Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Investment Management, 66362-66375 [2012-26806]

Agencies

• Farm Credit Administration

[Federal Register Volume 77, Number 214 (Monday, November 5, 2012)]
[Rules and Regulations]
[Pages 66362-66375]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26806]



[[Page 66362]]

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FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC50


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Investment Management

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, our, or we) 
issues this final rule to amend our regulations governing investments 
held by institutions of the Farm Credit System (FCS or System), as well 
as related regulations. This final rule strengthens our regulations 
governing investment management and interest rate risk management; 
reduces regulatory burden for investments that fail to meet eligibility 
criteria after purchase; and makes other changes that will enhance the 
safety and soundness of System institutions.

DATES: This regulation will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. We will publish a notice of the effective date in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: 

Timothy T. Nerdahl, Senior Financial Analyst, Office of Regulatory 
Policy, Farm Credit Administration, McLean, VA 22102-5090, (952) 854-
7151 extension 5035, TTY (952) 854-2239;

Or

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

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this rule are to:
     Ensure that Farm Credit banks \1\ hold sufficient high-
quality, readily marketable investments to provide sufficient liquidity 
to continue operations and pay maturing obligations in the event of 
market disruption;
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    \1\ Section 619.9140 of FCA regulations defines Farm Credit bank 
to include Farm Credit Banks, agricultural credit banks, and banks 
for cooperatives.
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     Strengthen the safety and soundness of System 
institutions;
     Reduce regulatory burden with respect to investments that 
fail to meet eligibility criteria after purchase; and
     Enhance the ability of the System to supply credit to 
agriculture and aquatic producers by ensuring adequate availability to 
funds.

II. Background

    Congress created the System as a Government-sponsored enterprise 
(GSE) to provide a permanent, stable, and reliable source of credit and 
related services to American agricultural and aquatic producers. Farm 
Credit banks obtain funds that they and System associations use to 
provide credit and related services primarily through the issuance of 
Systemwide debt securities.\2\ If access to the debt market becomes 
temporarily impeded, Farm Credit banks must have enough readily 
available funds to continue operations and pay maturing obligations. 
Subpart E of part 615 imposes comprehensive requirements regarding the 
investments of System institutions in order to ensure continuity of 
operations.
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    \2\ Farm Credit banks use the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation) to issue and market Systemwide 
debt securities. The Funding Corporation is owned by the Farm Credit 
banks.
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III. History of Rule

    We adopted our last major revisions to our investment regulations 
in 1999 and amended them in a more limited manner in 2005. Since 1999, 
the marketplace pertaining to investments has changed significantly. 
Innovations in investment products have led to their increasing 
complexity, and investors need to have greater expertise to fully 
understand them. In addition, the financial crisis that began in 2007 
resulted in numerous investment downgrades and the loss of billions of 
dollars by financial institutions. While System banks suffered 
considerably less stress during the crisis than many other financial 
institutions, they did experience numerous downgrades and some losses 
on individual investments.
    In 2010, we issued FCA Bookletter BL-064, which provided 
clarification and guidance regarding our regulations and expectations 
with respect to the key elements of a robust investment asset 
management framework that institutions should establish to prudently 
manage their investments in changing markets.\3\ The issuance of this 
bookletter was an interim measure towards strengthening our investment 
regulations.
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    \3\ FCA Bookletter BL-064, Farm Credit System Investment Asset 
Management (December 9, 2010). This Bookletter may be viewed at 
www.fca.gov. Under Quick Links, click on Bookletters.
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    On August 18, 2011, we published a proposed rule to amend FCA's 
regulations governing System investments.\4\ Our intention was to 
strengthen and enhance board governance and controls and clarify our 
expectations over investment management practices, while reducing 
regulatory burden in several areas. After considering the comments we 
received on the proposed rule, we now plan to finalize the proposed 
provisions contained in the proposed rule in installments.
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    \4\ 76 FR 51289.
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    This first installment of final regulations will revise the 
following regulations:
     Sec.  615.5131--Definitions;
     Sec.  615.5132--Investment Purposes;
     Sec.  615.5133--Investment Management;
     Sec.  615.5136--Emergencies Impeding Normal Access of Farm 
Credit Banks to Capital Markets;
     Sec.  615.5143--Management of Ineligible Investments and 
Reservation of Authority to Require Divestiture;
     Sec.  615.5174--Farmer Mac Securities;
     Sec.  615.5180--Bank Interest Rate Risk Management 
Program; and
     615.5182--Interest Rate Risk Management by Associations 
and Other Farm Credit System Institutions Other Than Banks.
    In addition, we are making minor technical conforming revisions to 
Sec.  615.5140 and to Sec.  615.5201, which is the Definitions section 
in our capital adequacy regulations.
    Finally, we are deleting the following existing provisions:
     Sec.  615.5135--Management of Interest Rate Risk (we are 
incorporating its provisions, as amended, into Sec.  615.5180);
     Sec.  615.5141--Stress Tests for Mortgage Securities (we 
are incorporating its provisions, as amended, into Sec. Sec.  
615.5133(f)(1)(iii) and 615.5133(f)(4)); and
     Sec.  615.5181--Bank Interest Rate Risk Management Program 
(we are incorporating its provisions, as amended, into Sec.  615.5180).
    We intend to address in one or more future rulemakings regulations 
covering all the areas of the proposed rule not covered in this final 
rule, including investment eligibility (including revised 
creditworthiness requirements) and association investments. The 
regulations that we proposed to revise but that we are not revising at 
this time include:
     Sec.  615.5140--Eligible Investments (except for minor 
technical changes); and
     Sec.  615.5142--Association Investments.
    This final regulation codifies much of the guidance that was 
contained in BL-064. In many areas, however, the regulation imposes 
requirements that go beyond the Bookletter's guidance. Although the 
Bookletter may continue to provide useful guidance, institutions must 
be sure that they are complying with the requirements in this 
regulation.

[[Page 66363]]

    Because we are not at this time finalizing revisions to Sec.  
615.5142, governing association investments, the guidance on 
association investments in BL-064, which clarifies existing Sec.  
615.5142, will continue to be relevant. In addition, institutions 
should be mindful of our Informational Memorandum on Association 
Investments dated May 16, 2012, which reminds banks and associations of 
their obligations under Sec.  615.5142.

IV. Discussion of Comment Letters and Section-by-Section Analysis of 
Final Rule

    FCA received comment letters from two Farm Credit banks--CoBank, 
ACB and the Farm Credit Bank of Texas. FCA also received comment 
letters from four Farm Credit associations--Colonial Farm Credit, ACA, 
FCS Financial, ACA, Farm Credit Services of Mid-America, ACA, and 
AgStar Financial Services, ACA. In addition, the Farm Credit Council 
(Council) submitted comments that were developed with input from a 
workgroup that includes financial officers from several associations, 
all Farm Credit banks, and the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation). Finally, we also considered a 
comment letter the Council submitted to FCA on a similar proposed rule 
governing the Federal Agricultural Mortgage Corporation (Farmer Mac) 
\5\ that generally encouraged us to make the requirements of the two 
rules more similar. Although the two final rules continue to differ 
where appropriate, changes were made to both this rule and the Farmer 
Mac rule to make the requirements more similar.\6\
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    \5\ 76 FR 71798 (November 18, 2011).
    \6\ In the interest of consistency, the FCA Board adopted the 
final rule governing Farmer Mac's investment management at the same 
time it adopted this final rule. That final rule is also published 
in today's issue of the Federal Register.
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    We received many constructive comments on the proposed rule. In 
general, the commenters stated that several of the provisions would 
enhance investment management at System institutions. They also stated, 
however, that many provisions of the proposed rule were inordinately 
and unnecessarily prescriptive.
    The Council also commented generally that the rule is unnecessary 
in light of FCA Bookletter BL-064. In response, we believe it is 
prudent to codify the bookletter's guidance into regulation. In 
addition, as stated above, in many areas the regulation imposes 
requirements that go beyond the bookletter's guidance. Accordingly, 
this regulation is necessary notwithstanding FCA Bookletter BL-064.
    We will address each specific comment received in our discussion of 
the regulation provision to which the comment relates. Those areas of 
the proposed rule not receiving comment or receiving positive comments 
are finalized as proposed unless otherwise discussed in this preamble. 
Throughout this regulation, we make minor technical, clarifying, and 
non-substantive language changes that we do not specifically discuss in 
this preamble.

