Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Farmer Mac Liquidity Management, 65541-65554 [2013-25918]

Agencies

• Farm Credit Administration

[Federal Register Volume 78, Number 212 (Friday, November 1, 2013)]
[Rules and Regulations]
[Pages 65541-65554]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25918]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC83


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we or us) adopts a final 
rule that amends its liquidity management regulations for the Federal 
Agricultural Mortgage Corporation (Farmer Mac). The purpose of the 
final rule is to strengthen liquidity risk management at Farmer Mac, 
improve the quality of assets in its liquidity reserves, and bolster 
its ability to fund its obligations and continue operations during 
times of economic, financial, or market adversity.

DATES: This regulation will be effective 180 days after date of 
publication in the Federal Register, provided either or both Houses of 
Congress are in session for at least 30 calendar days after publication 
of this regulation in the Federal Register. We will publish a notice of 
the effective date in the Federal Register.

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

[[Page 65542]]

883-4056; or Richard A. Katz, Senior Counsel, Office of General 
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of the final rule are to:
     Improve Farmer Mac's capacity to pay its obligations and 
fund its operations by maintaining adequate liquidity to withstand 
market disruptions and adverse economic or financial conditions;
     Strengthen liquidity management at Farmer Mac;
     Increase the minimum liquidity reserve requirement for 
Farmer Mac from 60 to 90 days, and revise how it is computed;
     Require Farmer Mac to hold more high-quality liquid assets 
in its liquidity reserve; and,
     Require Farmer Mac to hold supplemental liquidity that it 
can draw upon in an emergency and is sufficient to cover its liquidity 
needs beyond 90 days.

II. Background

    Congress established Farmer Mac in 1988 as part of its effort to 
resolve the agricultural crisis of the 1980s. Congress expected that a 
secondary market for agricultural and rural housing mortgages would 
increase the availability of competitively priced mortgage credit to 
America's farmers, ranchers, and rural homeowners.
    Striking an appropriate balance between achieving its mission and 
managing risk is a guiding principle that the FCA follows when it 
issues regulations for Farmer Mac.\1\ Specifically, the intent of this 
regulation is to allow Farmer Mac sufficient flexibility to fully serve 
its customers and to provide an appropriate return for investors while 
ensuring that it engages in safe and sound operations.\2\ Our primary 
supervisory and regulatory objective is to ensure that Farmer Mac will 
achieve its congressional mandate of increasing the availability of 
affordable credit for farmers, ranchers, rural homeowners, and rural 
utilities in a safe and sound manner.
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    \1\ See 76 FR 71798 (Nov. 18, 2011).
    \2\ Id.
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    Liquidity is a financial institution's ability to meet its 
obligations as they come due without substantial negative impact on its 
operations or financial condition.\3\ The availability of an 
appropriately sized portfolio comprised of highly liquid assets is 
necessary for Farmer Mac to conduct its business and to achieve its 
statutory purposes.\4\ Although Farmer Mac's liquidity reserve 
portfolio must contain low and manageable risk, it can appropriately 
include investments that provide a positive return on the portfolio and 
still fulfill the investment purposes authorized by regulation under 
most market conditions.\5\
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    \3\ See 76 FR 71798, supra at 71799.
    \4\ Id.
    \5\ Id.
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    Liquidity risk is the risk that Farmer Mac could become unable to 
meet expected obligations and reasonably estimated unexpected 
obligations as they come due without substantial adverse impact on its 
operations or financial condition.\6\ Reasonably estimated liquidity 
risk should consider plausible scenarios of debt market disruptions, 
asset market disruptions (such as industry sector security price risk 
scenarios), and other contingent liquidity events.\7\ Contingent 
liquidity events could include significant changes in overall economic 
conditions, events that would impact the market's perception of Farmer 
Mac,\8\ or a broad and significant deterioration in the agriculture 
sector. We believe that these events could have a potential impact on 
Farmer Mac's need for cash to fulfill obligations under the terms of 
products such as Long-Term Standby Purchase Commitments and AgVantage 
Plus bond guarantees.\9\
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    \6\ Id.
    \7\ Id.
    \8\ For example, reputation risk and legal risk could affect the 
market's perception of Farmer Mac.
    \9\ Id.
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III. History of This Rule

    The financial crisis in 2008 caused the FCA to review its 
regulations governing investments and liquidity for all Farm Credit 
System (FCS or System) institutions,\10\ including Farmer Mac. The FCA 
commenced this rulemaking to revise its existing regulations pertaining 
to non-program investments and liquidity at Farmer Mac by publishing an 
advance notice of proposed rulemaking (ANPRM) on May 19, 2010.\11\ 
After reviewing and considering the comments that we received, we 
published proposed rule on November 18, 2011.\12\ The 60-day comment 
period ended on January 17, 2012.
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    \10\ We proposed new liquidity rules for FCS banks in 2011. See 
76 FR 80817 (Dec. 27, 2011). We adopted the final liquidity rule for 
these banks earlier this year. See 78 FR 23438 (Apr. 18, 2013).
    \11\ See 75 FR 27951 (May 19, 2010).
    \12\ See 76 FR 71798 supra.
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    By a letter dated April 17, 2013, Farmer Mac asked us to reopen the 
comment period for 30 days. According to its letter, Farmer Mac 
``commenced an evaluation and rebalancing of its investment portfolio 
in the context of the proposed liquidity requirements'' after the final 
investment management rule became effective. Farmer Mac claimed that 
its evaluation exposed possible concerns regarding the proposed 
liquidity requirements, which in its opinion merited further 
consideration by the FCA. On May 8, 2013, we reopened the comment 
period \13\ so that all interested parties could bring to our attention 
issues and concerns that they believe warrant further or heightened FCA 
scrutiny. The second comment period expired on June 7, 2013.
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    \13\ 78 FR 26711 (May 8, 2013).
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    The proposed rule covered several subjects. The FCA has decided to 
finalize different proposed regulations separately.\14\ On November 5, 
2012, the FCA adopted a final rule that amended its investment 
management regulations.\15\ Today, the FCA enacts a final liquidity 
rule for Farmer Mac. Next, the FCA will adopt a final rule pertaining 
to eligible investments for Farmer Mac, which will conclude the 
rulemaking that began in 2010.
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    \14\ One regulation, Sec.  652.5, contains all the definitions 
that apply to our investment and liquidity regulations for Farmer 
Mac. Each final rule that we adopt through this extensive rulemaking 
process will amend different definitions in Sec.  652.5.
    \15\ 77 FR 66375 (Nov 5, 2012). This final rule amended 
Sec. Sec.  652.10, 652.15, 652.25, 652.30 and 652.45.
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    The FCA proposed to amend three regulations that apply to liquidity 
management at Farmer Mac. Proposed Sec.  652.5 contained four 
definitions pertaining to liquidity. Proposed Sec.  652.35 addressed 
liquidity management at Farmer Mac. The focus of proposed Sec.  652.35 
is board policies that establish internal controls, reporting 
requirements, and risk management practices, such as the Contingency 
Funding Plan (CFP) and the Liquidity Maturity Management Plan (LMMP). 
Effective liquidity management in accordance with proposed Sec.  652.35 
ensures that Farmer Mac always maintains adequate liquidity as economic 
and financial conditions change. Proposed Sec.  652.40 established 
requirements concerning Farmer Mac's liquidity reserve and supplement 
liquidity buffer. As proposed, Sec.  652.40 would:
     Increase the minimum days of liquidity in Farmer Mac's 
liquidity reserve from 60 to 90 days;
     Divide the 90-day liquidity reserve into three tiers so 
Farmer Mac has a sufficient amount of cash and cash-like instruments 
available to pay its

[[Page 65543]]

obligations and fund its operations for next 15 days, and maintain a 
pool of cash and highly liquid instruments for the both the subsequent 
15 days and the 60 days after that; and,
     Require Farmer Mac to hold supplemental liquidity that 
would provide a longer term, stable source of funding beyond the 90-day 
minimum liquidity reserve.
    Proposed Sec.  652.40 would also specify corrective actions that 
the FCA could compel Farmer Mac to implement under a reservation of 
authority.

IV. Comment Letters

A. Overview

    The FCA received comment letters from Farmer Mac and the Farm 
Credit Council when the initial comment period expired on January 17, 
2012. We received another comment letter from Farmer Mac when the 
second comment period expired on June 7, 2013.

B. Comments Received During the First Comment Period

    The Farm Credit Council's comment letter asked us to consider 
comment letters that it and its members filed in response to other 
proposed rules concerning investment management and liquidity at FCS 
banks and associations.\16\ According to the commenter, most of the 
concepts pertaining to investment management and liquidity at FCS banks 
and associations also apply to Farmer Mac. In this context, the Farm 
Credit Council ``strongly encouraged'' the FCA to adopt liquidity rules 
for Farmer Mac that ``more closely mirror the requirements'' for FCS 
banks. In large measure, the Farm Credit Council asked us to closely 
align the liquidity regulations for FCS banks and Farmer Mac because it 
expressed concern that the FCA treats Farmer Mac more favorably than 
other FCS institutions. We will address this issue in greater detail 
below.
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    \16\ The FCA proposed an investment management rule for FCS 
banks and associations on August 18, 2011. See 76 FR 51289. On 
December 27, 2011, the FCA proposed to amend its liquidity rule for 
FCS banks. See 76 FR 80817.
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    Both commenters acknowledged that the proposed rule reflects the 
FCA's intent to strengthen Farmer Mac's safety and soundness. However, 
they opined that the proposed liquidity rule is overly prescriptive and 
imposes undue regulatory burden on Farmer Mac. According to the 
commenters, the proposed rule goes beyond establishing an appropriate 
regulatory and supervisory framework that ensures that Farmer Mac 
safely and soundly manages its liquidity. Instead, the commenters claim 
that the proposed rule imposes the FCA's judgment on business matters 
that Farmer Mac's board and management should decide.
    The commenters raised a number of substantive issues about the 
proposed liquidity rule, and they recommended specific revisions for 
the final rule. The main concerns that the commenters expressed are 
whether:
     The proposed rule is too prescriptive in assigning 
responsibilities to the board and management for devising and 
implementing liquidity policies for Farmer Mac;
     The regulation should require Farmer Mac to adopt a new 
internal LMMP; and,
     The FCA's regulatory approach for liquidity management at 
both Farmer Mac and FCS banks should be consistent and equitable.

