows that pay its maturing
obligations. In devising its
diversification strategy the bank should
consider how it may need to rely on its
liquidity portfolio as an available
funding source in the short-,
intermediate-, and long-term. As highquality investments season and come
closer to maturity, they become more
liquid. In this context, a well-reasoned
policy should guide management about
deploying the strata of investments
throughout the liquidity reserve and the
supplemental liquidity buffer.
Proposed § 615.5134(a)(2)(iii) also
focuses on the credit quality standards
that board policies should establish for
investments that the bank will hold to
meet the liquidity reserve requirements
of this regulation. Investments with
short terms to maturity and high credit
quality tend to be liquid and, therefore,
are generally suitable for the bank’s
liquidity reserve and supplemental
liquidity buffer. The preamble to
§ 615.5134(c) below, will discuss many
of the attributes of high-quality liquidity
investments in greater detail. The bank’s
liquidity policies should base credit
quality standards for investments on
factors and standards that the financial
services industry uses to determine that
the risk of default for both the asset and
its issuer are negligible. In determining
the credit quality of a security, FCS
banks may consider the credit ratings
issued by a Nationally Recognized
Statistical Rating Organization
(NRSRO), but may not rely solely or
disproportionately on such ratings.
System banks must document their
credit quality determinations.
Under proposed § 615.5134(a)(2)(iv),
the board’s policies should cover the
target amount of days of liquidity that
the bank needs based on its business
model and its risk profile. Estimating
the target amount of days of liquidity
that the bank will need to outlast
various stress events is an effective tool
for managing and mitigating liquidity
risks. The FCA expects each FCS bank
to include a prudent amount of
unfunded commitments in its
calculation of the target amount of days
of liquidity it will need to survive a
liquidity crisis in the markets.
Proposed § 615.5134(a)(2)(v) would
require the bank’s policies address the
elements of the Contingency Funding
Plan (CFP) in paragraph (h) of the
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proposed rule. The purpose of the CFP
is to address unexpected events or
unusual business conditions that
increase liquidity risk at FCS banks. Our
existing regulation, § 615.5134(d),
requires each FCS bank to have a formal
written CFP to address liquidity
shortfalls that may occur during market
disruptions. The proposed rule would
strengthen contingency funding
planning at FCS banks. Under proposed
§ 615.5134(a)(2)(v), an effective CFP
would cover at a minimum: (1)
Strategies, policies, and procedures to
manage a range of stress scenarios; (2)
chains of communications and
responsibility within the bank; and (3)
implementation of the CFP during all
phases of an adverse liquidity event.
The preamble to proposed § 615.5134(h)
will discuss the substantive
requirements of the CFP and our
expectations of FCS banks in greater
detail.
The next provision of this regulation,
proposed § 615.5134(a)(2)(vi), covers
delegations of authority pertaining to
the liquidity reserve in the bank’s
liquidity policies. As with all other
aspects of the bank’s operations, an
explicit delegation of authority within a
clearly defined chain of command
strengthens the effectiveness and
efficiency of an institution’s operations
and mitigates the risk of loss. The
purpose of a delegation of authority is
to clearly establish lines of authority
and responsibility for managing the
bank’s liquidity risk.19 The policies
should clearly identify those
individuals and committees that are
responsible for making decisions
involving liquidity risk and
implementing risk mitigation strategies.
Additionally, the policies should ensure
that the ALCO has sufficiently broad
representation across the operational
functions of the bank that influence the
bank’s liquidity risk profile.
Under proposed § 615.5134(a)(2)(vii),
the policies must contain reporting
requirements, which at a minimum,
would require management to report to
the board at least once every quarter
about compliance with the bank’s
liquidity policies, and to what extent
the liquidity reserve portfolio has
achieved the bank’s liquidity objectives.
This provision would also require
management to report immediately to
the board about any deviation from its
liquidity policies, or any failure to meet
the liquidity targets in the board’s
policies. The purpose of this provision
is to ensure that an effective reporting
19 See Interagency Policy Statement on Funding
and Liquidity Risk, 75 FR 13656, 13661 (Mar. 22,
2010).
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process is in place, and management
communicates accurate and timely
information to the board about the level
and sources of the bank’s exposure to
liquidity risk. These reports should
enable the board to take prompt
corrective action. The board should also
consider these quarterly reports when it
conducts its annual review of the bank’s
liquidity policies and decides whether
to make any revisions to its policies,
pursuant to proposed § 615.5134(a)(1).
B. Liquidity Reserve Requirement—
§ 615.5134(b)
Proposed § 615.5134(b) is the
cornerstone of the FCA’s proposal
because it articulates the core liquidity
reserve requirements for FCS banks.
Proposed § 615.5134(b) is not a
departure from the liquidity reserve
requirement in FCA’s existing liquidity
regulation. Instead, it builds upon and
strengthens the concepts, principles,
and requirements of existing § 615.5134.
The purpose of proposed § 615.5134(b)
is to better prepare FCS banks so they
can withstand future liquidity crises.
The FCA designed this proposal to
address the vulnerabilities identified
during recent crises. In developing
proposed § 615.5134(b), we also
considered the Basel Committee’s
recommendations for an international
framework for liquidity, and the Federal
banking agencies’ Interagency Policy
Statement on Funding and Liquidity
Risk Management.
Both the existing and proposed
regulations require each FCS bank to
maintain a liquidity reserve sufficient to
fund 90 days of the principal portion of
maturing obligations and other
borrowings of the bank at all times.
However, in contrast to the existing
regulation, proposed § 615.5134(b) and
(e) would divide the bank’s liquidity
reserve into two levels. The first level of
the liquidity reserve would fund a
bank’s maturing obligations and
operations for the first 30 days from the
onset of a significant stress event. Cash
and certain instruments that mature
within 3 years or less must comprise at
least 15 days of the first level of the
bank’s liquidity reserve. The bank
would draw on the second level of the
reserve if market turmoil continued to
persist for the subsequent 60 days after
the initial 30 days thereby comprising
together a stratified 90-day liquidity
reserve.
Proposed § 615.5134(b) would require
FCS banks, for the first time, to maintain
a supplemental liquidity buffer
pursuant to proposed § 615.5134(f). The
new regulation would require each FCS
bank to hold supplemental liquid assets
(comprised of cash and other qualified
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assets listed in § 615.5140) in excess of
the 90-day minimum liquidity reserve.
The supplemental liquidity buffer
would complement the 90-day liquidity
reserve, and its purpose is to enable
each FCS bank to continue operations if
market access becomes impeded for a
prolonged period of time in differing
stress scenarios.
Proposed § 615.5134(b) would also
require FCS banks to discount the assets
in their liquidity reserve by the
percentages specified in proposed
§ 615.5134(g). Although the existing
regulation already requires FCS banks to
discount assets in the liquidity reserve,
the proposed rule would change some of
the percentages to reflect the new twotier structure of the liquidity reserve.
The preamble to proposed § 615.5134(g)
discusses in detail how we are revising
the discounting requirements for the
liquidity reserve.
The final sentence of proposed
§ 615.5134(b) states that the liquidity
reserve must be comprised only of cash,
including cash due from traded but not
yet settled debt, and qualified eligible
investments under § 615.5140 that are
marketable under proposed
§ 615.5134(d). Proposed § 615.5134(b) is
similar, but not identical, to existing
§ 615.5134(a). Both the existing and the
proposed rule specify that the liquidity
reserve must be comprised of cash,
including cash due from traded but not
yet settled debt, and investments listed
in § 615.5140.
The final sentence of proposed
§ 615.5140(b), however, differs from
existing § 615.5140(a) in two crucial
respects. First, the proposed rule
emphasizes that all investments held in
liquidity reserves must be marketable.
As the preamble to proposed
§ 615.5134(d) explains in greater detail
below, the new regulation would
establish specific regulatory benchmarks
for determining whether particular
investments are marketable.
Marketability of a security is an
essential attribute of its liquidity and
helps determine its suitability for the
liquidity reserve.
Second, the proposed rule would
repeal the provisions in existing
§ 615.5134(a) that impose specific credit
ratings on investments that FCS banks
hold in their liquidity reserves. Under
the existing regulation, money market
instruments and floating and fixed rate
debt securities held in the banks’
liquidity reserve must maintain one of
the two highest NSRSO credit ratings. In
the event that an unrated instrument is
in the liquidity reserve, the existing
regulation requires the issuer to carry
one of the two highest NRSRO ratings.
Section 939A of the Dodd-Frank Wall
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Street Reform and Consumer Protection
Act 20 requires each Federal agency to:
(1) Review any references or
requirements in its regulations
concerning the credit ratings of
securities and money market
instruments, and (2) replace references
to, and requirements that regulated
entities rely on such credit ratings with
standards of creditworthiness that the
agency determines is appropriate. In
making this determination, every agency
must seek to establish, to the extent
feasible, uniform standards of
creditworthiness. Our proposed
liquidity regulation does not seek to
replace the NRSRO rating requirements
in existing § 615.5134(a) with a specific
alternate standard of creditworthiness.
Instead, we propose to require FCS
banks to hold investments in the
liquidity reserve that are unencumbered
under proposed § 615.5134(c), and are
marketable under proposed
§ 615.5134(d). In two other rulemakings,
the FCA has invited the public to
suggest options for replacing NRSRO
credit ratings with other standards to
determine the creditworthiness of
financial instruments and their
issuers.21 We also solicit your comments
and suggestions about the best approach
for addressing standards of
creditworthiness for investments held in
the liquidity reserves of FCS banks.
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C. Unencumbered and Marketable
Investments in the Liquidity Reserve
Currently, existing § 615.5134(b)
states that all investments that an FCS
bank holds for the purpose of meeting
its regulatory liquidity reserve
requirement must be free of lien.
Proposed § 615.5134(c) would expand
upon this concept by requiring FCS
banks to hold only unencumbered
investments in their liquidity reserves.
Under proposed § 615.5134(c), an asset
is unencumbered if it is free of lien and
is not explicitly or implicitly pledged to
secure, collateralize, or enhance the
credit of any transaction.22
Additionally, proposed § 615.5134(c)
also would prohibit any FCS bank from
using an investment in the liquidity
reserve as a hedge against interest rate
20 See Public Law 111–203, sec. 939A, 124 Stat.
1376, 1887 (Jul. 21, 2010).
21 See 76 FR 51289, 51298 (Aug. 18, 2011) and 76
FR 53344 (Aug. 26, 2011). The first cite is to the
proposed rule on investment management. The FCA
is soliciting comments on how to replace NRSRO
credit ratings for eligible investments. The second
cite is to an Advance Notice of Proposed
Rulemaking concerning the NRSRO credit ratings in
our capital regulations.
22 Basel Committee on Banking Supervision,
Basel III: International framework for liquidity risk
measurement, standards, and monitoring, (Dec.
2010) p. 6.
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risk pursuant to § 615.5135 if
liquidation of that particular investment
would expose the bank to a material risk
of loss. Unencumbered investments are
free of the impediments or restrictions
that would otherwise curtail the bank’s
ability to liquidate them to pay its
obligations when normal access to the
debt market is obstructed. Proposed
§ 615.5134(c) strengthens the liquidity
of FCS banks and improves the safety
and soundness of the Farm Credit
System as a whole.
Under both proposed § 615.5134(b)
and (d), all eligible investments that
FCS banks hold in their liquidity
reserves must be marketable. Proposed
§ 615.5134(d) specifies the criteria and
attributes that determine whether
investments are marketable for the
purposes of this regulation. Investments
that meet all the marketability criteria in
proposed § 615.5134(d) would be
deemed to possess the characteristics of
high-quality liquid assets that are
suitable for the liquidity reserves at FCS
banks. Proposed § 615.5134(d) is based
on many of the concepts that the Basel
Committee articulated in the Basel III
Liquidity Framework.23 The FCA
tailored these concepts to the unique
structure, needs, and circumstances of
the FCS.
Proposed § 615.5134(d)(1) states that
an investment is marketable if it can be
easily and immediately converted into
cash with little or no loss in value.
Investments that exhibit this attribute
are more likely to generate funds for the
bank without incurring steep discounts
even if they were liquidated in a ‘‘fire
sale’’ during turmoil in the markets.24
The liquidity of an asset depends on its
performance during a stress event, and
is measured by the amount that the
holder can convert into cash within a
certain timeframe.25
On a related note, proposed
§ 615.5134(d)(1) complements the
definition of ‘‘liquid investments’’ in
existing § 615.5131(e).26 The existing
regulation defines ‘‘liquid investments’’
as ‘‘assets that can be promptly
converted into cash without significant
loss to the investor.’’ 27 We do not
consider § 615.5131(e) to be redundant
or inconsistent with proposed
§ 615.5134(d)(1). For this reason, we do
23 Id
at p. 5.
24 Id.
25 Id.
26 The proposed rule on investment management
would change the designation of § 615.5131(e) by
omitting the paragraph designations of all
definitions in the regulation.
27 Existing § 615.5131(e) also states, ‘‘In the
money market, a security is liquid if the spread
between its bid and ask price is narrow and a
reasonable amount can be sold at those prices.’’
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not propose to repeal or amend
§ 615.5131(e). However, we invite your
comments about whether the final rule
should retain, relocate, or modify
§ 615.5131(e).