A. Section 615.5131--Definitions

    We proposed to amend Sec.  615.5131 to add definitions for the 
terms Government agency and Government-sponsored agency. The Council 
noted that FCA had already defined these terms in our capital adequacy 
regulation at Sec.  615.5201. The Council stated that FCA and the other 
banking regulators ``essentially define these terms identically'' for 
capital purposes, and it asked us to conform the definitions.
    We note that the definitions of these terms in the capital 
regulations of FCA and of other banking regulators such as the Federal 
Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), 
and the Office of the Comptroller of the Currency (OCC) contain 
technical differences from one another.\7\ In an effort to bring 
additional clarity to these definitions, the definitions we proposed in 
this rulemaking also differed in technical ways from any of these other 
definitions. In the absence of definitive common definitions, we 
believe our technical differences from the other regulators are 
warranted. We agree, however, that FCA's definitions should be 
consistent among themselves. Accordingly, we are finalizing the Sec.  
615.5131 definitions as proposed with minor technical changes and, as 
discussed below, we are revising the definitions in Sec.  615.5201 to 
conform.
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    \7\ See, e.g., 12 CFR Part 208, App. A (FRB); 12 CFR Part 225, 
App. A (FRB); 12 CFR Part 325, App. A (FDIC); 12 CFR Part 3, App. A 
(OCC).
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    Section 615.5131 defines Government agency as the United States 
Government or an agency, instrumentality, or corporation of the United 
States Government whose obligations are fully and explicitly insured or 
guaranteed as to the timely repayment of principal and interest by the 
full faith and credit of the United States Government. Section 615.5131 
defines Government-sponsored agency as an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government. This definition includes GSEs such as the 
Federal National Mortgage Association (Fannie Mae) and the Federal Home 
Loan Mortgage Corporation (Freddie Mac), as well as Federal agencies, 
such as the Tennessee Valley Authority, that issue obligations that are 
not explicitly guaranteed by the Government of the United States' full 
faith and credit.

B. Section 615.5132--Investment Purposes

    Section 615.5132 permits each Farm Credit bank to hold eligible 
investments, for specified purposes,\8\ in an amount not to exceed 35 
percent of its total outstanding loans. We remind banks that generating 
earnings is not an authorized investment purpose, although it is 
permissible if the earnings are incidental to one or more of the 
specified investment purposes.\9\
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    \8\ The specified purposes are maintaining a liquidity reserve, 
managing surplus short-term funds, and managing interest rate risk.
    \9\ We also remind associations that, pursuant to Sec.  
615.5142, which we are not amending today, their only authorized 
investment purposes are reducing interest rate risk and managing 
surplus short-term funds. One association commenter suggested that 
it holds investments to augment income. As with banks, augmenting 
income through investments is permissible only if such income is 
incidental to one or more of the authorized investment purposes. 
Under Sec.  611.1135(a), service corporations may hold investments 
for the purposes authorized for their organizers.
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    In our proposed rule, we asked whether the 35-percent investment 
limit should be raised. Commenters responded that this limit was 
appropriate, as long as our regulations permitted the exclusion of 
certain investments. We discuss these comments, and our responses, 
below.
1. Exclusion of Investments Pledged To Meet Margin Requirements for 
Derivative Transactions
    In Sec.  615.5132(b)(1), we adopt as final our proposal to permit 
Farm Credit banks to exclude investments pledged to meet margin 
requirements for derivative transactions (collateral) when calculating 
the 35-percent investment limit under paragraph (a). We note that 
investments that are pledged as collateral do not count toward a Farm 
Credit bank's compliance with its liquidity requirements.\10\ We make 
this change because derivatives are used as a hedging tool against 
interest rate risk and liquidity risk. Farm Credit banks use derivative 
products as an integral part of their interest rate risk

[[Page 66364]]

management activities and as a supplement to the issuance of debt 
securities in the capital markets. We recognize that banks are required 
to post collateral to counterparties resulting from entering into 
derivative transactions, and we believe banks should not be discouraged 
from implementing appropriate risk management practices. We received 
positive comments on this proposal from the Council and a bank.
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    \10\ Under Sec.  615.5134(b), all investments that a bank holds 
for the purpose of meeting the liquidity reserve requirement must be 
free of lien.
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2. Exclusion of Other Investments
    Some commenters requested that we also exclude certain other 
investments from the 35-percent limit. They requested that we exclude 
securities purchased and designated for the primary purpose of posting 
collateral for derivative positions, even if the collateral is returned 
or the securities are never posted. These commenters stated that 
including these securities in the 35-percent limit would require a bank 
to maintain a cushion under the limit to accommodate the possibility of 
return, thereby limiting the amount of other investments it can hold to 
manage its liquidity position and derivative counterparty exposures.
    Commenters also requested that we exclude Treasury securities from 
the 35-percent limit. They stated that including Treasury securities in 
the limit crowds out other higher-yielding, high-quality liquid 
investments. Thus, their inclusion in the limit creates an economic 
constraint and disincentive to holding Treasury securities, even though 
they are the most liquid and marketable investment. They requested that 
we treat Treasury securities like cash and exclude them from the 35-
percent limit.
    Finally, the Council requested that investment securities pledged 
in secured borrowing relationships be excluded from the 35-percent 
limit. The Council cited State Ag-Linked lending programs and 
repurchase agreements as examples of these secured borrowing 
relationships. Under both arrangements, according to the Council, the 
pledging of securities acts as an alternative that provides cash for 
operations without the issuance of new Federal Farm Credit Banks debt 
obligations. Under Sec.  615.5134(b), these investments may not be 
counted in the liquidity reserve because they are not unencumbered. The 
Council asserts that excluding pledged securities from the 35-percent 
limit would be consistent with use of the securities as an alternative 
method to secure financing and their treatment under the FCA regulatory 
liquidity measurement.
    We decline to exclude these investments from the investment limit 
on a blanket basis. We view these types of transactions as part of a 
Farm Credit bank's normal cash management operations. Thus, under 
normal conditions, we expect each Farm Credit bank to manage the level 
of its investments within FCA's portfolio size limits to ensure 
regulatory compliance. As discussed below, however, we are providing 
additional flexibility to each bank in the management of its investment 
portfolio by revising the regulation to allow compliance with the limit 
on a 30-day average daily balance (ADB) basis rather than on a daily 
basis; this change will enable a bank to exceed the investment limit 
temporarily, as long as its 30-day ADB is below the limit. Moreover, 
final Sec.  615.5132(b)(2) permits the exclusion from the investment 
limit of other investments as FCA determines is appropriate.
3. Revision to Calculation
    In order to provide Farm Credit banks with additional flexibility 
to manage their investment portfolio, we are modifying how the 35-
percent investment limit is calculated in paragraph (a).
    The numerator (investments) will be calculated as a 30-day ADB of 
investments measured at amortized cost, excluding interest and net of 
all collateral pledged for derivative purposes and any other 
investments for which FCA has approved exclusions. The calculation of 
the denominator (total outstanding loans) remains unchanged, although 
the regulation makes explicit our existing interpretation that total 
loans include accrued interest and do not include allowance for loan 
loss.\11\ Compliance will only be measured at month end.
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    \11\ Section 615.5131 provides that loans are calculated 
quarterly (as of the last day of March, June, September, and 
December) by using the ADB of loans during the quarter.

    Example of the January 31, 2012 calculation: 30-day ADB of 
investments as of January 31, 2012 divided by the 90-day ADB of 
total outstanding loans as of December 31, 2011.
    Example of the March 31, 2012 calculation: 30-day ADB of 
investments as of March 31, 2012 divided by the 90-day ADB of total 
outstanding loans as of March 31, 2012.

    We believe this modification of the 35-percent calculation will 
provide additional flexibility for Farm Credit banks in managing their 
investment portfolios. Because FCA will evaluate compliance at month 
end and on a 30-day ADB rather than the actual daily balance, a bank 
that receives a large amount of returned collateral that temporarily 
increases its investment portfolio above 35 percent on a particular 
day, for example, should still be below the 35-percent ADB--unless it 
is managing its investment portfolio too close to the 35-percent limit.

C. Section 615.5133--Investment Management

    Effective investment management requires financial institutions to 
establish policies that include risk limits, approved mechanisms for 
identifying, measuring, and reporting exposures, and strong corporate 
governance. The recent crisis and its lingering effects have re-
emphasized the importance of sound investment management, and we 
believe that strengthened regulation would further ensure the safe and 
sound management of investments. Accordingly, we are making significant 
changes to Sec.  615.5133, which governs investment management.
    One association commented that the economic impact of certain 
proposals on small associations could be profound, because they cannot 
afford a bank's level of investment management expertise. The 
association recognizes that association boards and management have a 
fiduciary duty to manage investments in a safe and sound manner, but it 
stated that it depends on its funding bank, in its approval role, to 
provide advice regarding unwise investment decisions. In addition, 
according to the association commenter, requiring associations to add 
unnecessary investment management committees, policies, analyses, and 
reports increases expenses and decreases the benefits of investments.
    Revised Sec.  615.5133(b), which we discuss in greater detail 
below, requires investment policies to be sufficiently detailed, 
consistent with, and appropriate for the amounts, types, and risk 
characteristics of an institution's investments.\12\ As we stated in 
1999 and have repeated since that time, bank oversight does not absolve 
an association's board and managers of their fiduciary responsibilities 
to manage investments in a safe and sound manner. The fiduciary 
responsibilities of association boards obligate them to develop 
appropriate investment management policies and practices to manage the 
risks associated with investment activities. Moreover, each 
association's investment managers must fully understand the risks of 
its investments and make independent and