C. Comments Received During the Second Comment Period

    During the second comment period, Farmer Mac raised two additional 
issues. First, Farmer Mac requested that the final regulation allow it 
to include the portion of loans that it owns and are guaranteed by the 
United States Department of Agriculture (USDA) in the second and third 
level of its liquidity reserve. Under the proposed rule, loans 
guaranteed by USDA would qualify only as supplemental liquidity. 
Second, Farmer Mac asked the FCA to phase in the new liquidity 
requirements over a 6-month period after the final rule is published. 
According to the commenter, the new rule would require Farmer Mac to 
hold a larger amount of investments for liquidity than it has 
historically held, and under the circumstances, it would need time to 
adjust its liquidity portfolio without sacrificing its long-term 
stability.

V. The FCA's Approach in the Final Rule

    The commenters have not persuaded the FCA that the proposed rule is 
unduly burdensome or overly prescriptive. Recent financial crises and 
continuing global economic uncertainty clearly demonstrate that strong 
liquidity management practices and access to reliable sources of 
emergency funding are crucial both to the viability of individual 
financial institutions, including Farmer Mac, and to the financial 
system as a whole. We proposed substantial revisions to Sec.  652.35 to 
redress vulnerabilities in liquidity management that we identified in 
the aftermath of the 2008 crisis.\17\ Proposed Sec.  652.40 would 
require Farmer Mac to retain an adequate liquidity reserve. The purpose 
of this rulemaking is to strengthen Farmer Mac's ability to withstand 
future crises by limiting the adverse effects that sudden changes in 
economic, financial, and market conditions may have on its liquidity. 
For these reasons, both the proposed and final rules follow the same 
basic supervisory and regulatory approaches to liquidity.
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    \17\ See 76 FR 71798 (Nov. 18, 2011).
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    The commenters offered many constructive and practical suggestions 
for improving the regulation that we incorporated into the final rule. 
Based on these comments, we restructured and refined the rule so it is 
easier to read, understand, and apply. Additionally, the comments 
caused us to reconsider and revise some our positions. As we explain 
the final rule and how it differs from our original proposal, we will 
respond to comments about our overall regulatory and supervisory 
approach to liquidity as well as specific issues arising from each 
provision of Sec. Sec.  652.35 and 652.40, as well as four definitions 
in Sec.  652.5.

A. Core Concepts in the Final Farmer Mac Liquidity Rule

    Our new liquidity regulation for Farmer Mac follows the fundamental 
concepts of the principle-based approach of the Basel Committee on 
Banking Supervision (Basel Committee) \18\ and the Federal banking 
agencies.\19\ These fundamental concepts apply to Farmer Mac as well as 
other financial institutions. The comprehensive supervisory approach 
developed by the Basel Committee and the Federal banking agencies 
effectively strengthens both the liquidity reserve and the liquidity 
management practices at financial institutions. The most important 
features of the framework of

[[Page 65544]]

other regulators that we considered and incorporated in this rule 
pertain to: (1) A multiple-tiered approach to the liquidity reserve 
that requires institutions keep a sufficient amount of cash and highly 
liquid investments on hand to pay obligations that fall due in next 15, 
30, and 90 days; (2) supplemental liquidity that provides Farmer Mac 
with a stable source of liquidity over a longer period of time; (3) 
specific policies and internal controls that combat liquidity risk; 
and, (4) contingency funding planning based in part on the results of 
liquidity stress tests. This principle-based approach is comprehensive, 
yet flexible to apply to all types of financial institutions of varying 
size, structure, and complexity. This approach is suitable to Farmer 
Mac's business model and operations, and we anticipate that it will 
enhance Farmer Mac's liquidity.
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    \18\ In September 2008, the Basel Committee issued the 
Principles for Sound Liquidity Risk Management and Supervision, 
which contained 17 core principles detailing international 
supervisory guidance for sound liquidity risk management. In 
December, 2010, the Basel Committee issued Basel III: International 
framework for liquidity risk measurement, standards, and monitoring 
(Basel III).
    \19\ The Federal banking agencies are the Office of the 
Comptroller of the Currency, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation (FDIC), 
and the National Credit Union Administration. The former Office of 
Thrift Supervision was also a Federal banking agency, and it issued 
joint guidance about liquidity with the other regulators prior to 
July 2011. Title III of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act abolished the Office of Thrift Supervision 
and transferred its supervisory and regulatory authorities over 
different institutions the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, and the 
Federal Deposit Insurance Corporation. See Public Law 111-203, Title 
III, Sec.  312, 124 Stat. 1376, 1521 (Jul. 21, 2010).
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    Basel III and other guidance from the Federal banking agencies are 
not the only basis for the new liquidity regulation. The revised 
regulation also builds upon the Farmer Mac's own initiatives to improve 
liquidity management as well as the FCA's experiences from examining 
and regulating liquidity risk management. In the aftermath of the 
financial crisis in 2008, Farmer Mac, on its own initiative, increased 
the size and diversity of its investment portfolio. As part of this 
effort, Farmer Mac reduced its hold limits for certain categories of 
investments so it would not have too much exposure to concentrations in 
certain industries or asset classes.
    Although both commenters allege that our new liquidity rules for 
Farmer Mac are too detailed and prescriptive, we observe that these 
regulations follow the core concepts of the principle-based approach of 
other regulators as previously discussed. These requirements will place 
Farmer Mac in a stronger position to endure and outlast future crises 
that could impede its access to funding. While the commenters may view 
this approach as too detailed and prescriptive, we conclude that the 
final rule establishes essential minimum standards from a safety and 
soundness perspective.

B. Equitable and Consistent Treatment of Farmer Mac and FCS Banks

    The Farm Credit Council, on behalf of its membership, commented in 
this and related rulemakings that the FCA's investment and liquidity 
regulations generally treat Farmer Mac more leniently and favorably 
than FCS banks and associations. The Farm Credit Council's comment 
letter expressed support for ``the basic concept that the liquidity 
standards for Farmer Mac and FCS institutions should essentially be the 
same,'' and it acknowledged that our regulations strive to achieve this 
objective. However, the commenter claimed that, ``differences remain 
between what is proposed for Farmer Mac and what is proposed for FCS 
institutions.'' From the Farm Credit Council's perspective, the 
``differences in business models between Farmer Mac and FCS 
institutions do not justify the differences in liquidity and investment 
management rules proposed by the [FCA].'' For these reasons, the 
commenter encouraged us to revise our rules for Farmer Mac so they 
``more closely mirror'' our regulations for other FCS institutions.
    Our regulatory and supervisory approach for liquidity is the same 
for both Farmer Mac and FCS banks. Farmer Mac and FCS banks have 
different corporate structures, and they offer retail lenders different 
products for extending credit to agriculture, rural homeowners, and 
rural utilities. However, Farmer Mac and Farm Credit banks depend on 
access to market to issue the debt obligations that, for the most part, 
fund their respective operations. If access to market becomes 
obstructed during times of economic or financial stress, FCS banks and 
Farmer Mac must draw on their liquidity reserves to pay their 
obligations and fund their operations. In this context, inadequate 
liquidity poses the same challenges and risks to both branches of the 
System, and it raises the same core safety and soundness concerns for 
the FCA. Accordingly, we agree with the commenter that the liquidity 
regulations for Farmer Mac and Farm Credit banks should ``mirror'' each 
other to the greatest extent possible. We have significantly revised 
the structure and text of the final liquidity regulations for Farmer 
Mac so they more closely resemble the final liquidity regulations for 
Farm Credit banks. We will discuss these conforming changes in greater 
detail in the Section-by-Section Analysis of this preamble.
    The Farm Credit Council claims that Farmer Mac enjoys two 
advantages over the rest of the System, which it asked us to consider 
so our final regulations promote equitable and consistent treatment in 
the markets where Farmer Mac competes with FCS banks and associations. 
As the commenter points out, Farmer Mac is a publicly traded stock 
corporation while other FCS institutions are cooperatives. 
Additionally, Farmer Mac has a line of credit with the Treasury whereas 
the rest of the FCS has no assured governmental lender of last resort 
at this time. According to the commenter, ``Farmer Mac enjoys the best 
of both worlds--private capital that can be traded at fair value and an 
explicit public backstop.''
    From the FCA's perspective, whether organized as a publicly traded 
stock corporation or organized as cooperative, Farmer Mac and System 
banks face roughly the same challenges when it comes to market access 
and managing liquidity risks associated with market disruptions. Both 
Farmer Mac and Farm Credit banks must maintain adequate high-quality 
liquidity at all times.
    We now respond to the Farm Credit Council's claim that Farmer Mac's 
authority under section 8.13 of the Act \20\ to issue up to $1.5 
billion in obligations to the Treasury to cover losses on its 
guarantees gives it an advantage over FCS banks, which have no assured 
governmental lender of last resort. According to this statutory 
provision, Farmer Mac may borrow from the Treasury ``solely for the 
purpose'' of honoring guarantees of timely payment of principal and 
interest it provided for securities or obligations backed by pools of 
qualified loans. Furthermore, section 8.10(c) of the Act prohibits 
Farmer Mac from issuing obligations to the Treasury until the reserve 
it maintains to cover losses on its guarantees has been exhausted.
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    \20\ Section 8.13 of the Act authorizes Farmer Mac to issue 
obligations to the Secretary of Treasury and use the proceeds solely 
for the purpose of fulfilling its obligations under any guarantee 
that Farmer Mac provided under title VIII of the Act. The aggregate 
amount of Farmer Mac obligations that the Secretary of Treasury may 
hold at any time shall not exceed $1,500,000,000. Under section 8.13 
of the Act, the Secretary of Treasury shall: (1) Set the interest 
rate that Farmer Mac shall pay on its obligations based on a 
specific formula; and, (2) require Farmer Mac to repurchase its 
obligations within a reasonable period of time.
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    In this context, the authority to borrow from the Treasury is of 
more value to Farmer Mac in an agricultural credit crisis (resulting in 
widespread defaults on pools of qualified loans that it has guaranteed) 
rather than in a liquidity crisis that impedes market access. In all 
probability, an agricultural credit crisis will unfold over a longer 
period of time whereas a liquidity crisis may be much more sudden, 
immediate, and short-term. Farmer Mac could not borrow from the 
Treasury if economic or financial turmoil outside of the agricultural 
sector were to obstruct market access as long as it could still honor 
its guarantees and its reserve is not exhausted. In a scenario such as 
the 2008 crisis, Farmer Mac's emergency backstop with the Treasury does 
not give it a competitive advantage over FCS banks.

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    In further response to the commenter, we emphasize that both Farmer 
Mac and FCS banks must always maintain sufficient liquidity to absorb 
the impact of market disruptions and economic downturns. Through 
effective FCA regulation and supervision of the System, both Farmer Mac 
and FCS banks will be able to reassure investors that they have 
adequate liquidity to meet their obligations when they are due. New 
liquidity regulations for both Farmer Mac and System banks bolster 
their ability to withstand severe economic and financial stress on 
their own, regardless of whether or not they have an assured 
governmental lender of last resort. As discussed earlier, these new 
liquidity regulations are modeled after the principle-based approach of 
Basel III, but they have been adjusted and calibrated for the unique 
circumstances and structures of both Farmer Mac and FCS banks. For all 
these reasons, we conclude that Farmer Mac's authority to borrow from 
the Treasury does not give it a competitive advantage over FCS banks 
when it comes to liquidity.