Another feature of a marketable
investment is that it exhibits low credit
and market risks, and we propose to
incorporate this criterion into proposed
§ 615.5134(d)(2). Assets tend to be more
liquid if they are less risky. An
investment has low credit risk if its
issuer has a strong credit standing, is
not heavily indebted, and its assets are
not heavily leveraged. Low duration 28
and low volatility indicate that an
investment is more likely to be liquid
because it has low market risk.29
Ease and certainty of valuation is also
an attribute of marketable
investments.30 We are incorporating this
concept into proposed § 615.5134(d)(3).
The liquidity of an asset is likely to
increase if market participants are able
to agree on its valuation. An instrument
has ease and certainty of valuation if the
components of its pricing formulation
are publicly available. The pricing of
high-quality liquid assets are usually
easy to calculate because they do not
depend significantly on numerous
assumptions. In practice, proposed
§ 615.5134(d)(3) effectively excludes
structured investments from the
liquidity reservesat FCS banks, although
banks may hold such assets in their
supplemental liquidity buffers if they
are eligible investments under
§ 615.5140. The proposed rule, however,
would allow FCS banks to hold
mortgage-backed securities issued by
the Government National Mortgage
Association in their liquidity reserves
because they are highly marketable
securities backed by the full faith and
credit of the United States.
Under proposed § 615.5134(d)(4), the
final attribute of a marketable
investment is that it can be easily
bought or sold. Money market
instruments generally qualify as
marketable investments under this
provision because they are easily bought
and sold even though they are not
traded on exchanges. Otherwise,
marketable investments include assets
listed on developed and recognized
exchange markets. Listing on a public
exchange enhances the transparency of
the pricing mechanisms of investments,
thus enhancing their marketability and
liquidity.31 Investments would also
28 Duration measures the price sensitivity of a
fixed income security to interest rate changes.
29 See Basel III Liquidity Framework supra. at p.
5.
30 Id.
31 Id.
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comply with the requirement of
proposed § 615.5134(d)(4) if investors
can sell or convert them into cash
through repurchase (repo) agreements in
active and sizeable markets. For the
purpose of this proposed rule, markets
are active and sizeable if they have a
large number of market participants,
high-trading volume, and investors can
sell or repo the asset at any time.32
Another feature of an active and
sizeable market is that it historically has
market breadth and market depth.33
Proposed § 615.5134(d)(4) would
exclude private placements from the
banks’ liquidity reserves, but not the
supplemental liquidity buffer.
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D. Composition of the Liquidity Reserve
Proposed § 615.5134(e) governs the
composition of the liquidity reserve.
This provision would require each FCS
bank to continuously hold cash and the
investments identified in the table to
proposed § 615.5134(e) to meet the 90day minimum liquidity reserve
requirement of this regulation. Under
this proposal, each bank would also
apply the discounts in proposed
§ 615.5134(g) to all cash and
investments that it holds in its liquidity
reserve.
Although the existing regulation
already requires every FCS bank to
maintain a sufficient stock of liquid
assets to fund its maturing obligations
and other borrowings for at least 90
days, the proposed rule would divide
the liquidity reserve into two levels. The
first level of the liquidity reserve would
provide sufficient liquidity for the bank
to pay its obligations and continue
operations for 30 days, whereas the
second level of the reserve would cover
the following 60 days. Taken together,
the two levels of the liquidity reserve
should provide each FCS bank with
adequate liquidity for 90 days.
Proposed § 615.5134(e) would require
FCS banks to hold a minimum of 90
days of cash and liquid investments in
their liquidity reserves. In other words,
FCS banks may need to exceed
90daysbased on their individual
liquidity needs. The FCA expects each
bank, in accordance with its policies
and procedures, to determine the
appropriate level, size, and quality of its
liquidity reserve based on its liquidity
32 Id. Many securities that System banks hold in
their liquidity reserves are traded in high volume.
Nevertheless, the FCA cautions that the potential
volume that an FCS bank trades or holds in a
particular security should not constitute a
significant percentage of the overall trading volume
in that security.
33 Id. Market breadth refers to the price impact
per unit of liquidity, whereas market depth refers
to units of the asset that can be traded for a given
price impact.
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risk profile. Determining and
maintaining an adequate level of
liquidity depends on each bank’s ability
to meet both expected and unexpected
cash flows and collateral needs without
adversely affecting its daily operations
and financial condition.34 Additionally,
the size and level of the liquidity
reserve should correlate to the bank’s
ability to fund its obligations at
reasonable cost.35 Each FCS bank must
document and be able to demonstrate to
FCA examiners how its liquidity reserve
mitigates the liquidity risk posed by the
bank’s business mix, balance sheet
structure, cash flows, and on- and offbalance sheet obligations.36 Matching
the size, level, and composition of the
liquidity reserve to obligations that are
maturing in a prescribed number of days
is a sound banking practice, and is
consistent with GSE status.
The proposed rule would require each
FCS bank to maintain sufficient quantity
of highly liquid assets in the first level
of its liquidity reserve so it could
continue normal operations for 30 days
if a national security emergency, a
natural disaster, or intense economic or
financial turmoil impedes System
access to the markets. As the first item
in the left column of the table states,
investments in the first level of the
liquidity reserve would be available for
the bank to sequentially apply to pay
obligations that mature starting on day
1 through day 30.
Under the second provision in the
left-hand column of the table, cash and
instruments with a final maturity of 3
years or less must comprise at least 15
days of the first level of the liquidity
reserve. As a result, the proposed rule
would mandate that each bank have
enough cash and short-term, highly
liquid assets on hand so it could pay its
obligations and fund its operations for
15 days if the debt markets were closed,
or the System’s cost of funding became
uneconomical. FCS banks would draw
first on this 15-day sublevel in the event
of significant stress event.
The right side of the table identifies
the assets that proposed § 615.5134(e)
would require FCS banks to hold in
Level 1 of their liquidity reserves.
Again, all of these assets are highly
liquid because they are cash, or
investments that are high quality, close
to their maturity, and marketable. All of
the assets that banks hold in their
liquidity reserve would be subject to the
discounts specified in proposed
§ 615.5134(g).
34 See Interagency Policy Statement on Funding
and Liquidity Risk Management, supra.at 13660.
35 Id.
36 Id.
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Under the proposed rule, FCS banks
are authorized to hold five classes of
assets in the first level of their liquidity
reserve. These assets are:
• Cash—
(1) Cash balances on hand,
(2) Cash due from traded but not yet
settled debt, and
(3) Insured deposits that FCS banks
hold at federally insured depository
institutions in the United States;
• United States Treasury securities—
Each FCS bank must select Treasury
securities that have final maturities and
other characteristics that best enables it
to fund operations if market access
becomes obstructed;
• Other marketable obligations
explicitly backed by the full faith and
credit of the United States 37
• Government-sponsored agency
senior debt securities that mature within
60 days (debt obligations of the FCS are
excluded);38
• Diversified investment funds that
are comprised exclusively of Level 1
instruments.
As discussed earlier, the second level
of the liquidity reserve would provide
FCS banks with sufficient liquidity to
fund their obligations and continue
normal operations starting on day 31
through day 90. Under proposed
§ 615.5134(e), FCS banks would use the
assets in Level 2 during a prolonged
stress event to fund obligations that
mature during the subsequent 60 days of
the 90-day liquidity reserve.
The proposed rule would authorize
FCS banks to hold the five following
classes of assets in the second level of
their liquidity reserves:
• Additional amounts of Level 1
instruments;
• Government-sponsored agency
senior debt securities with maturities
that exceed 60 days;39
37 Obligations that are backed by the full faith
credit of the United States are not eligible for the
liquidity reserve if they are not marketable under
proposed § 615.5134(d).
38 A Government-sponsored agency means as an
agency, instrumentality, or corporation chartered or
established to serve public purposes specified by
the United States Congress but whose obligations
are not explicitly insured or guaranteed by the full
faith and credit of the United States Government.
The FCA proposed to add this definition to
§ 615.5132 on August 18, 2011. See 76 FR 51289
(Aug. 18, 2011). This category would include the
Federal Home Loan Banks, Federal National
Mortgage Association (Fannie Mae), Federal Home
Loan Mortgage Corporation (Freddie Mac), and the
Tennessee Valley Authority. Although Fannie Mae
and Freddie Mac are currently in conservatorship,
their obligations are not explicitly backed by the
full faith and credit of the United States.
39 Once the Government-sponsored agency senior
debt securities in Level 2 come within 60 days to
maturity, the bank should move them to Level 1 of
the liquidity reserve so they can cover maturing
obligations.
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• Government-sponsored agency
mortgage-backed securities;
• Money market instruments that
mature in 90 days; and
• Diversified investment funds that
are comprised exclusively of Levels 1
and 2 instruments.
Unfunded commitments are another
issue that raises concerns for the FCA.
FCS banks or their affiliated
associations often have outstanding
lines of credit to borrowers who may
draw funds to meet their seasonal
business needs. FCS banks and
associations can be legally obligated to
fund these commitments. A sudden
surge in borrower demand for funds
under these lines may impair the bank’s
liquidity at a time when market access
is becoming impeded. For this reason, it
is important that FCS banks adequately
account for unfunded commitments and
other contingencies, including those
that are off balance sheet, when they
calculate the amount and quality of
liquid assets they need in their liquidity
reserve to fund all maturing and
contingent obligations during a
particular time period. Each FCS bank
has its own unique circumstances and
risk profile and, therefore, exposure to
unfunded commitments and other
contingent obligations varies within the
FCS.
Unfunded commitments and other
material contingent obligations,
including those off balance sheet,
potentially expose both FCS and other
financial institutions to significant
safety and soundness risks.
Accordingly, contingent outflows raise
substantial regulatory concerns for the
FCA and other financial regulators.40
Proposed § 615.5134(e) does not
specifically require FCS banks to
maintain sufficient assets in the
liquidity reserve to cover unfunded
commitments and other contingent
obligations. However, the FCA is
contemplating whether to add a specific
provision to the final regulation that
would require the liquidity reserve to
adequately cover unfunded
commitments and other contingent
obligations. Requiring FCS banks to
hold sufficient liquidity to cover these
contingencies could mitigate risks that
pose a threat to the liquidity, solvency,
and ultimate viability of FCS banks.
However, such a requirement could also
impose significant opportunity costs on
FCS banks in that they would be
compelled to provide for these
40 See Basel III Liquidity Framework supra. at p.
21–22. The Basel Committee on Banking
Supervision focused on unfunded commitments
throughout Basel III.
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contingencies with cash and short-term
liquid investments.
The FCA considers the guidance of
the Federal banking agencies and the
Basel III Liquidity Framework in
developing this proposed rule on
liquidity, and evaluates whether it is
appropriate for System banks.
Specifically, the Basel Committee
currently suggests that regulated entities
account for unfunded commitments and
other contingent obligations in their
liquidity reserve calculations. We are
evaluating to what extent we should
incorporate the approach of the Basel III
Liquidity Framework into our
regulation.
For this reason, we solicit your
responses to the following questions:
• Should the final rule explicitly
require the liquidity reserve to cover
unfunded commitments and other
contingent obligations? In your opinion,
what would be the advantages and
disadvantages of adding this
requirement to § 615.5134(e)?
• Should the FCA consider more
stringent liquidity reserve requirements
based on size and complexity of
different FCS banks, or should the
liquidity reserve requirements remain
the same for all System banks?
• What cash inflows and outflows
identified in the Basel III Liquidity
Framework are relevant to System
banks? For those that are relevant, how
should we incorporate them into our
regulation?
• Should we incorporate the Basel III
Liquidity Framework stress parameters
in the liquidity reserve requirement for
System banks? If so, which ones? For
those, please indicate what percentage
of the unfunded commitments and other
contingent obligations the FCS bank
should cover in its liquidity reserve.
• How should an association’s direct
loan under the General Financing
Agreement and its accompanying
contingent commitments factor into the
funding bank’s liquidity reserve
requirement?
Please provide any information or
data concerning unfunded commitments
and other contingent obligations that
support your answers to the above
questions.
E. Supplemental Liquidity Buffer
Proposed § 615.5134(f) would
introduce a new concept into the FCA’s
liquidity regulation by requiring all FCS
banks to establish and maintain a
supplemental liquidity buffer that
would provide a longer term, stable
source of funding beyond the 90-day
minimum liquidity reserve. The
supplemental liquidity buffer would
complement the 90-day minimum
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liquidity reserve. Whereas the primary
purpose of the 90-day minimum
liquidity reserve is to furnish sufficient
short-term funding to outlast an
immediate crisis, the supplemental
liquidity buffer would enable FCS banks
to manage and mitigate their liquidity
risk over a longer term horizon. Besides
providing FCS banks with longer term
and stable source of funding, each bank
would be able to draw on the
supplemental liquidity buffer if a heavy
demand for funds strains its 90-day
minimum liquidity reserve during a
significant stress event. The
supplemental liquidity buffer is an
additional stock of assets that would
provide stable, longer term funding of
the bank’s operations beyond the first 90
days.
The proposed rule does not specify
the length of time that the supplemental
liquidity buffer should cover. The Basel
Committee on Banking Supervision
recommends that a supplemental
reserve should provide depository
institutions and related banking
organizations stable, long-term funding
over a 1-year time horizon. We invite
your comments about whether our final
rule should establish a specific time
horizon for the supplemental liquidity
buffer at FCS banks. If you believe that
we should establish a specific timeframe
for the supplemental liquidity buffer,
please tell us what you think it should
be, and why. If you oppose a specific
regulatory time horizon for the
supplemental liquidity buffer, please
explain your reasoning. We are also
interested in hearing your views about
how the similarities and differences
between FCS banks and financial
institutions under the supervision of
other Federal and international
regulators influence the answers to our
questions about potential time horizons
for the supplemental liquidity buffers at
FCS banks.