[[Page 66365]]

objective evaluations of investments prior to purchase. An association 
must comply with all the requirements in Sec.  615.5133 if the level or 
type of its investments could expose its capital to material loss.
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    \12\ The existing language imposes similar requirements.
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    A bank's approval serves as an additional safeguard for an 
association's investments, but the association must nevertheless have 
the requisite expertise to manage the investments that it holds.
1. Section 615.5133(a)--Responsibilities of Board of Directors
    The Council commented that the proposed requirement that the board 
(or a designated committee of the board) must, at least annually, 
review and ``affirmatively validate'' the sufficiency of its investment 
policies is overly prescriptive, burdensome, and unclear. We agree that 
a review requirement is sufficient and delete ``affirmatively 
validate'' from the final rule.
    We also move to this section and clarify a documentation 
requirement that we had proposed in Sec.  615.5133(b). We had proposed 
to require institutions to document in their records or board minutes 
any analyses used in formulating their policies or amendments to the 
policies. The Council stated that suggesting board minutes as a place 
to document this analysis is burdensome and does not enhance the 
investment management process. We do not agree that suggesting board 
minutes as an optional location for documentation is burdensome. 
Nevertheless, we revise the last sentence of Sec.  615.5133(a) to 
require that any changes to the policies must be documented, without 
specifying a location.
    The revisions in this paragraph are otherwise unchanged from the 
proposed rule. All other comments supported the proposed revisions in 
this provision.
2. Section 615.5133(b)--Investment Policies--General Requirements
    The Council commented that the revisions in this proposed paragraph 
appeared reasonable overall. We move from Sec.  615.5133(f)(1) a 
sentence requiring investment policies to fully address the extent of 
pre-purchase analysis that management must perform for various classes 
of investments. Otherwise, except for several minor non-substantive 
technical changes, the revisions in this paragraph are unchanged from 
the proposed rule.
3. Section 615.5133(c)--Investment Policies--Risk Tolerance
    We received comment on the clarity of the proposed language in this 
provision. Accordingly, we are clarifying the requirements in final 
Sec.  615.5133(c) to require that investment policies must include 
concentration limits to ensure prudent diversification of credit, 
market, and liquidity risk in the investment portfolio.
    In addition, our proposed rule, as well as our existing rule, 
provides that risk limits must be based on an institution's 
institutional objectives, capital position, and risk tolerance. In the 
final rule, we are requiring that risk limits be based on all relevant 
factors, including an institution's institutional objectives, capital 
position, earnings, and quality and reliability of risk management 
systems. In addition, in light of our relocation of our interest rate 
risk management requirements to another subpart of these regulations 
(discussed below), we are making explicit that risk limits must also 
consider the interest rate risk management program required for banks 
and associations.
a. Section 615.5133(c)(1)--Credit Risk
    Existing Sec.  615.5133(c)(1)(ii) requires an institution's board 
to review annually the investment policy criteria for selecting 
securities firms and to determine whether to continue the institution's 
existing relationships with them. To reduce regulatory burden, we 
proposed to permit a designated committee of the board to review the 
criteria and to determine whether to continue existing relationships, 
but the board would have had to approve any changes to the criteria or 
to the existing relationships.
    Both the Council and a bank objected to the existing requirement 
that the board must determine whether to continue an institution's 
existing relationships with securities firms. They commented that this 
requirement is confusing, creates an excessive burden, and results in 
an unnecessary distraction for the board.
    We agree that as long as an institution's board (or a designated 
committee) reviews the selection criteria on an annual basis, and the 
board approves any changes to the criteria, the board does not need to 
be involved in the approval of the relationships. Accordingly, we have 
deleted the existing and proposed requirements of board involvement in 
an institution's relationships with securities firms.
    Existing Sec.  615.5133(c)(1)(iii) requires investment policies to 
establish collateral margin requirements on repurchase agreements. We 
proposed to require institutions to regularly mark the collateral to 
market and ensure appropriate controls are maintained over collateral 
held. We received positive comments on this provision and adopt it as 
proposed.
b. Section 615.5133(c)(2)--Market Risk
    Existing Sec.  615.5133(c)(2) requires an institution's board to 
establish market risk limits in accordance with our regulations and 
other policies. In our proposed rule, we specifically identified these 
other regulations as those governing stress testing and interest rate 
risk.
    The Council objected to the proposed revision, stating that it did 
not appear to add a new requirement but that it could be used to impose 
duplicative requirements. In addition, the Council vigorously objected 
to the proposed and existing reference to ``other policies''; because 
these policies have not been subject to notice and comment rulemaking, 
we cannot require compliance with them in this regulation.
    In response to these comments, the final regulation, like the 
existing regulation, requires investment policies to set market risk 
limits for specific types of investments and for the investment 
portfolio.\13\ We believe this requirement is sufficient and the 
reference to our ``regulations and * * * other policies'' is not 
needed.
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    \13\ We adopt our proposed technical changes to this provision.
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4. Section 615.5133(e)--Internal Controls
    Existing Sec.  615.5133(e)(2) requires System institutions to 
establish and maintain a separation of duties and supervision between 
personnel who execute investment transactions and personnel who 
approve, revaluate, and oversee investments. Proposed Sec.  
615.5133(e)(2) would have added to the list of personnel whose duties 
and supervision would have had to be separated from personnel who 
execute investment transactions. These additional personnel would have 
been those who post accounting entries, reconcile trade confirmations, 
and report compliance with investment policy.
    Both the Council and a bank objected to this proposed revision as 
overly prescriptive. In response, rather than itemizing all of the 
possible personnel functions, final Sec.  615.5133(e)(2) provides that 
System institutions must establish and maintain a separation of duties 
between personnel who supervise or execute investment transactions and 
personnel who supervise or engage in all other investment-related 
functions. These other investment-related functions

[[Page 66366]]

include those itemized in the list in the proposed rule, as well as any 
other functions that are investment-related. Examples of those items in 
the proposed rule include but are not limited to posting accounting 
entries and reconciling trade confirmations. This regulation does not 
prohibit one person from performing or supervising more than one 
investment-related function, except that the same person cannot 
supervise or execute investment transactions and at the same time 
supervise or engage in any other investment-related function. Each 
institution must maintain appropriate controls as warranted by the 
complexity and risk of its investment operations.
    Proposed Sec.  615.5133(e)(4) would have added a new requirement 
that System institutions must implement effective internal audit 
programs to review, at least annually, their investment controls, 
processes, and compliance with FCA regulations and other regulatory 
guidance. Internal audit programs would have had to specifically 
include a review of the process for ensuring all investments, at the 
time of purchase, were eligible and suitable for purchase under the 
boards' investment policies.
    The Council and both bank commenters stated that this requirement 
was too prescriptive and eliminated the flexibility that is necessary 
for an institution's internal auditors to establish its own risk-based 
approach to audits. An association encouraged FCA to set a de minimis 
investment portfolio amount relative to an association's total assets 
or total capital; investment portfolios under this amount would not be 
subject to annual risk assessments.
    Final Sec.  615.5133(e)(4) requires institutions to implement 
effective internal audit programs to review, at least annually, their 
investment management functions, controls, processes, and compliance 
with FCA regulations. The scope of the annual review must be 
appropriate for the size, risk, and complexity of the investment 
portfolio. Thus, while the final rule retains the annual audit 
requirement, it provides flexibility in determining the scope of the 
audit.
    While the final rule allows for flexibility depending on the nature 
of an institution's investment portfolio, there is no bright line de 
minimis portfolio size that would permit an institution not to engage 
in risk assessment. As stated above, an association must comply with 
all the requirements in Sec.  615.5133 if the level or type of its 
investments could expose its capital to material loss. Each association 
must have the ability to manage the investments that it holds.
    In addition to the regulatory requirements in Sec.  615.5133(e)(4), 
the guidance provided in BL-064 continues to be relevant for 
institutions in their development of internal audit processes.
5. Section 615.5133(f)--Due Diligence
    As proposed, the final rule adds a new Sec.  615.5133(f) that 
covers due diligence. This provision combines in one location the 
requirements governing securities valuation and those governing stress 
testing that are in existing Sec.  615.5133(f) and Sec.  615.5141, 
respectively.
    In addition to the substantive changes to specific provisions, 
which we discuss below, we make extensive organizational and technical 
changes to make the structure and approach of this rule more similar to 
the rule governing Farmer Mac. We also make a number of minor technical 
and non-substantive changes to clarify the requirements.
a. Section 615.5133(f)(1)(i)--Eligibility, Purpose, and Compliance with 
Investment Policies
    Proposed Sec.  615.5133(f)(1) would have required a System 
institution, before it purchased an investment, to conduct sufficient 
due diligence to determine whether the investment was eligible and 
``suitable'' for purchase under its board's investment policies. The 
institution would have been required to document this assessment.
    This proposed requirement is retained in new Sec.  
615.5133(f)(1)(i), with minor clarifications. Since we had used the 
term ``suitable'' to mean an investment complied with the board's 
investment policies, we simplify the regulation by eliminating that 
term and instead requiring that an institution determine whether an 
investment complies with those policies. We also clarify that an 
institution must determine whether an investment is for an authorized 
purpose.
    The Council and a bank commented that eligibility and the other 
pre-purchase assessments are often established for a class or segment 
of securities by specifying the criteria (credit risk, liquidity, 
market risk, etc.) that make a class of securities eligible and 
suitable per se, and they requested clarification that these pre-
purchase assessments may be defined for segments or classes of 
securities that meet appropriate criteria rather than on a security-by-
security basis. We note that the regulation does not prohibit the 
establishment of criteria for various classes or segments of 
investments, as long as an institution adequately documents its 
assessments.
    We also added a sentence to Sec.  615.5133(f)(1)(i) specifically 
authorizing an institution, with board approval, to hold investments 
that do not comply with its investment policies. This addition 
recognizes that such decisions are within the discretion of the board's 
business judgment.\14\ This provision does not authorize the board to 
approve investments that do not comply with our regulatory eligibility 
requirements and purpose limitations.
---------------------------------------------------------------------------

