Removal of References to Credit Ratings in Certain Regulations Governing the Federal Home Loan Banks, 30784-30791 [2013-12333]
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30784
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
make it difficult for the domestic
industry to compete. However, the
Committee agreed the quality of the fruit
was the most important issue and
shipping the lower grade fruit lowered
that high standard established by the
Florida avocado industry. Also,
Committee members stated that they
believe increasing the minimum grade
for Florida avocados shipped outside
the production area for the entire season
would result in improved quality of
both domestic and imported avocados,
as imports would likely strive to match
the quality standards set by the Florida
avocado industry. Therefore, this
alternative was rejected.
The Committee also considered
changing the minimum grade
requirements for all Florida avocados
handled, regardless of market
destination. However, maintaining the
current minimum grade requirement for
avocados shipped to destinations within
the production area provides an outlet
for U.S. No. 2 grade fruit not utilized in
the higher grade packs. Therefore, the
Committee also rejected this alternative.
In accordance with the Paperwork
Reduction Act of 1995, (44 U.S.C.
Chapter 35), the order’s information
collection requirements have been
previously approved by the Office of
Management and Budget (OMB) and
assigned OMB No. 0581–0189, Generic
Fruit Crops. No changes in those
requirements as a result of this action
are necessary. Should any changes
become necessary, they would be
submitted to OMB for approval.
This proposed rule would increase
the minimum grade requirement under
the Florida avocado marketing order.
Accordingly, this action would not
impose any additional reporting or
recordkeeping requirements on either
small or large Florida avocado handlers.
As with all Federal marketing order
programs, reports and forms are
periodically reviewed to reduce
information requirements and
duplication by industry and public
sector agencies.
AMS is committed to complying with
the E-Government Act, to promote the
use of the Internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
USDA has not identified any relevant
Federal rules that duplicate, overlap or
conflict with this proposed rule.
In addition, the Committee’s meeting
was widely publicized throughout the
Florida avocado industry and all
interested persons were invited to
attend the meeting and participate in
Committee deliberations on all issues.
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Like all Committee meetings, the
October 10, 2012, meeting was a public
meeting and all entities, both large and
small, were able to express views on
this issue. Finally, interested persons
are invited to submit comments on this
proposed rule, including the regulatory
and informational impacts of this action
on small businesses.
A small business guide on complying
with fruit, vegetable, and specialty crop
marketing agreements and orders may
be viewed at: www.ams.usda.gov/
MarketingOrdersSmallBusinessGuide.
Any questions about the compliance
guide should be sent to Jeffrey Smutny
at the previously mentioned address in
the FOR FURTHER INFORMATION CONTACT
section.
A 30-day comment period is provided
to allow interested persons to respond
to this proposal. Thirty days is deemed
appropriate so this change would be in
place by May when handlers begin
shipping. This would also give handlers
advanced notice of the increased grade
requirement before the season begins.
All written comments timely received
will be considered before a final
determination is made on this matter.
List of Subjects in 7 CFR Part 915
Avocados, Reporting and
recordkeeping requirements.
For the reasons set forth in the
preamble, 7 CFR part 915 is proposed to
be amended as follows:
PART 915—AVOCADOS GROWN IN
SOUTH FLORIDA
1. The authority citation for 7 CFR
part 915 continues to read as follows:
■
Authority: 7 U.S.C. 601–674.
2. In § 915.306, paragraph (a)(1) is
revised to read as follows:
■
§ 915.306 Florida avocado grade, pack and
container marking regulation.
(a) * * *
(1) Such avocados grade at least U.S.
Combination, except that avocadoes
handled to destinations within the
production area grade U.S. No. 2 and
except further that such avocados may
be placed in containers with avocados
of dissimilar varietal characteristics.
*
*
*
*
*
Dated: May 17, 2013.
Rex A. Barnes,
Associate Administrator, Agricultural
Marketing Service.
[FR Doc. 2013–12239 Filed 5–22–13; 8:45 am]
BILLING CODE 3410–02–P
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FEDERAL HOUSING FINANCE
AGENCY
12 CFR Parts 1267, 1269, and 1270
RIN 2590–AA40
Removal of References to Credit
Ratings in Certain Regulations
Governing the Federal Home Loan
Banks
Federal Housing Finance
Agency.
ACTION: Notice of proposed rulemaking;
request for comment.
AGENCY:
SUMMARY: Section 939A of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act)
requires Federal agencies to review
regulations that require the use of an
assessment of the credit-worthiness of a
security or money market instrument
and any references to, or requirements
in, such regulations regarding credit
ratings issued by credit rating
organizations registered with the
Securities and Exchange Commission
(SEC) as nationally recognized statistical
rating organizations (NRSROs), and to
remove such references or requirements.
To implement this provision, the
Federal Housing Finance Agency
(FHFA) is proposing to remove a
number of references and requirements
in certain safety and soundness
regulations affecting the Federal Home
Loan Banks (Banks) and to adopt new
provisions that would require the Banks
to apply internal analytic standards and
criteria to determine the credit quality
of a security or obligation, subject to
FHFA oversight and review through the
examination and supervisory process.
FHFA will undertake separate
rulemakings to remove NRSRO
references and requirements contained
in the capital regulations applicable to
the Banks and in the regulations
governing the Banks’ acquired member
asset (AMA) programs.
DATES: Comments on the proposed rule
must be received on or before July 22,
2013.
ADDRESSES: You may submit your
comments on the proposed rule,
identified by regulatory information
number (RIN) 2590–AA40 by any of the
following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comments to the
Federal eRulemaking Portal, please also
send it by email to FHFA at
RegComments@FHFA.gov to ensure
timely receipt by the agency. Please
include ‘‘RIN 2590–AA40’’ in the
subject line of the message.
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• Email: Comments to Alfred M.
Pollard, General Counsel may be sent by
email to RegComments@FHFA.gov.
Please include ‘‘RIN 2590–AA40’’ in the
subject line of the message.
• Hand Delivery/Courier: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA40, Federal Housing
Finance Agency, Constitution Center,
(OGC) Eighth Floor, 400 Seventh Street
SW., Washington, DC 20024. The
package should be logged at the Seventh
Street entrance Guard Desk, First Floor,
on business days between 9 a.m. and 5
p.m.
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590–AA40,
Federal Housing Finance Agency,
Constitution Center, (OGC) Eighth Floor,
400 Seventh Street SW., Washington,
DC 20024.
FOR FURTHER INFORMATION CONTACT:
Amy Bogdon, Associate Director for
Regulatory Policy and Programs,
Amy.Bogdon@FHFA.gov, 202–649–
3320, Division of Federal Home Loan
Bank Regulation, Federal Housing
Finance Agency; or Thomas E. Joseph,
Associate General Counsel,
Thomas.Joseph@FHFA.gov, 202–649–
3076 (these are not toll-free numbers),
Office of General Counsel (OGC),
Federal Housing Finance Agency,
Constitution Center, Eighth Floor, 400
Seventh Street SW., Washington, DC
20024. The telephone number for the
Telecommunications Device for the
Hearing Impaired is 800–877–8339.
SUPPLEMENTARY INFORMATION:
tkelley on DSK3SPTVN1PROD with PROPOSALS
I. Comments
FHFA invites comments on all aspects
of the Notice of Proposed Rulemaking
(NPR), and will develop final
regulations after taking all comments
into consideration. Copies of all
comments will be posted without
change, including any personal
information you may provide such as
your name and address (mailing or
email) and telephone numbers, on the
internet Web site at https://
www.fhfa.gov. In addition, copies of all
comments received will be available for
examination by the public on business
days between the hours of 10 a.m. and
3 p.m., at the Federal Housing Finance
Agency, Constitution Center, (OGC)
Eighth Floor, 400 Seventh Street SW.,
Washington, DC 20024. To make an
appointment to inspect comments,
please call the Office of General Counsel
at 202–649–3804.
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II. Background
A. Dodd-Frank Act Provisions
Section 939A of the Dodd-Frank Act
requires federal agencies to: (i) Review
regulations that require the use of an
assessment of the creditworthiness of a
security or money market instrument;
and (ii) to the extent those regulations
contain any references to, or
requirements regarding credit ratings,
remove such references or requirements.
See section 939A, Public Law 111–203,
124 Stat. 1887 (July 21, 2010). In place
of such credit-rating based
requirements, agencies are instructed to
substitute appropriate standards for
determining creditworthiness. The new
law further provides that, to the extent
feasible, an agency should adopt a
uniform standard of creditworthiness
for use in its regulations, taking into
account the entities regulated by it and
the purposes for which such regulated
entities would rely on the
creditworthiness standard.
B. The Bank System
The twelve Banks are wholesale
financial institutions organized under
the Federal Home Loan Bank Act (Bank
Act).1 The Banks are cooperatives; only
members of a Bank may purchase the
capital stock of a Bank, and only
members or certain eligible housing
associates (such as state housing finance
agencies) may obtain access to secured
loans, known as advances, or other
products provided by a Bank.2 Each
Bank is managed by its own board of
directors and serves the public interest
by enhancing the availability of
residential credit through its member
institutions.3 Any eligible institution
(generally a federally insured depository
institution or state-regulated insurance
company) may become a member of a
Bank if it satisfies certain criteria and
purchases a specified amount of the
Bank’s capital stock.4
As government-sponsored enterprises,
the Banks are granted certain privileges
under federal law. In light of those
privileges, the Banks typically can
borrow funds at spreads over the rates
on U.S. Treasury securities of
comparable maturity lower than most
other entities. The Banks pass along a
portion of their funding advantage to
their members—and ultimately to
consumers—by providing advances and
other financial services at rates that
would not otherwise be available to
their members. Consolidated obligations
1 See
12 U.S.C. 1423, 1432(a).
12 U.S.C. 1426(a)(4), 1430(a), 1430b.
3 See 12 U.S.C. 1427.
4 See 12 U.S.C. 1424; 12 CFR part 1263.
2 See
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(COs), consisting of bonds and discount
notes, are the principal funding source
for the Banks. The Bank System’s Office
of Finance (OF) issues all COs on behalf
of the twelve Banks. Although each
Bank is primarily liable for the portion
of COs corresponding to the proceeds
received by that Bank, each Bank is also
jointly and severally liable with the
other eleven Banks for the payment of
principal and interest on all COs.5
C. Advance Notice of Proposed
Rulemaking
On January 31, 2011, FHFA published
an advance notice of proposed
rulemaking (ANPR) in which it solicited
comments from the public on potential
alternatives to the use of NRSRO credit
ratings in its regulations applicable to
the Banks, as well as in its regulations
applicable to the Federal National
Mortgage Association and the Federal
Home Loan Mortgage Corporation
(collectively, the Enterprises).6 Prior to
issuing the ANPR, FHFA also had
issued a proposed rule on Bank
liabilities and COs, which, among other
things, would have combined and redesignated a number of existing
regulations as new part 1270 of the
FHFA rules.7 In the preamble for the
proposed rule on Bank Liabilities, FHFA
asked for comments on implementing
section 939A of the Dodd-Frank Act
with regard to certain provisions
addressed in that rulemaking but did
not propose specific amendments
related to section 939A at that time.
FHFA ultimately decided to adopt the
Bank Liability Rule without amending
those provisions that referenced credit
ratings but noted that it would propose
changes to those provisions as part of a
future rulemaking.8 It also stated that it
would consider relevant comments
made on the part 1270 rules, along with
the comments received on the ANPR, as
part of such rulemaking.