The first sentence of proposed
§ 615.5134(f) would require each Farm
Credit bank to hold supplemental liquid
assets in excess of the 90-day minimum
liquidity reserve. Again, the
supplemental liquidity buffer consists of
the amount of stable longer term
funding that a FCS bank has available,
and it should match the amount of
stable funding that the bank needs to
operate during a prolonged period of
time. For the purposes of proposed
§ 615.5134(f), stable funding means that
the instruments in the supplemental
liquidity buffer are expected to furnish
the bank with a reliable source of funds
over a longer term time horizon under
conditions of extended stress. The
amount and composition of the
supplemental liquidity buffer at a
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particular bank ultimately depends on a
number of different factors pertaining to
its operations, including the funding of
its assets and liabilities, off-balance
sheet items, and contingent exposure,
such as unfunded commitments.
According to the second sentence of
proposed § 615.5134(f), the
supplemental liquidity buffer must be
comprised of cash and qualified eligible
investments listed in § 615.5140 of this
part. Thus, the proposed rule would
allow FCS banks to hold qualified
eligible investments (listed in
§ 615.5140) in their supplemental
liquidity buffer that they could not hold
in their 90-day liquidity reserve.
However, the FCA expects each FCS
bank to calibrate the quality and
quantity of assets that it selects for the
supplemental liquidity buffer to the
amount of funding it will need to outlast
significant stress scenarios. Each bank
should configure its supplemental
liquidity buffer so it realistically
corresponds to the demands of its
liquidity risk profile.
The third sentence of proposed
§ 615.5134(f) states that each FCS bank
must be able to liquidate any qualified
investment in its supplemental liquidity
buffer within the timeframe established
in the bank’s liquidity policies at no less
than 80 percent of its book value. The
fourth sentence of proposed
§ 615.5134(f) would require an FCS
bank to remove from its supplemental
liquidity buffer any investment that has,
at any time, a market value that is less
than 80 percent of its book value. These
two provisions are designed to limit loss
that the bank might incur on qualified
investments that it holds in its
supplemental liquidity buffer. From the
FCA’s perspective, the liquid and
marketable characteristics of qualified
investments in the supplemental
liquidity buffer would be called into
question if their market value falls 20
percent or more below their book value.
In all probability, an FCS bank could no
longer convert such assets easily or
immediately into cash at little or no loss
in value. Additionally, a qualified
investment that has lost 20 percent or
more of its book value no longer
exhibits low credit or market risks. The
proposed rule would instill strong
discipline and control by requiring FCS
banks to remove from their
supplemental liquidity buffer an
investment that has depreciated 20
percent or more off its book value. We
invite your comments on the maximum
percentage that the final rule should
allow the market value of an asset to
depreciate from its book value before
the bank must remove it from the
supplemental liquidity buffer.
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Finally, proposed § 615.5134(f) would
require the amount that each bank holds
in its supplemental liquidity buffer, at a
minimum, to: (1)Adhere to the
requirements of the board’s liquidity
policies; (2) provide excess liquidity
beyond the days covered by the 90-day
minimum liquidity reserve; and (3)
enable the bank to meet the needs of its
CFP. The supplemental liquidity buffer
is a stable longer term funding source
that enables each bank, based on its
business and risk profiles, to match the
inflow and outflow of funds from its
assets and liabilities.
F. Discounts
Our existing liquidity regulation
requires FCS banks to discount assets in
their liquidity reserves. Existing
§ 615.5134(c) specifies the discount
percentage that applies to particular
classes of assets. We propose to revise
the provision in the rule pertaining to
discounts so they are more appropriate
to the new regulatory structure, which
splits the liquidity reserve into two
levels, establishes a supplemental
liquidity buffer, and greatly strengthens
contingency funding planning at FCS
banks.
Discounts approximate the cost of
liquidating investments over a short
period of time during adverse situations.
The system of discounting assets is
designed to accurately reflect true
market conditions. For example, the
proposed rule would assign only a
minimal discount to investments that
are less sensitive to interest rate
fluctuations because they are exposed to
less price risk. Conversely, the discount
for long-term fixed rate instruments is
higher because they expose FCS banks
to greater market risk.
Accordingly, the FCA proposes the
following discounts for the classes of
assets that FCS banks hold in their
liquidity reserves and supplemental
liquidity buffers:
Instrument
Cash and overnight
investments.
United States Treasuries.
All other Level 1 instruments including
such instruments
held in Level 2 to
fund obligations
maturing on day 31
through day 90.
All Level 2 instruments.
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Multiply by
100 percent.
97 percent of market
value.
95 percent of market
value.
93 percent of market
value.
Sfmt 4702
80825
Instrument
Multiply by
All other qualified investments held for
meeting the bank’s
liquidity policy and
contingency plans
unless they merit
the discount for
Level 1 or Level 2
instruments.
85 percent of market
value.
G. Contingency Funding Plan
Contingency funding planning is an
essential and crucial element of
effective liquidity risk management at
all financial institutions. The CFP is a
blueprint that helps financial
institutions respond to contingent
liquidity events, which are unexpected
events or conditions that may increase
liquidity risk.41 Contingent liquidity
events may arise from external factors
that adversely affect the financial
system, or they may be specific to the
conditions at an individual
institution.42
Since 2005, our regulation has
required all FCS banks to have a
contingency funding plan that addresses
liquidity shortfalls during market
disruptions. Existing § 615.5134(d) also
requires the board of directors of each
FCS bank to review the contingency
funding plan every year and make any
necessary changes. The crisis in 2008
revealed actual and potential
vulnerabilities in contingency planning
at FCS banks. As a result, the FCA
proposes to strengthen contingency
planning at FCS banks by amending the
applicable provisions of our liquidity
regulation. These amendments should
reinforce the wherewithal of FCS banks
to withstand future crises.
The first sentence of proposed
§ 615.5134(h) would require each FCS
bank to have a CFP to ensure sources of
liquidity are sufficient to fund normal
operations under a variety of stress
events. Whereas existing § 615.5134(d)
only requires the CFP to address
liquidity shortfalls caused by market
disruptions, proposed § 615.5134(h)
would require the CFP to explicitly
cover other stress events that threaten
the bank’s liquidity. In addition to
market disruptions, the proposed rule
would require the CFP to specifically
address:
(1) Rapid increases in loan demand;
(2) Unexpected draws on unfunded
commitments;
(3) Difficulties in renewing or
replacing funding with desired terms
and structures;
41 See Interagency Policy Statement on Funding
and Liquidity Risk Management, supra. at 13664.
42 Id.
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(4) Pledging collateral with
counterparties; and
(5) Reduced market access.
Each of these events could weaken the
bank’s liquidity and impair its access to
funding during a crisis.
The second sentence of proposed
§ 615.5134(h) would require each Farm
Credit bank to maintain an adequate
level of unencumbered and marketable
assets in its liquidity reserve that could
be converted into cash to meet its net
liquidity needs based on estimated cash
inflows and outflows for a 30-day time
horizon under an acute stress scenario.
As an integral and critical part of
contingency planning, each FCS bank
should quantitatively project and
evaluate its expected funding needs and
its available funding sources during
likely stress scenarios. More
specifically, each FCS bank must
realistically assess and analyze its cash
inflows, cash outflows, and its access to
funding at different phases of a
potential, but acute liquidity stress
event that continues for 30 days. In
addition to a realistic assessment of
potential cash-flow mismatches that
may occur during different intervals of
various stress events, effective
contingency planning also requires the
bank to evaluate whether it has a
sufficient amount of marketable assets
that it can convert into cash and
continue operations for the duration of
any potential crisis.
The next provisions of proposed
§ 615.5134(h) would require the CFP to
address four specific areas that are
essential to the bank’s efforts to mitigate
its liquidity risk. Taken together, these
four provisions require each bank to
have an emergency preparedness plan
in place so it can effectively cope with
a full range of contingencies that could
endanger its liquidity, solvency, and
viability.
First, proposed § 615.5134(h)(1)
would require each FCS bank to
customize the CFP to its individual
financial condition and liquidity risk
profile and the board’s liquidity risk
tolerance policy. The CFP is part of the
bank’s overall liquidity policies, and as
such, it should be commensurate with
the complexity, risk profile, and scope
of the bank’s operations.43 The CFP
should cover a number of plausible
scenarios that could adversely affect the
bank’s liquidity. In this context, the CFP
should address contingencies that are
both:
• Highly probable, but would have a
low impact on the bank’s liquidity; and
43 Id.
at 13665.
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• Less likely to occur but would have
a significant impact on the bank’s
liquidity.44
The CFP should identify stress events
that could have a significant impact on
the bank’s liquidity based on its
individual circumstances, such as its
balance sheet structure, business model,
and organizational configuration.45 The
CFP should also assess how different
stress events are likely to affect the
bank’s liquidity.
Under proposed § 615.5134(h)(2), the
CFP must identify funding alternatives
that the Farm Credit bank can
implement whenever its access to
funding is impeded. For the purposes of
proposed § 615.5134(h)(2), funding
alternatives include, at a minimum,
arrangements for pledging collateral to
secure funding and possible initiatives
to raise additional capital. Each bank
must be able to readily access its
contingent funding sources during a
stress event. The FCA expects every FCS
bank to take appropriate measures,
including advance planning and
periodic testing, so it always has reliable
funding alternatives available when
normal market access becomes
impeded.
Pursuant to proposed
§ 615.5134(h)(3), the CFP must require
the bank to conduct periodic stress
testing in order to analyze the possible
impacts on the bank’s cash inflows and
outflows, liquidity position, profitability
and solvency under a variety of stress
scenarios. Periodic stress testing of its
anticipated cash flows would enable the
bank to estimate future funding
surpluses and shortfalls under several
different stress scenarios, which in turn,
affects the bank’s ability to fund its
assets, liabilities, and operations
throughout adverse situations.
Proposed § 615.5134(h)(4) would
require each bank’s CFP to establish a
process for managing events that imperil
its liquidity. This includes assigning
appropriate personnel and having
executable action plans to implement
the CFP. Under this provision, the CFP
would establish a framework for the
bank to monitor contingent events that
potentially threaten its liquidity. This
framework should contain mechanisms,
such as early-warning indicators and
event triggers,46 which are tailored to
44 Id.
45 Id.
46 Early warning signals and event triggers
encompass events that are both global and bank
specific. Examples of global warning signals and
event triggers include: (1) Concerns over the credit
quality of particular classes of assets widely held
by financial institutions; (2) widening spreads
between different types of securities, or derivatives;
(3) macro-economic factors adversely affecting
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the bank’s liquidity profile. These earlywarning systems help the, bank to
identify potential adverse liquidity
events that are looming on the horizon.
This enables the bank to position itself
and be ready for the various phases of
the stress event as it evolves.
The second prong of proposed
§ 615.5134(h)(4) involves internal
controls and management of
contingency events. The CFP should
establish a reliable crisis management
team. Frequent communication and
reporting among team members,
management, and the board optimize
the effectiveness of the CFP during a
liquidity crisis by coordinating the
bank’s response and diminishing
liquidity risks to the bank’s
operations.47 The CFP should also
identify the processes and procedures
that the bank will use to manage any
evolving crisis.
The final sentence of proposed
§ 615.5134(h) would require the board
of directors of each FCS bank to review
and approve the CFP at least once every
year, and incorporate adjustments to
reflect changes in the bank’s risk profile
and market conditions. Internal
conditions and the external
environment in which the FCS operates
may shift, either gradually or suddenly,
thus affecting the liquidity risk profile
of each bank. The FCA expects each
FCS bank to constantly monitor
fluctuations in its operating
environment and react effectively so it
can quickly stem potential damage to its
liquidity, solvency, and viability.
Reviewing the CFP at least once every
12 months and more frequently as
conditions warrant, is a necessary tool
for FCS banks to manage and mitigate
its liquidity risk.
H. The FCA’s Reservation of Authority
In addition to capital, asset quality,
management, earnings, and interest rate
sensitivity, liquidity is a prime
barometer of the financial health,
vitality, and viability of financial
institutions. Illiquidity indicates that a
financial institution is in an unsafe and
unsound condition. More than the other
indicia of safety and soundness,
liquidity is often, but not always,
determined by external factors that are
agriculture; and (4) debt market stagnation and
constrictions. Warning signals and event triggers
that are specific to individual FCS banks include:
(1) Draws on unfunded commitments or letters of
credit; (2) a rapid and substantial increase in loan
demand; (3) actual and projected increases in
collateral pledged; and (4) unrealized losses in its
liquidity reserve. Events such as reduced market
access and the downgrading of credit ratings could
be either a global or bank-specific signal or trigger.
47 See Interagency Policy Statement on Funding
and Liquidity Risk Management, supra. at 13665.
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beyond the control of FCS banks and
other financial institutions. For
example, a national defense emergency
(such as terrorist attacks), a catastrophic
natural disaster, or a macroeconomic or
financial crisis could suddenly and
without warning close or impede access
to the debt markets that FCS banks
depend on to fund their normal
operations.