    \14\ This authority incorporates and broadens proposed Sec.  
615.5133(f)(2)(i), which would have permitted an institution, with 
board approval, to purchase an investment that exceeds the stress-
test parameters defined in its board policy.
---------------------------------------------------------------------------

b. Section 615.5133(f)(1)(ii)--Valuation
    Existing Sec.  615.5133(f)(1) requires a System institution to 
verify the value of a security that it plans to purchase, other than a 
new issue, with a source that is independent of the broker, dealer, 
counterparty, or other intermediary to the transaction. We proposed no 
substantive changes to the requirement.
    The Council objected to this existing requirement, commenting that 
verifying value from an independent source is not realistic for 
investments of tranches of collateralized mortgage obligations, 
including planned amortization class bonds, purchased in the primary 
market. The Council stated that these securities are generally unique 
in nature and their value, when newly created, will be impossible to 
verify with a third party prior to purchase.
    In response, we reiterate that the third party pre-purchase 
valuation requirement explicitly excludes new issues. Accordingly, 
institutions need not seek third party pre-purchase valuation for new 
issues.
    This valuation requirement and exclusion for new issues is retained 
in new Sec.  615.5133(f)(1)(ii).
c. Section 615.5133(f)(1)(iii)--Risk Assessment
    Like proposed Sec.  615.5133(f)(1), new Sec.  615.5133(f)(1)(iii) 
provides that an institution's assessment of each investment at the 
time of purchase must at a minimum include an evaluation of credit 
risk, liquidity risk, market risk, interest rate risk, and the 
underlying collateral of the investment.
    The Council, a bank, and an association commented that while a 
comprehensive level of due diligence is appropriate for more risky and 
complex instruments such as mortgage-backed securities (MBS), such due 
diligence would be excessive and burdensome for instruments such as 
Treasury securities, federal funds investments, short-term commercial 
paper, discount notes, bullet bonds, and other less complex

[[Page 66367]]

and less risky securities. To ensure that we do not require more due 
diligence than is necessary, we add a provision that an institution's 
risk assessment must be commensurate with the complexity and risk in 
the investment.
    The final rule specifies the risks that must be assessed but does 
not specify how these risks must be assessed. We explain in this 
preamble our expectations for how System institutions should assess 
their risk.
    In their assessment of credit risk, System institutions should 
consider the nature and type of underlying collateral, credit 
enhancements, complexity of structure, and any other available 
indicators of the risk of default.
    In their assessment of liquidity risk, System institutions should 
consider the investment structure, depth of the market, and ability to 
liquidate the position under a variety of economic scenarios and market 
conditions.
    In their assessment of market risk, System institutions should 
consider how various market stress scenarios including, at a minimum, 
potential changes in interest rates and market conditions (such as 
market perceptions of creditworthiness), are likely to affect the cash 
flow and price of the instrument.
    Proposed Sec.  615.5133(f)(2) had required institutions to stress 
test all investments at the time of purchase. Commenters stated that 
while a pre-purchase stress-testing requirement is appropriate for 
complex securities such as MBS, asset-backed securities (ABS), and 
other non-Government guaranteed investments, it is inappropriate to 
require pre-purchase stress testing on instruments with low price 
sensitivity, such as Government-guaranteed investments and non-
amortizing, bullet-type investments maturing within 1 year. Moreover, 
an association requested the establishment of a de minimis limit for 
stress testing even of higher-risk, more complex securities.
    We agree that stress testing lower risk, less complex investments, 
such as overnight securities and commercial paper, may not provide 
value and may create excessive burden. Accordingly, final Sec.  
615.5133(f)(1)(iii) requires an institution to stress test before 
purchase only investments that are structured or that have uncertain 
cash flows, including all MBS and ABS. The stress test must be 
commensurate with the risk and complexity of the investment and must 
enable the institution to determine that the investment does not expose 
its capital, earnings, and liquidity to risks that exceed the risks 
specified in its investment policies.\15\ The stress testing must 
comply with the requirements governing quarterly stress testing, which 
are discussed below.
---------------------------------------------------------------------------

    \15\ As part of reorganizing the final rule, we relocated this 
requirement from proposed Sec.  615.5133(f)(2)(iii).
---------------------------------------------------------------------------

    We do not establish a de minimis amount below which stress testing 
need not be performed, because we believe that all high-risk, complex 
instruments must be stress tested. We note that final Sec.  
615.5133(f)(4) requires stress tests to be comprehensive and 
appropriate for the risk profile of each institution. Moreover, that 
provision also requires that the methodology an institution uses be 
appropriate for the complexity, structure, and cash flow of the 
investments in its portfolio.
d. Section 615.5133(f)(2)--Ongoing Value Determination
    We retain the requirements of the first sentence of existing Sec.  
615.5133(f)(2), with slight wording changes.
e. Section 615.5133(f)(3)--Ongoing Analysis of Credit Risk
    We move the second sentence of existing Sec.  615.5133(f)(2) to 
Sec.  615.5133(f)(3), with several changes. First, we delete the 
existing ongoing requirement to evaluate price sensitivity to market 
interest rates because that is adequately addressed in final Sec.  
615.5180(c)(3). Second, rather than requiring institutions to evaluate 
credit quality, we are requiring institutions to establish and maintain 
processes to monitor and evaluate changes in credit quality. Finally, 
we are retaining the existing requirement that institutions must 
analyze credit risk on an ongoing basis, rather than monthly, as we had 
proposed.
    An association stated that it supported the proposed requirement to 
evaluate the credit quality of investments, provided fixed-rate, 
Government-guaranteed investments are excluded. We do not exclude these 
investments from this requirement because, like any other investments, 
the credit quality of Government-guaranteed investments can change over 
time.
f. Section 615.5133(f)(4)--Quarterly Stress Testing
    Final Sec.  615.5133(f)(4)(i) imposes requirements regarding 
quarterly stress testing. The technical changes we made from proposed 
Sec.  615.5133(f)(2)(ii) are not material. These changes consist of 
clarifying the language and relocating language from proposed Sec.  
615.5133(f)(2)(iii) that is more logically located here.
    One of the bank commenters agreed that a properly structured and 
documented quarterly stress test can provide useful information on 
capital, earnings, and liquidity risk relative to changes in market 
value of the entire portfolio, and it stated that the parameters an 
individual institution sets for the quarterly stress-testing analysis 
of its entire investment portfolio as a whole should be sufficient to 
analyze the level of risk contributed by investments.
    We do not believe that stress testing an institution's entire 
portfolio as a whole is sufficient to analyze the risk of investments. 
It is critical to know individual results. Otherwise, risks could be 
offsetting each other, resulting in a portfolio-wide test that shows 
little risk, yet has pockets of investments that may exhibit 
significant risk. Accordingly, both proposed Sec.  615.5133(f)(2)(ii) 
and final Sec.  615.5133(f)(4)(i) require institutions to stress test 
their entire investment portfolio, including stress tests of all 
investments individually and stress tests of the portfolio as a whole.
    Final Sec.  615.5133(f)(4)(ii) sets forth a methodology that 
applies to both pre-purchase and quarterly stress testing. Except for 
minor technical changes, it is identical to proposed Sec.  
615.5133(f)(2)(iii).
    As proposed, because all banks currently use the alternative stress 
test and the Council believes that they have the capability and 
sophistication to develop their own stress test processes, we eliminate 
the existing standardized stress test option.
g. Section 615.5133(f)(5)--Presale Value Verification
    We redesignate existing Sec.  615.5133(f)(3) as Sec.  
615.5133(f)(5) and change the word ``security'' to ``investment.''
6. Section 615.5133(g)--Reports to the Board of Directors
    We proposed revisions to Sec.  615.5133(g), which specifies 
information that management must report to the board or a board 
committee each quarter. Proposed Sec.  615.5133(g)(1) retained the 
general quarterly reporting requirements from existing Sec.  
615.5133(g) but added to and modified them to strengthen the overall 
reporting requirements.
    The Council and a bank commented that the board reporting 
requirements were exceedingly prescriptive and limiting of the board's 
authority to direct management, and they requested that the provisions 
be generalized and simply require that the board receive a