VI. Section-by-Section Analysis of the Rule

    We received no comments about many of the changes that we proposed 
to Sec. Sec.  652.35 and 652.40. Except for minor stylistic or 
technical changes that are explained elsewhere in this preamble, we are 
finalizing those provisions as proposed without further explanation.

A. Section 652.5--Definitions

    We proposed to add definitions for ``Cash,'' ``Contingency Funding 
Plan,'' ``Liability Maturity Management Plan,'' and ``Liquidity 
Reserve'' to Sec.  652.5. We received no comments about the last three 
definitions, and the final rule adopts these definitions as proposed. 
However, the cross-references in the definitions of ``Contingency 
Funding Plan'' and ``Liability Maturity Management Plan'' have been 
changed to reflect the renumbering of the paragraphs in the final Sec.  
652.35, which resulted from other changes the commenters requested.
    Proposed Sec.  652.5 defined ``cash'' to include ``the insured 
amount of balances held in deposit accounts at Federal Deposit 
Insurance Corporation-insured banks.'' Farmer Mac stated that the 
proposed rule is unclear about how the liquidity rule would treat 
existing cash balances that Farmer Mac holds in deposit that exceed the 
deposit insurance limit. We responded to this comment by amending the 
definition of ``cash'' so it no longer requires bank deposits in Farmer 
Mac's liquidity portfolio to be insured. As a result, cash held in 
Farmer Mac's liquidity reserve may include deposits that exceed the 
amount covered by FDIC insurance. The risk of loss in uninsured 
deposits generally is low over the short-term. Both Sec.  652.10 and 
Farmer Mac's fiduciary responsibilities require Farmer Mac to establish 
appropriate risk limits, including credit quality standards and 
concentration limits for its investments. Additionally, Sec.  
652.10(f)(3) requires Farmer Mac to establish and maintain processes to 
monitor and evaluate changes in the credit quality of investments and 
counterparties. Accordingly, both the FCA and Farmer Mac closely 
monitor the strength and condition of depository institution 
counterparties where Farmer Mac maintains accounts that exceed the 
deposit insurance limit.

B. Section 652.35--Liquidity Management

    Proposed Sec.  652.35 governs liquidity management at Farmer Mac. 
The five provisions of proposed Sec.  652.35 addressed: (1) Board 
responsibility; (2) content of Farmer Mac's liquidity policy; (3) 
reporting requirements; (4) LMMP; and, (5) CFP. We revised proposed 
Sec.  652.35 in response to comments from both Farmer Mac and the Farm 
Credit Council.
1. Section 652.35(a)--Board Responsibilities
    Proposed Sec.  652.35(a) addresses the responsibilities of the 
board of directors for effective liquidity management at Farmer Mac. 
The FCA proposed only minor changes to existing regulation governing 
the board's responsibility for Farmer Mac's liquidity reserve 
policy.\21\ Essentially, this regulatory provision would require Farmer 
Mac's board of directors to adopt a liquidity policy, which may be 
integrated into a comprehensive asset-liability management or 
enterprise-wide risk management policy. Under proposed Sec.  652.35(a), 
the risk tolerance embodied in the liquidity policy must be consistent 
with the investment management policies required by Sec.  652.10. The 
next sentence of the proposed rule would require the board to ensure 
that adequate internal controls are in place so management complies 
with the board's liquidity policies. Proposed Sec.  652.35(a) would 
require the board of directors, or a designated committee of the board, 
at least annually to review and ``affirmatively validate'' the 
sufficiency of Farmer Mac's liquidity policy. The board of directors 
must approve any changes to the liquidity policy, and it must provide a 
copy of its revised liquidity policy to OSMO within 10 business days of 
adoption.
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    \21\ See 76 FR 71798, 71810 (Nov. 18, 2011).
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    We received a general comment about proposed Sec.  652.35(a) from 
Farmer Mac. This commenter reiterated concerns that it expressed in 
earlier phases of this rulemaking that the new investment management 
and liquidity regulations should establish broad guidelines for prudent 
risk management rather than prescribing operational business practices 
to Farmer Mac. Although the FCA emphasized that the objective of this 
rulemaking is to establish an appropriate regulatory and supervisory 
framework to promote Farmer Mac's long-term viability and safety and 
soundness,\22\ the commenter opined that the level of detail in the 
proposed rule imposes the FCA's business judgments on Farmer Mac's 
board.
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    \22\ See 76 FR 71798, 71799 (Nov. 18, 2011).
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    Farmer Mac's comments about board responsibility are broad in scope 
and general in nature. In fact, Farmer Mac did not offer specific 
comment about proposed Sec.  652.35(a). Instead, Farmer Mac's comments 
seem applicable to both Sec.  652.35(a) and Sec.  652.10(a), which 
addressed board responsibility for investment management.\23\ The 
preamble to the final investment management rule concluded that Sec.  
652.10(a) merited only minor, technical, clarifying, and non-
substantive changes \24\ because it was not overly prescriptive or 
unduly burdensome. This same reasoning applies here.
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    \23\ Farmer Mac's comment letter contained footnotes that 
referred to passages in the preamble to the proposed rule that 
addressed investment management practices under Sec.  652.10.
    \24\ See 77 FR 66375, supra at 66377.
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    We made one revision to proposed Sec.  652.35(a). A sentence in 
proposed Sec.  652.35(a) would have required ``the board of directors 
or a designated committee of the board to review and affirmatively 
validate the sufficiency of the liquidity policy'' at least once a 
year. The final rule omits the phrase ``affirmatively validate'' from 
this sentence. This revision addresses concerns by both commenters that 
regulatory provisions pertaining to board responsibility are overly 
prescriptive. Additionally, this change aligns the regulatory 
provisions for FCS banks and Farmer Mac, as the Farm Credit Council 
requested. We agree with the Farm Credit Council that our regulatory 
approach pertaining to board responsibility for effective liquidity 
management at Farmer Mac and FCS

[[Page 65546]]

banks should be consistent. This change to Sec.  652.35(a) mirrors 
changes that the FCA has already made to Sec. Sec.  652.10(a) and 
615.5134(a), which govern investment management at Farmer Mac and 
liquidity management at FCS banks, respectively. We refer readers to 
the preambles to the final investment management rule \25\ for Farmer 
Mac and the final liquidity rule for FCS banks for an in-depth 
explanation of this revision.\26\
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    \25\ See 77 FR 66375, 66377 (Nov. 5, 2012).
    \26\ See 78 FR 23438, 23443 (Apr. 18, 2013).
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2. Section 652.35(b)--Policy Content
    Proposed Sec.  652.35(b) focused on the content of the board's 
liquidity policies. As the preamble to the proposed rule explained, the 
FCA planned to recodify an existing regulation, Sec.  652.20(d), as 
Sec.  652.35(b) with only minor, non-substantive revisions.\27\ 
Proposed Sec.  652.35(b) would require Farmer Mac to address 11 
different issues, at a minimum, in its liquidity policies.\28\
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    \27\ 76 FR 71798 supra at 71810. On November 5, 2012, the FCA 
redesignated existing Sec.  652.20(d) as Sec.  652.35(e) without any 
change, pending the adoption of final liquidity rules for Farmer 
Mac. See 77 FR 66375, supra at 66387-66388.
    \28\ The 11 issues are: (1) The purpose and objectives of the 
liquidity reserves; (2) a list of specific asset classes and 
characteristics that can be used to meet liquidity objectives; (3) 
diversification requirement for the liquidity reserve portfolio; (4) 
maturity limits and credit quality standards for non-program 
investments used to meet the minimum liquidity reserve requirement; 
(5) the minimum and target amounts of liquidity that are appropriate 
for Farmer Mac, expressed in days of maturing obligations; (6) the 
maximum amount of non-program investments that can be held for 
meeting Farmer Mac's liquidity needs, expressed as a percentage of 
program assets and program obligations; (7) exception parameters and 
post approvals needed with respect to the liquidity reserve; (8) 
delegation of authorities pertaining to the liquidity reserve; (9) 
reporting requirements which must comply with Sec.  652.35(c); (10) 
a LMMP, as described in proposed Sec.  652.35(d); and, (11) a CFP, 
as described in proposed Sec.  652.35(e).
---------------------------------------------------------------------------

    The FCA received no specific comments about proposed Sec.  
652.35(b). However, comments we received from the Farm Credit Council 
about parity between the liquidity rules for FCS banks and Farmer Mac, 
and the LMMP are relevant. Accordingly, we are modifying final Sec.  
652.35(b) in response to these comments. First, the final rule omits 
proposed Sec. Sec.  652.35(b)(4) and 652.35(b)(11), which respectively 
require Farmer Mac's liquidity policy to address maturity limits and 
credit quality standards and the CFP. We eliminated a comparable 
provision from the final liquidity rule for FCS banks,\29\ and the same 
logic applies to liquidity management at Farmer Mac. A full substantive 
explanation of our reasons for omitting these provisions from our final 
regulations is available in the preamble to final liquidity rule for 
FCS banks.\30\
---------------------------------------------------------------------------

    \29\ 78 FR 23438 supra at 23445.
    \30\ Id. at 23445-46.
---------------------------------------------------------------------------

    The final rule also omits proposed Sec.  652.35(b)(10), which would 
have required the board's liquidity policy to address the LMMP. We 
decided to streamline our regulatory approach to the LMMP in response 
to a comment from the Farm Credit Council. Although the FCA has decided 
to retain the LMMP, the preamble to final Sec.  652.35(e) explains in 
greater detail below why changes to this regulation establishes an 
appropriate balance between safeguarding Farmer Mac's safety and 
soundness, and eliminating unnecessary regulatory burden. A 
corresponding change is that final Sec.  652.35(b) will no longer 
require Farmer Mac's board to specifically address the LMMP in its 
policy.
    On our own initiative, we have omitted proposed Sec.  652.35(b)(2) 
from the final rule. This provision would have required a listing in 
the board's policy of the specific asset classes and characteristics 
that could have been used to meet Farmer Mac's liquidity objectives. 
Although we received no specific comment about proposed Sec.  
652.35(b)(2), we have decided to omit this provision from the final 
rule because it is redundant with final Sec.  652.10(b) and (c), which 
are provisions of the investment management rule that amply cover board 
policies for all non-program investments at Farmer Mac. This revision, 
which streamlines our regulations in part 652, responds to claims by 
both commenters that ``regulatory layering'' in our investment 
management and liquidity rules for Farmer Mac results in regulations 
that are too complicated and burdensome.
    The omission of four provisions from the proposed regulation has 
caused us to renumber the paragraphs of final Sec.  652.35. On our own 
initiative, we modified proposed Sec.  652.35(b)(7), which has been 
redesignated as final Sec.  652.35(b)(5). As proposed, this provision 
would require the board's policy to address exception parameters and 
``post'' approvals needed with respect to the liquidity reserve. We 
omitted the word ``post'' from this provision because such approvals 
may occur at any time.
3. Section 652.35(c)--Reporting Requirements
    Proposed Sec.  652.35(c) recodified, with minor revisions, the 
existing reporting requirements for Farmer Mac's liquidity 
portfolio.\31\ This provision contains the periodic and special 
reporting requirements to Farmer Mac's board and special reporting to 
OSMO.
---------------------------------------------------------------------------