FHFA received nine comment letters
on the ANPR. It also received five
comment letters on the proposed Bank
Liability Rule, all but one of which
addressed issues related to the
implementation of section 939A of the
5 See
12 U.S.C. 1431(c); 12 CFR 1270.10.
Advance Notice of Proposed Rulemaking,
Alternatives to Use of Credit Ratings in Regulations
Governing the Federal National Mortgage
Association, the Federal Home Loan Mortgage
Corporation, and the Federal Home Loan Banks, 76
FR 5292 (Jan. 31, 2011).
7 See Proposed Rule: Federal Home Loan Bank
Liabilities, 75 FR 68534, 68536–38 (Nov. 8, 2010)
(Bank Liability Rule).
8 See Final Rule: Federal Home Loan Bank
Liabilities, 76 FR 18366, 18368 (Apr. 4, 2011)
(adopting 12 CFR part 1270).
6 See
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tkelley on DSK3SPTVN1PROD with PROPOSALS
Dodd-Frank Act.9 These comments
generally supported an approach to
implementing section 939A of the
Dodd-Frank Act that would allow the
Banks and the Enterprises flexibility to
develop internal processes and
procedures for measuring, monitoring,
and controlling the credit risk of
specific assets and obligations. Many of
the comments also stated that the DoddFrank Act did not prohibit use of
NRSRO or other third party credit
analytics as part of any internal process
as long as such use was not mandated
by FHFA and the entity undertook its
own analysis of the appropriateness of
any rating or third party analytics. A
number of commenters believed that
any proposed new credit standards
should not be unduly burdensome or
costly to implement and should
recognize difference in risk profiles
among different counterparties, assets or
obligations. The comments received are
discussed in more detail below to the
extent that they are relevant to the
specific provisions being addressed in
this notice of proposed rulemaking.
While the ANPR addressed all FHFA
regulations that referenced or otherwise
applied requirements based on credit
ratings, this proposed rulemaking only
addresses Bank safety and soundness
regulations that reference or contain
requirements based on credit ratings
found in parts 1267 (Federal Home Loan
Bank Investments), 1269 (Standby
Letters of Credit), and 1270 (Liabilities)
of the FHFA regulations. FHFA intends
to undertake separate rulemakings to
remove references to and requirements
based on NRSRO credit ratings in the
Bank AMA regulations as well as to
revise and remove NRSRO rating related
references and requirements in the Bank
capital and related rules found at part
932 of the former Federal Housing
Finance Board regulations.10
Finally, FHFA has determined not to
amend part 1273 of its regulations to
remove references to NRSROs found in
9 In addition, FHFA staff met with an outside
party who provided comments concerning certain
minimum credit rating requirements for insurance
companies in the AMA regulation.
10 See 12 CFR part 955 (AMA rules); 12 CFR part
932 (Bank capital and related rules). Effective July
30, 2008, the Housing and Economic Recovery Act
of 2008 (HERA), Public Law 110–289, 122 Stat.
2654, created FHFA as a new independent agency
of the Federal Government, and transferred to
FHFA the supervisory and oversight responsibilities
of the Office of Federal Housing Enterprise
Oversight (OFHEO) over the Enterprises, and the
supervisory and oversight responsibilities of the
Federal Housing Finance Board over the Banks and
the OF. See id. at section 1101, 122 Stat. 2661–62.
The Enterprises, the Banks, and the OF continue to
operate under regulations promulgated by OFHEO
and the Finance Board until FHFA issues
regulations that supersede those regulations. See id.
at sections 1302, 1312, 122 Stat. 2795, 2798.
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§ 1273.6(d) of its rules.11 As FHFA
noted in the ANPR, this provision
assigns to OF the responsibility to
manage the Bank System’s relationship
with NRSROs, if NRSRO ratings are
considered necessary or desirable in
connection with the issuance and sale of
COs.12 The provision does not prohibit
any action or mandate any particular
action be taken by the Banks or OF
based on NRSRO ratings. Therefore,
FHFA believes this provision is outside
the scope of the requirements in section
939A of the Dodd-Frank Act and need
not be changed.13
D. Actions of Other Regulators
In formulating this proposed rule,
FHFA also considered actions taken by
other regulators to implement section
939A of Dodd-Frank with respect to
similar regulations, including actions by
SEC, the Commodity Futures Trading
Commission (CFTC), the Federal
Deposit Insurance Corporation (FDIC),
the National Credit Union
Administration (NCUA), the Office of
the Comptroller of the Currency (OCC)
and the Federal Reserve Board (FRB).
The FHFA recognizes, as have the
other federal regulatory agencies, that
existing references to credit ratings
generally serve several regulatory
purposes including those related to
capital adequacy, investment
acceptability, risk assessment, and
disclosure. Agencies that have proposed
or finalized regulations in line with the
requirements of section 939A of the
Dodd-Frank Act have taken one or more
of the following actions: (i) Removed
and not replaced references to credit
ratings; (ii) prohibited certain high risk
activities altogether; (iii) established
new definitions for minimum credit
standards with an emphasis on
repayment capacity and risk of default;
11 12
CFR 1273.6(d).
76 FR at 5295.
13 No commenters disagreed with FHFA’s
statement in the ANPR that § 1273.6(d) appeared
outside the scope of section 939A of the DoddFrank Act.
FHFA is not undertaking as part of these Bankrelated rulemakings the removal of specific
references to NRSRO ratings in safety and
soundness or capital regulations applicable to the
Enterprises. As FHFA noted in the ANPR, the
references to NRSRO ratings in the Enterprise safety
and soundness regulations do not require the
Enterprises to take or refrain from specific actions
based on those ratings and therefore appear outside
the scope of section 939A of the Dodd-Frank Act.
See 76 FR at 5294. FHFA also noted that the
Enterprise statutory and regulatory capital
requirements, including those regulatory
requirements that referenced NRSRO ratings, were
not binding on the Enterprises for the duration of
the current conservatorships, although FHFA
recognized that it might have to develop and adopt
new risk-based capital requirements for the
Enterprises or their successors in a postconservatorship environment. Id.
12 See
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(iv) replaced creditworthiness standards
that previously referenced credit ratings
with standards that evaluate other
common credit criteria; (v) eliminated
any undue reliance on third-party credit
ratings; and/or (vi) re-emphasized and
promoted sound and effective
governance, (credit) risk management,
due diligence, and documentation
practices.
The final rules that the NCUA, FDIC,
and OCC adopted regarding investments
are most relevant to this rulemaking.14
In their rulemakings, the FDIC and OCC
redefined an ‘‘investment grade’’
security as one where the issuer has an
adequate capacity to meet all financial
commitments under the security for the
projected life of the security. To meet
this new standard, national banks and
federal and state savings associations
must determine that the risk of default
by the obligor is low and that the full
and timely repayment of principal and
interest is expected. Both agencies also
published guidance to assist their
regulated institutions in complying with
the new regulations.15 Similarly, the
NCUA replaced minimum rating
requirements with a requirement that
the federal credit union or corporate
credit union conduct and document a
credit analysis demonstrating that the
issuer of the security has a certain,
specified capacity to meet its financial
commitments. For regulations
pertaining to counterparty transactions,
the NCUA’s final rule replaced
minimum rating requirements with a
requirement that the credit union
conduct a credit analysis of the
counterparty based on a standard
approved by the credit union’s board of
directors.
E. Considerations of Differences
Between the Banks and the Enterprises
When promulgating regulations
relating to the Banks, section 1313(f) of
the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 (Safety and Soundness Act), as
amended by section 1201 of HERA,
requires the Director of FHFA (Director)
to consider the differences between the
Banks and the Enterprises with respect
14 See Final Rule: Alternatives to the Use of Credit
Ratings, 77 FR 74103 (Dec. 13, 2012) (NCUA); Final
Rule: Permissible Investments for Federal and State
Savings Associations: Corporate Debt Securities, 77
FR 43151 (Jul. 24, 2012) (FDIC); and Final Rule:
Alternatives to the Use of External Credit Ratings
in the Regulations of the OCC, 77 FR 35253
(Jun. 13, 2012) (OCC).
15 See Guidance on Due Diligence Requirements
for Savings Associations in Determining Whether a
Corporate Debt Security Is Eligible for Investment,
77 FR 43155 (Jul. 24, 2012) (FDIC); and Guidance
on Due Diligence Requirements in Determining
Whether Securities Are Eligible for Investment, 77
FR 35259 (Jun. 13, 2012) (OCC).
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to the Banks’ cooperative ownership
structure; mission of providing liquidity
to members; affordable housing and
community development mission;
capital structure; and joint and several
liability.16 The Director also may
consider any other differences that are
deemed appropriate. The changes
proposed in this rulemaking apply
exclusively to the Banks. FHFA, in
preparing this proposed rule,
considered the differences between the
Banks and the Enterprises as they relate
to the above factors. FHFA, however,
requests comments from the public
about whether these differences should
result in any revisions to the proposed
rules.
tkelley on DSK3SPTVN1PROD with PROPOSALS
III. Proposed Amendments to Parts
1267, 1269, and 1270 of the FHFA
Regulations
As noted in the ANPR and above, a
number of requirements in FHFA
regulations impose limits on Bank
activity or investments or otherwise
require the Banks to take certain actions
based on NRSRO credit ratings. To
remove these requirements, FHFA is
proposing to require the Banks to base
determinations about the
appropriateness of specific investments
or activities on their own documented
analyses of credit and other risks. FHFA
has a long standing expectation that
Banks apply, demonstrate and
document appropriate risk management
in the assumption and extension of
credit risk. The analyses required will
be subject to FHFA oversight and review
through the examination and
supervisory process. FHFA’s
expectations with respect to appropriate
standards for assessing creditworthiness
under this proposal are described in
more detail below.
A. Part 1267 Rules—Investments
A number of provisions in the
investment regulation limit Bank
investments by reference to the rating
issued by an NRSRO for a particular
instrument. First, the Banks are
prohibited from investing in any debt
instrument that is rated below
investment grade by an NRSRO at the
time the investment is made.17 Another
provision, which sets forth exceptions
to a general prohibition on a Bank’s
investment in mortgages or other whole
loans, specifically allows for investment
in marketable direct obligations of state,
local, or tribal government units or
agencies, having at least the second
highest credit rating from an NRSRO
16 See 12 U.S.C. 4513 (as amended by section
1201 Pub. L. 110–289, 122 Stat. 2782–83).
17 See 12 CFR 1267.3(a)(3).
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where the purchase would generate
customized terms, necessary liquidity,
or favorable pricing for the issuer’s
funding of housing or community
lending.18
To remove references to NRSRO
credit ratings from these provisions,
FHFA is proposing to add a new defined
term ‘‘investment quality’’ to § 1267.1 of
its rules while removing the current
definitions for ‘‘investment grade’’ and
‘‘NRSRO’’ from that provision. FHFA
would then substitute the term
‘‘investment quality’’ for the two
references to ‘‘investment grade’’ in
§ 1267.3(a) and for the reference to
‘‘second highest credit rating from an
NRSRO’’ in § 1267.3(a)(4)(iii).
Under the proposed rule, ‘‘investment
quality’’ would be defined as a
determination made by a Bank that
there is adequate financial backing for
any security or obligation so that full
and timely payment of principal and
interest is expected, and there is only
minimal risk that such timely payment
would not occur because of adverse
changes in financial or economic
conditions over the life of the
instrument. This Bank determination
must be based on well documented
internal analysis that would include
consideration of the sources for
repayment on a particular security or
obligation.