[[Page 66368]]

quarterly report containing information on the investment portfolio as 
the board deems appropriate.
    With one exception that we discuss below and minor technical 
changes, we are finalizing all of the general quarterly reporting 
requirements of Sec.  615.5133(g)(1) (redesignated as Sec.  
615.5133(g)) that we proposed. We believe this level of reporting is 
necessary to ensure an institution's board has the information it needs 
about the institution's investments. The one proposed requirement that 
we are not adopting in final Sec.  615.5133(g) is that we are not 
requiring institutions to report on the results of their quarterly 
stress tests. We expect, however, that institutions will report on 
stress tests results that do not comply with their investment policies.
    We are including in final Sec.  615.5133(g) the reporting 
requirements that were contained in proposed Sec.  615.5143(c), 
governing management of ineligible investments, because we believe it 
is more logical to have all board reporting requirements in one 
provision of the regulations. We make technical, but not substantive, 
changes to these requirements.
    Proposed Sec.  615.5133(g)(2) would have required an institution to 
provide immediate notification to its board of directors or to a 
designated board committee if its portfolio exceeded the quarterly 
stress-test parameters defined in its board policy. The Council 
expressed concern that the term ``immediate'' is vague, and it 
requested that FCA require notification to be completed ``in a 
reasonable manner'' as the board may direct.
    Since exceeding a board policy's stress test parameters is not a 
regulatory violation, we have decided not to require board notification 
if this occurs. Nevertheless, we encourage each institution's board to 
require that it be notified of such a situation, because it could lead 
to serious risk exposures for the institution.
7. Investment Plan and Investment Oversight Committee
    Our proposed rule recommended, but did not propose to require, that 
institutions develop an investment plan and an investment oversight 
committee. Three commenters opposed a requirement for an investment 
plan or investment committee, stating that institutions' current 
practices already achieve the purposes of the plans and committees. 
Because this may be true for some institutions, we do not impose these 
as requirements. We continue to believe, however, that each institution 
that maintains an investment portfolio should consider whether it could 
benefit from the development of an investment plan and the 
establishment of an investment committee. The preamble to our proposed 
rule discusses the benefits of these plans and committees. We also note 
that the Federal Reserve published a proposed rule (77 FR 594, January 
5, 2012) that would require publicly traded bank holding companies with 
total consolidated assets of $10 billion or more to establish and 
maintain an enterprise-wide risk committee of the board of directors. 
Some System banks have already begun to or have implemented such 
committees.

D. Section 615.5135--Management of Interest Rate Risk

    We are relocating the requirements of existing Sec.  615.5135 to 
revised Sec.  615.5180 in part 615 subpart G of our regulations, 
because we had other interest rate risk requirements in subpart G and 
it was logical to locate all of these requirements together. We will 
discuss the changes made to Sec.  615.5180, and to other provisions in 
subpart G, below.

E. Section 615.5136--Emergencies Impeding Normal Access of Farm Credit 
Banks to Capital Markets

    Final Sec.  615.5136, which is very similar to what we proposed, 
provides that an emergency shall be deemed to exist whenever a 
financial, economic, agricultural, or national defense, or other crisis 
could impede the normal access of Farm Credit banks to the capital 
markets. Whenever the FCA determines, after consultations with the 
Funding Corporation to the extent practicable, that such an emergency 
exists, the FCA Board may, in its sole discretion, adopt a resolution 
that:
     Modifies the amount, qualities, and types of eligible 
investments that banks are authorized to hold pursuant to Sec.  
615.5132;
     Modifies or waives the liquidity requirement(s) in Sec.  
615.5134; and/or
     Authorizes other actions as deemed appropriate.
    The revisions in our proposal, which we itemized in the preamble to 
the proposed rule, provide additional flexibility to the resolution 
that the FCA Board may adopt. The Council supported these revisions. 
The final rule adds the catch-all ``other crisis'' that could impede 
normal access to the capital markets.

F. Section 615.5140--Eligible Investments

    We make only minor technical changes to this provision. We delete 
the reference to divestiture in existing Sec.  615.5140(a)(4), because 
we no longer require divestiture of investments that were eligible when 
purchased, and the treatment of investments that were ineligible when 
purchased is specified in Sec.  615.5143(a). We also delete the 
references to stress testing mortgage securities in existing Sec.  
615.5140(a)(5), because new Sec.  615.5133(f) sets forth stress-testing 
requirements for investments. Finally, we make a slight formatting 
change to Sec.  615.5140(a) to clarify its requirements.

G. Section 615.5141--Stress Tests for Mortgage Securities

    As proposed, we remove this stand-alone, stress-testing section 
from our regulations, because we have included stress-testing 
requirements in final Sec.  615.5133(f)(1)(iii) and (f)(4).

H. Section 615.5143--Management of Ineligible Investments and 
Reservation of Authority To Require Divestiture

    Existing Sec.  615.5143 requires an institution to dispose of an 
investment that is ineligible\16\ within 6 months unless we approve, in 
writing, a plan that authorizes the institution to divest the 
instrument over a longer period of time.
---------------------------------------------------------------------------

    \16\ Under existing Sec.  615.5140.
---------------------------------------------------------------------------

    New Sec.  615.5143(b) no longer requires a System institution to 
divest of (or to receive approval of a divestiture plan for) an 
investment that was eligible when purchased but no longer satisfies the 
eligibility criteria.\17\ Rather, the institution must notify the FCA 
within 15 calendar days of determining that the investment no longer 
satisfies eligibility criteria. This approach provides institutions 
with greater flexibility to manage their positions and mitigate losses 
as compared with a forced divestiture during a specified time period. 
Two commenters supported this change to our overall approach.
---------------------------------------------------------------------------

    \17\ Such an investment would no longer be considered 
``ineligible.''
---------------------------------------------------------------------------

    The proposed rule would have required an institution to notify FCA 
``promptly'' if an investment no longer satisfies the eligibility 
criteria. The Council commented that it was unsure what ``prompt'' 
meant in the context of the rule, and it stated that notification is 
redundant and unnecessary given the requirements of the regulation and 
the ongoing nature of the FCA's examination function. If FCA retained 
this requirement, the Council suggested a 60-day calendar notice.
    In response to this comment, we make the notification period 15 
calendar days after the System institution determines

[[Page 66369]]

that the investment no longer satisfies the eligibility criteria. We 
believe this notification period is adequate, since the timeframe does 
not begin until the System institution makes the determination. 
Moreover, notification can be as simple as a telephone call or email.
    In addition, in the final rule as in the proposed, the institution 
is subject to the following requirements:
     It must not use the investment to satisfy its liquidity 
requirement(s) under Sec.  615.5134;
     It must continue to include the investment in the Sec.  
615.5132 investment portfolio limit calculation;
     It may continue to include the investment as collateral 
under Sec.  615.5050 and net collateral under Sec.  615.5301(c) at the 
lower of cost or market value; and
     It must develop a plan to reduce the risk arising from the 
investment.
    The proposed rule would have required notification to FCA when an 
investment that satisfied the regulatory eligibility criteria was not 
suitable because it did not satisfy the risk tolerance established in 
the institution's required board policy, and the investment would have 
been subject to requirements regarding exclusion from the liquidity 
reserve, inclusion in the investment portfolio limit, inclusion in 
collateral and net collateral, and the development of a risk reduction 
plan. We are deleting this notification requirement, as well as the 
other requirements, from the final rule because we do not want to 
create a disincentive for a System institution to establish a risk 
tolerance that is stricter than FCA's regulatory eligibility criteria. 
Under the final rule, a System institution does not have to notify the 
FCA when an investment that satisfies FCA's regulatory eligibility 
criteria does not satisfy its own risk tolerance, nor is the investment 
subject to the other requirements.
    As we proposed, final Sec.  615.5143(a) provides that an investment 
that does not satisfy the regulatory eligibility criteria at the time 
of purchase is ineligible. Under the final rule (as under the existing 
regulation), System institutions may not purchase ineligible 
investments. If a System institution does purchase an ineligible 
investment, it must notify the FCA within 15 calendar days after 
determining that the investment was ineligible and must divest of the 
investment no later than 60 calendar days after the determination 
unless we approve, in writing, a plan that authorizes divestiture over 
a longer period of time. In addition, in the final rule as in the 
proposed, until the institution divests of the investment:
     It must not be used to satisfy the institution's liquidity 
requirement(s) under Sec.  615.5134;
     It must continue to be included in the Sec.  615.5132 
investment portfolio limit calculation; and
     It must be excluded as collateral under Sec.  615.5050 and 
net collateral under Sec.  615.5301(c).
    Although it is not stated in the regulation, we clarify here than 
an acceptable divestiture plan would have to require a System 
institution to dispose of the investment as quickly as possible without 
substantial financial loss. The plan would also have to contain 
sufficient analysis to support retention of the investment, including 
its effect on the institution's capital, earnings, liquidity, and 
collateral position. Our decision would not be based solely on 
financial loss and would include consideration of all circumstances 
surrounding the purchase.
    In addition, we emphasize that any purchase of an ineligible 
investment would indicate weaknesses in a System institution's internal 
controls and due diligence and would trigger increased FCA oversight if 
it occurs. We expect such a purchase to occur rarely, if ever. For this 
reason, we are retaining the divestiture requirements from the existing 
and proposed rules, despite the Council's and a bank commenter's 
request that we treat investments that are ineligible when purchased in 
the same manner as we treat investments that are eligible when 
purchased but that subsequently fail to meet the eligibility criteria. 
Furthermore, in response to the Council's comment that this provision 
essentially authorizes System institutions to purchase ineligible 
investments that could be held for 60 calendar days, we emphasize that 
this provision does not authorize such a purchase. As stated, if a 
System institution makes such a purchase, it should expect increased 
FCA oversight of its internal controls and due diligence process as 
well as enforcement actions as appropriate.
    Proposed Sec.  615.5143(c) would have required each institution to 
report to its board at least quarterly regarding investments that were 
ineligible when purchased and investments that were eligible when 
purchased but that no longer satisfy the eligibility criteria. As 
discussed above, we have moved these reporting requirements to Sec.  
615.5133(g) so that all board reporting requirements for investments 
are in one place.
    Finally, Sec.  615.5143(d) reserves FCA's authority to require an 
institution to divest of any investment at any time for failure to 
comply with Sec.  615.5132(a) or Sec.  615.5142 (as applicable) or for 
safety and soundness purposes. Although we did not propose failure to 
comply with the permissible investment purposes specified in Sec.  
615.5132(a) and Sec.  615.5142 as a basis for requiring divestiture, 
this change merely makes explicit our implicit authority to require 
divestiture of an investment that does not comply with our investment 
regulations. The timeframe FCA sets would consider the expected loss on 
the transaction (or transactions) and the effect on a System 
institution's financial condition and performance. Because the final 
rule would not require divestiture of any investment that was eligible 
when purchased, FCA is making express our authority to require 
divestiture of investments when necessary. We received no comments on 
our proposed reservation of authority.