Congress designated the FCA as the
Federal agency that is responsible for
ensuring that all FCS institutions: (1)
Comply with all applicable laws; (2)
fulfill their public policy mission of
extending credit to agriculture, rural
utilities, and rural homeowners; and (3)
operate safely and soundly. As a result,
the Act grants the FCA comprehensive
examination, enforcement, and
regulatory powers to carry out these
duties. The System’s liquidity could
come under sudden strain when
economic uncertainty sparks financial
turmoil and, therefore, the FCA must be
able to act decisively so all FCS banks
meet their obligations and continue
operations until the crisis subsides. The
FCA has various tools at its disposal to
lessen the damage that a liquidity crisis
could inflict on the FCS. These tools
include exercising its enforcement
powers under subtitle C of title V of the
Act, and invoking its authority under
§ 615.5136 to increase the amount of
liquid investments that FCS banks may
hold in their liquidity reserve during an
emergency.
The FCA now proposes to strengthen
its supervisory and regulatory oversight
of liquidity management at FCS banks.
Under proposed § 615.5134(i), the FCA
expressly reserves its right to require
Farm Credit banks, either individually
or jointly, to adjust their treatment of
instruments (assets) in their liquidity
reserves so they have liquidity that is
sufficient and commensurate for the
risks they face. This reservation of
authority would enable the FCA to
respond to adverse financial, economic,
or market conditions by requiring any,
some, or all Farm Credit bank(s) to take
certain prescribed actions to protect FCS
liquidity.
More specifically, the FCA reserves
the authority under proposed
§ 615.5134(i) to require one or more FCS
bank(s) to:
(1) Apply a greater discount to any
individual security or any class of
securities;
(2) Shift individual or multiple
securities from one level of the liquidity
reserve to another, or between one of the
levels of the liquidity reserve and the
supplemental liquidity buffer based on
the performance of such asset(s), or
based on financial, economic, or market
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conditions affecting the liquidity and
solvency of the bank;
(3) Spread out or otherwise change
concentrations in the allocation of
securities in any level of the bank’s
liquidity reserve and its supplemental
liquidity buffer;
(4) Perform additional stress tests
using other or different stress criteria or
scenarios;
(5) Hold additional liquid assets to
cover unfunded commitments and other
contingent outflows; or
(6) Take any other action that the
Farm Credit Administration deems
necessary to ensure that the bank has
sufficient liquidity to meet its financial
obligations as they fall due.
We invite your comments about any
specific scenario that you think we
should include in our reservation of
authority. We also ask whether you
think that there are other actions that
the FCA could or should take during a
significant stress event so it can act
rapidly and decisively to staunch or
prevent deterioration in the liquidity
position of FCS banks on an individual
or collective basis.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), the FCA hereby certifies that the
proposed rule will not have a significant
economic impact on a substantial
number of small entities. Each of the
banks in the System, considered
together with its affiliated associations,
has assets and annual income in excess
of the amounts that would qualify them
as small entities. Therefore, System
institutions are not ‘‘small entities’’ as
defined in the Regulatory Flexibility
Act.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks,
Banking, Government securities,
Investments, Rural areas.
For the reasons stated in the
preamble, part 615 of chapter VI, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:
PART 615—FUNDING AND FISCAL
AFFAIRS, LOAN POLICIES AND
OPERATIONS, AND FUNDING
OPERATIONS
1. The authority citation for part 615
is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26,
8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the
Farm Credit Act (12 U.S.C. 2013, 2015, 2018,
2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2154a, 2160,
2202b, 2211, 2243, 2252, 2278b, 2278b–6,
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80827
2279aa, 2279aa–3, 2279aa–4, 2279aa–6,
2279aa–7, 2279aa–8, 2279aa–10, 2279aa–12);
sec. 301(a) of Pub. L. 100–233, 101 Stat. 1568,
1608; sec. 939A of Pub. L. 111–203, 124 Stat
1326, 1887.
2. Revise § 615.5134 to read as
follows:
§ 615.5134
Liquidity reserve.
(a) Liquidity policy.(1) Board
responsibility. The board of each Farm
Credit bank must adopt a written
liquidity policy. The liquidity policy
must be compatible with the investment
management policies that the bank’s
board adopts pursuant to § 615.5133 of
this part. At least once every year, the
bank’s board must review its liquidity
policy, affirmatively validate the
sufficiency of its liquidity policy, and
make any revisions it deems necessary.
The board of each Farm Credit bank
must ensure that adequate internal
controls are in place so that
management complies with and carries
out this liquidity policy.
(2) Policy content. At a minimum, the
liquidity policy of each Farm Credit
bank must address:
(i) The purpose and objectives of the
liquidity reserve;
(ii) Diversification requirements for
the liquidity reserve portfolio;
(iii) Maturity limits and credit quality
standards for investments that the bank
is holding to meet the minimum
liquidity reserve requirements of
paragraphs (b) and (e) of this section;
(iv) The target amount of days of
liquidity that the bank needs based on
its business model and risk profile;
(v) The Contingency Funding Plan
(CFP) required by paragraph (h) of this
section;
(vi) Delegations of authority
pertaining to the liquidity reserve; and
(vii) Reporting requirements, which at
a minimum must require management
to report to the board at least once every
quarter about compliance with the
bank’s liquidity policy and the
performance of the liquidity reserve
portfolio. Management must report any
deviation from the bank’s liquidity
policy, or failure to meet the board’s
liquidity targets immediately to the
board.
(b) Liquidity reserve requirement.
Each Farm Credit bank must maintain a
liquidity reserve, in accordance with
paragraph (e) of this section, sufficient
to fund at least 90 days of the principal
portion of maturing obligations and
other borrowings of the bank at all
times. Each Farm Credit bank must also
maintain a supplemental liquidity
buffer in accordance with paragraph (f)
of this section. Each Farm Credit bank
must discount the liquid assets in its
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liquidity reserve and its supplemental
liquidity buffer in accordance with
paragraph (g) of this section. The
liquidity reserve must be comprised
only of cash, including cash due from
traded but not yet settled debt, and
qualified eligible investments under
§ 615.5140 of this part that are
unencumbered and marketable under
paragraphs (c) and (d) of this section,
respectively.
(c) Unencumbered. All investments
that a Farm Credit bank holds in its
liquidity reserve in accordance with this
section must be unencumbered. For the
purpose of this section, an investment is
unencumbered if it is free of lien, and
it is not explicitly or implicitly pledged
to secure, collateralize, or enhance the
credit of any transaction. Additionally,
an unencumbered investment held in
the liquidity reserve cannot be used as
a hedge against interest rate risk if
liquidation of that particular investment
would expose the bank to a material risk
of loss.
(d) Marketable. All investments that a
Farm Credit bank holds in its liquidity
reserve in accordance with this section
must be marketable. For the purposes of
this section, an investment is
marketable if it:
(1) Can be easily and immediately
converted into cash with little or no loss
in value;
(2) Exhibits low credit and market
risks;
(3) Has ease and certainty of
valuation; and
(4) Except for money market
instruments, is listed on a developed
and recognized exchange market, and
can be sold or converted to cash through
repurchase agreements in active and
sizable markets.
(e) Composition of liquidity reserve.
Each Farm Credit bank must
continuously hold cash and the
investments in the table below to meet
the 90-day minimum liquidity reserve
requirement in paragraph (b) of this
section. A Farm Credit bank must apply
the discounts in paragraph (g) of this
section to all cash and investments in its
liquidity reserve:
• Cash;
• Treasury securities;
• Other marketable obligations that are explicitly backed by the full
faith and credit of the United States;
• Mortgage-backed securities issued by the Government National
Mortgage Association;
• Government-sponsored Agency senior debt securities that mature
within 60 days, excluding senior debt securities of the Farm Credit
System; and
• Diversified investment Funds that are comprised exclusively of Level
1 instruments.
Level 2 Instruments:
Each Farm Credit bank must sequentially apply Level 2 instruments to fund obligations that mature starting on day 31 through
day 90.
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Level 1 Instruments:
Each Farm Credit bank must sequentially apply Level 1 instruments to fund obligations that mature starting on day 1 through
day 30.
Cash and instruments with a final remaining maturity of 3 years or
less must comprise at least 15 days of the liquidity reserve at
Level 1.
• Additional amounts of Level 1 instruments;
• Government-sponsored Agency senior debt securities with maturities
that exceed 60 days, excluding senior debt securities of the Farm
Credit System;
• Government-sponsored Agency mortgage-backed securities;
• Money market instruments maturing within 90 days; and
• Diversified Investment Funds that are comprised exclusively of Levels 1 and 2 instruments.
(f) Supplemental liquidity buffer. Each
Farm Credit bank must hold
supplemental liquid assets in excess of
the 90-day minimum liquidity reserve.
The supplemental liquidity buffer must
be comprised of cash and qualified
eligible investments listed in § 615.5140
of this part. A Farm Credit bank must
be able to liquidate any qualified
eligible investment in its supplemental
liquidity buffer within the liquidity
policy timeframe established in the
bank’s liquidity policy at no less than 80
percent of its book value. A Farm Credit
bank must remove from its
supplemental liquidity buffer any
investment that has, at any time, a
market value that is less than 80 percent
of its book value. The amount of
supplemental liquidity that each Farm
Credit bank holds, at minimum, must
meet the requirements of its board’s
liquidity policy, provide excess
liquidity beyond the days covered by
the liquidity reserve, and satisfy the
applicable portions of the bank’s CFP in
accordance with paragraph (h) of this
section.
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(g) Discounts. Each Farm Credit bank
must discount the liquid assets in its
liquidity reserve under paragraph (d) of
this section and in its supplemental
liquidity buffer under paragraph (e) of
this section as follows:
(1) Multiply cash and overnight
investments by 100 percent.
(2) Multiply Treasury securities by 97
percent of the market value.
(3) Multiply all other Level 1
instruments by 95 percent of their
market value, even if the bank holds
them in Level 2 to fund obligations
maturing starting on day 31 through day
90.
(4) Multiply all Level 2 instruments
by 93 percent of the market value.
(5) Multiply all other qualified
investments held for meeting the bank’s
liquidity policy and contingency plans
by 85 percent of market value unless
they merit Level 1 or Level 2 instrument
discounts.
(h) Contingency Funding Plan (CFP).
The board of each Farm Credit bank
must adopt a CFP to ensure sources of
liquidity are sufficient to fund normal
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operations under a variety of stress
events including market disruptions,
rapid increase in loan demand,
unexpected draws on unfunded
commitments, difficulties in renewing
or replacing funding with desired terms
and structures, requirements to pledge
collateral with counterparties, and
reduced market access. Each Farm
Credit bank must maintain an adequate
level of unencumbered and marketable
assets in its liquidity reserve that can be
converted into cash to meet its net
liquidity needs based on estimated cash
inflows and outflows for a 30-day time
horizon under an acute stress scenario.
The board of directors must review and
approve the CFP at least once every year
and make adjustments to reflect changes
in the bank’s risk profile and market
conditions. The CFP must:
(1) Be customized to the financial
condition and liquidity risk profile of
the bank and the board’s liquidity risk
tolerance policy.
(2) Identify funding alternatives that
the Farm Credit bank can implement
whenever access to funding is impeded,
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Federal Register / Vol. 76, No. 248 / Tuesday, December 27, 2011 / Proposed Rules
which must include, at a minimum,
arrangements for pledging collateral to
secure funding and possible initiatives
to raise additional capital.
(3) Require periodic stress testing,
which analyzes the possible impacts on
the bank’s cash inflows and outflows,
liquidity position, profitability and
solvency under a variety of stress
scenarios.
(4) Establish a process for managing
events that imperil the bank’s liquidity,
and assign appropriate personnel and
implement executable action plans that
carry out the CFP.
(i) Reservation of Authority. The Farm
Credit Administration reserves the right
to require a Farm Credit bank to adjust
the treatment of assets in its liquidity
reserve so that it has liquidity that is
sufficient and commensurate for the
risks it faces. The Farm Credit
Administration reserves the right to use
this authority in response to adverse
financial, economic, or market
conditions by requiring any Farm Credit
bank, on a case-by-case basis, to:
(1) Apply a greater discount to any
individual security or any class of
securities;
(2) Shift individual or multiple
securities from one level of the liquidity
reserve to another, or between one of the
levels of the liquidity reserve and the
supplemental liquidity buffer based on
the performance of such asset(s), or
based on financial, economic, or market
conditions affecting the liquidity and
solvency of the bank;
(3) Spread out or otherwise change
concentrations in the allocation of
securities in any level of the bank’s
liquidity reserve and its supplemental
liquidity buffer;
(4) Perform additional stress tests
using other or different stress criteria or
scenarios;
(5) Hold additional liquid assets to
cover unfunded commitments and other
contingent outflows; or
(6) Take any other action that the
Farm Credit Administration deems
necessary to ensure that the bank has
sufficient liquidity to meet its financial
obligations as they fall due.
Dated: December 15, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2011–32698 Filed 12–23–11; 8:45 am]
BILLING CODE 6705–01–P
VerDate Mar<15>2010
18:47 Dec 23, 2011
Jkt 226001
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 23
[Docket No.FAA–2011–1387; Notice No. 23–
11–02–SC]
Special Conditions: XtremeAir GmbH,
XA42; Acrobatic Category
Aerodynamic Stability
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed special
conditions.