FHFA believes that the proposed
definition would allow Banks to build
upon their current internal credit risk
assessment and management practices
and provide flexibility to consider
differences in credit quality of different
investments—considerations which
were supported by many commenters to
the ANPR. By requiring the Banks to
consider sources of repayment for a
particular instrument, the proposed
definition also would allow the Banks to
consider guarantees or other credit
enhancements when determining the
credit quality of a particular investment.
FHFA emphasizes that under the
proposed definition a Bank must
document its analysis as to the credit
quality of a particular instrument so
FHFA would be able to review these
decisions as part of its supervisory and
examination process and thereby help
ensure consistency and rigor in the
analysis across all Banks.
Factors the Banks may consider in
evaluating the creditworthiness of a
security or other obligation include, but
are not limited to, internal or external
credit risk assessments, including
scenario analysis; security or asset-class
related research; credit analysis of cash
flow and debt service projections; credit
18 See
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spreads for like financial instruments;
loss distributions, default rates, and
other statistics; relevant market data, for
example, bid-ask spreads, most recent
sales price, and historical price
volatility, trading volume, implied
market rating, and size, depth and
concentration level of the market for the
investment; local and regional economic
conditions; legal or other contractual
implications to credit and repayment
risk; underwriting, performance
measures and triggers; and other
financial instrument covenants and
considerations. FHFA notes that some
commenters to the ANPR believed that
FHFA should not eliminate references
to credit ratings in its rules but should
instead adopt specific standards that
would help ensure an NRSRO would be
independent from an issuer of a security
or would meet other specific
qualifications. Other commenters
believed that any proposal should not
prevent the Banks from using NRSRO
ratings as part of any credit analysis.
While FHFA believes that mandating
any use or reliance on NRSRO credit
ratings in the investment regulation
would be inconsistent with the DoddFrank Act provisions, the proposed
definition of ‘‘investment quality’’
would not prevent a Bank from using
NRSRO ratings or other third party
analytics in its credit determination so
long as the Bank does not rely
principally on such rating or third party
analysis. Instead, FHFA expects that
such determination will be driven
primarily by the Bank’s own internal
analysis of market and other external
data and relevant financial information,
including the size and complexity of the
financial instrument and the Bank’s
own risk appetite and risk assessment
framework. This approach is consistent
with the existing FHFA supervisory
expectation that the Banks have in place
appropriate credit risk management and
due diligence review processes.
Under the new language proposed for
§ 1267.3(a), a Bank would need to make
its determination concerning the credit
quality of a debt instrument prior to
purchasing such instrument. If the Bank
determined that the instrument did not
meet its criteria to be considered
‘‘investment quality’’ consistent with
the proposed definition of that term
discussed above the Bank would be
prohibited from purchasing the debt
instrument. If the Bank determined that
the instrument is ‘‘investment quality,’’
the Bank would be permitted to
purchase it.
As part of its risk management and
monitoring process, FHFA expects a
Bank to periodically update its analysis
with regard to any debt instruments
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purchased to determine whether they
continue to meet criteria to be
considered ‘‘investment quality’’ as well
as to meet other safety, soundness, and
business objectives. The Bank would
also be expected to develop appropriate
strategies to respond to a decline in the
credit quality of its investments,
consistent with then-current market and
financial conditions and considerations.
Under proposed § 1267.(3)(a)(ii),
however, the Bank would not be
required to sell a debt instrument if
subsequent analysis indicated the
instrument became less than
‘‘investment quality’’ after the initial
purchase. This approach is consistent
with current § 1267.3(a), which provides
that a Bank cannot buy debt instruments
that are rated less than investment grade
by an NRSRO at the time of purchase,
but that the Bank does not have to sell
any such instrument if it is downgraded
to below investment grade after
acquisition. FHFA is proposing no other
changes to current § 1267.3(a) beyond
replacing the current references to
‘‘investment grade’’ with references to
‘‘investment quality.’’
Similarly, under proposed
§ 1267.3(a)(4)(iii), a Bank would be
permitted to purchase a marketable
direct obligation of a state, local or tribal
government agency or unit, as an
exception to the general prohibition on
the purchases of mortgages or interest in
mortgages, only after determining that
the obligation would meet the
‘‘investment quality’’ criteria (as well as
meeting all the other conditions set
forth in the provision).19 As with the
debt investments, a Bank would be
expected to periodically update its
credit analysis to determine whether the
obligation in question continues to meet
the ‘‘investment quality’’ criteria. The
‘‘investment quality’’ standard would
replace the current requirement that the
instrument have ‘‘the second highest
rating from an NRSRO.’’ No other
change to the provision is being
proposed.
The proposed change may appear to
extend somewhat the ability of the
Banks to invest in certain marketable
direct obligations of a state, local or
tribal government agencies or units as
such investments would not be limited
to instruments rated by an NRSRO in
the second highest rating category or
19 Specifically, the Bank’s purchase of the
marketable direct obligation of a state, local or tribal
government unit or agency would have to provide
the issuer the customized terms, necessary
liquidity, or favorable pricing required to generate
needed funding for housing or community lending.
These conditions are being carried over from the
current rule without change as part of the proposed
amendments.
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better. Before making a purchase,
however, a Bank would first need to
determine, based on rigorous analysis,
that there will be sufficient financial
backing so that full and timely
repayment of principal and interest on
such obligations is expected, and only
minimal risk that adverse changes
would alter this likelihood. FHFA
believes that requiring the Banks to
undertake this affirmative analysis
should help ensure that the proposed
change would not alter substantially the
risk a Bank may face from this class of
investments and could help improve the
quality of a Bank’s investment decisions
in this area. FHFA also believes that it
would be complex and unduly
burdensome to develop and apply a
standard that would more closely
approximate the current requirement
than that proposed.
Finally, FHFA proposes to remove
current § 1267.5 because it no longer
applies to any Bank. This provision
establishes interim capital requirements
for investments, but by its terms applies
only to those Banks that have not yet
converted to the capital stock structure
mandated by the Gramm-Leach-Bliley
Act 20 (GLB Act) and are not subject to
the more rigorous risk-based and
leverage capital requirements mandated
by the GLB Act and implemented by the
capital regulations found at 12 CFR part
932. Because all Banks have now
converted to the GLB Act capital stock
structure, none remain subject to the
requirements of § 1267.5,21 and FHFA
proposes to delete it from its
regulations.
B. Part 1269 Rules—Standby Letters of
Credit
Section 1269.2(c)(2) of FHFA
regulations provides that a standby
letter of credit issued or confirmed by a
Bank on behalf of a member to assist the
member in facilitating residential
housing finance or community lending
may be collateralized by obligations of
a state or local government unit or
agency, if the obligation is rated
investment grade by an NRSRO.22 FHFA
proposes to eliminate this reference to
an NRSRO investment grade rating in
§ 1269.2(c)(2) and replace it with a
requirement that the obligation of the
state or local government unit or agency
have a readily ascertainable value, can
be reliably discounted to account for
liquidation and other risks, and can be
liquidated in due course. FHFA also
proposes to remove the current
20 Public
Law 106–102, 133 Stat. 1338 (1999).
76 FR at 5295, n.5.
22 See 12 CFR 1269.2(c)(2).
21 See
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definitions for ‘‘investment grade’’ and
‘‘NRSRO’’ from § 1269.1.23
FHFA considered replacing the
investment grade rating requirement in
§ 1269.2(c)(2) with the same
‘‘investment quality’’ standard that is
being proposed in the part 1267
Investment Regulations. However,
FHFA believes that it would not be
realistic and would be unnecessarily
onerous for a Bank to perform the same
type of in- depth credit analysis, as
discussed above, for a security that will
be accepted as collateral as for one in
which the Bank intends to invest. This
is especially true given that the amounts
of likely collateral covered by this
requirement are not large. Instead,
FHFA is proposing a standard that is
more appropriate for collateral and is
similar to one already applied in other
FHFA collateral regulations.24 FHFA
also believes the proposed standard is
consistent with the original intent of the
investment grade requirement in this
regulation, given that the rating was
meant to serve as a proxy for securities
that had ‘‘an established secondary
market . . . [that] . . . can be easily
valued and, if necessary, liquidated by
a [Bank].’’ 25
Under the new language proposed for
§ 1269.2(c)(2), a Bank would be
expected to incorporate criteria into its
collateral policies to assure that any
state or local government obligation
accepted as collateral for a standby
letter of credit under this provision
would have a readily ascertainable
value, can be reliably discounted to
account for liquidation and other risks,
and can be liquidated by the Bank in
due course. FHFA also would expect the
Bank to meet other requirements
applicable to collateral more generally,
including having a policy and
procedures in place to ensure that the
Bank accurately values the collateral
and applies realistic haircuts that reflect
the market for the instrument and
existing economic conditions.
C. Part 1270 Rules—Liabilities
Part 1270 contains a number of
provisions that reference NRSRO credit
ratings or require the Banks to seek a
rating from an NRSRO. First,
§ 1270.4(b)(6) 26 references assets that
have been assigned a rating or
assessment by an NRSRO that is
equivalent to, or higher than, the rating
or assessment assigned by the NRSRO to
outstanding COs. This provision is
23 12
CFR 1269.1.
12 CFR 1266.7(a)(4).
25 Proposed Rule: Federal Home Loan Bank
Standby Letters of Credit, 63 FR 25726, 25729 (May
8, 1998).
26 12 CFR 1270.4(b)(6).
24 See
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contained in the ‘‘negative pledge
requirement,’’ which states that a Bank
must maintain certain specific assets
free of any lien or pledge in an amount
equal to the Bank’s pro rata share of
total outstanding COs. FHFA proposes
to remove § 1270.4(b)(6) because the
provision does not appear to expand the
type of assets that can be used to fulfill
negative pledge requirement beyond
those already identified in paragraphs
(b)(1) through (b)(5) of the regulation.
The negative pledge requirement was
first adopted in 1946. It has been
amended only once to any significant
degree, in 1992, at which time the
Finance Board added the provisions
currently found at § 1270.4(b)(5) and at
§ 1270.4(b)(6) of FHFA regulations.27
While § 1270.4(b)(6) allows certain
securities to be used to fulfill the
negative pledge requirement based on
their NRSRO rating based on their
NRSRO ratings, § 1270.4(b)(5) allows a
Bank to rely on investments authorized
under section 16(a) of the Bank Act 28 to
fulfill this requirement. Among the
investment authorized by section 16(a)
of the Bank Act are ‘‘such securities as
fiduciary and trust funds may be
invested in under the laws of the State
in which the . . . Bank is located.’’ The
type of securities that would be
included within the broad authority
provided by this ‘‘fiduciary’’ language
would appear to include the assets that
are also authorized for use in meeting
the negative pledge requirement by
§ 1270.4(b)(6). Moreover, FHFA is not
aware of any asset that the Banks
currently use to fulfill the negative
pledge requirement that would be
exclusively authorized by § 1270.4(b)(6).
Nor did the Finance Board, in adding
current § 1270.4(b)(6), indicate any
specific instrument or class of
instruments that would be covered by
the provision.29 Thus, FHFA is
proposing to delete this provision as
duplicative and unnecessary.