I. Section 615.5174--Farmer Mac Securities

    We proposed changes to Sec.  615.5174(d), governing stress testing 
of Farmer Mac securities, which Farm Credit banks, associations, and 
service corporations are permitted to purchase and hold for the purpose 
of managing credit and interest rate risk and furthering their mission 
to finance agriculture. For the reason discussed in the preamble to the 
proposed rule, we proposed to remove the requirement that a System 
institution must subject Farmer Mac securities backed by loans that the 
institution originated to the stress testing applicable to investments. 
If a System institution purchases a Farmer Mac security from another 
System institution or from outside the System, however, the security 
would remain subject to the stress testing applicable to investments. 
Because we proposed to eliminate our divestiture requirement for other 
investments that fail a stress test, we also proposed to eliminate that 
divestiture requirement for those Farmer Mac securities that remain 
subject to stress testing.
    We also added a definition of the term ``you'' in new Sec.  
615.5174(e), to clarify that the regulation applies to Farm Credit 
banks, associations, and service corporations.
    We received two comments on Sec.  615.5174, both supporting the 
stress-testing change, and we are finalizing Sec.  615.5174 as 
proposed.

J. Section 615.5180--Bank Interest Rate Risk Management Program

    We are revising Sec.  615.5180 by moving the requirements of 
existing Sec.  615.5135 and existing Sec.  615.5181 into this

[[Page 66370]]

section. Since all three existing sections govern interest rate risk 
management of banks, it makes sense to combine them into one regulatory 
provision.
    Interest rate risk management is an important part of the overall 
financial management of a Farm Credit bank. The potentially adverse 
effects that interest rate risk may have on net interest income and the 
market value of equity is of particular importance.
    We believe that strong policy direction from a Farm Credit bank's 
board of directors is essential to an effective interest rate risk 
management program. Accordingly, final Sec.  615.5180(a) retains the 
existing requirement, currently contained in Sec.  615.5180, that a 
bank's board must develop and implement an interest rate risk 
management program, tailored to the needs of the institution, that 
establishes a risk management process that effectively identifies, 
measures, monitors, and controls interest rate risk. Final Sec.  
615.5180(a) also contains the requirement, currently contained in Sec.  
615.5181(a), that the bank's board of directors must be knowledgeable 
of the nature and level of interest rate risk taken by the institution.
    Final Sec.  615.5180(b) contains the requirement, currently in 
Sec.  615.5181(b), that senior management is responsible for ensuring 
that interest rate risk is properly managed on both a long-range and a 
day-to-day basis.
    Final Sec.  615.5180(c), which requires the board of directors of 
each bank to adopt an interest rate risk management section of an 
asset/liability management policy that establishes interest rate risk 
exposure limits as well as the criteria to determine compliance with 
these limits, contains the requirements we had proposed in Sec.  
615.5135, as revised. Final Sec.  615.5180(c) requires, in addition to 
the existing requirements that carry over, that the interest rate risk 
management section must establish policies and procedures for the bank 
to:
     Address the purpose and objectives of interest rate risk 
management;
     Consider the effect of investments on interest rate risk 
based on the results of the required stress testing; \18\
---------------------------------------------------------------------------

    \18\ Existing Sec.  615.5135 already requires banks to include 
investments in their interest rate shock analysis.
---------------------------------------------------------------------------

     Identify exception parameters and approvals needed for any 
exceptions to the requirements of the board's policies;
     Describe delegations of authority;
     Describe reporting requirements, including exceptions to 
limits contained in the board's policies; and
     Consider the nature and purpose of derivative contracts 
and establish counterparty risk thresholds and limits for derivatives.
    We delete several existing requirements because similar 
requirements are also contained in the board reporting requirements of 
Sec.  615.5133(g).
    We are finalizing our proposal to require that management of each 
bank must report at least quarterly to its board of directors, or to a 
designated committee of the board, describing the nature and level of 
interest rate risk exposure. Any deviations from the board's policies 
on interest rate risk must be specifically identified in the report and 
approved by the board or a designated committee of the board.
    The Council generally supported the proposed changes to the rule, 
but it was concerned that FCA would implement the additional 
requirements in a way that results in additional burden in areas where 
such burden is not supported by identified weaknesses in current System 
interest rate risk management practices. The Council stated that this 
area has functioned exceedingly well over the years, including 
throughout the recent financial market crisis, and it asked that FCA 
recognize this effectiveness.
    We recognize that overall, the System has implemented effective 
interest rate risk management practices. We believe our revisions to 
this rule will further strengthen these practices. We do not intend to 
impose additional burden in implementation unless that burden is 
warranted.

K. Section 615.5181--Bank Interest Rate Risk Management Program

    We remove this section from our regulations, because we have 
included these requirements in final Sec.  615.5180.

L. Section 615.5182--Interest Rate Risk Management by Associations and 
Other Farm Credit System Institutions Other Than Banks

    We made minor technical, non-substantive changes to this provision.

M. Section 615.5201--Definitions

    As discussed above, our capital adequacy regulation at Sec.  
615.5201 defines the terms Government agency and Government-sponsored 
agency. We agree with the Council's comment that FCA's definitions 
should be consistent among themselves. Accordingly, we are revising the 
definitions in Sec.  615.5201 to conform to the new definitions in 
Sec.  615.5131.

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 final 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 amended as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
1. The authority citation for part 615 continues 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, 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.

0
2. Section 615.5131 is amended by:
0
a. Removing designations for paragraphs (a) through (l) and maintaining 
alphabetical order;
0
b. Removing the reference to ``615.5131(h)'' from the definition for 
``asset-backed securities (ABS)'' and adding in its place the words 
``this section''; and
0
c. Adding in alphabetical order definitions for ``government agency'' 
and ``government-sponsored agency'' to read as follows:


Sec.  615.5131  Definitions.

* * * * *
    Government agency means the United States Government or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or guaranteed as to the 
timely repayment of principal and interest by the full faith and credit 
of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the

[[Page 66371]]

United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government, including but not limited to any Government-
sponsored enterprise.
* * * * *

0
3. Section 615.5132 is revised to read as follows:


Sec.  615.5132  Investment purposes.

    (a) Each Farm Credit bank may hold eligible investments, listed 
under Sec.  615.5140, in an amount not to exceed 35 percent of its 
total outstanding loans, to comply with its liquidity requirements in 
Sec.  615.5134, manage surplus short-term funds, and manage interest 
rate risk under Sec.  615.5180. To comply with this calculation, the 
30-day average daily balance of investments is divided by loans. 
Investments are calculated at amortized cost. Loans are calculated as 
defined in Sec.  615.5131. For the purpose of this calculation, loans 
include accrued interest and do not include any allowance for loan loss 
adjustments. Compliance with the calculation is measured on the last 
day of every month.
    (b) The following investments may be excluded when calculating the 
amount of eligible investments held by the Farm Credit bank pursuant to 
Sec.  615.5132(a):
    (1) Eligible investments listed under Sec.  615.5140 that are 
pledged by a Farm Credit bank to meet margin requirements for 
derivative transactions; and
    (2) Any other investments FCA determines are appropriate for 
exclusion.

0
4. Section 615.5133 is revised to read as follows:


Sec.  615.5133  Investment management.