AGENCY:
This action proposes special
conditions for the XtremeAir GmbH
XA42 airplane. The XA42 airplane has
a novel or unusual design feature
associated with its static stability. This
airplane can perform at the highest level
of aerobatic competition. To be
competitive, the aircraft was designed
with positive and, at some points,
neutral stability within its flight
envelope. Its lateral and directional axes
are also decoupled from each other
providing more precise maneuvering.
The applicable airworthiness
regulations do not contain adequate or
appropriate safety standards for these
design features. These proposed special
conditions contain the additional safety
standards that the Administrator
considers necessary to establish a level
of safety equivalent to that established
by the existing airworthiness standards.
These special conditions are only
applicable to aircraft certified solely in
the acrobatic category.
DATES: Send your comments on or
before January 26, 2012.
ADDRESSES: Send comments identified
by docket number FAA–2011–1387
using any of the following methods:
• Federal eRegulations Portal: Go to
https://www.regulations.gov and follow
the online instructions for sending your
comments electronically.
• Mail: Send comments to Docket
Operations, M–30, U.S. Department of
Transportation (DOT), 1200 New Jersey
Avenue SE., Room W12–140, West
Building Ground Floor, Washington, DC
20590–0001.
• Hand Delivery of Courier: Take
comments to Docket Operations in
Room W12–140 of the West Building
Ground Floor at 1200 New Jersey
Avenue SE., Washington, DC, between 8
a.m., and 5 p.m., Monday through
Friday, except Federal holidays.
• Fax: Fax comments to Docket
Operations at (202) 493–2251.
Privacy: The FAA will post all
comments it receives, without change,
SUMMARY:
PO 00000
Frm 00027
Fmt 4702
Sfmt 4702
80829
to https://regulations.gov, including any
personal information the commenter
provides. Using the search function of
the docket web site, anyone can find
and read the electronic form of all
comments received into any FAA
docket, including the name of the
individual sending the comment (or
signing the comment for an association,
business, labor union, etc.). DOT’s
complete Privacy Act Statement can be
found in the Federal Register published
on April 11, 2000 (65 FR 19477–19478),
as well as at https://DocketsInfo.dot.gov.
Docket: Background documents or
comments received may be read at
https://www.regulations.gov at any time.
Follow the online instructions for
accessing the docket or go to the Docket
Operations in Room W12–140 of the
West Building Ground Floor at 1200
New Jersey Avenue SE., Washington,
DC, between 9 a.m., and 5 p.m., Monday
through Friday, except Federal holidays.
FOR FURTHER INFORMATION CONTACT: Mr.
Ross Schaller, Federal Aviation
Administration, Small Airplane
Directorate, Aircraft Certification
Service, 901 Locust, Room 301, Kansas
City, Missouri 64106; telephone (816)
329–4162; facsimile (816) 329–4090.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite interested people to take
part in this rulemaking by sending
written comments, data, or views. The
most helpful comments reference a
specific portion of the special
conditions, explain the reason for any
recommended change, and include
supporting data.
We will consider all comments we
receive on or before the closing date for
comments. We will consider comments
filed late if it is possible to do so
without incurring expense or delay. We
may change these special conditions
based on the comments we receive.
Background
On May 3, 2011, XtremeAir GmbH
applied for a type certificate for their
new XA42. The XA42 is certified under
EASA authority as a dual category
(acrobatic/utility) airplane. It has a twoplace tandem canopy cockpit, and a
single-engine. It also features a
conventional landing gear, conventional
low-wing planform and is of composite
construction. The engine is a Lycoming
AEIO–580–B1A with a rated power of
315 Hp at 2,700 rpm. The airplane is
proposed to be approved for Day-VFR
operations with no icing approval.
The maximum takeoff weight is 2,200
pounds in utility category, 1,874 pounds
in acrobatic category. VNE is 225 knots,
E:\FR\FM\27DEP1.SGM
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[Federal Register Volume 76, Number 248 (Tuesday, December 27, 2011)]
[Proposed Rules]
[Pages 80817-80829]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32698]
=======================================================================
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AC54
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Liquidity and Funding
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we or us) proposes to
amend its liquidity regulation. The purpose of the proposed rule is to
strengthen liquidity risk management at Farm Credit System (FCS or
System) banks, improve the quality of assets in the liquidity reserve,
and bolster the ability of System banks to fund their obligations and
continue their operations during times of economic, financial, or
market adversity.
DATES: Comments should be received on or before February 27, 2012.
ADDRESSES: We offer a variety of methods for you to submit your
comments. For accuracy and efficiency, commenters are encouraged to
submit comments by email or through the FCA'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
Comments'' and follow the directions for ``Submitting a Comment.''
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Director, Office of Regulatory
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090.
You may review copies of comments we receive at our office in
McLean, Virginia, or from 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: David J. Lewandrowski, Senior Policy
Analyst, Office of Regulatory Policy, Farm Credit Administration, 1501
Farm Credit Drive, McLean, VA, (703) 883-4498, TTY (703) 883-4434; or
Richard A. Katz, Senior Counsel, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the proposed rule are to:
Improve the capacity of FCS banks to pay their obligations
and fund their operations by maintaining adequate liquidity to
withstand various market disruptions and adverse financial or economic
conditions;
Strengthen liquidity management at all FCS banks;
Enhance the marketability of assets that System banks hold
in their liquidity reserve;
Require that cash and highly liquid investments comprise
the first 30 days of the 90-day liquidity reserve;
Establish a supplemental liquidity buffer that a bank can
draw upon during an emergency and that is sufficient to cover the
bank's liquidity needs beyond the 90-day liquidity reserve; and
Strengthen each bank's Contingency Funding Plan (CFP).
II. Background
The FCS is a nationwide network of borrower-owned financial
cooperatives that lend to farmers, ranchers, aquatic producers and
harvesters, agricultural cooperatives, rural utilities, farm-related
service businesses, and rural homeowners. By law, FCS institutions are
instrumentalities of the United States,\1\ and Government-sponsored
enterprises (GSEs).\2\ According to section 1.1(a) of the Farm Credit
Act of 1971, as amended, (Act), Congress established the System for the
purpose
[[Page 80818]]
of furnishing ``sound, adequate, and constructive credit and closely
related services'' to farmers, ranchers, aquatic producers and
harvesters, their cooperatives, and certain farm-related businesses
necessary to fund efficient agricultural operations in the United
States.
---------------------------------------------------------------------------
\1\ See sections 1.3(a), 2.0(a), 2.10(a), 3.0, 4.25, and
8.1(a)(1) of the Act; 12 U.S.C. 2011(a), 2071(a), 2091(a), 2121,
2211, and 2279aa-1.
\2\ See Public Law 101-73, sec. 1404(e)(1)(A), 103 Stat. 183,
552-53 (Aug. 9, 1989).
---------------------------------------------------------------------------
In many respects, the FCS is different from other lenders. In
contrast to commercial banks and most other financial institutions, the
System lends mostly to agriculture and in rural areas. Unlike most
other lenders, FCS banks and associations are cooperatives that are
owned and controlled by their agricultural borrowers, and their common
equity is not publicly traded.
The System funds its operations differently than most commercial
lenders. FCS banks issue System-wide debt securities, which are the
System's primary source for funding loans to agricultural producers,
their cooperatives, and other eligible borrowers.\3\ Although section
4.2(a) of the Act authorizes FCS banks to borrow from commercial banks
and other lending institutions, lines of credit with non-System lenders
are a negligible source of FCS funding. FCS banks and associations are
not depository institutions.
---------------------------------------------------------------------------
\3\ Farm Credit banks (which are the four Farm Credit Banks and
the Agricultural Credit Bank) issue and market System-wide debt
securities through the Federal Farm Credit Banks Funding Corporation
(Funding Corporation). The Funding Corporation, which is established
pursuant to section 4.9 of the Act, is owned by all Farm Credit
banks.
---------------------------------------------------------------------------
The System's ability to finance agriculture, rural housing, and
rural utilities in both good and bad economic times primarily depends
on continuing access to the debt markets. During normal economic
conditions, access to debt markets provides the System with funds it
needs to operate. However, if access to the debt markets becomes
impeded for any reason, Farm Credit banks must rely on assets to
continue operations and pay maturing obligations. Liquidity is the
ability to convert assets into cash quickly and at a price that is
close to their book value.
In contrast to commercial banks, savings associations, and credit
unions, the FCS does not have guaranteed access to a government
provider of liquidity in an emergency.\4\ If market access is impeded,
FCS banks must rely on their liquidity reserves more heavily than other
federally regulated lending institutions \5\ because they do not have
an assured lender of last resort.\6\
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\4\ The Federal Reserve Banks, the Federal Home Loan Banks, and
National Credit Union Administration Central Liquidity Facility
serve as a source of liquidity for commercial banks, savings
associations, and credit unions both in ordinary times and during
emergencies.
\5\ Section 1101 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act amended section 13(3) of the Federal Reserve
Act, 12 U.S.C. 343(3), to allow the Board of Governors of the
Federal Reserve System, in consultation with the Secretary of the
Treasury, to establish by regulation, policies and procedures that
would govern emergency lending under a program or facility for the
purpose of providing liquidity to the financial system. Under
section 13(3) of the Federal Reserve Act, as amended, the Board of
Governors of the Federal Reserve System must establish procedures
that prohibit insolvent and failing entities from borrowing under
the emergency program or facility. Pursuant to section 13(3) of the
Federal Reserve Act, as amended, the Board of Governors of the
Federal Reserve System, with the approval of the Secretary of the
Treasury could authorize the Federal Reserve Banks to serve as an
emergency source of liquidity for the FCS, but it is not obligated
to do so. See Public Law 11-203, title XI, sec. 1101(a), 124 Stat.
2113 (Jul. 21, 2010).
\6\ If market access is completely impeded, the Farm Credit
Insurance Fund would also be available to ensure the payments of
maturing insured debt obligations. See 12 U.S.C. 2277a-9(c)(1).
---------------------------------------------------------------------------
The liquidity of System banks has drawn more scrutiny from the FCA,
credit rating agencies, and investors as economic and financial turmoil
have roiled the markets with greater frequency and magnitude in recent
years. As a result, the FCA proposes to amend its liquidity regulations
so that FCS banks are better able to withstand uncertainty and
instability in the financial markets.\7\
---------------------------------------------------------------------------
\7\ The FCA has broad authority under various provisions of the
Act to supervise and regulate liquidity management at FCS banks.
Section 5.17(a) of the Act authorizes the FCA to: (1) Approve the
issuance of FCS debt securities under section 4.2(c) and (d) of the
Act; (2) establish standards regarding loan security requirements at
FCS institutions, and regulate the borrowing, repayment, and
transfer of funds between System institutions; (3) prescribe rules
and regulations necessary or appropriate for carrying out the Act;
and (4) exercise its statutory enforcement powers for the purpose of
ensuring the safety and soundness of System institutions.
---------------------------------------------------------------------------
Liquidity is important for the financial system as a whole. Recent
market disruptions have raised concerns among regulators, credit rating
agencies, investors, and other market participants about the ability of
financial institutions to maintain sufficient liquidity to meet their
immediate funding needs during times of economic and financial
turmoil.\8\ The experience of these crises demonstrates why sound
liquidity risk management is important to the safety and soundness of
individual financial institutions and the financial system as a whole.
---------------------------------------------------------------------------
\8\ For example, financial institutions collectively had
difficulty maintaining sufficient short-term liquidity in the
aftermath of the attacks on September 11, 2001, and again in
September and October of 2008 after several large financial
institutions collapsed. During these crises, the Federal Reserve
injected additional liquidity into the financial system in the
United States.
---------------------------------------------------------------------------
Regulatory agencies, in particular, have responded by formulating
more comprehensive supervisory approaches toward liquidity risk
management at financial institutions. For example, the Basel Committee
on Banking Supervision (Basel Committee) issued in September 2008, the
Principles for Sound Liquidity Risk Management and Supervision, which
contains 17 principles detailing international supervisory guidance for
sound liquidity risk management. In December, 2010, the Basel Committee
issued Basel III: International framework for liquidity risk
measurement, standards, and monitoring (Basel III Liquidity Framework).
On March 22, 2010, the five Federal agencies that regulate depository
institutions (Federal banking agencies) \9\ published their Interagency
Policy Statement on Funding and Liquidity Risk Management \10\, which
sets forth the supervisory expectations for depository institutions.
The purpose of all these documents is to guide the supervisory efforts
of Federal and international regulators of depository institutions into
the future.
---------------------------------------------------------------------------
\9\ The five agencies are the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the National Credit Union
Administration, and the now-defunct Office of Thrift Supervision.
\10\ See 75 FR 13656 (Mar. 22, 2010).
---------------------------------------------------------------------------
The FCA has considered the guidance of both the Basel Committee and
the Federal banking agencies as part of its efforts to develop revised
liquidity regulations. Many of the core concepts that the Basel
Committee and the Federal banking agencies articulated about liquidity
are appropriate for our proposed rule. However, the corporate, funding,
and lending structures of the FCS are fundamentally different from
those of depository institutions and, therefore, the FCA has modified
and adapted the guidance of international regulators and Federal
banking agencies concerning liquidity risk management so they are
relevant to the System's unique circumstances, needs, and structure.
The FCA also added other requirements that are tailored to the System's
unique nature.