FHFA considered replacing the
current reference to NRSRO credit
ratings in § 1270.4(b)(6) with a
requirement that a Bank determine that
a security has a level of credit risk that
is equivalent to or less than that of
outstanding COs before the security can
be used to fulfill the negative pledge
requirement. Under this alternative
approach, the determination would
have been based on credit standards
collectively developed by the Banks in
27 See Proposed Rule: Leverage Ratio on
Consolidated Federal Home Loan Bank Debt, 57 FR
20061, 20062 (May 11, 1992); Final Rule: Leverage
Ratio on Consolidated Federal Home Loan Bank
Debt, 57 FR 62183, 62185 (Dec. 30, 1992).
28 12 U.S.C. 1436(a).
29 See 57 FR at 20062, and 57 FR at 62185.
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consultation with OF. Use of a
collectively developed standard would
be warranted in this case because all
Banks are jointly and severally liable on
outstanding COs, and FHFA believed
that each Bank would have a strong
interest in seeing that the other Banks
maintain the conservative risk profile of
assets used to fulfill the negative pledge
requirement. FHFA viewed this
alternative approach as overly complex,
however, especially in light of the fact
that § 1270.4(b)(6) appears not to
expand the pool of assets already
authorized for use to meet the negative
pledge requirement elsewhere in the
regulation.
Nevertheless, FHFA specifically
requests comments on whether
§ 1270.4(b)(6) should be removed as
proposed or if there would be benefits
to amending rather than deleting the
provision. If commenters believe the
provision should be amended, FHFA
requests comments on the alternative
approach described above, which would
require the Banks to collectively
develop a credit standard in
consultation with OF to replace use of
NRSRO ratings and on whether such an
approach would be overly complex to
implement.
In addition to the references in
§ 1270.4(b)(6), §§ 1270.5(b) and (c) 30
require Banks collectively to maintain
the highest NRSRO rating for COs and
each Bank individually to maintain a
rating of at least the second highest from
an NRSRO. These requirements were
adopted as a means of enhancing
protections afforded holders of COs by
requiring Banks either collectively or
individually to take actions to maintain
the required ratings.31 The Finance
Board believed that these requirements
provided more effective on-going
protections to bond holders than the
provision that they replaced, which had
required a written statement from a
rating agency or an investment bank that
a change in the leverage limit applicable
to the Banks would not adversely affect
the ratings or creditworthiness of COs,
prior to the change becoming
effective.32
FHFA proposes to delete current
§ 1270.5(b) and (c) and replace them
with new § 1270.5. This new
requirement would provide that the
Banks, individually and collectively,
should operate in such manner and take
any actions necessary, including
reducing leverage, to ensure that COs
30 12
CFR 1270.5(b) and (c).
Final Rule: Office of Finance; Authority of
Federal Home Loan Banks to Issue Consolidated
Obligations, 65 FR 36290, 36294 (June 7, 2000).
32 Id.
31 See
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30789
maintain the highest level of acceptance
by financial markets and are generally
perceived by investors as presenting a
very low level of credit risk. FHFA
believes that the proposed provision
captures the intent of the current rules
and helps protect holders of COs while
upholding the spirit of the Dodd-Frank
Act requirements by not mandating
through regulation that NRSROs
effectively provide an imprimatur of
Bank actions through the rating
process.33 Nothing in the language as
proposed, however, would prohibit the
Banks collectively from seeking NRSRO
ratings for COs or an individual Bank
from maintaining an individual NRSRO
rating if such ratings were found to be
desirable or helpful for either business
or other reasons.
FHFA also is proposing to delete
current § 1270.5(a) of its regulations
because no Bank remains subject to it.34
This provision established leverage
requirements which were applicable
only to Banks that had not yet converted
to the capital stock structure mandated
by the GLB Act and had not become
subject to the part 932 capital
requirements. As already discussed, all
Banks have now converted to the GLB
Act capital stock structure and are
subject to the part 932 capital
requirements. Therefore § 1270.5(a) no
longer applies to any Bank and can be
removed from FHFA regulations. The
proposed amendments also would
delete the definition of ‘‘NRSRO’’ from
§ 1270.1, given that the term would no
longer be used in part 1270 if the other
proposed changes are adopted.
D. Phase-In Period
In comments to the ANPR, the Banks
requested that FHFA provide a phase-in
period of no less than one year for any
amendments that would implement
section 939A of the Dodd-Frank Act.
FHFA disagrees and believes that a
phase-in period of one year or more is
too long, especially as the Banks should
be able to leverage their current
governance, risk selection, and credit
risk management policies, processes,
and practices to meet the proposed
requirements. Nevertheless, FHFA may
consider a delayed implementation date
for any final requirements, and requests
33 In comments to the ANPR, the Banks stated
that because the individual Bank rating requirement
in § 1270.5(c) did not involve the rating of a
security or a money market instrument, it was
outside the scope of section 939A of the DoddFrank Act. FHFA disagrees and believes that
requiring the Banks to maintain a specific credit
rating from an NRSRO would be a violation of the
spirit of the Dodd-Frank provision by requiring the
Banks to rely on NRSROs to review and essentially
opine on Bank actions.
34 12 CFR 1270.5(a).
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comments on what time frame may be
necessary for the Banks to implement
the proposal. FHFA further requests that
any comments on this issue specifically
identify and describe the actions that
would need to be taken to implement
these proposed amendments.
IV. Paperwork Reduction Act
The proposed rule amendments do
not contain any collections of
information pursuant to the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
et seq.). Therefore, FHFA has not
submitted any information to the Office
of Management and Budget for review.
V. Regulatory Flexibility Act
The proposed rule amendments apply
only to the Banks, which do not come
within the meaning of small entities as
defined in the Regulatory Flexibility Act
(RFA). See 5 U.S.C. 601(6). Therefore in
accordance with section 605(b) of the
RFA, FHFA certifies that this proposed
rule, if promulgated as a final rule, will
not have significant economic impact on
a substantial number of small entities.
List of Subjects
12 CFR Parts 1267 and 1269
Community development, Credit,
Federal home loan bank, Housing,
Reporting and recordkeeping
requirements.
12 CFR Part 1270
Accounting, Federal home loan banks,
Government securities.
Accordingly, for reasons stated in the
preamble and under authority in 12
U.S.C. 4511, 4513, and 4526, FHFA
proposes to amend chapter XII of title
12 of the Code of Federal Regulations as
follows:
PART 1267—FEDERAL HOME LOAN
BANK INVESTMENTS
1. The authority citation for part 1267
continues to read as follows:
■
Authority: 12 U.S.C. 1429, 1430, 1430b,
1431, 1436, 4511, 4513, 4526.
2. Amend § 1267.1 by removing the
definitions for ‘‘Investment grade’’ and
‘‘NRSRO’’ and adding in correct
alphabetical order a definition for
‘‘Investment quality’’ to read as follows:
■
tkelley on DSK3SPTVN1PROD with PROPOSALS
§ 1267.1
Definitions.
(1) There is adequate financial
backing so that full and timely payment
of principal and interest on such
security or obligation is expected; and
(2) There is minimal risk that that
timely payment of principal or interest
would not occur because of adverse
changes in economic and financial
conditions during the projected life of
the security or obligation.
*
*
*
*
*
■ 3. Amend § 1267.3 by revising
paragraphs (a)(3) and (a)(4) to read as
follows:
§ 1267.3 Prohibited investments and
prudential rules.
(a) * * *
(3) Debt instruments that are not
investment quality, except:
(i) Investments described in
§ 1265.3(e) of this chapter; and
(ii) Debt instruments that a Bank
determined became less than
investment quality because of
developments or events that occurred
after acquisition of the instrument by
the Bank;
(4) Whole mortgages or other whole
loans, or interests in mortgages or loans,
except:
(i) Acquired member assets;
(ii) Investments described in
§ 1265.3(e) of this chapter;
(iii) Marketable direct obligations of
state, local, or Tribal government units
or agencies, that are investment quality,
where the purchase of such obligations
by the Bank provides to the issuer the
customized terms, necessary liquidity,
or favorable pricing required to generate
needed funding for housing or
community lending;
(iv) Mortgage-backed securities, or
asset-backed securities collateralized by
manufactured housing loans or home
equity loans, that meet the definition of
the term ‘‘securities’’ under 15 U.S.C.
77b(a)(1) and are not otherwise
prohibited under paragraphs (a)(5)
through (a)(7) of this section, and
(v) Loans held or acquired pursuant to
section 12(b) of the Bank Act (12 U.S.C.
1432(b)). * * *
*
*
*
*
*
§ 1267.5
■
*
*
*
*
*
Investment quality means a
determination made by the Bank with
respect to a security or obligation that
based on documented analysis,
including consideration of the sources
for repayment on the security or
obligation:
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[Removed]
4. Remove § 1267.5.
PART 1269—STANDBY LETTERS OF
CREDIT
5. The authority citation for part 1269
continues to read as follows:
■
Authority: 12 U.S.C. 1429, 1430, 1430b,
1431, 4511, 4513, 4526.
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§ 1269.1
[Amended]
6. Amend § 1269.1 by removing the
definitions for ‘‘Investment grade’’ and
‘‘NRSRO.’’
■ 7. Amend § 1269.2 by revising
paragraph (c)(2) to read as follows:
■
§ 1269.2 Standby letters of credit on behalf
of members.
*
*
*
*
*
(c) * * *
(2) A standby letter of credit issued or
confirmed on behalf of a member for a
purpose described in paragraphs (a)(1)
or (a)(2) of this section may, in addition
to the collateral described in paragraph
(c)(1) of this section, be secured by
obligations of state or local government
units or agencies, where such
obligations have a readily ascertainable
value, can be reliably discounted to
account for liquidation and other risks,
and can be liquidated in due course.
PART 1270—LIABILITIES
8. The authority citation for part 1270
continues to read as follows:
■
Authority: 12 U.S.C. 1431, 1432, 1435,
4511, 4512, 4513, 4526.
§ 1270.1
Definitions.
9. Amend § 1270.1 by removing the
definition of ‘‘NRSRO.’’
■ 10. Amend § 1270.4 by revising
paragraph (b) to read as follows:
■
§ 1270.4 Issuance of consolidated
obligations.
*
*
*
*
*
(b) Negative pledge requirement. Each
Bank shall at all times maintain assets
described in paragraphs (b)(1) through
(b)(5) of this section free from any lien
or pledge, in an amount at least equal
to a pro rata share of the total amount
of currently outstanding consolidated
obligations and equal to such Bank’s
participation in all such consolidated
obligations outstanding, provided that
any assets that are subject to a lien or
pledge for the benefit of the holders of
any issue of consolidated obligations
shall be treated as if they were assets
free from any lien or pledge for
purposes of compliance with this
paragraph (b). Eligible assets are:
(1) Cash;
(2) Obligations of or fully guaranteed
by the United States;
(3) Secured advances;
(4) Mortgages as to which one or more
Banks have any guaranty or insurance,
or commitment therefor, by the United
States or any agency thereof; and
(5) Investments described in section
16(a) of the Bank Act (12 U.S.C.
1436(a)).
■ 11. Amend § 1270.5 by revising this
section in its entirety to read as follows:
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§ 1270.5
Bank operations.
14 CFR Part 39
Room W12–140, 1200 New Jersey
Avenue SE., Washington, DC 20590.
• Hand Delivery: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
Room W12–140, 1200 New Jersey
Avenue SE., Washington, DC 20590,
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
For service information identified in
this proposed AD, contact Alexander
Schleicher GmbH & Co
Segelflugzeugbau, Stra+e 1 D—36163
Poppenhausen, Germany; phone: ++49
(0) 6658/89–0; fax: ++49 (0) 6658/89–40;
email: info@alexander-schleicher.de;
Internet: https://www.alexanderschleicher.de/. You may review copies
of the referenced service information at
the FAA, Small Airplane Directorate,
901 Locust, Kansas City, Missouri
64106. For information on the
availability of this material at the FAA,
call (816) 329–4148.