    (a) Responsibilities of board of directors. Your board of directors 
must adopt written policies for managing your investment activities. 
Your board must also ensure that management complies with these 
policies and that appropriate internal controls are in place to prevent 
loss. At least annually, the board, or a designated committee of the 
board, must review the sufficiency of these investment policies. Any 
changes to the policies must be adopted by the board and be documented.
    (b) Investment policies--general requirements. Your board's written 
investment policies must address the purposes and objectives of 
investments; risk tolerance; delegations of authority; internal 
controls; due diligence; and reporting requirements. Moreover, your 
investment policies must fully address the extent of pre-purchase 
analysis that management must perform for various classes of 
investments. Furthermore, your investment policies must address the 
means for reporting, and approvals needed for, exceptions to 
established policies. Investment policies must be sufficiently 
detailed, consistent with, and appropriate for the amounts, types, and 
risk characteristics of your investments.
    (c) Investment policies--risk tolerance. Your investment policies 
must establish risk limits for the various types, classes, and sectors 
of eligible investments and for the entire investment portfolio. These 
policies must include concentration limits to ensure prudent 
diversification of credit, market, and liquidity risks in the 
investment portfolio. Risk limits must be based on all relevant 
factors, including your institutional objectives, capital position, 
earnings, and quality and reliability of risk management systems and 
must take into consideration the interest rate risk management program 
required by Sec.  615.5180 or Sec.  615.5182, as applicable. Your 
policies must identify the types and quantity of investments that you 
will hold to achieve your objectives and control credit, market, 
liquidity, and operational risks. Each association or service 
corporation that holds significant investments and each bank must 
establish risk limits in its investment policies for these four types 
of risk.
    (1) Credit risk. Investment policies must establish:
    (i) Credit quality standards, limits on counterparty risk, and risk 
diversification standards that limit concentrations. Limits must be set 
for single or related counterparty(ies), a geographical area, 
industries, and asset classes or obligations with similar 
characteristics.
    (ii) Criteria for selecting brokers, dealers, and investment 
bankers (collectively, securities firms). You must buy and sell 
eligible investments with more than one securities firm. As part of 
your review of your investment policies required under paragraph (a) of 
this section, your board of directors, or a designated committee of the 
board, must review the criteria for selecting securities firms. Any 
changes to the criteria must be approved by the board.
    (iii) Collateral margin requirements on repurchase agreements. You 
must regularly mark the collateral to market and ensure appropriate 
controls are maintained over collateral held.
    (2) Market risk. Investment policies must set market risk limits 
for specific types of investments and for the investment portfolio.
    (3) Liquidity risk. Investment policies must describe the liquidity 
characteristics of eligible investments that you will hold to meet your 
liquidity needs and other institutional objectives.
    (4) Operational risk. Investment policies must address operational 
risks, including delegations of authority and internal controls in 
accordance with paragraphs (d) and (e) of this section.
    (d) Delegation of authority. All delegations of authority to 
specified personnel or committees must state the extent of management's 
authority and responsibilities for investments.
    (e) Internal controls. You must:
    (1) Establish appropriate internal controls to detect and prevent 
loss, fraud, embezzlement, conflicts of interest, and unauthorized 
investments.
    (2) Establish and maintain a separation of duties between personnel 
who supervise or execute investment transactions and personnel who 
supervise or engage in all other investment-related functions.
    (3) Maintain records and management information systems that are 
appropriate for the level and complexity of your investment activities.
    (4) Implement an effective internal audit program to review, at 
least annually, your investment management function, controls, 
processes, and compliance with FCA regulations. The scope of the annual 
review must be appropriate for the size, risk and complexity of the 
investment portfolio.
    (f) Due diligence--(1) Pre-purchase analysis. (i) Eligibility, 
purpose, and compliance with investment policies. Before you purchase 
an investment, you must conduct sufficient due diligence to determine 
whether it is eligible under Sec.  615.5140, is for an authorized 
purpose under Sec.  615.5132 or Sec.  615.5142, as applicable, and 
complies with your board's investment policies. You must document your 
assessment and the information used in your assessment. Your board must 
approve your decision to hold an investment that does not comply with 
your investment policies.
    (ii) Valuation. Prior to purchase, you must verify the value of the 
investment (unless it is a new issue) with a source that is independent 
of the broker, dealer, counterparty or other intermediary to the 
transaction.
    (iii) Risk assessment. Your assessment of each investment at the 
time of purchase must at a minimum include an evaluation of credit 
risk, liquidity risk, market risk, interest rate risk, and the 
underlying collateral of the investment. This assessment must be 
commensurate with the complexity and risk in the

[[Page 66372]]

investment. You must perform stress testing on any investment that is 
structured or that has uncertain cash flows, including all mortgage-
backed securities and asset-backed securities, before you purchase it. 
The stress test must be commensurate with the risk and complexity of 
the investment and must enable you to determine that the investment 
does not expose your capital, earnings, or liquidity to risks that are 
greater than those specified in your investment policies. The stress 
testing must comply with the requirements in paragraph (f)(4)(ii) of 
this section.
    (2) Ongoing value determination. At least monthly, you must 
determine the fair market value of each investment in your portfolio 
and the fair market value of your whole investment portfolio.
    (3) Ongoing analysis of credit risk. You must establish and 
maintain processes to monitor and evaluate changes in the credit 
quality of each investment in your portfolio and in your whole 
investment portfolio on an ongoing basis.
    (4) Quarterly stress testing. (i) You must stress test your entire 
investment portfolio, including stress tests of all investments 
individually and stress tests of the portfolio as a whole, at the end 
of each quarter. The stress tests must enable you to determine that 
your investment securities, both individually and on a portfolio-wide 
basis, do not expose your capital, earnings, or liquidity to risks that 
exceed the risk tolerance specified in your investment policies. If 
your portfolio risk exceeds your investment policy limits, you must 
develop a plan to comply with those limits.
    (ii) Your stress tests must be defined in a board-approved policy 
and must include defined parameters for the types of securities you 
purchase. The stress tests must be comprehensive and appropriate for 
the risk profile of your institution. At a minimum, the stress tests 
must be able to measure the price sensitivity of investments over a 
range of possible interest rate/yield curve scenarios. The methodology 
that you use to analyze investment securities must be appropriate for 
the complexity, structure, and cash flows of the investments in your 
portfolio. You must rely to the maximum extent practicable on 
verifiable information to support all your assumptions, including 
prepayment and interest rate volatility assumptions, when you apply 
your stress tests. You must document the basis for all assumptions that 
you use to evaluate the security and its underlying collateral. You 
must also document all subsequent changes in your assumptions.
    (5) Presale value verification. Before you sell an investment, you 
must verify its value with a source that is independent of the broker, 
dealer, counterparty, or other intermediary to the transaction.
    (g) Reports to the board of directors. At least quarterly, your 
management must report on the following to your board of directors or a 
designated board committee:
    (1) Plans and strategies for achieving the board's objectives for 
the investment portfolio;
    (2) Whether the investment portfolio effectively achieves the 
board's objectives;
    (3) The current composition, quality, and liquidity profile of the 
investment portfolio;
    (4) The performance of each class of investments and the entire 
investment portfolio, including all gains and losses realized during 
the quarter on individual investments that you sold before maturity and 
why they were liquidated;
    (5) Potential risk exposure to changes in market interest rates as 
identified through quarterly stress testing and any other factors that 
may affect the value of your investment holdings;
    (6) How investments affect your capital, earnings, and overall 
financial condition;
    (7) Any deviations from the board's policies (must be specifically 
identified);
    (8) The status and performance of each investment described in 
Sec.  615.5143(a) and (b) or that does not comply with your investment 
policies; including the expected effect of these investments on your 
capital, earnings, liquidity, and collateral position; and
    (9) The terms and status of any required divestiture plan or risk 
reduction plan.


Sec.  615.5135  [Removed]

0
5. Section 615.5135 is removed.

0
6. Section 615.5136 is revised to read as follows:


Sec.  615.5136  Emergencies impeding normal access of Farm Credit banks 
to capital markets.

    An emergency shall be deemed to exist whenever a financial, 
economic, agricultural, national defense, or other crisis could impede 
the normal access of Farm Credit banks to the capital markets. Whenever 
the Farm Credit Administration determines, after consultation with the 
Federal Farm Credit Banks Funding Corporation to the extent 
practicable, that such an emergency exists, the Farm Credit 
Administration Board may, in its sole discretion, adopt a resolution 
that:
    (a) Modifies the amount, qualities, and types of eligible 
investments that Farm Credit banks are authorized to hold pursuant to 
Sec.  615.5132 of this subpart;
    (b) Modifies or waives the liquidity requirement(s) in Sec.  
615.5134 of this subpart; and/or
    (c) Authorizes other actions as deemed appropriate.

0
7. Section 615.5140 is amended by revising paragraph (a) to read as 
follows:


Sec.  615.5140  Eligible investments.

    (a) You may hold only the following types of investments listed in 
the Investment Eligibility Criteria Table. These investments must be 
denominated in United States dollars.

                                      Investment Eligibility Criteria Table
----------------------------------------------------------------------------------------------------------------
                                    Final maturity       NRSRO Credit                             Investment
           Asset class                   limit              rating        Other requirements    portfolio limit
----------------------------------------------------------------------------------------------------------------
(1) Obligations of the United     None..............  NA................  None..............  None.
 States.
 Treasuries.
 Agency securities
 (except mortgage securities).
 Other obligations fully
 insured or guaranteed by the
 United States, its agencies,
 instrumentalities and
 corporations.