In addition to the guidance of the Basel Committee and other
Federal regulators, both the FCA and the System have implemented
various measures to improve liquidity management so FCS banks are in a
better position to withstand financial and economic shocks. More
specifically, System banks agreed to a common framework that stipulated
the days of liquidity coverage that they would maintain, and
[[Page 80819]]
established the parameter for the quality of investments held in their
liquidity reserves.
The FCA also took action to improve the ability of FCS banks to
maintain sufficient liquidity to outlast episodes of market turbulence.
On November 13, 2008, the FCA Board passed a Market Emergency Standby
Resolution that waives the 90-day liquidity reserve requirement in
Sec. 615.5134 for a limited period of time if a crisis shuts, or
severely restricts access to, debt markets. On May 5, 2009, the FCA
issued a letter to FCS banks and the Funding Corporation that required
the standing monthly collateral certification of all banks to include
detailed information about days of liquidity in a specified format.
This directive also required reporting of days of liquidity for each
FCS bank and the FCS in aggregate, and detailed information about the
type and remaining term of the investments from which those days of
liquidity are derived.
FCS banks withstood recent economic and financial turmoil with
their liquidity intact. Both the FCA and FCS have gained valuable
experience and insights into the effects that sudden and severe stress
have on liquidity at individual FCS institutions and the financial
system as a whole. The FCA has identified several vulnerabilities that
need to be addressed:
(1) Banks must ensure that the liquidity reserve is managed
primarily as an emergency source of funding;
(2) Board policies need to provide clearer guidance to the asset-
liability committee (ALCO) for monitoring, measuring, and managing
liquidity risk;
(3) Risk analyses need to address how investments that the bank
purchases and hold actually achieve its primary liquidity objective.
(4) Contingency funding plans need to provide orderly and effective
procedures that would allow the bank to maintain sufficient liquidity
to fund its operations during each phase of an emerging crisis;
(5) Discounts that FCS banks apply to the market values of assets
in the liquidity reserve pursuant to current Sec. 615.5134(c) need to
be increased for certain types of investments;
(6) Counterparty risk needs to be reduced; and
(7) Liquidity policies need to take into account the continuing
uncertainty as to whether the Federal Reserve System would provide a
line of credit to FCS banks under section 13(3) of the Federal Reserve
Act during a systemic liquidity crisis.
As our colleagues at international financial regulators and the
Federal banking agencies are doing, we are drawing conclusions from the
lessons that we learned during recent crises. As a result, we are
revising our regulatory and supervisory approaches towards liquidity so
that System institutions are in a better position to withstand whatever
future crises may arise. As part of our ongoing efforts to limit the
adverse effect of rapidly changing economic, financial, and market
conditions on the liquidity of any FCS bank,\11\ we now propose
amendments to Sec. 615.5134 that would redress these vulnerabilities.
---------------------------------------------------------------------------
\11\ The FCA has periodically amended its liquidity regulations
over the past 18 years. The FCA originally adopted Sec. 615.5134 in
1993, and subsequently amended it 1999 and 2005. See 58 FR 63056
(Nov. 30, 1993); 64 FR 28896 (May 28, 1999); 70 FR 51590 (Aug. 31,
2005). Originally, Sec. 615.5134 required each FCS bank to maintain
15 days of liquidity, and to separately identify investments held
for the purpose of meeting its liquidity reserve requirement. In
1999, the FCA repealed the provision requiring FCS banks to
separately identify investments held for liquidity. In 2005, the FCA
expanded the liquidity reserve requirement to 90 days, increased the
limit on investments from 30 to 35 percent of total outstanding
loans, and for the first time, required all FCS banks to develop
CFPs for liquidity.
---------------------------------------------------------------------------
III. Section-by Section Analysis of the Proposed Rule
A. Section 615.5134(a)--Liquidity Policy
The board of directors is responsible for ensuring that the bank
always has readily available funds to continue operations and pay
maturing obligations. The board discharges this responsibility by
adopting policies and procedures for management to follow. A provision
in the existing investment management regulation, Sec. 615.5133(c)(3),
requires FCS banks to address liquidity risk in their investment
policies. However, the only affirmative requirement that Sec.
615.5133(c)(3) imposes on FCS banks is that their investment policies
must describe the liquidity characteristics of eligible investments
that they hold to meet their liquidity needs and institutional
objectives. Although the existing regulation gives FCS banks ample
flexibility to formulate liquidity policies that meet their particular
needs and objectives, the FCA is proposing to add a new paragraph (a)
to Sec. 615.5134 that for the first time, would require each FCS bank
to address other specific issues in its liquidity policies. The banks
have the option of either incorporating these new liquidity policies in
their investment management policies required under Sec. 615.5133, or
in a separate document.
Proposed Sec. 615.5134(a) addresses the board's responsibility for
establishing and implementing liquidity policies for the bank. Proposed
Sec. 615.5134(a)(1) would require the board of directors of each FCS
bank to adopt written liquidity policies that are consistent with the
investment management policies that the board adopts under Sec.
615.5133. The guidance that the FCA has provided to FCS banks about
investment management policies and practices in Sec. 615.5133 also
applies to their liquidity policies.\12\ The FCA expects the bank's
liquidity policies to be consistent with, and fit into its overall
investment strategy. Liquidity risk management is critically important
to the long-term viability of the bank, and for this reason, it must be
integrated into the bank's overall investment management and risk
management processes.\13\
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\12\ The FCA recently proposed substantive amendments to Sec.
615.5133. The preamble to the proposed rule discusses the FCA's
expectations concerning proper investment practices at FCS banks and
associations. See 76 FR 51289 (Aug. 18, 2011). The FCA incorporates
by reference its guidance about proper investment management
practices in the preamble to Sec. 615.5133 into this preamble.
\13\ See Interagency Policy Statement on Funding and Liquidity
Risk Management, supra at 13661.
---------------------------------------------------------------------------
In discharging its responsibility, the board must establish
appropriate strategies, policies, procedures, and limits that will
enable the bank to monitor, measure, manage, and mitigate liquidity
risk.\14\ The board's policy should provide adequate guidance to
management as it develops and implements strategies for managing
liquidity risk. At a minimum, the policy should provide clear direction
to management about limiting and controlling risk exposures, and
keeping them within the board's risk tolerance levels. Additionally,
these policies should establish parameters that enable management to
determine whether particular investments belong in the liquidity
reserve given their potential suitability for managing interest rate
risks.
---------------------------------------------------------------------------
\14\ Id.
---------------------------------------------------------------------------
Proposed Sec. 615.5134(a)(1) would also require the board to: (1)
Review its liquidity policies at least once every year; (2)
affirmatively validate the sufficiency of its liquidity policies; and
(3) make any revisions it deems necessary. The purpose of this
provision is to compel every FCS bank board to ascertain whether its
policies enable the bank to respond promptly and effectively to events
that may occur and threaten its liquidity. More specifically, the board
should determine, as part of its review, whether its current policies
enable the bank to consistently maintain sufficient liquidity for its
ongoing funding needs, thus covering both
[[Page 80820]]
expected and unexpected deviations in the availability of funds to meet
cash demands.\15\ A bank's viability often depends on effective
liquidity risk management (that is fully integrated into its overall
risk management strategies and processes), and the annual review should
determine whether the policies achieve these objectives.\16\ As part of
its review, the bank board should consider whether it needs to adjust
its liquidity policies based both on past experiences and on expected
trends in the economy, agriculture, and financial markets.
---------------------------------------------------------------------------
\15\ Id.
\16\ Id.
---------------------------------------------------------------------------
The final provision of proposed Sec. 615.5134(a)(1) would require
the board to ensure that adequate and effective internal controls are
in place, and that management complies with and carries out the bank's
liquidity policies. Besides preventing losses caused by fraud or
mismanagement, strong internal controls will enable FCS banks to
respond more quickly and effectively when significant market turmoil
arises and impedes access to funding.
The content of the board's liquidity policies are the focus of
Sec. 615.5134(a)(2). This regulatory provision identifies seven
different issues that, at a minimum, a bank must address in its
liquidity policies. The bank's policies should be comprehensive and
commensurate with the complexity of the bank's operations and risk
profile.
Proposed Sec. 615.5134(a)(2)(i) would require policies to address
the purpose and objectives of the liquidity reserve. This section of
the bank's policies should distinguish the purpose and objectives of
the liquidity reserve from the other operations and asset-liability
functions of the bank, including interest rate management. The board's
philosophy and position on the purpose and objectives of the liquidity
reserve are of prime importance to effective liquidity management at
the bank. In normal times, access to the debt markets provides the
System with ready liquidity. However, when market access is impeded,
the liquidity reserve should enable each FCS bank to maintain
sufficient cash flows to pay its obligations, meet its collateral
needs, and fund operations in a safe and sound manner.\17\
---------------------------------------------------------------------------
\17\ Id at 13660.
---------------------------------------------------------------------------
In normal times, FCS banks may pay more attention to the financial
performance of the liquidity reserve rather than its role as an
emergency source of funding. Incorrectly prioritizing these two
objectives is problematic because the liquidity reserve should consist
of cash and high-quality investments that can be quickly converted into
cash at, or close to, par value. Cash-like investments pose little risk
to the investor and, therefore, they usually do not earn the highest
rate of return.
During the crisis in 2008, some FCS banks experienced losses that
were larger than expected given the primary purpose of the liquidity
reserve is an emergency source of funding. The FCA expects FCS banks to
select investments for the liquidity reserve by their liquidity
characteristics, and to match these assets closely to the bank's
maturing liabilities. Choosing investments primarily for their ability
to generate revenue is fundamentally incompatible with the System's GSE
status.\18\ Pursuant to proposed Sec. 615.5134(a)(2)(i), the board
should provide guidance to management about these issues when it
addresses the objectives and purposes of the liquidity reserve in its
policies.
---------------------------------------------------------------------------
\18\ See 70 FR 51587 (Aug. 31, 2005); 58 FR 63039 (Nov, 30,
1993).
---------------------------------------------------------------------------
Proposed Sec. 615.5134(a)(2)(ii) would require the board's
policies to address the diversification of the liquidity reserve
portfolio. This diversification requirement would apply to both the
liquidity reserve in proposed Sec. 615.5134(e) and the supplemental
liquidity buffer in proposed Sec. 615.5134(f). Diversification by
tenor, issuer, issuer type, size, asset type, and other factors can
reduce certain investment risks. The bank's diversification policy
should address the board's desired mix of cash and investments that the
bank should hold for liquidity under a variety of scenarios, including
both normal and adverse conditions. Within the spectrum of eligible
qualified investments, proposed Sec. 615.5134(a)(2)(ii) would require
the policy to establish criteria for diversifying these assets based on
issuers, maturity, and other factors that the bank deems relevant. In
formulating these criteria, each bank should consider, in light of its
needs and circumstances, how diversification would better enable the
liquidity reserve and supplemental liquidity buffer to serve as its
emergency or supplemental funding source when market access is
curtailed or fully impeded. The FCA expects each bank to tailor its
policy to its individual circumstances and financial conditions, and to
revise it in response to changes in the business environment.
Proposed Sec. 615.5134(a)(2)(iii) would require the board's
policies to establish maturity limits and credit quality standards for
investments that the bank is holding in its liquidity reserve. This
aspect of the bank's policies would help management to target and match
cash inflows from loans and investments to outflows that pay its
maturing obligations. In devising its diversification strategy the bank
should consider how it may need to rely on its liquidity portfolio as
an available funding source in the short-, intermediate-, and long-
term. As high-quality investments season and come closer to maturity,
they become more liquid. In this context, a well-reasoned policy should
guide management about deploying the strata of investments throughout
the liquidity reserve and the supplemental liquidity buffer.
Proposed Sec. 615.5134(a)(2)(iii) also focuses on the credit
quality standards that board policies should establish for investments
that the bank will hold to meet the liquidity reserve requirements of
this regulation. Investments with short terms to maturity and high
credit quality tend to be liquid and, therefore, are generally suitable
for the bank's liquidity reserve and supplemental liquidity buffer. The
preamble to Sec. 615.5134(c) below, will discuss many of the
attributes of high-quality liquidity investments in greater detail. The
bank's liquidity policies should base credit quality standards for
investments on factors and standards that the financial services
industry uses to determine that the risk of default for both the asset
and its issuer are negligible. In determining the credit quality of a
security, FCS banks may consider the credit ratings issued by a
Nationally Recognized Statistical Rating Organization (NRSRO), but may
not rely solely or disproportionately on such ratings. System banks
must document their credit quality determinations.
Under proposed Sec. 615.5134(a)(2)(iv), the board's policies
should cover the target amount of days of liquidity that the bank needs
based on its business model and its risk profile. Estimating the target
amount of days of liquidity that the bank will need to outlast various
stress events is an effective tool for managing and mitigating
liquidity risks. The FCA expects each FCS bank to include a prudent
amount of unfunded commitments in its calculation of the target amount
of days of liquidity it will need to survive a liquidity crisis in the
markets.
Proposed Sec. 615.5134(a)(2)(v) would require the bank's policies
address the elements of the Contingency Funding Plan (CFP) in paragraph
(h) of the
[[Page 80821]]
proposed rule. The purpose of the CFP is to address unexpected events
or unusual business conditions that increase liquidity risk at FCS
banks. Our existing regulation, Sec. 615.5134(d), requires each FCS
bank to have a formal written CFP to address liquidity shortfalls that
may occur during market disruptions. The proposed rule would strengthen
contingency funding planning at FCS banks. Under proposed Sec.