[Docket No. FAA–2013–0450; Directorate
Identifier 2013–CE–010–AD]
Examining the AD Docket
The Banks, individually and
collectively, shall operate in such
manner and take any actions necessary,
including without limitation reducing
leverage, to ensure that consolidated
obligations maintain a high level of
acceptance by financial markets and are
generally perceived by investors as
presenting a low level of credit risk.
Dated: May 17, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance
Agency.
[FR Doc. 2013–12333 Filed 5–22–13; 8:45 am]
BILLING CODE 8070–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
RIN 2120–AA64
Airworthiness Directives; Alexander
Schleicher GmbH & Co.
Segelflugzeugbau Sailplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
SUMMARY: We propose to adopt a new
airworthiness directive (AD) for all
Alexander Schleicher GmbH & Co.
Segelflugzeugbau Models AS–K13,
Ka2B, Ka 6, Ka 6 B, Ka 6 BR, Ka 6 C,
Ka 6 CR, K7, K8, and K 8 B sailplanes
that would supersede an existing AD.
This proposed AD results from
mandatory continuing airworthiness
information (MCAI) originated by an
aviation authority of another country to
identify and correct an unsafe condition
on an aviation product. The MCAI
describes the unsafe condition as
misalignment of the automatic elevator
control connection. We are issuing this
proposed AD to require actions to
address the unsafe condition on these
products.
We must receive comments on
this proposed AD by July 8, 2013.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: (202) 493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
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DATES:
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You may examine the AD docket on
the Internet at https://
www.regulations.gov; or in person at the
Docket Management Facility between 9
a.m. and 5 p.m., Monday through
Friday, except Federal holidays. The AD
docket contains this proposed AD, the
regulatory evaluation, any comments
received, and other information. The
street address for the Docket Office
(telephone (800) 647–5527) is in the
ADDRESSES section. Comments will be
available in the AD docket shortly after
receipt.
FOR FURTHER INFORMATION CONTACT: Jim
Rutherford, Aerospace Engineer, FAA,
Small Airplane Directorate, 901 Locust,
Room 301, Kansas City, Missouri 64106;
telephone: (816) 329–4165; fax: (816)
329–4090; email:
jim.rutherford@faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to send any written
relevant data, views, or arguments about
this proposed AD. Send your comments
to an address listed under the
ADDRESSES section. Include ‘‘Docket No.
FAA–2013–0450; Directorate Identifier
2013–CE–010–AD’’ at the beginning of
your comments. We specifically invite
comments on the overall regulatory,
economic, environmental, and energy
aspects of this proposed AD. We will
consider all comments received by the
closing date and may amend this
proposed AD because of those
comments.
We will post all comments we
receive, without change, to https://
regulations.gov, including any personal
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information you provide. We will also
post a report summarizing each
substantive verbal contact we receive
about this proposed AD.
Discussion
On March 5, 1964, we issued AD 64–
07–05, Amendment 701 (29 FR 3227,
March 11, 1964). That AD required
actions intended to address an unsafe
condition on some of the products listed
above.
Since we issued AD 64–07–05,
Amendment 701 (29 FR 3227, March 11,
1964) the European Aviation Safety
Agency (EASA), which is the Technical
Agent for the Member States of the
European Community, has issued a new
AD to add additional sailplane models
to the applicability and to add
additional inspections of the elevator
control connection. Alexander
Schleicher GmbH & Co.
Segelflugzeugbau has also issued
revised service information to address
the unsafe condition.
The EASA has issued AD No. 2013–
0091, dated April 12, 2013 (referred to
after this as ‘‘the MCAI’’), to correct an
unsafe condition for the specified
products. The MCAI states:
A recent report has been received concerning
a problem with the elevator control during
take-off of an ASK 13 sailplane. The results
of the technical investigation revealed a
misalignment in the automatic elevator
control connection, presumably caused by an
incorrect repair or damage at the tail-planearea. In addition, similar elevator connection
failure during early 1960’s which led to the
issuance of LBA LTM 4/62. However, LTM,
4/62 did not apply to ASK 13 and ASK 18
sailplanes coming later into production.
This condition, if not detected and corrected,
could lead to failure of the automatic elevator
control connection, possibly resulting in loss
of control of the sailplane.
To address this unsafe condition, Alexander
Schleicher GmbH issued a Technical Note
(TN) (Ka 6 TN–Nr. 26; K 7 TN–Nr. 24; K 8
TN–Nr. 30; ASK 13 TN–Nr. 19; ASK 18 TN–
Nr. 9) providing instructions for elevator
control inspection and replacement and
EASA issued AD 2012–0246 to require
accomplishment of those instructions.
Since that AD was issued, Alexander
Schleicher GmbH issued a revision of TN (Ka
6 TN–Nr. 26; K 7 TN–Nr. 24; K 8 TN–Nr. 30;
ASK 13 TN–Nr. 19, ASK 18 TN–Nr. 9), dated
08 January 2013 to re-introduce a pushrod
support modification for K 7 and K 8
sailplanes, previously required by LBA LTM
4/62, but no longer required by EASA AD
2012–0246, which superseded the LBA LTM.
For the reasons described above, this AD
retains the requirements of EASA AD 2012–
0246, which is superseded, and additionally
requires, for K 7 and K 8 sailplanes,
verification of embodiment of pushrod
support modification, and depending on
finding, pushrod support modification.
E:\FR\FM\23MYP1.SGM
23MYP1
Agencies
[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Proposed Rules]
[Pages 30784-30791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12333]
=======================================================================
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Parts 1267, 1269, and 1270
RIN 2590-AA40
Removal of References to Credit Ratings in Certain Regulations
Governing the Federal Home Loan Banks
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking; request for comment.
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SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) requires Federal agencies to review
regulations that require the use of an assessment of the credit-
worthiness of a security or money market instrument and any references
to, or requirements in, such regulations regarding credit ratings
issued by credit rating organizations registered with the Securities
and Exchange Commission (SEC) as nationally recognized statistical
rating organizations (NRSROs), and to remove such references or
requirements. To implement this provision, the Federal Housing Finance
Agency (FHFA) is proposing to remove a number of references and
requirements in certain safety and soundness regulations affecting the
Federal Home Loan Banks (Banks) and to adopt new provisions that would
require the Banks to apply internal analytic standards and criteria to
determine the credit quality of a security or obligation, subject to
FHFA oversight and review through the examination and supervisory
process. FHFA will undertake separate rulemakings to remove NRSRO
references and requirements contained in the capital regulations
applicable to the Banks and in the regulations governing the Banks'
acquired member asset (AMA) programs.
DATES: Comments on the proposed rule must be received on or before July
22, 2013.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AA40 by any of
the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comments to the Federal eRulemaking Portal, please also send it by
email to FHFA at RegComments@FHFA.gov to ensure timely receipt by the
agency. Please include ``RIN 2590-AA40'' in the subject line of the
message.
[[Page 30785]]
Email: Comments to Alfred M. Pollard, General Counsel may
be sent by email to RegComments@FHFA.gov. Please include ``RIN 2590-
AA40'' in the subject line of the message.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA40,
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth
Floor, 400 Seventh Street SW., Washington, DC 20024. The package should
be logged at the Seventh Street entrance Guard Desk, First Floor, on
business days between 9 a.m. and 5 p.m.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA40, Federal
Housing Finance Agency, Constitution Center, (OGC) Eighth Floor, 400
Seventh Street SW., Washington, DC 20024.
FOR FURTHER INFORMATION CONTACT: Amy Bogdon, Associate Director for
Regulatory Policy and Programs, Amy.Bogdon@FHFA.gov, 202-649-3320,
Division of Federal Home Loan Bank Regulation, Federal Housing Finance
Agency; or Thomas E. Joseph, Associate General Counsel,
Thomas.Joseph@FHFA.gov, 202-649-3076 (these are not toll-free numbers),
Office of General Counsel (OGC), Federal Housing Finance Agency,
Constitution Center, Eighth Floor, 400 Seventh Street SW., Washington,
DC 20024. The telephone number for the Telecommunications Device for
the Hearing Impaired is 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of the Notice of Proposed
Rulemaking (NPR), and will develop final regulations after taking all
comments into consideration. Copies of all comments will be posted
without change, including any personal information you may provide such
as your name and address (mailing or email) and telephone numbers, on
the internet Web site at https://www.fhfa.gov. In addition, copies of
all comments received will be available for examination by the public
on business days between the hours of 10 a.m. and 3 p.m., at the
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth
Floor, 400 Seventh Street SW., Washington, DC 20024. To make an
appointment to inspect comments, please call the Office of General
Counsel at 202-649-3804.
II. Background
A. Dodd-Frank Act Provisions
Section 939A of the Dodd-Frank Act requires federal agencies to:
(i) Review regulations that require the use of an assessment of the
creditworthiness of a security or money market instrument; and (ii) to
the extent those regulations contain any references to, or requirements
regarding credit ratings, remove such references or requirements. See
section 939A, Public Law 111-203, 124 Stat. 1887 (July 21, 2010). In
place of such credit-rating based requirements, agencies are instructed
to substitute appropriate standards for determining creditworthiness.
The new law further provides that, to the extent feasible, an agency
should adopt a uniform standard of creditworthiness for use in its
regulations, taking into account the entities regulated by it and the
purposes for which such regulated entities would rely on the
creditworthiness standard.
B. The Bank System
The twelve Banks are wholesale financial institutions organized
under the Federal Home Loan Bank Act (Bank Act).\1\ The Banks are
cooperatives; only members of a Bank may purchase the capital stock of
a Bank, and only members or certain eligible housing associates (such
as state housing finance agencies) may obtain access to secured loans,
known as advances, or other products provided by a Bank.\2\ Each Bank
is managed by its own board of directors and serves the public interest
by enhancing the availability of residential credit through its member
institutions.\3\ Any eligible institution (generally a federally
insured depository institution or state-regulated insurance company)
may become a member of a Bank if it satisfies certain criteria and
purchases a specified amount of the Bank's capital stock.\4\
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\1\ See 12 U.S.C. 1423, 1432(a).
\2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
\3\ See 12 U.S.C. 1427.
\4\ See 12 U.S.C. 1424; 12 CFR part 1263.
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As government-sponsored enterprises, the Banks are granted certain
privileges under federal law. In light of those privileges, the Banks
typically can borrow funds at spreads over the rates on U.S. Treasury
securities of comparable maturity lower than most other entities. The
Banks pass along a portion of their funding advantage to their
members--and ultimately to consumers--by providing advances and other
financial services at rates that would not otherwise be available to
their members. Consolidated obligations (COs), consisting of bonds and
discount notes, are the principal funding source for the Banks. The
Bank System's Office of Finance (OF) issues all COs on behalf of the
twelve Banks. Although each Bank is primarily liable for the portion of
COs corresponding to the proceeds received by that Bank, each Bank is
also jointly and severally liable with the other eleven Banks for the
payment of principal and interest on all COs.\5\
---------------------------------------------------------------------------
\5\ See 12 U.S.C. 1431(c); 12 CFR 1270.10.