[[Page 66373]]

 
(2) Municipal Securities:
 General obligations....  10 years..........  One of the highest  None..............  None.
                                                       two.
 Revenue bonds..........  5 years...........  Highest...........  At the time of      15%.
                                                                           purchase, you
                                                                           must document
                                                                           that the issue is
                                                                           actively traded
                                                                           in an established
                                                                           secondary market.
(3) International and             None..............  None..............  The United States   None.
 Multilateral Development Bank                                             must be a voting
 Obligations.                                                              shareholder.
(4) Money Market Instruments:
 Federal funds..........  1 day or            One of the two      None..............  None.
                                   continuously        highest short-
                                   callable up to      term.
                                   100 days.
 Negotiable certificates  1 year............  One of the two      None..............  None.
 of deposit.                                           highest short-
                                                       term.
 Bankers acceptances....  None..............  One of the two      Issued by a         None.
                                                       highest short-      depository
                                                       term.               institution.
 Commercial paper.......  270 days..........  Highest short-term  None..............  None.
 Non-callable Term        100 days..........  Highest short-term  None..............  20%.
 Federal funds and Eurodollar
 time deposits.
 Master notes...........  270 days..........  Highest short-term  None..............  20%.
 Repurchase agreements    100 days..........  NA................  None..............  None.
 collateralized by eligible
 investments or marketable
 securities rated in the highest
 credit rating category by an
 NRSRO.
(5) Mortgage Securities:
 Issued or guaranteed by  None..............  NA................  None..............  None.
 the United States.
 Fannie Mae or Freddie    None..............  NA................  None..............  50%.
 Mac mortgage securities.
 Non-Agency securities    None..............  Highest...........  None..............  15%.
 that comply 15 U.S.C. 77d(5) or
 15 U.S.C. 78c(a)(41).
 Commercial mortgage-     None..............  Highest...........   Security
 backed securities.                                                        must be backed by
                                                                           a minimum of 100
                                                                           loans.
                                                                           Loans
                                                                           from a single
                                                                           mortgagor cannot
                                                                           exceed 5% of the
                                                                           pool.
                                                                           Pool must
                                                                           be geographically
                                                                           diversified
                                                                           pursuant to the
                                                                           board's policy.
(6) Asset-Backed Securities       None..............  Highest...........  5-year WAL for      20%.
 secured by.                                                               fixed rate or
 Credit card                                                       floating rate ABS
 receivables..                                                             at their
 Automobile loans.......                                           contractual
 Home equity loans......                                           interest rate
 Wholesale automobile                                              caps.
 dealer loans..                                                           7-year WAL for
 Student loans..........                                           floating rate ABS
 Equipment loans........                                           that remain below
 Manufactured housing                                              their contractual
 loans..                                                                   interest rate
                                                                           cap..
(7) Corporate Debt Securities...  5 years...........  One of the two      Cannot be           20%.
                                                       highest.            convertible to
                                                                           equity securities.

[[Page 66374]]

 
(8) Diversified Investment Funds  NA................  NA................  The portfolio of    None, if your
Shares of an investment company                                            the investment      shares in each
 registered under section 8 of                                             company must        investment
 the Investment Company Act of                                             consist solely of   company comprise
 1940..                                                                    eligible            10% or less of
                                                                           investments         your portfolio.
                                                                           authorized by       Otherwise counts
                                                                           Sec.  Sec.          toward limit for
                                                                           615.5140 and        each type of
                                                                           615.5174.           investment.
                                                                          The investment
                                                                           company's risk
                                                                           and return
                                                                           objectives and
                                                                           use of
                                                                           derivatives must
                                                                           be consistent
                                                                           with FCA guidance
                                                                           and your
                                                                           investment
                                                                           policies..
----------------------------------------------------------------------------------------------------------------

* * * * *


Sec.  615.5141  [Removed]

0
8. Section 615.5141 is removed.

0
9. Section 615.5143 is revised to read as follows:


Sec.  615.5143  Management of ineligible investments and reservation of 
authority to require divestiture.

    (a) Investments ineligible when purchased. Investments that do not 
satisfy the eligibility criteria set forth in Sec.  615.5140 at the 
time of purchase are ineligible. You must not purchase ineligible 
investments. If you determine that you have purchased an ineligible 
investment, you must notify us within 15 calendar days after the 
determination. You must divest of the investment no later than 60 
calendar days after you determine that the investment is ineligible 
unless we approve, in writing, a plan that authorizes you to divest the 
investment over a longer period of time. Until you divest of the 
investment:
    (1) It must not be used to satisfy your liquidity requirement(s) 
under Sec.  615.5134;
    (2) It must continue to be included in the Sec.  615.5132 
investment portfolio limit calculation; and
    (3) It must be excluded as collateral under Sec.  615.5050 and net 
collateral under Sec.  615.5301(c).
    (b) Investments that no longer satisfy eligibility criteria. If you 
determine that an investment (that satisfied the eligibility criteria 
set forth in Sec.  615.5140 when purchased) no longer satisfies the 
eligibility criteria, you may continue to hold it, subject to the 
following requirements:
    (1) You must notify us within 15 calendar days after such 
determination;
    (2) You must not use the investment to satisfy your liquidity 
requirement(s) under Sec.  615.5134;
    (3) You must continue to include the investment in the Sec.  
615.5132 investment portfolio limit calculation;
    (4) You may continue to include the investment as collateral under 
Sec.  615.5050 and net collateral under Sec.  615.5301(c) at the lower 
of cost or market value; and
    (5) You must develop a plan to reduce the investment's risk to you.
    (c) Reservation of authority. FCA retains the authority to require 
you to divest of any investment at any time for failure to comply with 
Sec.  615.5132(a) or Sec.  615.5142 or for safety and soundness 
reasons. The timeframe set by FCA will consider the expected loss on 
the transaction (or transactions) and the effect on your financial 
condition and performance.

0
10. Section 615.5174 is amended by:
0
a. Removing the reference ``615.5131(f)'' in paragraph (a) and adding 
in its place, the reference ``615.5131'';
0
b. Revising paragraph (d); and
0
c. Adding paragraph (e).
    The revision and addition read as follows:


Sec.  615.5174  Farmer Mac securities.

* * * * *
    (d) Stress Test. You must perform stress tests, in accordance with 
Sec.  615.5133(f)(1)(iii) and Sec.  615.5133(f)(4), on mortgage 
securities, issued or guaranteed by Farmer Mac, that are backed by 
loans that you did not originate.
    (e) You. Means a Farm Credit bank, association, or service 
corporation.

0
11. Section 615.5180 is revised to read as follows:


Sec.  615.5180  Bank interest rate risk management program.

    (a) The board of directors of each Farm Credit bank must develop, 
implement, and effectively oversee an interest rate risk management 
program tailored to the needs of the institution. The program must 
establish a risk management process that effectively identifies, 
measures, monitors, and controls interest rate risk. The board of 
directors of each Farm Credit bank must be knowledgeable of the nature 
and level of interest rate risk taken by the institution.
    (b) Senior management is responsible for ensuring that interest 
rate risk is properly managed on both a long-range and a day-to-day 
basis.
    (c) The board of directors of each Farm Credit bank must adopt an 
interest rate risk management section of an asset/liability management 
policy that establishes interest rate risk exposure limits as well as 
the criteria to determine compliance with these limits. At a minimum, 
the interest rate risk management section must establish policies and 
procedures for the bank to:
    (1) Address the purpose and objectives of interest rate risk 
management;
    (2) Identify and analyze the causes of risks within its existing 
balance sheet structure;
    (3) Measure the potential effect of these risks on projected 
earnings and market values by conducting interest rate shock tests and 
simulations of multiple economic scenarios at least on a quarterly 
basis and by considering the effect of investments on interest rate 
risk based on the results of the stress testing required under Sec.  
615.5133(f)(4);
    (4) Describe and implement actions needed to obtain its desired 
risk management objectives;
    (5) Identify exception parameters and approvals needed for any 
exceptions to the requirements of the board's policies;
    (6) Describe delegations of authority;
    (7) Describe reporting requirements, including exceptions to limits 
contained in the board's policies;
    (8) Consider the nature and purpose of derivative contracts and 
establish counterparty risk thresholds and limits for derivatives.
    (d) At least quarterly, management of each Farm Credit bank must 
report to its board of directors, or a designated committee of the 
board, describing the nature and level of interest rate risk

[[Page 66375]]

exposure. Any deviations from the board's policy on interest rate risk 
must be specifically identified in the report and approved by the board 
or designated committee of the board.


Sec.  615.5181  [Removed]

0
12. Section 615.5181 is removed.

0
13. Section 615.5182 is revised to read as follows:


Sec.  615.5182  Interest rate risk management by associations and other 
Farm Credit System institutions other than banks.

    Any association or other Farm Credit System institution other than 
Farm Credit banks, excluding the Federal Agricultural Mortgage 
Corporation, with interest rate risk that could lead to significant 
declines in net income or in the market value of capital must comply 
with the requirements of Sec.  615.5180. The interest rate risk 
management program required under Sec.  615.5180 must be commensurate 
with the level of interest rate risk of the institution.

0
14. Section 615.5201 is amended by revising the definitions for 
``government agency'' and ``government-sponsored agency'' to read as 
follows:


Sec.  615.5201  Definitions.

* * * * *
    Government agency means the United States Government or an agency, 
instrumentality, or corporation of the United States Government whose 
obligations are fully and explicitly insured or guaranteed as to the 
timely repayment of principal and interest by the full faith and credit 
of the United States Government.
    Government-sponsored agency means an agency, instrumentality, or 
corporation chartered or established to serve public purposes specified 
by the United States Congress but whose obligations are not fully and 
explicitly insured or guaranteed by the full faith and credit of the 
United States Government, including but not limited to any Government-
sponsored enterprise.
* * * * *

    Dated: October 25, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-26806 Filed 11-2-12; 8:45 am]
BILLING CODE 6705-01-P