    \31\ These reporting requirements were previously located at 
Sec.  652.20(f) and (g). On November 5, 2012, the FCA redesignated 
existing Sec.  652.20(f) and (g) as Sec.  652.35(f) and (g), 
respectively, without any change, pending the adoption of final 
liquidity rules for Farmer Mac. See 77 FR 66375, supra at 
66388.SSSSSS
---------------------------------------------------------------------------

    We received no specific comments about proposed Sec.  652.35(c). We 
finalize this regulatory provision with only one revision to Sec.  
652.35(c)(1)(ii). Whereas proposed Sec.  652.35(c)(1)(ii) would have 
required management to report any deviations from Farmer Mac's 
liquidity policy,\32\ or failure to meet the board's liquidity target 
``immediately'' to the board, the final rule requires management to 
report such deviations and failures to the board before the end of the 
quarter if it has the potential to cause material loss. This change is 
identical to a change to the final liquidity rule for FCS banks,\33\ 
and it responds to the Farm Credit Council's request that the FCA 
synchronize the investment management and liquidity regulations for 
Farmer Mac and the rest of the FCS as appropriate. We see no reason for 
these requirements to differ for FCS banks and Farmer Mac. The preamble 
to the final liquidity rule for FCS banks explains the substantive 
reasons for this change,\34\ and this same logic applies to Farmer Mac.
---------------------------------------------------------------------------

    \32\ Both the preamble and regulatory text of proposed Sec.  
652.35(c)(1)(ii) incorrectly referred to the ``bank's'' liquidity 
policy. We now correct this inadvertent technical error. The final 
rule correctly refers to the ``Farmer Mac's'' liquidity policy.
    \33\ See Sec.  615.5134(a)(2)(v) of FCA regulations.
    \34\ 78 FR 23438 supra at 23446.
---------------------------------------------------------------------------

4. Section 652.35(d)--LMMP
    Proposed Sec.  652.35(d) would require Farmer Mac's board to adopt 
an LMMP that establishes a funding strategy, which provides for 
effective diversification of the sources and tenors of funding. Under 
our proposal, the LMMP must: (1) Include targets of acceptable ranges 
of the proportion of debt issuances maturing with specific time 
intervals; (2) reflect the board's liquidity risk tolerance; and, (3) 
consider components of Farmer Mac's funding strategy that offset or 
contribute to liquidity risk associated with debt maturity 
concentrations.
    The LMMP is an essential part of funding and liquidity risk 
management governance because it helps establish targets for the term 
structure of debt. As the preamble to the proposed rule explained, the 
purpose of the LMMP is to remedy potential funding instability that 
could result from relying primarily

[[Page 65547]]

on shorter term debt--especially when the maturity is extended 
synthetically,\35\ which could expose a financial institution to 
greater counterparty and refunding risks.
---------------------------------------------------------------------------

    \35\ See 76 FR 71798 supra at 71810.
---------------------------------------------------------------------------

    We received a comment about the LMMP from the Farm Credit Council. 
Although the Farm Credit Council favored an LMMP requirement when it 
commented on the ANPRM, its comment letter on the proposed rule opposed 
the LMMP. According to the commenter, the concept of an LMMP is far too 
complex as a regulatory requirement, and it adds to ``regulatory burden 
without any clear corresponding benefit.'' The Farm Credit Council 
suggested that the FCA address the LMMP through supervision, rather 
than by regulation.
    The FCA is not removing the LMMP requirement from the final rule 
because it enhances Farmer Mac's safety and soundness. As the portion 
of total debt maturing within a short-term time interval increases, 
Farmer Mac may experience difficulty in rolling over and re-funding its 
debt if severe financial or economic stress obstructs its access to 
market. An effective LMMP should place appropriate limits on Farmer 
Mac's refunding risk consistent with its board's risk tolerance level 
as set forth in its liquidity and investment management policies.\36\
---------------------------------------------------------------------------

    \36\ Not all of the instruments that Farmer Mac deploys to fund 
(and refund) its obligations are strictly a form of debt because, as 
noted above, swaps synthetically extend debt tenors to offset 
liquidity risk.
---------------------------------------------------------------------------

    Final Sec.  652.35(d) creates an appropriate balance between the 
commenter's concern that the LMMP requirement is too complex and 
burdensome, and potential safety and soundness concerns that could 
arise if Farmer Mac pursued certain funding strategies and practices. 
The final regulation requires Farmer Mac to have an LMMP that its board 
of directors reviews and approves at least once each year. Under final 
Sec.  652.35(d), the LMMP must establish a funding strategy that 
provides for effective diversification of the sources and tenors of 
funding, and considers Farmer Mac's risk profile and current market 
conditions. Additionally, the LMMP must include targets of acceptable 
ranges of the proportion of debt issuances maturing within specific 
time periods. We have excluded proposed Sec.  652.35(d)(2) and (d)(3) 
from the final rule in effort to streamline and simplify our 
regulations governing investment and liquidity management at Farmer 
Mac. However, the FCA expects that Farmer Mac will consider the board's 
liquidity risk tolerance and its funding strategies as it develops 
liquidity and investment management policies and practices. We have 
also made minor stylistic changes to enhance the clarity of final Sec.  
652.35(d).
5. Section 652.35(d)--Contingency Funding Plan
    The purpose of a CFP is to address liquidity shortfalls during 
market disruptions. Proposed Sec.  652.35(e)(1) would require Farmer 
Mac to have a CFP that ensures sources of liquidity are sufficient to 
fund normal operations under a variety of stress events. Under our 
proposal, the CFP should explicitly cover stress events that could 
threaten Farmer Mac's liquidity, such as: (1) Market disruptions; (2) 
rapid increases in contractually required loan purchases; (3) 
unexpected requirements to fund commitments or revolving lines of 
credit or to fulfill guarantee obligations; (4) difficulties in 
renewing or replacing funding with desired terms or structures; (5) 
requirements to pledge collateral with counterparties; and, (6) reduced 
access to debt markets as a result of asset quality deterioration 
(including both program and non-program assets).
    Proposed Sec.  652.35(e)(2) would require Farmer Mac's board of 
directors to review and approve the CFP at least once each year and to 
make adjustments to reflect changes that result from stress tests, 
Farmer Mac's risk profile, and market conditions. Additionally, the 
proposed rule would require Farmer Mac to maintain an adequate level of 
unencumbered and marketable assets in its liquidity reserve that could 
readily be converted into cash to meet its net liquidity needs based on 
estimated cash inflows and outflows for a 30-day time horizon under an 
acute stress scenario. Contingency funding planning and stress testing 
are integral parts of effective liquidity risk management governance, 
which require robust processes for identifying, measuring, monitoring, 
and controlling liquidity risk. As an integral and critical part of its 
contingency planning, the FCA expects Farmer Mac to be able to 
quantitatively project and evaluate its expected funding needs and its 
available funding sources during plausible, but in some cases acute, 
stress scenarios.
    Proposed Sec.  652.35(e)(3) would require the CFP to address four 
specific areas that are essential to Farmer Mac's efforts to mitigate 
its liquidity risk. Taken together, these four areas constitute an 
emergency preparedness plan that should enable Farmer Mac to 
effectively cope with a full range of contingency that could endanger 
its liquidity, solvency, and viability. More specifically, the proposed 
rule would require the CFP to:
     Be customized to the financial condition and liquidity 
risk profile of Farmer Mac, the board's liquidity risk tolerance, and 
Farmer Mac's business model. As such, the CFP should be commensurate 
with the complexity, risk profile and scope of Farmer Mac's operations;
     Identify funding alternatives that Farmer Mac can 
implement as its access to funding is reduced. Such funding 
alternatives, at a minimum, would include collateral pledging 
arrangements to secure funding and possible initiatives to raise 
additional capital;
     Establish a process for managing events that imperil 
Farmer Mac's liquidity. The process would assign appropriate personnel 
and incorporate executable action plans to implement the CFP; and,
     Mandate periodic stress testing that would analyze the 
possible impacts on Farmer Mac's cash inflows and outflows, liquidity 
position, profitability, and solvency under a wide variety of stress 
scenarios. The board would establish and define stress scenarios that 
are consistent with stress scenarios in other areas of Farmer Mac's 
risk analysis, such as investment management and interest rate risk 
management. The basis for these assumptions underlying the stress tests 
must be well-reasoned and documented. The rule would also require the 
stress scenarios to address specific and plausible situations that 
could undermine Farmer Mac's liquidity.
    The FCA received no specific comments about contingency funding 
planning at Farmer Mac. The rationale for Sec.  652.35(e) is sound 
because contingency funding planning strengthens Farmer Mac's ability 
to maintain sufficient liquidity during times of severe economic or 
financial stress. For this reason, we adopt Sec.  652.35(e) as a final 
rule without significant change. However, we made organizational, 
conforming, and stylistic changes to final Sec.  652.35(e) so the CFP 
regulatory requirements for FCS banks and Farmer Mac are almost 
identical, as the Farm Credit Council requested. Additionally, these 
changes address both commenters' concerns that the proposed rule was 
too prescriptive and imposed unnecessary regulatory burden on Farmer 
Mac.
    First, we streamlined and revised Sec.  652.35(e)(1) to enhance its 
clarity so it is easier to read and understand. Proposed Sec.  
652.35(e)(1) stated that, ``Farmer Mac must have a CFP to ensure