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C. Advance Notice of Proposed Rulemaking
On January 31, 2011, FHFA published an advance notice of proposed
rulemaking (ANPR) in which it solicited comments from the public on
potential alternatives to the use of NRSRO credit ratings in its
regulations applicable to the Banks, as well as in its regulations
applicable to the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation (collectively, the Enterprises).\6\
Prior to issuing the ANPR, FHFA also had issued a proposed rule on Bank
liabilities and COs, which, among other things, would have combined and
re-designated a number of existing regulations as new part 1270 of the
FHFA rules.\7\ In the preamble for the proposed rule on Bank
Liabilities, FHFA asked for comments on implementing section 939A of
the Dodd-Frank Act with regard to certain provisions addressed in that
rulemaking but did not propose specific amendments related to section
939A at that time. FHFA ultimately decided to adopt the Bank Liability
Rule without amending those provisions that referenced credit ratings
but noted that it would propose changes to those provisions as part of
a future rulemaking.\8\ It also stated that it would consider relevant
comments made on the part 1270 rules, along with the comments received
on the ANPR, as part of such rulemaking.
---------------------------------------------------------------------------
\6\ See Advance Notice of Proposed Rulemaking, Alternatives to
Use of Credit Ratings in Regulations Governing the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation,
and the Federal Home Loan Banks, 76 FR 5292 (Jan. 31, 2011).
\7\ See Proposed Rule: Federal Home Loan Bank Liabilities, 75 FR
68534, 68536-38 (Nov. 8, 2010) (Bank Liability Rule).
\8\ See Final Rule: Federal Home Loan Bank Liabilities, 76 FR
18366, 18368 (Apr. 4, 2011) (adopting 12 CFR part 1270).
---------------------------------------------------------------------------
FHFA received nine comment letters on the ANPR. It also received
five comment letters on the proposed Bank Liability Rule, all but one
of which addressed issues related to the implementation of section 939A
of the
[[Page 30786]]
Dodd-Frank Act.\9\ These comments generally supported an approach to
implementing section 939A of the Dodd-Frank Act that would allow the
Banks and the Enterprises flexibility to develop internal processes and
procedures for measuring, monitoring, and controlling the credit risk
of specific assets and obligations. Many of the comments also stated
that the Dodd-Frank Act did not prohibit use of NRSRO or other third
party credit analytics as part of any internal process as long as such
use was not mandated by FHFA and the entity undertook its own analysis
of the appropriateness of any rating or third party analytics. A number
of commenters believed that any proposed new credit standards should
not be unduly burdensome or costly to implement and should recognize
difference in risk profiles among different counterparties, assets or
obligations. The comments received are discussed in more detail below
to the extent that they are relevant to the specific provisions being
addressed in this notice of proposed rulemaking.
---------------------------------------------------------------------------
\9\ In addition, FHFA staff met with an outside party who
provided comments concerning certain minimum credit rating
requirements for insurance companies in the AMA regulation.
---------------------------------------------------------------------------
While the ANPR addressed all FHFA regulations that referenced or
otherwise applied requirements based on credit ratings, this proposed
rulemaking only addresses Bank safety and soundness regulations that
reference or contain requirements based on credit ratings found in
parts 1267 (Federal Home Loan Bank Investments), 1269 (Standby Letters
of Credit), and 1270 (Liabilities) of the FHFA regulations. FHFA
intends to undertake separate rulemakings to remove references to and
requirements based on NRSRO credit ratings in the Bank AMA regulations
as well as to revise and remove NRSRO rating related references and
requirements in the Bank capital and related rules found at part 932 of
the former Federal Housing Finance Board regulations.\10\
---------------------------------------------------------------------------
\10\ See 12 CFR part 955 (AMA rules); 12 CFR part 932 (Bank
capital and related rules). Effective July 30, 2008, the Housing and
Economic Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat.
2654, created FHFA as a new independent agency of the Federal
Government, and transferred to FHFA the supervisory and oversight
responsibilities of the Office of Federal Housing Enterprise
Oversight (OFHEO) over the Enterprises, and the supervisory and
oversight responsibilities of the Federal Housing Finance Board over
the Banks and the OF. See id. at section 1101, 122 Stat. 2661-62.
The Enterprises, the Banks, and the OF continue to operate under
regulations promulgated by OFHEO and the Finance Board until FHFA
issues regulations that supersede those regulations. See id. at
sections 1302, 1312, 122 Stat. 2795, 2798.
---------------------------------------------------------------------------
Finally, FHFA has determined not to amend part 1273 of its
regulations to remove references to NRSROs found in Sec. 1273.6(d) of
its rules.\11\ As FHFA noted in the ANPR, this provision assigns to OF
the responsibility to manage the Bank System's relationship with
NRSROs, if NRSRO ratings are considered necessary or desirable in
connection with the issuance and sale of COs.\12\ The provision does
not prohibit any action or mandate any particular action be taken by
the Banks or OF based on NRSRO ratings. Therefore, FHFA believes this
provision is outside the scope of the requirements in section 939A of
the Dodd-Frank Act and need not be changed.\13\
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\11\ 12 CFR 1273.6(d).
\12\ See 76 FR at 5295.
\13\ No commenters disagreed with FHFA's statement in the ANPR
that Sec. 1273.6(d) appeared outside the scope of section 939A of
the Dodd-Frank Act.
FHFA is not undertaking as part of these Bank-related
rulemakings the removal of specific references to NRSRO ratings in
safety and soundness or capital regulations applicable to the
Enterprises. As FHFA noted in the ANPR, the references to NRSRO
ratings in the Enterprise safety and soundness regulations do not
require the Enterprises to take or refrain from specific actions
based on those ratings and therefore appear outside the scope of
section 939A of the Dodd-Frank Act. See 76 FR at 5294. FHFA also
noted that the Enterprise statutory and regulatory capital
requirements, including those regulatory requirements that
referenced NRSRO ratings, were not binding on the Enterprises for
the duration of the current conservatorships, although FHFA
recognized that it might have to develop and adopt new risk-based
capital requirements for the Enterprises or their successors in a
post-conservatorship environment. Id.
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D. Actions of Other Regulators
In formulating this proposed rule, FHFA also considered actions
taken by other regulators to implement section 939A of Dodd-Frank with
respect to similar regulations, including actions by SEC, the Commodity
Futures Trading Commission (CFTC), the Federal Deposit Insurance
Corporation (FDIC), the National Credit Union Administration (NCUA),
the Office of the Comptroller of the Currency (OCC) and the Federal
Reserve Board (FRB).
The FHFA recognizes, as have the other federal regulatory agencies,
that existing references to credit ratings generally serve several
regulatory purposes including those related to capital adequacy,
investment acceptability, risk assessment, and disclosure. Agencies
that have proposed or finalized regulations in line with the
requirements of section 939A of the Dodd-Frank Act have taken one or
more of the following actions: (i) Removed and not replaced references
to credit ratings; (ii) prohibited certain high risk activities
altogether; (iii) established new definitions for minimum credit
standards with an emphasis on repayment capacity and risk of default;
(iv) replaced creditworthiness standards that previously referenced
credit ratings with standards that evaluate other common credit
criteria; (v) eliminated any undue reliance on third-party credit
ratings; and/or (vi) re-emphasized and promoted sound and effective
governance, (credit) risk management, due diligence, and documentation
practices.
The final rules that the NCUA, FDIC, and OCC adopted regarding
investments are most relevant to this rulemaking.\14\ In their
rulemakings, the FDIC and OCC redefined an ``investment grade''
security as one where the issuer has an adequate capacity to meet all
financial commitments under the security for the projected life of the
security. To meet this new standard, national banks and federal and
state savings associations must determine that the risk of default by
the obligor is low and that the full and timely repayment of principal
and interest is expected. Both agencies also published guidance to
assist their regulated institutions in complying with the new
regulations.\15\ Similarly, the NCUA replaced minimum rating
requirements with a requirement that the federal credit union or
corporate credit union conduct and document a credit analysis
demonstrating that the issuer of the security has a certain, specified
capacity to meet its financial commitments. For regulations pertaining
to counterparty transactions, the NCUA's final rule replaced minimum
rating requirements with a requirement that the credit union conduct a
credit analysis of the counterparty based on a standard approved by the
credit union's board of directors.
---------------------------------------------------------------------------
\14\ See Final Rule: Alternatives to the Use of Credit Ratings,
77 FR 74103 (Dec. 13, 2012) (NCUA); Final Rule: Permissible
Investments for Federal and State Savings Associations: Corporate
Debt Securities, 77 FR 43151 (Jul. 24, 2012) (FDIC); and Final Rule:
Alternatives to the Use of External Credit Ratings in the
Regulations of the OCC, 77 FR 35253 (Jun. 13, 2012) (OCC).
\15\ See Guidance on Due Diligence Requirements for Savings
Associations in Determining Whether a Corporate Debt Security Is
Eligible for Investment, 77 FR 43155 (Jul. 24, 2012) (FDIC); and
Guidance on Due Diligence Requirements in Determining Whether
Securities Are Eligible for Investment, 77 FR 35259 (Jun. 13, 2012)
(OCC).
---------------------------------------------------------------------------
E. Considerations of Differences Between the Banks and the Enterprises
When promulgating regulations relating to the Banks, section
1313(f) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (Safety and Soundness Act), as amended by section
1201 of HERA, requires the Director of FHFA (Director) to consider the
differences between the Banks and the Enterprises with respect
[[Page 30787]]
to the Banks' cooperative ownership structure; mission of providing
liquidity to members; affordable housing and community development
mission; capital structure; and joint and several liability.\16\ The
Director also may consider any other differences that are deemed
appropriate. The changes proposed in this rulemaking apply exclusively
to the Banks. FHFA, in preparing this proposed rule, considered the
differences between the Banks and the Enterprises as they relate to the
above factors. FHFA, however, requests comments from the public about
whether these differences should result in any revisions to the
proposed rules.
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 4513 (as amended by section 1201 Pub. L. 110-
289, 122 Stat. 2782-83).
---------------------------------------------------------------------------
III. Proposed Amendments to Parts 1267, 1269, and 1270 of the FHFA
Regulations
As noted in the ANPR and above, a number of requirements in FHFA
regulations impose limits on Bank activity or investments or otherwise
require the Banks to take certain actions based on NRSRO credit
ratings. To remove these requirements, FHFA is proposing to require the
Banks to base determinations about the appropriateness of specific
investments or activities on their own documented analyses of credit
and other risks. FHFA has a long standing expectation that Banks apply,
demonstrate and document appropriate risk management in the assumption
and extension of credit risk. The analyses required will be subject to
FHFA oversight and review through the examination and supervisory
process. FHFA's expectations with respect to appropriate standards for
assessing creditworthiness under this proposal are described in more
detail below.
A. Part 1267 Rules--Investments
A number of provisions in the investment regulation limit Bank
investments by reference to the rating issued by an NRSRO for a
particular instrument. First, the Banks are prohibited from investing
in any debt instrument that is rated below investment grade by an NRSRO
at the time the investment is made.\17\ Another provision, which sets
forth exceptions to a general prohibition on a Bank's investment in
mortgages or other whole loans, specifically allows for investment in
marketable direct obligations of state, local, or tribal government
units or agencies, having at least the second highest credit rating
from an NRSRO where the purchase would generate customized terms,
necessary liquidity, or favorable pricing for the issuer's funding of
housing or community lending.\18\
---------------------------------------------------------------------------
\17\ See 12 CFR 1267.3(a)(3).
\18\ See 12 CFR 1267.3(a)(4)(iii).
