Federal Home Loan Bank Capital Requirements, 30776-30798 [2017-13560]
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Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
corporate risk taking authorities in part
704.
Appendix B to Part 704—Expanded
Authorities and Requirements
Appendix B to part 704 enumerates
the expanded authorities available to
corporates and the procedures that a
corporate must follow to be granted
such authorities. The Part I expanded
investment authority allows a corporate
to take on additional risk in certain
investment products. As part of this
authority, a corporate’s NEV ratios may
decline to specified amounts when
meeting certain leverage ratios.
The Board proposes to add a
‘‘retained earnings ratio’’ requirement to
the Part I expanded investment
authorities. The Board believes that by
doing so the retained earnings ratio
requirement will limit the risk of the
expanded investment portfolios.
Specifically, the Board proposes to
employ an indexed retained earnings
requirement, which will correlate with
the actual level of risk taking.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis of
any significant economic impact a
regulation may have on a substantial
number of small entities (primarily
those under $100 million in assets).9
This proposed rule only affects
corporates, all of which have more than
$100 million in assets. Accordingly,
NCUA certifies the rule will not have a
significant economic impact on a
substantial number of small credit
unions.
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2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden or increases an
existing burden.10 For purposes of the
PRA, a paperwork burden may take the
form of a reporting or recordkeeping
requirement, both referred to as
information collections. The proposed
rule does not contain information
collection requirements that require
approval by OMB under the Paperwork
Reduction Act (44 U.S.C. 3501).
3. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. NCUA, an
independent regulatory agency as
defined in 44 U.S.C. 3502(5), voluntarily
95
U.S.C. 603(a).
U.S.C. 3507(d); 5 CFR part 1320.
10 44
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complies with the executive order to
adhere to fundamental federalism
principles. The proposed rule does not
have substantial direct effects on the
states, on the relationship between the
national government and the states, or
on the distribution of power and
responsibilities among the various
levels of government. NCUA has,
therefore, determined that this proposal
does not constitute a policy that has
federalism implications for purposes of
the executive order.
4. Assessment of Federal Regulations
and Policies on Families
NCUA has determined that this
proposed rule will not affect family
well-being within the meaning of § 654
of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit
unions, Reporting and recordkeeping
requirements.
By the National Credit Union
Administration Board on June 23, 2017.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the
National Credit Union Administration
Board proposes to amend 12 CFR part
704 as follows:
PART 704—CORPORATE CREDIT
UNIONS
1. The authority citation for Part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1781, 1789.
2. Amend § 704.2 by:
a. Revising the definition of ‘‘Retained
earnings’’;
■ b. Adding a definition of ‘‘Retained
Earnings Ratio’’; and
■ c. Revising the definition of ‘‘Tier 1
capital’’ to read as follows:
■
■
§ 704.2
Definitions
*
*
*
*
*
Retained earnings means undivided
earnings, regular reserve, reserve for
contingencies, supplemental reserves,
reserve for losses, GAAP equity
acquired in a merger, and other
appropriations from undivided earnings
as designated by management or NCUA.
Retained earnings ratio means the
corporate credit union’s retained
earnings divided by its moving daily
average net assets.
*
*
*
*
*
Tier 1 capital means the sum of items
(1) through (2) of this definition from
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which items (3) through (6) are
deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the
corporate credit union’s intangible
assets that exceed one half percent of its
moving daily average net assets
(however, NCUA may direct the
corporate credit union to add back some
of these assets on NCUA’s own
initiative, or NCUA’s approval of
petition from the applicable state
regulator or application from the
corporate credit union);
(4) Deduct investments, both equity
and debt, in unconsolidated CUSOs;
(5) Deduct an amount equal to any
PCC or NCA that the corporate credit
union maintains at another corporate
credit union;
(6) Deduct any amount of PCC
received from federally insured credit
unions that causes PCC minus retained
earnings, all divided by moving daily
average net assets, to exceed two
percent when a corporate credit union’s
retained earnings ratio is less than two
and a half percent.
*
*
*
*
*
■ 3. Amend by revising paragraphs
(b)(2) and (b)(3) of Part I of Appendix B
to Part 704 to read as follows:
Appendix B to Part 704—Expanded
Authorities and Requirements
*
*
*
*
*
(b)(1) * * *
(2) 28 percent if the corporate credit union
has a seven percent minimum leverage ratio
and a two and a half percent retained
earnings ratio, and is specifically approved
by NCUA; or
(3) 35 percent if the corporate credit union
has an eight percent minimum leverage ratio
and a three percent retained earnings ratio
and is specifically approved by NCUA.
*
*
*
*
*
[FR Doc. 2017–13642 Filed 6–30–17; 8:45 am]
BILLING CODE 7535–01–P
FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 930 and 932
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1277
RIN 2590–AA70
Federal Home Loan Bank Capital
Requirements
Federal Housing Finance
Board; Federal Housing Finance
Agency.
ACTION: Proposed rule.
AGENCY:
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Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
The Federal Housing Finance
Agency (FHFA) is proposing to adopt,
with amendments, the regulations of the
Federal Housing Finance Board
(Finance Board) pertaining to the capital
requirements for the Federal Home Loan
Banks (Banks). The proposed rule
would carry over most of the existing
regulations without material change, but
would substantively revise the credit
risk component of the risk-based capital
requirement, as well as the limitations
on extensions of unsecured credit. The
principal revisions to those provisions
would remove requirements that the
Banks calculate credit risk capital
charges and unsecured credit limits
based on ratings issued by a Nationally
Recognized Statistical Rating
Organization (NRSRO), and would
instead require that the Banks use their
own internal rating methodology. The
proposed rule also would revise the
percentages used in the tables to
calculate the credit risk capital charges
for advances and non-mortgage assets.