615.5134(a)(2)(v), an effective CFP would cover at a minimum: (1)
Strategies, policies, and procedures to manage a range of stress
scenarios; (2) chains of communications and responsibility within the
bank; and (3) implementation of the CFP during all phases of an adverse
liquidity event. The preamble to proposed Sec. 615.5134(h) will
discuss the substantive requirements of the CFP and our expectations of
FCS banks in greater detail.
The next provision of this regulation, proposed Sec.
615.5134(a)(2)(vi), covers delegations of authority pertaining to the
liquidity reserve in the bank's liquidity policies. As with all other
aspects of the bank's operations, an explicit delegation of authority
within a clearly defined chain of command strengthens the effectiveness
and efficiency of an institution's operations and mitigates the risk of
loss. The purpose of a delegation of authority is to clearly establish
lines of authority and responsibility for managing the bank's liquidity
risk.\19\ The policies should clearly identify those individuals and
committees that are responsible for making decisions involving
liquidity risk and implementing risk mitigation strategies.
Additionally, the policies should ensure that the ALCO has sufficiently
broad representation across the operational functions of the bank that
influence the bank's liquidity risk profile.
---------------------------------------------------------------------------
\19\ See Interagency Policy Statement on Funding and Liquidity
Risk, 75 FR 13656, 13661 (Mar. 22, 2010).
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Under proposed Sec. 615.5134(a)(2)(vii), the policies must contain
reporting requirements, which at a minimum, would require management to
report to the board at least once every quarter about compliance with
the bank's liquidity policies, and to what extent the liquidity reserve
portfolio has achieved the bank's liquidity objectives. This provision
would also require management to report immediately to the board about
any deviation from its liquidity policies, or any failure to meet the
liquidity targets in the board's policies. The purpose of this
provision is to ensure that an effective reporting process is in place,
and management communicates accurate and timely information to the
board about the level and sources of the bank's exposure to liquidity
risk. These reports should enable the board to take prompt corrective
action. The board should also consider these quarterly reports when it
conducts its annual review of the bank's liquidity policies and decides
whether to make any revisions to its policies, pursuant to proposed
Sec. 615.5134(a)(1).
B. Liquidity Reserve Requirement--Sec. 615.5134(b)
Proposed Sec. 615.5134(b) is the cornerstone of the FCA's proposal
because it articulates the core liquidity reserve requirements for FCS
banks. Proposed Sec. 615.5134(b) is not a departure from the liquidity
reserve requirement in FCA's existing liquidity regulation. Instead, it
builds upon and strengthens the concepts, principles, and requirements
of existing Sec. 615.5134. The purpose of proposed Sec. 615.5134(b)
is to better prepare FCS banks so they can withstand future liquidity
crises. The FCA designed this proposal to address the vulnerabilities
identified during recent crises. In developing proposed Sec.
615.5134(b), we also considered the Basel Committee's recommendations
for an international framework for liquidity, and the Federal banking
agencies' Interagency Policy Statement on Funding and Liquidity Risk
Management.
Both the existing and proposed regulations require each FCS bank to
maintain a liquidity reserve sufficient to fund 90 days of the
principal portion of maturing obligations and other borrowings of the
bank at all times. However, in contrast to the existing regulation,
proposed Sec. 615.5134(b) and (e) would divide the bank's liquidity
reserve into two levels. The first level of the liquidity reserve would
fund a bank's maturing obligations and operations for the first 30 days
from the onset of a significant stress event. Cash and certain
instruments that mature within 3 years or less must comprise at least
15 days of the first level of the bank's liquidity reserve. The bank
would draw on the second level of the reserve if market turmoil
continued to persist for the subsequent 60 days after the initial 30
days thereby comprising together a stratified 90-day liquidity reserve.
Proposed Sec. 615.5134(b) would require FCS banks, for the first
time, to maintain a supplemental liquidity buffer pursuant to proposed
Sec. 615.5134(f). The new regulation would require each FCS bank to
hold supplemental liquid assets (comprised of cash and other qualified
assets listed in Sec. 615.5140) in excess of the 90-day minimum
liquidity reserve. The supplemental liquidity buffer would complement
the 90-day liquidity reserve, and its purpose is to enable each FCS
bank to continue operations if market access becomes impeded for a
prolonged period of time in differing stress scenarios.
Proposed Sec. 615.5134(b) would also require FCS banks to discount
the assets in their liquidity reserve by the percentages specified in
proposed Sec. 615.5134(g). Although the existing regulation already
requires FCS banks to discount assets in the liquidity reserve, the
proposed rule would change some of the percentages to reflect the new
two-tier structure of the liquidity reserve. The preamble to proposed
Sec. 615.5134(g) discusses in detail how we are revising the
discounting requirements for the liquidity reserve.
The final sentence of proposed Sec. 615.5134(b) states that the
liquidity reserve must be comprised only of cash, including cash due
from traded but not yet settled debt, and qualified eligible
investments under Sec. 615.5140 that are marketable under proposed
Sec. 615.5134(d). Proposed Sec. 615.5134(b) is similar, but not
identical, to existing Sec. 615.5134(a). Both the existing and the
proposed rule specify that the liquidity reserve must be comprised of
cash, including cash due from traded but not yet settled debt, and
investments listed in Sec. 615.5140.
The final sentence of proposed Sec. 615.5140(b), however, differs
from existing Sec. 615.5140(a) in two crucial respects. First, the
proposed rule emphasizes that all investments held in liquidity
reserves must be marketable. As the preamble to proposed Sec.
615.5134(d) explains in greater detail below, the new regulation would
establish specific regulatory benchmarks for determining whether
particular investments are marketable. Marketability of a security is
an essential attribute of its liquidity and helps determine its
suitability for the liquidity reserve.
Second, the proposed rule would repeal the provisions in existing
Sec. 615.5134(a) that impose specific credit ratings on investments
that FCS banks hold in their liquidity reserves. Under the existing
regulation, money market instruments and floating and fixed rate debt
securities held in the banks' liquidity reserve must maintain one of
the two highest NSRSO credit ratings. In the event that an unrated
instrument is in the liquidity reserve, the existing regulation
requires the issuer to carry one of the two highest NRSRO ratings.
Section 939A of the Dodd-Frank Wall
[[Page 80822]]
Street Reform and Consumer Protection Act \20\ requires each Federal
agency to: (1) Review any references or requirements in its regulations
concerning the credit ratings of securities and money market
instruments, and (2) replace references to, and requirements that
regulated entities rely on such credit ratings with standards of
creditworthiness that the agency determines is appropriate. In making
this determination, every agency must seek to establish, to the extent
feasible, uniform standards of creditworthiness. Our proposed liquidity
regulation does not seek to replace the NRSRO rating requirements in
existing Sec. 615.5134(a) with a specific alternate standard of
creditworthiness. Instead, we propose to require FCS banks to hold
investments in the liquidity reserve that are unencumbered under
proposed Sec. 615.5134(c), and are marketable under proposed Sec.
615.5134(d). In two other rulemakings, the FCA has invited the public
to suggest options for replacing NRSRO credit ratings with other
standards to determine the creditworthiness of financial instruments
and their issuers.\21\ We also solicit your comments and suggestions
about the best approach for addressing standards of creditworthiness
for investments held in the liquidity reserves of FCS banks.
---------------------------------------------------------------------------
\20\ See Public Law 111-203, sec. 939A, 124 Stat. 1376, 1887
(Jul. 21, 2010).
\21\ See 76 FR 51289, 51298 (Aug. 18, 2011) and 76 FR 53344
(Aug. 26, 2011). The first cite is to the proposed rule on
investment management. The FCA is soliciting comments on how to
replace NRSRO credit ratings for eligible investments. The second
cite is to an Advance Notice of Proposed Rulemaking concerning the
NRSRO credit ratings in our capital regulations.
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C. Unencumbered and Marketable Investments in the Liquidity Reserve
Currently, existing Sec. 615.5134(b) states that all investments
that an FCS bank holds for the purpose of meeting its regulatory
liquidity reserve requirement must be free of lien. Proposed Sec.
615.5134(c) would expand upon this concept by requiring FCS banks to
hold only unencumbered investments in their liquidity reserves. Under
proposed Sec. 615.5134(c), an asset is unencumbered if it is free of
lien and is not explicitly or implicitly pledged to secure,
collateralize, or enhance the credit of any transaction.\22\
Additionally, proposed Sec. 615.5134(c) also would prohibit any FCS
bank from using an investment in the liquidity reserve as a hedge
against interest rate risk pursuant to Sec. 615.5135 if liquidation of
that particular investment would expose the bank to a material risk of
loss. Unencumbered investments are free of the impediments or
restrictions that would otherwise curtail the bank's ability to
liquidate them to pay its obligations when normal access to the debt
market is obstructed. Proposed Sec. 615.5134(c) strengthens the
liquidity of FCS banks and improves the safety and soundness of the
Farm Credit System as a whole.
---------------------------------------------------------------------------
\22\ Basel Committee on Banking Supervision, Basel III:
International framework for liquidity risk measurement, standards,
and monitoring, (Dec. 2010) p. 6.
---------------------------------------------------------------------------
Under both proposed Sec. 615.5134(b) and (d), all eligible
investments that FCS banks hold in their liquidity reserves must be
marketable. Proposed Sec. 615.5134(d) specifies the criteria and
attributes that determine whether investments are marketable for the
purposes of this regulation. Investments that meet all the
marketability criteria in proposed Sec. 615.5134(d) would be deemed to
possess the characteristics of high-quality liquid assets that are
suitable for the liquidity reserves at FCS banks. Proposed Sec.
615.5134(d) is based on many of the concepts that the Basel Committee
articulated in the Basel III Liquidity Framework.\23\ The FCA tailored
these concepts to the unique structure, needs, and circumstances of the
FCS.
---------------------------------------------------------------------------
\23\ Id at p. 5.
---------------------------------------------------------------------------
Proposed Sec. 615.5134(d)(1) states that an investment is
marketable if it can be easily and immediately converted into cash with
little or no loss in value. Investments that exhibit this attribute are
more likely to generate funds for the bank without incurring steep
discounts even if they were liquidated in a ``fire sale'' during
turmoil in the markets.\24\ The liquidity of an asset depends on its
performance during a stress event, and is measured by the amount that
the holder can convert into cash within a certain timeframe.\25\
---------------------------------------------------------------------------
\24\ Id.
\25\ Id.
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On a related note, proposed Sec. 615.5134(d)(1) complements the
definition of ``liquid investments'' in existing Sec. 615.5131(e).\26\
The existing regulation defines ``liquid investments'' as ``assets that
can be promptly converted into cash without significant loss to the
investor.'' \27\ We do not consider Sec. 615.5131(e) to be redundant
or inconsistent with proposed Sec. 615.5134(d)(1). For this reason, we
do not propose to repeal or amend Sec. 615.5131(e). However, we invite
your comments about whether the final rule should retain, relocate, or
modify Sec. 615.5131(e).
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\26\ The proposed rule on investment management would change the
designation of Sec. 615.5131(e) by omitting the paragraph
designations of all definitions in the regulation.
\27\ Existing Sec. 615.5131(e) also states, ``In the money
market, a security is liquid if the spread between its bid and ask
price is narrow and a reasonable amount can be sold at those
prices.''
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Another feature of a marketable investment is that it exhibits low
credit and market risks, and we propose to incorporate this criterion
into proposed Sec. 615.5134(d)(2). Assets tend to be more liquid if
they are less risky. An investment has low credit risk if its issuer
has a strong credit standing, is not heavily indebted, and its assets
are not heavily leveraged. Low duration \28\ and low volatility
indicate that an investment is more likely to be liquid because it has
low market risk.\29\
---------------------------------------------------------------------------
\28\ Duration measures the price sensitivity of a fixed income
security to interest rate changes.
\29\ See Basel III Liquidity Framework supra. at p. 5.
---------------------------------------------------------------------------
Ease and certainty of valuation is also an attribute of marketable
investments.\30\ We are incorporating this concept into proposed Sec.
615.5134(d)(3). The liquidity of an asset is likely to increase if
market participants are able to agree on its valuation. An instrument
has ease and certainty of valuation if the components of its pricing
formulation are publicly available. The pricing of high-quality liquid
assets are usually easy to calculate because they do not depend
significantly on numerous assumptions. In practice, proposed Sec.
615.5134(d)(3) effectively excludes structured investments from the
liquidity reservesat FCS banks, although banks may hold such assets in
their supplemental liquidity buffers if they are eligible investments
under Sec. 615.5140. The proposed rule, however, would allow FCS banks
to hold mortgage-backed securities issued by the Government National
Mortgage Association in their liquidity reserves because they are
highly marketable securities backed by the full faith and credit of the
United States.
---------------------------------------------------------------------------
\30\ Id.
---------------------------------------------------------------------------
Under proposed Sec. 615.5134(d)(4), the final attribute of a
marketable investment is that it can be easily bought or sold. Money
market instruments generally qualify as marketable investments under
this provision because they are easily bought and sold even though they
are not traded on exchanges. Otherwise, marketable investments include
assets listed on developed and recognized exchange markets. Listing on
a public exchange enhances the transparency of the pricing mechanisms
of investments, thus enhancing their marketability and liquidity.\31\
Investments would also
[[Page 80823]]
comply with the requirement of proposed Sec. 615.5134(d)(4) if
investors can sell or convert them into cash through repurchase (repo)
agreements in active and sizeable markets. For the purpose of this
proposed rule, markets are active and sizeable if they have a large
number of market participants, high-trading volume, and investors can
sell or repo the asset at any time.\32\ Another feature of an active
and sizeable market is that it historically has market breadth and
market depth.\33\ Proposed Sec. 615.5134(d)(4) would exclude private
placements from the banks' liquidity reserves, but not the supplemental
liquidity buffer.