---------------------------------------------------------------------------
To remove references to NRSRO credit ratings from these provisions,
FHFA is proposing to add a new defined term ``investment quality'' to
Sec. 1267.1 of its rules while removing the current definitions for
``investment grade'' and ``NRSRO'' from that provision. FHFA would then
substitute the term ``investment quality'' for the two references to
``investment grade'' in Sec. 1267.3(a) and for the reference to
``second highest credit rating from an NRSRO'' in Sec.
1267.3(a)(4)(iii).
Under the proposed rule, ``investment quality'' would be defined as
a determination made by a Bank that there is adequate financial backing
for any security or obligation so that full and timely payment of
principal and interest is expected, and there is only minimal risk that
such timely payment would not occur because of adverse changes in
financial or economic conditions over the life of the instrument. This
Bank determination must be based on well documented internal analysis
that would include consideration of the sources for repayment on a
particular security or obligation.
FHFA believes that the proposed definition would allow Banks to
build upon their current internal credit risk assessment and management
practices and provide flexibility to consider differences in credit
quality of different investments--considerations which were supported
by many commenters to the ANPR. By requiring the Banks to consider
sources of repayment for a particular instrument, the proposed
definition also would allow the Banks to consider guarantees or other
credit enhancements when determining the credit quality of a particular
investment. FHFA emphasizes that under the proposed definition a Bank
must document its analysis as to the credit quality of a particular
instrument so FHFA would be able to review these decisions as part of
its supervisory and examination process and thereby help ensure
consistency and rigor in the analysis across all Banks.
Factors the Banks may consider in evaluating the creditworthiness
of a security or other obligation include, but are not limited to,
internal or external credit risk assessments, including scenario
analysis; security or asset-class related research; credit analysis of
cash flow and debt service projections; credit spreads for like
financial instruments; loss distributions, default rates, and other
statistics; relevant market data, for example, bid-ask spreads, most
recent sales price, and historical price volatility, trading volume,
implied market rating, and size, depth and concentration level of the
market for the investment; local and regional economic conditions;
legal or other contractual implications to credit and repayment risk;
underwriting, performance measures and triggers; and other financial
instrument covenants and considerations. FHFA notes that some
commenters to the ANPR believed that FHFA should not eliminate
references to credit ratings in its rules but should instead adopt
specific standards that would help ensure an NRSRO would be independent
from an issuer of a security or would meet other specific
qualifications. Other commenters believed that any proposal should not
prevent the Banks from using NRSRO ratings as part of any credit
analysis. While FHFA believes that mandating any use or reliance on
NRSRO credit ratings in the investment regulation would be inconsistent
with the Dodd-Frank Act provisions, the proposed definition of
``investment quality'' would not prevent a Bank from using NRSRO
ratings or other third party analytics in its credit determination so
long as the Bank does not rely principally on such rating or third
party analysis. Instead, FHFA expects that such determination will be
driven primarily by the Bank's own internal analysis of market and
other external data and relevant financial information, including the
size and complexity of the financial instrument and the Bank's own risk
appetite and risk assessment framework. This approach is consistent
with the existing FHFA supervisory expectation that the Banks have in
place appropriate credit risk management and due diligence review
processes.
Under the new language proposed for Sec. 1267.3(a), a Bank would
need to make its determination concerning the credit quality of a debt
instrument prior to purchasing such instrument. If the Bank determined
that the instrument did not meet its criteria to be considered
``investment quality'' consistent with the proposed definition of that
term discussed above the Bank would be prohibited from purchasing the
debt instrument. If the Bank determined that the instrument is
``investment quality,'' the Bank would be permitted to purchase it.
As part of its risk management and monitoring process, FHFA expects
a Bank to periodically update its analysis with regard to any debt
instruments
[[Page 30788]]
purchased to determine whether they continue to meet criteria to be
considered ``investment quality'' as well as to meet other safety,
soundness, and business objectives. The Bank would also be expected to
develop appropriate strategies to respond to a decline in the credit
quality of its investments, consistent with then-current market and
financial conditions and considerations. Under proposed Sec.
1267.(3)(a)(ii), however, the Bank would not be required to sell a debt
instrument if subsequent analysis indicated the instrument became less
than ``investment quality'' after the initial purchase. This approach
is consistent with current Sec. 1267.3(a), which provides that a Bank
cannot buy debt instruments that are rated less than investment grade
by an NRSRO at the time of purchase, but that the Bank does not have to
sell any such instrument if it is downgraded to below investment grade
after acquisition. FHFA is proposing no other changes to current Sec.
1267.3(a) beyond replacing the current references to ``investment
grade'' with references to ``investment quality.''
Similarly, under proposed Sec. 1267.3(a)(4)(iii), a Bank would be
permitted to purchase a marketable direct obligation of a state, local
or tribal government agency or unit, as an exception to the general
prohibition on the purchases of mortgages or interest in mortgages,
only after determining that the obligation would meet the ``investment
quality'' criteria (as well as meeting all the other conditions set
forth in the provision).\19\ As with the debt investments, a Bank would
be expected to periodically update its credit analysis to determine
whether the obligation in question continues to meet the ``investment
quality'' criteria. The ``investment quality'' standard would replace
the current requirement that the instrument have ``the second highest
rating from an NRSRO.'' No other change to the provision is being
proposed.
---------------------------------------------------------------------------
\19\ Specifically, the Bank's purchase of the marketable direct
obligation of a state, local or tribal government unit or agency
would have to provide the issuer the customized terms, necessary
liquidity, or favorable pricing required to generate needed funding
for housing or community lending. These conditions are being carried
over from the current rule without change as part of the proposed
amendments.
---------------------------------------------------------------------------
The proposed change may appear to extend somewhat the ability of
the Banks to invest in certain marketable direct obligations of a
state, local or tribal government agencies or units as such investments
would not be limited to instruments rated by an NRSRO in the second
highest rating category or better. Before making a purchase, however, a
Bank would first need to determine, based on rigorous analysis, that
there will be sufficient financial backing so that full and timely
repayment of principal and interest on such obligations is expected,
and only minimal risk that adverse changes would alter this likelihood.
FHFA believes that requiring the Banks to undertake this affirmative
analysis should help ensure that the proposed change would not alter
substantially the risk a Bank may face from this class of investments
and could help improve the quality of a Bank's investment decisions in
this area. FHFA also believes that it would be complex and unduly
burdensome to develop and apply a standard that would more closely
approximate the current requirement than that proposed.
Finally, FHFA proposes to remove current Sec. 1267.5 because it no
longer applies to any Bank. This provision establishes interim capital
requirements for investments, but by its terms applies only to those
Banks that have not yet converted to the capital stock structure
mandated by the Gramm-Leach-Bliley Act \20\ (GLB Act) and are not
subject to the more rigorous risk-based and leverage capital
requirements mandated by the GLB Act and implemented by the capital
regulations found at 12 CFR part 932. Because all Banks have now
converted to the GLB Act capital stock structure, none remain subject
to the requirements of Sec. 1267.5,\21\ and FHFA proposes to delete it
from its regulations.
---------------------------------------------------------------------------
\20\ Public Law 106-102, 133 Stat. 1338 (1999).
\21\ See 76 FR at 5295, n.5.
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B. Part 1269 Rules--Standby Letters of Credit
Section 1269.2(c)(2) of FHFA regulations provides that a standby
letter of credit issued or confirmed by a Bank on behalf of a member to
assist the member in facilitating residential housing finance or
community lending may be collateralized by obligations of a state or
local government unit or agency, if the obligation is rated investment
grade by an NRSRO.\22\ FHFA proposes to eliminate this reference to an
NRSRO investment grade rating in Sec. 1269.2(c)(2) and replace it with
a requirement that the obligation of the state or local government unit
or agency have a readily ascertainable value, can be reliably
discounted to account for liquidation and other risks, and can be
liquidated in due course. FHFA also proposes to remove the current
definitions for ``investment grade'' and ``NRSRO'' from Sec.
1269.1.\23\
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\22\ See 12 CFR 1269.2(c)(2).
\23\ 12 CFR 1269.1.
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FHFA considered replacing the investment grade rating requirement
in Sec. 1269.2(c)(2) with the same ``investment quality'' standard
that is being proposed in the part 1267 Investment Regulations.
However, FHFA believes that it would not be realistic and would be
unnecessarily onerous for a Bank to perform the same type of in- depth
credit analysis, as discussed above, for a security that will be
accepted as collateral as for one in which the Bank intends to invest.
This is especially true given that the amounts of likely collateral
covered by this requirement are not large. Instead, FHFA is proposing a
standard that is more appropriate for collateral and is similar to one
already applied in other FHFA collateral regulations.\24\ FHFA also
believes the proposed standard is consistent with the original intent
of the investment grade requirement in this regulation, given that the
rating was meant to serve as a proxy for securities that had ``an
established secondary market . . . [that] . . . can be easily valued
and, if necessary, liquidated by a [Bank].'' \25\
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\24\ See 12 CFR 1266.7(a)(4).
\25\ Proposed Rule: Federal Home Loan Bank Standby Letters of
Credit, 63 FR 25726, 25729 (May 8, 1998).
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Under the new language proposed for Sec. 1269.2(c)(2), a Bank
would be expected to incorporate criteria into its collateral policies
to assure that any state or local government obligation accepted as
collateral for a standby letter of credit under this provision would
have a readily ascertainable value, can be reliably discounted to
account for liquidation and other risks, and can be liquidated by the
Bank in due course. FHFA also would expect the Bank to meet other
requirements applicable to collateral more generally, including having
a policy and procedures in place to ensure that the Bank accurately
values the collateral and applies realistic haircuts that reflect the
market for the instrument and existing economic conditions.
C. Part 1270 Rules--Liabilities
Part 1270 contains a number of provisions that reference NRSRO
credit ratings or require the Banks to seek a rating from an NRSRO.
First, Sec. 1270.4(b)(6) \26\ references assets that have been
assigned a rating or assessment by an NRSRO that is equivalent to, or
higher than, the rating or assessment assigned by the NRSRO to
outstanding COs. This provision is
[[Page 30789]]
contained in the ``negative pledge requirement,'' which states that a
Bank must maintain certain specific assets free of any lien or pledge
in an amount equal to the Bank's pro rata share of total outstanding
COs. FHFA proposes to remove Sec. 1270.4(b)(6) because the provision
does not appear to expand the type of assets that can be used to
fulfill negative pledge requirement beyond those already identified in
paragraphs (b)(1) through (b)(5) of the regulation.
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\26\ 12 CFR 1270.4(b)(6).
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The negative pledge requirement was first adopted in 1946. It has
been amended only once to any significant degree, in 1992, at which
time the Finance Board added the provisions currently found at Sec.
1270.4(b)(5) and at Sec. 1270.4(b)(6) of FHFA regulations.\27\ While
Sec. 1270.4(b)(6) allows certain securities to be used to fulfill the
negative pledge requirement based on their NRSRO rating based on their
NRSRO ratings, Sec. 1270.4(b)(5) allows a Bank to rely on investments
authorized under section 16(a) of the Bank Act \28\ to fulfill this
requirement. Among the investment authorized by section 16(a) of the
Bank Act are ``such securities as fiduciary and trust funds may be
invested in under the laws of the State in which the . . . Bank is
located.'' The type of securities that would be included within the
broad authority provided by this ``fiduciary'' language would appear to
include the assets that are also authorized for use in meeting the
negative pledge requirement by Sec. 1270.4(b)(6). Moreover, FHFA is
not aware of any asset that the Banks currently use to fulfill the
negative pledge requirement that would be exclusively authorized by
Sec. 1270.4(b)(6). Nor did the Finance Board, in adding current Sec.