[[Page 65548]]

sources of liquidity are sufficient to fund normal operating 
requirements under a variety of stress events described in paragraph 
(e)(3)(iv) of this section.'' We eliminated the cross-reference to 
Sec.  652.35(e)(3)(iv) and relocated the list of stress events that the 
CFP must cover to final Sec.  652.35(e)(1). Additionally, the phrase 
``normal operating requirements'' has been changed to ``normal 
operations.'' As revised, final Sec.  652.35(e)(1) is closely aligned 
to the first two sentences of Sec.  615.5134(f) of FCA regulations, 
which governs contingency funding planning at FCS banks. The lists of 
stress events that the CFP covers diverge in these two regulations to 
reflect the fact that FCS banks engage in wholesale lending while 
Farmer Mac operates a secondary market.
    Second, we reversed the order of the two sentences in Sec.  
652.35(e)(2) and revised the wording of this paragraph so it is almost 
identical with the comparable regulatory provision for FCS banks. Our 
regulatory approach to contingency funding planning is the same for FCS 
banks and Farmer Mac. However, discrepancies between the structure and 
text of proposed Sec.  652.35(e)(2) and the last two sentences of Sec.  
615.5134(f) may have inadvertently created the impression that the FCA 
has different policies and expectations for Farmer Mac and Farm Credit 
banks. We revised final Sec. 652.35(e)(2) so it mirrors the applicable 
passage in Sec. 615.5134(f), which clearly and concisely communicates 
the core regulatory requirements for the CFP.
    We revised Sec.  652.34(e)(3), which identifies the issues that 
Farmer Mac must address in its CFP. We changed the final word of Sec.  
652.35(e)(3)(ii) from ``reduced'' to ``impeded'' because it is a more 
technically accurate description of Farmer Mac's access to market 
during a severe crisis.
    Finally, we revised Sec.  652.35(e)(3)(iv) so it is virtually 
identical to the comparable regulatory provision for FCS banks. As 
amended, final Sec.  652.35(e)(3)(iv) retains only the first sentence 
of the proposed rule, which requires Farmer Mac to conduct periodic 
stress testing that analyzes possible impacts of its cash flows, 
liquidity position, profitability, and solvency for a wide variety of 
stress scenarios. The next three sentences of proposed Sec.  
652.35(e)(3)(iv), which specified the types of stress scenarios and 
assumptions that Farmer Mac should use for its stress tests, have been 
omitted from the final rule because they are overly prescriptive. 
However, these three sentences provide guidance about the scenarios and 
assumptions that Farmer Mac should consider as it stress tests its 
exposure to liquidity risks. The final rule also omits the last 
sentence of proposed Sec.  652.35(e)(3)(iv), which would have allowed 
the FCA, at its discretion, to require specific stress scenarios in 
response to changes and market and economic outlooks. This provision is 
a reservation of authority, which the FCA has excluded from its final 
liquidity rules for both Farmer Mac and Farm Credit banks.

C. Section 652.40--Liquidity Reserve Requirement and Supplemental 
Liquidity

    The FCA proposed to replace Sec.  652.20 with Sec.  652.40, which 
would strengthen the liquidity reserve requirement for Farmer Mac and 
require it, for the first time, to hold supplemental liquidity. The 
purpose of this provision is to ensure that Farmer Mac always has 
sufficient liquidity to outlast severe economic or financial stress 
that could obstruct it access to market.
    Specifically, proposed Sec.  652.40 would:
     Increase the minimum days of liquidity in Farmer Mac's 
liquidity reserve from 60 to 90 days;
     Divide the 90-day liquidity reserve into three levels so 
Farmer Mac's reserves of cash, cash-like instruments, and highly liquid 
investments are sufficient to pay obligations and fund its operations 
for the next 15, 30, and 90 days;
     Specify the composition of assets in each level of the 
liquidity reserve;
     Stipulate the discounts that Farmer Mac should apply to 
the assets in the liquidity reserve;
     Refine the definitions of ``unencumbered'' and 
``marketable'' assets that are suitable for the liquidity reserve; and,
     Require Farmer Mac to maintain supplemental liquidity 
beyond the 90 days in its liquidity reserve.
    Proposed Sec.  652.40 also contained a reservation of authority 
that would strengthen the FCA's supervisory and regulatory oversight of 
liquidity management at Farmer Mac. Under this reservation of 
authority, the FCA could compel Farmer Mac to implement specific 
corrective actions that would improve liquidity risk management or 
strengthen its liquidity reserves.
1. Reorganization of Final Sec.  652.40
    At the Farm Credit Council's request, we modified and aligned Sec.  
652.40 more closely with the final liquidity rule for Farm Credit 
banks. The structure and format of the liquidity rules for Farmer Mac 
and Farm Credit banks are not identical because a single regulation 
governs liquidity at the banks while two regulations, Sec. Sec.  652.35 
and 652.40, separately address liquidity management and the liquidity 
reserve requirements for Farmer Mac. As explained in greater detail 
below, both our proposed and final regulations treat supplemental 
liquidity at Farmer Mac and Farm Credit banks differently. The 
authorities, business models, and operations of Farmer Mac and FCS 
banks are different, and Farmer Mac is regulated by a separate office 
of the FCA as required by the Act, which accounts for certain 
differences in their liquidity regulations--none of which, we believe, 
results in material differences in regulatory burden or requirements.
    We reorganized the regulation by combining proposed Sec. Sec.  
652.40(a), 652.40(d), and 652.40(e) into single provision, final Sec.  
652.40(c). As a result, final Sec.  652.40(c) covers: (1) The core 
liquidity reserve requirements; (2) supplemental liquidity; (3) the 
composition of the liquidity reserve; and, (4) the discounts that 
Farmer Mac will apply to various assets in its liquidity reserve and 
supplemental liquidity buffer.
    As a result of the restructuring of the rule, the definitions of 
``unencumbered'' and ``highly marketable'' in proposed Sec.  652.40(b) 
and (c) have been redesignated as final Sec.  652.40(a) and (b), 
respectively. We made additional revisions to these two provisions in 
response to the comments we received.
2. Section 652.40(a)--Unencumbered Investments
    We revised the definition of ``unencumbered'' in final Sec.  
652.40(a) so it is virtually identical to the same definition in the 
liquidity regulation for Farm Credit banks. As a result, we split the 
first sentence in proposed Sec.  652.40(b) into three sentences. The 
first sentence of the final rule reiterates that all investments that 
Farmer Mac holds in its liquidity reserve and as supplemental liquidity 
must be unencumbered. The second sentence of final Sec.  652.40(a) 
clarifies that an investment is ``unencumbered'' if it is free of lien, 
and it is not explicitly or implicitly pledged to secure, 
collateralize, or enhance the credit of any transaction. The third 
sentence states that unencumbered investments held in the liquidity 
reserve cannot be used as a hedge against interest rate risk if 
liquidation of that particular investment would expose Farmer Mac to a 
material risk of loss. These changes are minor and stylistic, and they 
do not substantively alter the meaning of this regulatory provision. 
These changes respond to the Farm Credit Council's

[[Page 65549]]

request that final liquidity regulations for Farmer Mac and Farm Credit 
banks reflect each other to the greatest extent possible.
    The proposed rule would have prohibited Farmer Mac from using an 
unencumbered investment in its liquidity reserve or supplemental 
liquidity buffer as a hedge against any other exposure. In contrast, 
final Sec.  652.40(a) is narrower in scope because an unencumbered 
investment held for liquidity cannot be used as a hedge against 
interest rate risk if liquidation of that particular investment would 
expose Farmer Mac to a material risk of loss. We revised this provision 
to reduce unnecessary regulatory burden on Farmer Mac. From a safety 
and soundness perspective, Farmer Mac should have flexibility to use 
unencumbered assets in its liquidity reserve or supplemental liquidity 
buffer to hedge against other exposures unless such hedges expose it to 
material risk of loss. Pursuant to Sec.  652.15, interest rate risk is 
the only other risk that Farmer Mac would hedge against by using assets 
it holds for liquidity. As a result of this revision, our regulations 
for Farmer Mac and FCS banks are now consistent on the issue. We refer 
our readers to the preamble of the final liquidity rule for FCS banks, 
which contains a comprehensive substantive explanation of the FCA's 
regulatory approach towards the FCS banks' use of investments in the 
liquidity reserve to hedge interest risk rate exposures.\37\
---------------------------------------------------------------------------

    \37\ See 78 FR 2323438, supra at 23450.
---------------------------------------------------------------------------

3. Section 652.40(b)--Marketable Investments
    Proposed Sec.  652.40(c) required all investments that Farmer Mac 
holds for the purpose of meeting the liquidity reserve requirements to 
this regulation to be ``highly marketable.'' The proposed rule then 
articulated four characteristics of a ``highly marketable'' investment, 
which are: (1) It is easily and immediately convertible to cash with 
little or no loss in value; (2) low credit and market risk; (3) ease 
and certainty of valuation; and, (4) except for money market 
instruments, it is listed on a developed and recognized exchange market 
and is able to be sold or converted to cash through repurchase 
agreements in active and sizeable markets.
    The Farm Credit Council commented on proposed Sec.  652.40(c). The 
commenter noted that the description of ``highly marketable'' 
investments in the proposed rule for Farmer Mac is essentially 
identical the definition of ``marketable'' investments for FCS banks in 
Sec.  615.5134(d). The Farm Credit Council expressed concern that ``the 
choice by FCA to use different terms for these identical concepts could 
be misunderstood to have significance,'' and it asked us to ``use 
identical terms when describing identical requirements.'' We agree with 
the commenter, and, accordingly, final Sec.  652.40(b) requires that 
Farmer Mac hold ``marketable'' rather than ``highly marketable'' 
investments to meet its liquidity reserve requirements. Additionally, 
the text of final Sec.  615.40(b) now refers to investments that are 
``readily marketable'' rather than ``highly marketable.'' As a result 
of these two changes, the title and text of the first paragraph of 
final Sec.  652.40(b) is virtually identical to Sec.  615.5134(d).
    However, the Farm Credit Council deemed this entire provision as 
too prescriptive and urged us to drop it from the final regulation. The 
commenter claimed that the definition of ``marketable'' is unworkable 
and vague because the proposed rule would require that a security must 
be ``immediately'' convertible to cash with little or no loss in value. 
According to the Farm Credit Council, the term ``immediately'' has 
different meanings in different market environments and, therefore, 
highly liquid Treasury securities would not necessarily sell 
``immediately'' during severe market turmoil. We have responded to this 
comment by substituting ``quickly'' for ``immediately'' in final Sec.  
652.40(b)(1). As a result of this change, this provision mirrors Sec.  
615.5134(d)(1), which applies the same requirement to FCS banks. As we 
noted in the preamble to the final rule for Farm Credit banks, the FCA 
interprets ``quickly'' to mean hours or a few days even during adverse 
market conditions.\38\
---------------------------------------------------------------------------

    \38\ See 78 FR 23439 supra at 23451.
---------------------------------------------------------------------------