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\31\ Id.
\32\ Id. Many securities that System banks hold in their
liquidity reserves are traded in high volume. Nevertheless, the FCA
cautions that the potential volume that an FCS bank trades or holds
in a particular security should not constitute a significant
percentage of the overall trading volume in that security.
\33\ Id. Market breadth refers to the price impact per unit of
liquidity, whereas market depth refers to units of the asset that
can be traded for a given price impact.
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D. Composition of the Liquidity Reserve
Proposed Sec. 615.5134(e) governs the composition of the liquidity
reserve. This provision would require each FCS bank to continuously
hold cash and the investments identified in the table to proposed Sec.
615.5134(e) to meet the 90-day minimum liquidity reserve requirement of
this regulation. Under this proposal, each bank would also apply the
discounts in proposed Sec. 615.5134(g) to all cash and investments
that it holds in its liquidity reserve.
Although the existing regulation already requires every FCS bank to
maintain a sufficient stock of liquid assets to fund its maturing
obligations and other borrowings for at least 90 days, the proposed
rule would divide the liquidity reserve into two levels. The first
level of the liquidity reserve would provide sufficient liquidity for
the bank to pay its obligations and continue operations for 30 days,
whereas the second level of the reserve would cover the following 60
days. Taken together, the two levels of the liquidity reserve should
provide each FCS bank with adequate liquidity for 90 days.
Proposed Sec. 615.5134(e) would require FCS banks to hold a
minimum of 90 days of cash and liquid investments in their liquidity
reserves. In other words, FCS banks may need to exceed 90daysbased on
their individual liquidity needs. The FCA expects each bank, in
accordance with its policies and procedures, to determine the
appropriate level, size, and quality of its liquidity reserve based on
its liquidity risk profile. Determining and maintaining an adequate
level of liquidity depends on each bank's ability to meet both expected
and unexpected cash flows and collateral needs without adversely
affecting its daily operations and financial condition.\34\
Additionally, the size and level of the liquidity reserve should
correlate to the bank's ability to fund its obligations at reasonable
cost.\35\ Each FCS bank must document and be able to demonstrate to FCA
examiners how its liquidity reserve mitigates the liquidity risk posed
by the bank's business mix, balance sheet structure, cash flows, and
on- and off-balance sheet obligations.\36\ Matching the size, level,
and composition of the liquidity reserve to obligations that are
maturing in a prescribed number of days is a sound banking practice,
and is consistent with GSE status.
---------------------------------------------------------------------------
\34\ See Interagency Policy Statement on Funding and Liquidity
Risk Management, supra.at 13660.
\35\ Id.
\36\ Id.
---------------------------------------------------------------------------
The proposed rule would require each FCS bank to maintain
sufficient quantity of highly liquid assets in the first level of its
liquidity reserve so it could continue normal operations for 30 days if
a national security emergency, a natural disaster, or intense economic
or financial turmoil impedes System access to the markets. As the first
item in the left column of the table states, investments in the first
level of the liquidity reserve would be available for the bank to
sequentially apply to pay obligations that mature starting on day 1
through day 30.
Under the second provision in the left-hand column of the table,
cash and instruments with a final maturity of 3 years or less must
comprise at least 15 days of the first level of the liquidity reserve.
As a result, the proposed rule would mandate that each bank have enough
cash and short-term, highly liquid assets on hand so it could pay its
obligations and fund its operations for 15 days if the debt markets
were closed, or the System's cost of funding became uneconomical. FCS
banks would draw first on this 15-day sublevel in the event of
significant stress event.
The right side of the table identifies the assets that proposed
Sec. 615.5134(e) would require FCS banks to hold in Level 1 of their
liquidity reserves. Again, all of these assets are highly liquid
because they are cash, or investments that are high quality, close to
their maturity, and marketable. All of the assets that banks hold in
their liquidity reserve would be subject to the discounts specified in
proposed Sec. 615.5134(g).
Under the proposed rule, FCS banks are authorized to hold five
classes of assets in the first level of their liquidity reserve. These
assets are:
Cash--
(1) Cash balances on hand,
(2) Cash due from traded but not yet settled debt, and
(3) Insured deposits that FCS banks hold at federally insured
depository institutions in the United States;
United States Treasury securities--
Each FCS bank must select Treasury securities that have final
maturities and other characteristics that best enables it to fund
operations if market access becomes obstructed;
Other marketable obligations explicitly backed by the full
faith and credit of the United States \37\
---------------------------------------------------------------------------
\37\ Obligations that are backed by the full faith credit of the
United States are not eligible for the liquidity reserve if they are
not marketable under proposed Sec. 615.5134(d).
---------------------------------------------------------------------------
Government-sponsored agency senior debt securities that
mature within 60 days (debt obligations of the FCS are excluded);\38\
---------------------------------------------------------------------------
\38\ A Government-sponsored agency means as an agency,
instrumentality, or corporation chartered or established to serve
public purposes specified by the United States Congress but whose
obligations are not explicitly insured or guaranteed by the full
faith and credit of the United States Government. The FCA proposed
to add this definition to Sec. 615.5132 on August 18, 2011. See 76
FR 51289 (Aug. 18, 2011). This category would include the Federal
Home Loan Banks, Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Corporation (Freddie Mac), and the
Tennessee Valley Authority. Although Fannie Mae and Freddie Mac are
currently in conservatorship, their obligations are not explicitly
backed by the full faith and credit of the United States.
---------------------------------------------------------------------------
Diversified investment funds that are comprised
exclusively of Level 1 instruments.
As discussed earlier, the second level of the liquidity reserve
would provide FCS banks with sufficient liquidity to fund their
obligations and continue normal operations starting on day 31 through
day 90. Under proposed Sec. 615.5134(e), FCS banks would use the
assets in Level 2 during a prolonged stress event to fund obligations
that mature during the subsequent 60 days of the 90-day liquidity
reserve.
The proposed rule would authorize FCS banks to hold the five
following classes of assets in the second level of their liquidity
reserves:
Additional amounts of Level 1 instruments;
Government-sponsored agency senior debt securities with
maturities that exceed 60 days;\39\
---------------------------------------------------------------------------
\39\ Once the Government-sponsored agency senior debt securities
in Level 2 come within 60 days to maturity, the bank should move
them to Level 1 of the liquidity reserve so they can cover maturing
obligations.
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[[Page 80824]]
Government-sponsored agency mortgage-backed securities;
Money market instruments that mature in 90 days; and
Diversified investment funds that are comprised
exclusively of Levels 1 and 2 instruments.
Unfunded commitments are another issue that raises concerns for the
FCA. FCS banks or their affiliated associations often have outstanding
lines of credit to borrowers who may draw funds to meet their seasonal
business needs. FCS banks and associations can be legally obligated to
fund these commitments. A sudden surge in borrower demand for funds
under these lines may impair the bank's liquidity at a time when market
access is becoming impeded. For this reason, it is important that FCS
banks adequately account for unfunded commitments and other
contingencies, including those that are off balance sheet, when they
calculate the amount and quality of liquid assets they need in their
liquidity reserve to fund all maturing and contingent obligations
during a particular time period. Each FCS bank has its own unique
circumstances and risk profile and, therefore, exposure to unfunded
commitments and other contingent obligations varies within the FCS.
Unfunded commitments and other material contingent obligations,
including those off balance sheet, potentially expose both FCS and
other financial institutions to significant safety and soundness risks.
Accordingly, contingent outflows raise substantial regulatory concerns
for the FCA and other financial regulators.\40\ Proposed Sec.
615.5134(e) does not specifically require FCS banks to maintain
sufficient assets in the liquidity reserve to cover unfunded
commitments and other contingent obligations. However, the FCA is
contemplating whether to add a specific provision to the final
regulation that would require the liquidity reserve to adequately cover
unfunded commitments and other contingent obligations. Requiring FCS
banks to hold sufficient liquidity to cover these contingencies could
mitigate risks that pose a threat to the liquidity, solvency, and
ultimate viability of FCS banks. However, such a requirement could also
impose significant opportunity costs on FCS banks in that they would be
compelled to provide for these contingencies with cash and short-term
liquid investments.
---------------------------------------------------------------------------
\40\ See Basel III Liquidity Framework supra. at p. 21-22. The
Basel Committee on Banking Supervision focused on unfunded
commitments throughout Basel III.
---------------------------------------------------------------------------
The FCA considers the guidance of the Federal banking agencies and
the Basel III Liquidity Framework in developing this proposed rule on
liquidity, and evaluates whether it is appropriate for System banks.
Specifically, the Basel Committee currently suggests that regulated
entities account for unfunded commitments and other contingent
obligations in their liquidity reserve calculations. We are evaluating
to what extent we should incorporate the approach of the Basel III
Liquidity Framework into our regulation.
For this reason, we solicit your responses to the following
questions:
Should the final rule explicitly require the liquidity
reserve to cover unfunded commitments and other contingent obligations?
In your opinion, what would be the advantages and disadvantages of
adding this requirement to Sec. 615.5134(e)?
Should the FCA consider more stringent liquidity reserve
requirements based on size and complexity of different FCS banks, or
should the liquidity reserve requirements remain the same for all
System banks?
What cash inflows and outflows identified in the Basel III
Liquidity Framework are relevant to System banks? For those that are
relevant, how should we incorporate them into our regulation?
Should we incorporate the Basel III Liquidity Framework
stress parameters in the liquidity reserve requirement for System
banks? If so, which ones? For those, please indicate what percentage of
the unfunded commitments and other contingent obligations the FCS bank
should cover in its liquidity reserve.
How should an association's direct loan under the General
Financing Agreement and its accompanying contingent commitments factor
into the funding bank's liquidity reserve requirement?
Please provide any information or data concerning unfunded
commitments and other contingent obligations that support your answers
to the above questions.
E. Supplemental Liquidity Buffer
Proposed Sec. 615.5134(f) would introduce a new concept into the
FCA's liquidity regulation by requiring all FCS banks to establish and
maintain a supplemental liquidity buffer that would provide a longer
term, stable source of funding beyond the 90-day minimum liquidity
reserve. The supplemental liquidity buffer would complement the 90-day
minimum liquidity reserve. Whereas the primary purpose of the 90-day
minimum liquidity reserve is to furnish sufficient short-term funding
to outlast an immediate crisis, the supplemental liquidity buffer would
enable FCS banks to manage and mitigate their liquidity risk over a
longer term horizon. Besides providing FCS banks with longer term and
stable source of funding, each bank would be able to draw on the
supplemental liquidity buffer if a heavy demand for funds strains its
90-day minimum liquidity reserve during a significant stress event. The
supplemental liquidity buffer is an additional stock of assets that
would provide stable, longer term funding of the bank's operations
beyond the first 90 days.
The proposed rule does not specify the length of time that the
supplemental liquidity buffer should cover. The Basel Committee on
Banking Supervision recommends that a supplemental reserve should
provide depository institutions and related banking organizations
stable, long-term funding over a 1-year time horizon. We invite your
comments about whether our final rule should establish a specific time
horizon for the supplemental liquidity buffer at FCS banks. If you
believe that we should establish a specific timeframe for the
supplemental liquidity buffer, please tell us what you think it should
be, and why. If you oppose a specific regulatory time horizon for the
supplemental liquidity buffer, please explain your reasoning. We are
also interested in hearing your views about how the similarities and
differences between FCS banks and financial institutions under the
supervision of other Federal and international regulators influence the
answers to our questions about potential time horizons for the
supplemental liquidity buffers at FCS banks.
The first sentence of proposed Sec. 615.5134(f) would require each
Farm Credit bank to hold supplemental liquid assets in excess of the
90-day minimum liquidity reserve. Again, the supplemental liquidity
buffer consists of the amount of stable longer term funding that a FCS
bank has available, and it should match the amount of stable funding
that the bank needs to operate during a prolonged period of time. For
the purposes of proposed Sec. 615.5134(f), stable funding means that
the instruments in the supplemental liquidity buffer are expected to
furnish the bank with a reliable source of funds over a longer term
time horizon under conditions of extended stress. The amount and
composition of the supplemental liquidity buffer at a
[[Page 80825]]
particular bank ultimately depends on a number of different factors
pertaining to its operations, including the funding of its assets and
liabilities, off-balance sheet items, and contingent exposure, such as
unfunded commitments.
According to the second sentence of proposed Sec. 615.5134(f), the
supplemental liquidity buffer must be comprised of cash and qualified
eligible investments listed in Sec. 615.5140 of this part. Thus, the
proposed rule would allow FCS banks to hold qualified eligible
investments (listed in Sec. 615.5140) in their supplemental liquidity
buffer that they could not hold in their 90-day liquidity reserve.
However, the FCA expects each FCS bank to calibrate the quality and
quantity of assets that it selects for the supplemental liquidity
buffer to the amount of funding it will need to outlast significant
stress scenarios. Each bank should configure its supplemental liquidity
buffer so it realistically corresponds to the demands of its liq