1270.4(b)(6), indicate any specific instrument or class of instruments
that would be covered by the provision.\29\ Thus, FHFA is proposing to
delete this provision as duplicative and unnecessary.
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\27\ See Proposed Rule: Leverage Ratio on Consolidated Federal
Home Loan Bank Debt, 57 FR 20061, 20062 (May 11, 1992); Final Rule:
Leverage Ratio on Consolidated Federal Home Loan Bank Debt, 57 FR
62183, 62185 (Dec. 30, 1992).
\28\ 12 U.S.C. 1436(a).
\29\ See 57 FR at 20062, and 57 FR at 62185.
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FHFA considered replacing the current reference to NRSRO credit
ratings in Sec. 1270.4(b)(6) with a requirement that a Bank determine
that a security has a level of credit risk that is equivalent to or
less than that of outstanding COs before the security can be used to
fulfill the negative pledge requirement. Under this alternative
approach, the determination would have been based on credit standards
collectively developed by the Banks in consultation with OF. Use of a
collectively developed standard would be warranted in this case because
all Banks are jointly and severally liable on outstanding COs, and FHFA
believed that each Bank would have a strong interest in seeing that the
other Banks maintain the conservative risk profile of assets used to
fulfill the negative pledge requirement. FHFA viewed this alternative
approach as overly complex, however, especially in light of the fact
that Sec. 1270.4(b)(6) appears not to expand the pool of assets
already authorized for use to meet the negative pledge requirement
elsewhere in the regulation.
Nevertheless, FHFA specifically requests comments on whether Sec.
1270.4(b)(6) should be removed as proposed or if there would be
benefits to amending rather than deleting the provision. If commenters
believe the provision should be amended, FHFA requests comments on the
alternative approach described above, which would require the Banks to
collectively develop a credit standard in consultation with OF to
replace use of NRSRO ratings and on whether such an approach would be
overly complex to implement.
In addition to the references in Sec. 1270.4(b)(6), Sec. Sec.
1270.5(b) and (c) \30\ require Banks collectively to maintain the
highest NRSRO rating for COs and each Bank individually to maintain a
rating of at least the second highest from an NRSRO. These requirements
were adopted as a means of enhancing protections afforded holders of
COs by requiring Banks either collectively or individually to take
actions to maintain the required ratings.\31\ The Finance Board
believed that these requirements provided more effective on-going
protections to bond holders than the provision that they replaced,
which had required a written statement from a rating agency or an
investment bank that a change in the leverage limit applicable to the
Banks would not adversely affect the ratings or creditworthiness of
COs, prior to the change becoming effective.\32\
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\30\ 12 CFR 1270.5(b) and (c).
\31\ See Final Rule: Office of Finance; Authority of Federal
Home Loan Banks to Issue Consolidated Obligations, 65 FR 36290,
36294 (June 7, 2000).
\32\ Id.
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FHFA proposes to delete current Sec. 1270.5(b) and (c) and replace
them with new Sec. 1270.5. This new requirement would provide that the
Banks, individually and collectively, should operate in such manner and
take any actions necessary, including reducing leverage, to ensure that
COs maintain the highest level of acceptance by financial markets and
are generally perceived by investors as presenting a very low level of
credit risk. FHFA believes that the proposed provision captures the
intent of the current rules and helps protect holders of COs while
upholding the spirit of the Dodd-Frank Act requirements by not
mandating through regulation that NRSROs effectively provide an
imprimatur of Bank actions through the rating process.\33\ Nothing in
the language as proposed, however, would prohibit the Banks
collectively from seeking NRSRO ratings for COs or an individual Bank
from maintaining an individual NRSRO rating if such ratings were found
to be desirable or helpful for either business or other reasons.
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\33\ In comments to the ANPR, the Banks stated that because the
individual Bank rating requirement in Sec. 1270.5(c) did not
involve the rating of a security or a money market instrument, it
was outside the scope of section 939A of the Dodd-Frank Act. FHFA
disagrees and believes that requiring the Banks to maintain a
specific credit rating from an NRSRO would be a violation of the
spirit of the Dodd-Frank provision by requiring the Banks to rely on
NRSROs to review and essentially opine on Bank actions.
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FHFA also is proposing to delete current Sec. 1270.5(a) of its
regulations because no Bank remains subject to it.\34\ This provision
established leverage requirements which were applicable only to Banks
that had not yet converted to the capital stock structure mandated by
the GLB Act and had not become subject to the part 932 capital
requirements. As already discussed, all Banks have now converted to the
GLB Act capital stock structure and are subject to the part 932 capital
requirements. Therefore Sec. 1270.5(a) no longer applies to any Bank
and can be removed from FHFA regulations. The proposed amendments also
would delete the definition of ``NRSRO'' from Sec. 1270.1, given that
the term would no longer be used in part 1270 if the other proposed
changes are adopted.
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\34\ 12 CFR 1270.5(a).
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D. Phase-In Period
In comments to the ANPR, the Banks requested that FHFA provide a
phase-in period of no less than one year for any amendments that would
implement section 939A of the Dodd-Frank Act. FHFA disagrees and
believes that a phase-in period of one year or more is too long,
especially as the Banks should be able to leverage their current
governance, risk selection, and credit risk management policies,
processes, and practices to meet the proposed requirements.
Nevertheless, FHFA may consider a delayed implementation date for any
final requirements, and requests
[[Page 30790]]
comments on what time frame may be necessary for the Banks to implement
the proposal. FHFA further requests that any comments on this issue
specifically identify and describe the actions that would need to be
taken to implement these proposed amendments.
IV. Paperwork Reduction Act
The proposed rule amendments do not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). Therefore, FHFA has not submitted any information to the
Office of Management and Budget for review.
V. Regulatory Flexibility Act
The proposed rule amendments apply only to the Banks, which do not
come within the meaning of small entities as defined in the Regulatory
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore in accordance
with section 605(b) of the RFA, FHFA certifies that this proposed rule,
if promulgated as a final rule, will not have significant economic
impact on a substantial number of small entities.
List of Subjects
12 CFR Parts 1267 and 1269
Community development, Credit, Federal home loan bank, Housing,
Reporting and recordkeeping requirements.
12 CFR Part 1270
Accounting, Federal home loan banks, Government securities.
Accordingly, for reasons stated in the preamble and under authority
in 12 U.S.C. 4511, 4513, and 4526, FHFA proposes to amend chapter XII
of title 12 of the Code of Federal Regulations as follows:
PART 1267--FEDERAL HOME LOAN BANK INVESTMENTS
0
1. The authority citation for part 1267 continues to read as follows:
Authority: 12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513,
4526.
0
2. Amend Sec. 1267.1 by removing the definitions for ``Investment
grade'' and ``NRSRO'' and adding in correct alphabetical order a
definition for ``Investment quality'' to read as follows:
Sec. 1267.1 Definitions.
* * * * *
Investment quality means a determination made by the Bank with
respect to a security or obligation that based on documented analysis,
including consideration of the sources for repayment on the security or
obligation:
(1) There is adequate financial backing so that full and timely
payment of principal and interest on such security or obligation is
expected; and
(2) There is minimal risk that that timely payment of principal or
interest would not occur because of adverse changes in economic and
financial conditions during the projected life of the security or
obligation.
* * * * *
0
3. Amend Sec. 1267.3 by revising paragraphs (a)(3) and (a)(4) to read
as follows:
Sec. 1267.3 Prohibited investments and prudential rules.
(a) * * *
(3) Debt instruments that are not investment quality, except:
(i) Investments described in Sec. 1265.3(e) of this chapter; and
(ii) Debt instruments that a Bank determined became less than
investment quality because of developments or events that occurred
after acquisition of the instrument by the Bank;
(4) Whole mortgages or other whole loans, or interests in mortgages
or loans, except:
(i) Acquired member assets;
(ii) Investments described in Sec. 1265.3(e) of this chapter;
(iii) Marketable direct obligations of state, local, or Tribal
government units or agencies, that are investment quality, where the
purchase of such obligations by the Bank provides to the issuer the
customized terms, necessary liquidity, or favorable pricing required to
generate needed funding for housing or community lending;
(iv) Mortgage-backed securities, or asset-backed securities
collateralized by manufactured housing loans or home equity loans, that
meet the definition of the term ``securities'' under 15 U.S.C.
77b(a)(1) and are not otherwise prohibited under paragraphs (a)(5)
through (a)(7) of this section, and
(v) Loans held or acquired pursuant to section 12(b) of the Bank
Act (12 U.S.C. 1432(b)). * * *
* * * * *
Sec. 1267.5 [Removed]
0
4. Remove Sec. 1267.5.
PART 1269--STANDBY LETTERS OF CREDIT
0
5. The authority citation for part 1269 continues to read as follows:
Authority: 12 U.S.C. 1429, 1430, 1430b, 1431, 4511, 4513, 4526.
Sec. 1269.1 [Amended]
0
6. Amend Sec. 1269.1 by removing the definitions for ``Investment
grade'' and ``NRSRO.''
0
7. Amend Sec. 1269.2 by revising paragraph (c)(2) to read as follows:
Sec. 1269.2 Standby letters of credit on behalf of members.
* * * * *
(c) * * *
(2) A standby letter of credit issued or confirmed on behalf of a
member for a purpose described in paragraphs (a)(1) or (a)(2) of this
section may, in addition to the collateral described in paragraph
(c)(1) of this section, be secured by obligations of state or local
government units or agencies, where such obligations have a readily
ascertainable value, can be reliably discounted to account for
liquidation and other risks, and can be liquidated in due course.
PART 1270--LIABILITIES
0
8. The authority citation for part 1270 continues to read as follows:
Authority: 12 U.S.C. 1431, 1432, 1435, 4511, 4512, 4513, 4526.
Sec. 1270.1 Definitions.
0
9. Amend Sec. 1270.1 by removing the definition of ``NRSRO.''
0
10. Amend Sec. 1270.4 by revising paragraph (b) to read as follows:
Sec. 1270.4 Issuance of consolidated obligations.
* * * * *
(b) Negative pledge requirement. Each Bank shall at all times
maintain assets described in paragraphs (b)(1) through (b)(5) of this
section free from any lien or pledge, in an amount at least equal to a
pro rata share of the total amount of currently outstanding
consolidated obligations and equal to such Bank's participation in all
such consolidated obligations outstanding, provided that any assets
that are subject to a lien or pledge for the benefit of the holders of
any issue of consolidated obligations shall be treated as if they were
assets free from any lien or pledge for purposes of compliance with
this paragraph (b). Eligible assets are:
(1) Cash;
(2) Obligations of or fully guaranteed by the United States;
(3) Secured advances;
(4) Mortgages as to which one or more Banks have any guaranty or
insurance, or commitment therefor, by the United States or any agency
thereof; and
(5) Investments described in section 16(a) of the Bank Act (12
U.S.C. 1436(a)).
0
11. Amend Sec. 1270.5 by revising this section in its entirety to read
as follows:
[[Page 30791]]
Sec. 1270.5 Bank operations.
The Banks, individually and collectively, shall operate in such
manner and take any actions necessary, including without limitation
reducing leverage, to ensure that consolidated obligations maintain a
high level of acceptance by financial markets and are generally
perceived by investors as presenting a low level of credit risk.
Dated: May 17, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-12333 Filed 5-22-13; 8:45 am]
BILLING CODE 8070-01-P