    The Farm Credit Council also inquired whether a security that 
Farmer Mac holds for liquidity must be ``marketable'' at the time of 
purchase or throughout its life. The commenter expressed uncertainty 
about whether the proposed rule referred to market value, face value, 
or some other measurement of value. In response to the commenter's 
first question, assets held for liquidity must remain marketable during 
the entire time they are in Farmer Mac's liquidity portfolio. An asset 
is not marketable for the purposes of this regulation if it does not 
continuously meet the four criteria in Sec.  652.40(b). Additionally, 
final Sec.  652.40(b)(1) clearly states that an investment is readily 
marketable if it can be easily and quickly converted into cash with 
little or no loss in value. We clarify that the rule generally refers 
to fair value in response to the Farm Credit Council's second question.
    For all these reasons, the FCA disagrees with the Farm Credit 
Council that the definition of ``marketable'' in final Sec.  652.40(b) 
is overly prescriptive or imposes unnecessary regulatory burdens on 
Farmer Mac. Instead, this provision is essential for safety and 
soundness because it establishes and identifies the basic attributes of 
assets that Farmer Mac needs for liquidity. Accordingly, we decline the 
Farm Credit Council's request to drop this provision from the final 
rule.
4. Section 652.40(c)--Liquidity Reserve, Supplemental Liquidity, and 
Discounts
    Final Sec.  652.40(c) contains the core aspects of our liquidity 
management regulation. Its provisions: (1) Establish the minimum 
liquidity reserve requirement for Farmer Mac; (2) identify the 
investments that compose Farmer Mac's liquidity reserve; (3) address 
supplemental liquidity; and, (4) specify the discounts for liquid 
assets held for liquidity. As mentioned above, the FCA has consolidated 
several provisions of the proposed rule into a single provision that is 
easier to read and understand. The format of final Sec.  652.40(c) is, 
in large measure, modeled after the same provision for FCS banks at 
Sec.  615.5134(b).
    Until now, former Sec.  652.35(a) required Farmer Mac to maintain a 
liquidity reserve equal to at least 60 days of maturing obligations and 
other borrowings. We proposed to increase the minimum liquidity reserve 
requirement to 90 days. One commenter supported this change, while the 
other did not object to it and, therefore, we now adopt it as the first 
sentence in final Sec.  652.40(c).
    The proposed rule would require Farmer Mac to hold supplemental 
liquid assets to fund obligations and other borrowings maturing after 
90 days. We received no comment about supplemental liquidity, and the 
final rule retains this requirement. However, we condensed three 
sentences pertaining to supplemental liquidity that were scattered 
throughout the proposed rule into a single concise statement that is 
now the second sentence of final Sec.  652.40(c). This change is 
stylistic rather than substantive.
    The FCA proposed to divide the 90-day liquidity reserve into two 
levels. Under the proposed rule, the first level of the liquidity 
reserve would provide Farmer Mac with sufficient liquidity to pay it 
obligations and continue

[[Page 65550]]

operations for 30 days if intense economic or financial turmoil impeded 
market access. Additionally, the proposed rule would have mandated that 
cash and certain instruments with a final maturity of 3 years or less 
comprise at least 15 days of the first level of the liquidity reserve. 
The purpose of this 15-day sublevel is to provide Farmer Mac with 
enough cash and short-term, highly liquid assets to pay its obligations 
and fund its operations for 15 consecutive days during a short-term 
emergency. The second level of the liquidity reserve would enable 
Farmer Mac to meet its obligations and continue operations for the next 
60 days.
    Final Sec.  652.40 divides the liquidity reserve into three levels. 
The first level of the liquidity reserve covers obligations that mature 
on days 1 through 15. The second level applies to days 16 through 30, 
while the third level covers days 31 through 90. This revision, which 
is not substantive, is part of our effort to restructure and reorganize 
Sec.  652.40 so it is easier to read, understand, and apply. As a 
result, the final rule more clearly communicates: (1) The exact period 
of time each level of the liquidity reserve covers; and, (2) which 
assets Farmer Mac may hold in each level.
    The Farm Credit Council commented that the proposed rule is not 
clear on the actual amount of liquidity that Farmer Mac must hold. We 
respond that under both the proposed and final rules, the actual dollar 
amount of liquidity that Farmer Mac must hold is determined by actual 
amount of obligations maturing in a specific timeframe. Additionally, 
the LMMP helps determine the tenor of liabilities that Farmer Mac needs 
in its liquidity portfolio so it has sufficient liquidity to meet its 
obligations as they fall due.
    Changes to the text and format of the final Sec.  652.40(c) clarify 
that the regulation does not require Farmer Mac to liquidate its most 
pristine liquid assets, such as cash and short-term United States 
Treasuries, first during a crisis. Instead, the text above the table in 
final Sec.  652.40(c) requires Farmer Mac to structure its liquidity 
reserve so it has sufficient assets of various calibers to meet 
obligations that mature within each of the specified timeframes. Under 
the final rule, Farmer Mac must hold a sufficient amount of:
     Level 1 instruments to cover obligations maturing between 
days 1 and 15;
     Level 1 and 2 instruments to cover obligations maturing 
between days 16 and 30; and,
     Level 1, 2, and 3 instruments to cover obligations 
maturing between days 31 and 90.
    This change signals that Farmer Mac has discretion to liquidate 
assets in whatever order best serves its interest as it responds to 
mounting distress in the markets. We made this revision to the final 
liquidity regulation for Farm Credit banks in response to two comments 
we received.\39\ This same concept also applies to liquidity management 
at Farmer Mac, and incorporating it into final Sec.  652.40(c) responds 
to the Farm Credit Council's request that our regulations treat both 
branches of the System equally whenever possible.
---------------------------------------------------------------------------

    \39\ See 78 FR 23438 supra at 23448.
---------------------------------------------------------------------------

a. Level 1 of the Liquidity Reserve
    The table in proposed Sec.  652.40(c) identified various assets 
that would comprise Level 1 of Farmer Mac's liquidity reserve. These 
assets are highly liquid because they are either cash or investments 
that are high quality, close to their maturity, and marketable. Under 
the proposed rule, these assets were: (1) Cash; (2) Treasury 
securities; (3) other Government obligations; (4) Government-sponsored 
agency securities (excluding mortgage securities) that mature within 60 
days; and, (5) Diversified Investment Funds comprised exclusively of 
Level 1 instruments.
    Farmer Mac commented about the assets that we proposed to include 
in the first level of the liquidity reserve. It requested that we add 
investments that mature overnight, including overnight repurchase 
agreements, to the list of investments that qualify for Level 1 of the 
liquidity reserve. Farmer Mac views overnight investments as one of the 
most liquid investments available to fund short-term obligations and 
possibly the most liquid to fund such obligations at a positive spread 
to the cost of funds.
    In response to this comment, we are adding overnight money market 
investments to the list of highly liquid assets that Farmer Mac may 
hold in the first 15 days of its liquidity reserve. Overnight money 
market investments are promptly convertible into cash at their face 
value and, as a result, these assets have characteristics that are 
similar to cash.
    However, we disagree with Farmer Mac's suggestion that any 
investment that matures overnight should qualify for Level 1 of the 
liquidity reserve. A regulatory policy that would automatically include 
any liquidity investments that mature overnight in Level 1 is simply 
too broad and not sufficiently cautious. We are aware that valuations, 
even of impaired assets, migrate to par as they approach maturity. 
However, given the potential change in liquidity characteristics that 
various eligible asset classes could take on under stress conditions, 
we deem such a policy to be imprudent when applied to the entire 
universe of eligible investments. Not all investments that mature 
overnight necessarily have the highly liquid characteristics of assets 
that are suitable for Level 1 of the liquidity reserve. For this 
reason, we decline Farmer Mac's request that the final rule include 
every type of investment that matures overnight in Level 1 of the 
liquidity reserve.
    Farmer Mac specifically requested that the final rule allow it to 
hold overnight repurchase agreements in Level 1 of the liquidity 
reserve. An overnight repurchase agreement would enable Farmer Mac to 
obtain cash through a short-term sale of securities, or effectively 
lend cash through a short-term purchase of securities. Although the 
cash that Farmer Mac might obtain from the overnight repurchase 
agreement would certainly qualify as a Level 1 investment, the 
securities it might obtain through such agreements might not 
automatically deserve Level 1 designation. Instead, Farmer Mac must 
judge the liquidity of the securities underlying an overnight 
repurchase agreement in accordance with the standards and criteria that 
this regulation establishes for Level 1 investments. The fact that a 
counterparty is willing to accept certain non-Level 1 securities as 
part of an overnight repurchase agreement does not mean that they have 
the liquidity characteristics of a Level 1 investment.
    The FCA acknowledges that collateral for repurchase agreements are 
generally of very good quality. As noted earlier, final Sec.  
652.40(b)(4) states that one of the attributes of a ``marketable'' 
asset is that it ``can be easily sold or converted to cash through 
repurchase agreements in active and sizable markets without 
significantly affecting prices.'' During the 2008 crisis, however, many 
financial institutions discovered that they often could not pledge many 
types of securities as collateral in the repo markets.
    Farmer Mac commented that we should adopt a more flexible approach 
to the treatment of diversified investment funds (DIFs) in the first 
level of the liquidity reserve. Under the proposed rule, Farmer Mac 
could only invest in DIFs comprised exclusively of Level 1 investments. 
Farmer Mac explained that as a practical matter it would be difficult, 
if not impossible, to find DIFs that contain only Level 1

[[Page 65551]]

investments. Farmer Mac suggested that DIFs should qualify for Level 1 
of the liquidity reserve if they complied with a Securities and 
Exchange Commission (SEC) regulation, 17 CFR 270.2a-7(c)(2), that 
establishes portfolio maturity limits for money market funds.\40\ 
According to Farmer Mac, this approach would allow it to maintain its 
current investment practices toward DIFs while providing sufficient 
liquidity that would satisfy the FCA's safety and soundness concerns. 
We agree with the commenter. As revised, final Sec.  652.40(b) allows 
Farmer Mac to hold DIFs in Level 1 that comply with 17 CFR 270.2a-
7(c)(2).
---------------------------------------------------------------------------

    \40\ Under the SEC regulation, a money market fund must maintain 
a dollar-weighted average portfolio maturity appropriate to its 
objective of maintaining a stable net asset value per share or price 
per share provided that the fund will not: (1) Acquire any 
instrument with a remaining maturity of greater than 397 days; (2) 
Maintain a dollar-weighted average portfolio maturity that exceeds 
60 calendar days; or (3) Maintain a dollar-weighted average 
portfolio maturity that exceeds 120 calendar days determined without 
reference to exceptions in the regulation regarding interest rate 
readjustments.
---------------------------------------------------------------------------

    We made several technical and stylistic revisions to the list of 
Level 1 investments that are found in the table of redesignated Sec.  
652.40(c), none of which are substantive. For example, the final rule 
clarifies that ``cash'' included in Level 1 of the liquidity reserve 
includes ``cash due from traded but not yet settled debt.'' 
Additionally, the final rule combined ``Treasury securities'' and 
``other Government obligations,'' which appeared in the proposed rule, 
into ``obligations of the United States.'' The final rule permits 
Farmer Mac to hold senior debt securities, but not mortgage-backed 
securities of Government-sponsored agencies in Level 1 of its liquidity 
reserve. In addition to improving the clarity of the rule, these 
changes make the substance, text, and structure of the liquidity 
regulations for Farmer Mac and Farm Credit banks similar.
    As revised, final and redesignated Sec.  652.40(c) authorizes 
Farmer Mac to hold the following investments in Level 1 of its 
liquidity reserve: (1) Cash, including cash due from traded but not yet 
settled debt; (2) overnight money market investments; (3) obligations 
of the United States with a final remaining maturity of 3 years or 
less; (4) Government-sponsored agency senior debt securities that 
mature within 60 days, excluding securities of Farmer Mac and other FCS 
institutions; and, (5) DIFs comprised of Level 1 investments that meet 
the requirements of 17 CFR 270.2a-7(c)(2). We received no comments on 
the discounts for Level 1 instruments. Accordingly, we finalize the 
discounts we proposed but relocated them from the text in proposed 
Sec.  652.40(e) to the table of final Sec.  652.40(c). The new column 
heading for discounts in the table specifies that the discounts are to 
be applied to market values.
b. Level 2 Instruments
    As we explained above, the final rule requires Farmer Mac to hold 
Level 2 instruments that are sufficient to cover obligations that 
mature between days 16 and 30. Most of the instruments that the final 
rule consigns to Level 2 were in Level 1 of the proposed rule. Under 
the final rule, Level 2 investments are: (1) Additional Level 1 
investments; (2) obligations of the United States with a final 
remaining maturity of more than 3 years; (3) mortgage-backed securities 
that are explicitly backed by the full faith and credit of the United 
States as to the timely payment of principal and interest; and, (4) 
DIFs that meet the requirements of 17 CFR 270.2a-7(c)(2), or are 
composed only of Level 2 instruments. The proposed rule was unclear 
about whether Ginnie Mae mortgage-backed securities (with a final 
maturity of more than 3 years) belong in Level 2 of Farmer Mac's 
liquidity reserve. The final rule clarifies this ambiguity by expressly 
including mortgage-backed securities that are explicitly backed by the 
full faith and credit of the United States as Level 2 instruments under 
the final rule. This is a non-substantive change that makes the 
liquidity regulations for Farmer Mac and FCS banks consistent on this 
issue. We received no comments about the discount multiplier for Level 
2 instruments. Accordingly, the discount multiplier for Level 2 
investments is the same in both the proposed and final rules.
c. Level 3 Instruments
    Investments in the liquidity reserve that enable Farmer Mac to pay 
obligations that mature between days 31 and 90 were designated as Level 
2 instrument in the proposed rule but as Level 3 in the final rule. The 
instruments that comprise this level of the liquidity reserve are the 
same in both the proposed and final rules. The discount multiplier for 
instruments in this level is 93 in both the proposed and final rules. 
We received no comments about the instruments and discounts that we 
proposed for this level of the liquidity reserve. We adopt our proposal 
for this provision as a final rule with only minor wording changes that 
bring into conformity with the liquidity rule for FCS banks.
d. Qualifying Securities Backed by USDA Loans Guarantees
    Farmer Mac's comment letter of May 31, 2013, objected to the 
proposed rule's treatment of qualifying securities backed by Farmer Mac 
program assets (loans) that are guaranteed by the USDA. Currently, 
Farmer Mac counts these assets toward its days of liquidity. However, 
the proposed rule would exclude these qualifying securities from the 
liquidity reserve but allow Farmer Mac to hold them as supplemental 
liquidity.
    The second comment letter requested that the final regulation allow 
Farmer Mac to continue to hold the USDA-guaranteed portions of loans it 
owns in the second and third level of the liquidity reserve. Farmer Mac 
advised us that these assets are of the highest credit quality because 
they are fully guaranteed by the USDA and backed by the full faith and 
credit of the United States. Additionally, Farmer Mac claimed that 
USDA-guaranteed loans are highly liquid and marketable because they are 
traded by numerous broker-dealers and banks on an active and sizeable 
market, and bid-ask spreads are historically narrow. Purchasing and 
securitizing those portions of loans that are fully guaranteed by the 
USDA under 7 U.S.C. 1921 et seq. is part of Farmer Mac's mandate under 
title VII of the Act.
    Farmer Mac is concerned that it would suffer hardship if the final 
rule excludes qualifying securities backed by USDA-guaranteed portions 
of loans it owns from the liquidity reserve. According to Farmer Mac, 
excluding these assets from the liquidity reserve would force it to 
``dramatically upsize its investment portfolio to meet its liquidity 
requirements'' under the regulation.
    In response to Farmer Mac's concerns, the final rule will allow 
Farmer Mac to hold USDA-guaranteed portions of loans it owns as Farmer 
Mac II program business in the third level of the liquidity reserve. 
Our approach in the final rule is consistent with the pre-existing 
liquidity regulation, which allowed Farmer Mac to hold these assets in 
its 60-day liquidity reserve. Although these assets are generally high-
credit quality, liquid, and marketable, they do not belong in Levels 1 
or 2 of the liquidity reserve, which is Farmer Mac's first line of 
defense in a liquidity crisis. Because securitizing USDA-guaranteed 
loans is among Farmer Mac's core congressional mandates, these assets 
are not expected be the first that Farmer Mac liquidates and converts 
to cash when market access becomes

[[Page 65552]]

obstructed. For this reason, the final rule authorizes Farmer Mac to 
hold these assets in Level 3 of its liquidity reserve. The final rule 
also applies the same discount for Level 3 investments to the USDA-
guaranteed portion of loans that Farmer Mac owns as Farmer Mac II 
program business.
e. Supplemental Liquidity
    We proposed to strengthen liquidity management at Farmer Mac by 
introducing the new concept of supplemental liquidity into this 
regulation. Proposed Sec.  652.40(d) would require Farmer Mac to 
maintain supplemental liquidity that would provide a longer term, 
stable source of funding beyond the 90-day minimum liquidity reserve. 
The supplemental liquidity buffer would complement the 90-day minimum 
liquidity reserve. The primary purpose of the 90-day minimum liquidity 
reserve is to furnish a sufficient supply of liquid assets that can be 
liquidated or converted to cash to meet Farmer Mac's short-term funding 
needs and outlast an immediate crisis. The supplemental liquidity 
buffer is designed to enable Farmer Mac to manage its contingency 
funding needs over a much longer time horizon that encompasses a 
sustained period of financial or market stress. As such, supplemental 
liquidity would provide Farmer Mac with an additional cushion of 
liquidity that should enable it to endure prolonged periods of 
uncertainty concerning funding.
    Under the proposed rule, Farmer Mac would hold supplemental liquid 
assets that are specific and commensurate with the risks it faces in 
maintaining stable longer term funding. Supplemental liquidity would be 
comprised of cash and qualified eligible investments listed in Sec.  
652.20. As a result, this regulation would permit Farmer Mac to hold 
other qualified eligible investments, such as corporate debt and asset-
backed securities, in its supplemental liquidity buffer that it might 
not be able to hold in its liquidity reserve.
    Other than Farmer Mac's comment about qualified securities backed 
by USDA-guaranteed loans, which we addressed above, we received no 
comments about which assets the final rule should allow Farmer Mac to 
hold as supplemental liquidity. From a regulatory perspective, all 
qualified eligible investments listed in Sec.  652.20 are suitable as 
supplemental liquidity, subject to the liquidity policy of Farmer Mac's 
board. For this reason, we finalize the provision in proposed Sec.  
652.40(c) that permits to hold the qualified eligible investments in 
Sec.  652.20 for supplemental liquidity.
    Under proposed Sec.  652.40(e), an 85-percent discount multiplier 
applies to all assets in the supplemental liquidity reserve that do not 
otherwise qualify for the discount levels for assets held in Levels 1, 
2, or 3 of the liquidity reserve. We proposed the same discount 
multiplier for assets that Farm Credit banks hold in their supplemental 
liquidity buffers. In response to a comment from the Farm Credit 
Council, we adopted a more lenient 90-percent discount multiplier for 
supplemental liquidity buffers at FCS banks. Although we received no 
specific comment about the discount multiplier for supplemental 
liquidity at Farmer Mac, the Farm Credit Council requested that the FCA 
apply the same regulatory requirements to both types of GSEs in the 
System whenever feasible. For this reason, we are changing the discount 
multiplier for assets that Farmer Mac holds for supplemental liquidity 
from 85 percent to 90 percent.
f. Reservation of Authority
    The FCA proposed to strengthen its supervisory and regulatory 
oversight of liquidity management at both Farmer Mac and Farm Credit 
banks by adding a new reservation of authority to these regulations. 
Under proposed Sec.  652.40(f), the FCA would expressly reserve the 
right to require Farmer Mac to adjust its treatment of any asset in its 
liquidity reserve so it always maintains liquidity that is sufficient 
and commensurate with the risk it faces. In response to strong 
opposition to the reservation of authority in both rulemakings, the FCA 
decided to omit it from the final liquidity regulations for both Farmer 
Mac and FCS banks. The FCA has comprehensive supervisory authority over 
all FCS institutions, including Farmer Mac. As a result, the FCA 
through its examination and enforcement authorities can compel Farmer 
Mac to promptly take specified action to correct deficiencies in the 
liquidity management practices if internal or external conditions so 
warrant. Because the FCA can effectively exercise its supervisory 
authority over Farmer Mac during times of economic, financial, or 
market adversity, inserting a reservation of authority in this 
regulation is unnecessary.
g. Effective Date of the Final Rule
    In its second comment letter of May 31, 2013, Farmer Mac asked the 
FCA to phase in the final liquidity rule over a 6-month period after it 
is published in the Federal Register. Farmer Mac advised the FCA that 
once the new regulation becomes effective, it will need to hold a 
greater amount of liquid assets in its liquidity portfolio than it 
historically held. As the size of its liquidity reserve expands from 60 
to a minimum of 90 days, Farmer Mac's letter indicates that it needs 
additional time to stock its liquidity portfolio with highly liquid 
assets of varying maturities so it will be able to consistently comply 
with the new regulation. The May 31, 2013 comment letter implies that 
Farmer Mac will be able to fully comply with this new regulation 6 
months after the Board adopts it. Accordingly, the FCA accedes to this 
request. This regulation will be effective 180 days after date of 
publication in the Federal Register, provided either or both Houses of 
Congress are in session for at least 30 calendar days after publication 
of this regulation in the Federal Register. We will publish a notice of 
the effective date in the Federal Register.

VII. Regulatory Flexibility Act

    Farmer Mac has assets and annual income in excess of the amounts 
that would qualify it as a small entity. Therefore, Farmer Mac is not a 
``small entity'' as defined in the Regulatory Flexibility Act. Pursuant 
to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the FCA hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 652

    Agriculture, Banks, banking, Capital, Investments, Rural areas.

    For the reasons stated in the preamble, part 652 of chapter VI, 
title 12 of the Code of Federal Regulations is amended as follows:

PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND 
FISCAL AFFAIRS

0
1. The authority citation for part 652 is revised to read as follows:

    Authority:  Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168; sec. 939A of Pub. 
L. 11-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note) (July 21, 
2010).

0
2. Revise Sec.  652.5 to read as follows:


Sec.  652.5  Definitions.

    Cash means cash balances held at Federal Reserve Banks, proceeds 
from traded-but-not-yet-settled debt, and deposit accounts at Federal 
Deposit Insurance Corporation-insured banks.

[[Page 65553]]

    Contingency Funding Plan (CFP) is described in Sec.  652.35(d)(2).
    Liability Maturity Management Plan (LMMP) is described in Sec.  
652.35(d)(2)(iv).
    Liquidity reserve is described in Sec.  652.40.

0
3. Revise Sec.  652.35 to read as follows:


Sec.  652.35  Liquidity management.

    (a) Liquidity policy--board responsibilities. Farmer Mac's board of 
directors must adopt a liquidity policy, which may be integrated into a 
comprehensive asset-liability management or enterprise-wide risk 
management policy. The risk tolerance embodied in the liquidity policy 
must be consistent with the investment management policies required by 
Sec.  652.10 of this subpart. The board must ensure that management 
uses adequate internal controls to ensure compliance with its liquidity 
policy. At least annually, the board of directors or a designated 
committee of the board must review the sufficiency of the liquidity 
policy. The board of directors must approve any changes to the policy. 
You must provide a copy of the revised liquidity policy to the OSMO 
within 10 business days of adoption.
    (b) Policy content. Your liquidity policy must contain at a minimum 
the following:
    (1) The purpose and objectives of liquidity reserves;
    (2) Diversification requirements for your liquidity reserve 
portfolio;
    (3) The minimum and target (or optimum) amounts of liquidity that 
the board has established for Farmer Mac, expressed in days of maturing 
obligations;
    (4) The maximum amount of non-program investments that can be held 
for meeting Farmer Mac's liquidity needs, expressed as a percentage of 
program assets and program obligations;
    (5) Exception parameters and approvals needed with respect to the 
liquidity reserve;
    (6) Delegations of authority pertaining to the liquidity reserve;
    (7) Reporting requirements which must comply with the requirements 
under paragraph (c) of this section;
    (c) Reporting requirements. (1) Board reporting. (i) Periodic. At 
least quarterly, Farmer Mac's management must report to Farmer Mac's 
board of directors or a designated committee of the board describing, 
at a minimum, the status of Farmer Mac's compliance with board policy 
and the performance of the liquidity reserve portfolio.
    (ii) Special. Management must report any deviation from Farmer 
Mac's liquidity policy, or failure to meet the board's liquidity 
targets to the board before the end of the quarter if such deviation or 
failure has the potential to cause material loss.
    (2) OSMO reporting. Farmer Mac must report, in writing, to the OSMO 
no later than the next business day following the discovery of any 
breach of the minimum liquidity reserve requirement in Sec.  652.40 of 
this subpart.
    (d) Liability maturity management plan. Farmer Mac must have a 
liability maturity management plan (LMMP) that its board of directors 
reviews and approves at least once each year. The LMMP must establish a 
funding strategy that provides for effective diversification of the 
sources and tenors of funding, and considers Farmer Mac's risk profile 
and current market conditions. The LMMP must include targets of 
acceptable ranges of the proportion of debt maturing within specific 
time periods.
    (e) Contingency funding plan. (1) General. Farmer Mac must have a 
CFP to ensure sources of liquidity are sufficient to fund normal 
operations under a variety of stress events. Such stress events 
include, but are not limited to market disruptions, rapid increase in 
contractually required loan purchases, unexpected requirements to fund 
commitments or revolving lines of credit or to fulfill guarantee 
obligations, difficulties in renewing or replacing funding with desired 
terms and structures, requirements to pledge collateral with 
counterparties, and reduced market access.
    (2) CFP requirements. Farmer Mac must maintain an adequate level of 
unencumbered and marketable assets (as defined in Sec.  652.40(a) and 
(b) of this subpart) in its liquidity reserve that can be converted 
into cash to meet its net liquidity needs for 30 days based on 
estimated cash inflows and outflows under an acute stress scenario. The 
board of directors must review and approve the CFP at least once each 
year and must make adjustments to reflect changes in the results of 
stress tests, Farmer Mac's risk profile, and market conditions.
    (3) The CFP must:
    (i) Be customized to the financial condition and liquidity risk 
profile of Farmer Mac, the board's liquidity risk tolerance, and Farmer 
Mac's business model;
    (ii) Identify funding alternatives that can be implemented as 
access to funding is impeded;
    (iii) Establish a process for managing events that imperil Farmer 
Mac's liquidity. The process must assign appropriate personnel and 
executable action plans to implement the CFP;
    (iv) Require periodic stress testing that analyzes the possible 
impacts on Farmer Mac's cash flows, liquidity position, profitability, 
and solvency for a wide variety of stress scenarios.

0
4. Add Sec.  652.40 to read as follows:


Sec.  652.40  Liquidity reserve requirement and supplemental liquidity.

    (a) Unencumbered. All investments that Farmer Mac holds in its 
liquidity reserve and as supplemental liquidity in accordance with this 
section must be unencumbered. For the purposes of this section, an 
investment is unencumbered if it is free of lien, and it is not 
explicitly or implicitly pledged to secure, collateralize, or enhance 
the credit of any transaction. Additionally, an unencumbered investment 
held in the liquidity reserve cannot be used as a hedge against 
interest rate risk if liquidation of that particular investment would 
expose Farmer Mac to a material risk of loss.
    (b) Marketable. All investments that Farmer Mac holds in its 
liquidity reserve in accordance with this section must be readily 
marketable. For purposes of this section, an investment is readily 
marketable if it:
    (1) Can be easily and quickly converted into cash with little or no 
loss in value;
    (2) Exhibits low credit and market risk;
    (3) Has ease and certainty of valuation; and,
    (4) Except for money market instruments, can be easily sold or 
converted to cash through repurchase agreements in active and sizable 
markets without significantly affecting prices.
    (c) Liquidity reserve requirement, supplemental liquidity, and 
discounts. Farmer Mac must maintain at all times a liquidity reserve 
sufficient to fund at least 90 days of the principal portion of 
maturing obligations and other borrowings. Farmer Mac must also hold 
supplemental liquid assets sufficient to fund obligations and other 
borrowings maturing after 90 calendar days to meet board liquidity 
policy in accordance with Sec.  652.35. At a minimum, Farmer Mac must 
hold instruments in the liquidity reserve, and as supplemental 
liquidity, that are listed and discounted in accordance with the 
following table, and are sufficient to cover:
    (1) Days 1 through 15 only with Level 1 instruments;
    (2) Days 16 through 30 only with Level 1 and Level 2 instruments; 
and,
    (3) Days 31 through 90 with Level 1, Level 2, and Level 3 
instruments.

[[Page 65554]]



                        Table to Sec.   652.40(c)
------------------------------------------------------------------------
                                                             Discount
                                                            (multiply
       Liquidity level               Instruments           market value
                                                               by)
------------------------------------------------------------------------
Level 1.....................   Cash, including   100 percent.
                               cash due from traded but
                               not yet settled debt.
                               Overnight money   100 percent.
                               market instruments,
                               including repurchase
                               agreements secured
                               exclusively by Level 1
                               investments.
                               Obligations of    97 percent.
                               the United States with a
                               final remaining maturity
                               of 3 years or less.
                               Government-       95 percent.
                               sponsored agency senior
                               debt securities that
                               mature within 60 days,
                               excluding securities
                               issued by the Farm
                               Credit System.
                               Diversified       95 percent.
                               investment funds
                               comprised of cash,
                               overnight money market
                               funds, obligations of
                               the United States, and
                               Government-sponsored
                               agency senior debt
                               securities provided that
                               such diversified
                               investment funds meet
                               the requirements of 17
                               CFR 270.2a-7(c)(2).
Level 2.....................   Additional Level  Discount for
                               1 investments.             each Level 1
                                                          investment
                                                          applies.
                               Obligations of    97 percent.
                               the United States with a
                               final remaining maturity
                               of more than 3 years.
                               Mortgage-backed   95 percent.
                               securities that are
                               explicitly backed by the
                               full faith and credit of
                               the United States as to
                               the timely payment of
                               principal and interest.
                               Diversified       95 percent.
                               investment funds that
                               qualify for Level 1 or
                               are comprised
                               exclusively of Level 2
                               instruments.
Level 3.....................   Additional Level  Discount for
                               1 or Level 2 investments.  each Level 1
                                                          or Level 2
                                                          investment
                                                          applies.
                               Government-       93 percent for
                               sponsored agency senior    all
                               debt securities with       instruments in
                               maturities exceeding 60    Level 3.
                               days, excluding senior
                               debt securities of the
                               Farm Credit System.
                               Government-
                               sponsored agency
                               mortgage-backed
                               securities that the
                               timely repayment of
                               principal and interest
                               are not explicitly
                               backed by the full faith
                               and credit of the United
                               States, excluding Farmer
                               Mac mortgage-backed
                               securities.
                               Money market
                               instruments maturing
                               within 90 days.
                               Diversified
                               investment funds
                               comprised exclusively of
                               levels 1, 2, and 3
                               instruments.
                               Qualifying
                               securities backed by
                               Farmer Mac program
                               assets (loans)
                               guaranteed by the United
                               States Department of
                               Agriculture (excluding
                               the portion that would
                               be necessary to satisfy
                               obligations to creditors
                               and equity holders in
                               Farmer Mac II LLC).
Supplemental Liquidity......   Eligible          90 percent
                               investments under Sec.     except
                               652.20.                    discounts for
                                                          Level 1, 2 or
                                                          3 investments
                                                          apply to such
                                                          investments
                                                          held as
                                                          supplemental
                                                          liquidity.
------------------------------------------------------------------------


    Dated: October 25, 2013.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2013-25918 Filed 10-31-13; 8:45 am]
BILLING CODE 6705-01-P