FHFA would retain the percentages
used in the existing table to calculate
the capital charges for mortgage-related
assets, but intends to address the
appropriate methodology for
determining the credit risk capital
charges for residential mortgage assets
as part of a subsequent rulemaking.
DATES: FHFA must receive written
comments on or before September 1,
2017. For additional information, see
SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your
comments, identified by Regulatory
Information Number (RIN) 2590–AA70,
by any of the following methods:
• Agency Web site: www.fhfa.gov/
open-for-comment-or-input.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by email to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by the agency. Please
include Comments/RIN 2590–AA70 in
the subject line of the message.
• Courier/Hand Delivery: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA70, Federal Housing
Finance Agency, 400 Seventh Street
SW., Eighth Floor, Washington, DC
20219. Deliver the package to the
Seventh Street entrance Guard Desk,
First Floor, on business days between 9
a.m. and 5 p.m.
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Alfred M. Pollard, General Counsel,
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SUMMARY:
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Attention: Comments/RIN 2590–AA70,
Federal Housing Finance Agency, 400
Seventh Street SW., Eighth Floor,
Washington, DC 20219. Please note that
all mail sent to FHFA via the U.S. Mail
service is routed through a national
irradiation facility, a process that may
delay delivery by approximately two
weeks. For any time-sensitive
correspondence, please plan
accordingly.
FOR FURTHER INFORMATION CONTACT:
Scott Smith, Associate Director, Office
of Policy Analysis and Research,
Scott.Smith@FHFA.gov, 202–649–3193;
Julie Paller, Principal Financial Analyst,
Division of Bank Regulation,
Julie.Paller@FHFA.gov, 202–649–3201;
or Neil R. Crowley, Deputy General
Counsel, Neil.Crowley@FHFA.gov, 202–
649–3055 (these are not toll-free
numbers), Federal Housing Finance
Agency, 400 Seventh Street SW.,
Washington, DC 20219. The telephone
number for the Telecommunications
Device for the Hearing Impaired is 800–
877–8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects
of the proposed rule and will take all
comments into consideration before
issuing a final rule. Copies of all
comments will be posted without
change, on the FHFA Web site at https://
www.fhfa.gov, and will include any
personal information you provide, such
as your name, address, email address,
and telephone number.
II. Background
A. Establishment of the Federal Housing
Finance Agency
Effective July 30, 2008, the Housing
and Economic Recovery Act of 2008
(HERA) 1 created FHFA as a new
independent agency of the Federal
Government, and transferred to FHFA
the supervisory and oversight
responsibilities of the Office of Federal
Housing Enterprise Oversight (OFHEO)
over the Federal National Mortgage
Association and the Federal Home Loan
Mortgage Corporation (collectively, the
Enterprises), the oversight
responsibilities of the Finance Board
over the Banks and the Office of Finance
(OF) (which acts as the Banks’ fiscal
agent), and certain functions of the
Department of Housing and Urban
Development.2 Under the legislation,
the Enterprises, the Banks, and the OF
continue to operate under regulations
promulgated by OFHEO and the
1 Public
2 See
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12 U.S.C. 4511.
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Finance Board, respectively, until such
regulations are superseded by
regulations issued by FHFA.3 While
FHFA has previously adopted
regulations addressing the capital
structure of the Banks and the Banks’
capital plans, the Finance Board
regulations establishing the Banks’ total,
leverage, and risk-based capital
requirements continue to apply to the
Banks pursuant to this provision, and
would be superseded by this
rulemaking.4
B. Federal Home Loan Bank Capital and
Capital Requirements
The eleven Banks are wholesale
financial institutions organized under
the Federal Home Loan Bank Act (Bank
Act).5 The Banks are cooperatives. Only
members of a Bank may purchase the
capital stock of a Bank, and only
members or certain eligible housing
associates (such as state housing finance
agencies) may obtain access to secured
loans, known as advances, or other
products provided by a Bank.6 Each
Bank is managed by its own board of
directors and serves the public interest
by enhancing the availability of
residential mortgage and community
lending credit through its member
institutions.7
In 1999, the Gramm-Leach-Bliley Act
(GLB Act) 8 amended the Bank Act to
replace the subscription capital
structure of the Bank System. It required
the Banks to replace their existing
capital stock with new classes of capital
stock that would have different terms
from the stock then held by Bank
System members. Specifically, the GLB
Act authorized the Banks to issue new
Class A stock, which the GLB Act
defined as redeemable six months after
filing of a notice by a member, and Class
B stock, defined as redeemable five
years after filing of a notice by a
member. The GLB Act allowed Banks to
issue Class A and Class B stock in any
combination and to establish terms and
preferences for each class or subclass of
stock issued, consistent with the Bank
Act and regulations adopted by the
Finance Board.9 The classes of stock to
be issued, as well as the terms, rights,
and preferences associated with each
3 See
12 U.S.C. 4511, note.
80 FR 12755 (March 11, 2015) (FHFA
rulemaking); 12 CFR part 932 (Finance Board
capital requirement regulations).
5 See 12 U.S.C. 1423 and 1432(a). The eleven
Banks are located in: Boston, New York, Pittsburgh,
Atlanta, Cincinnati, Indianapolis, Chicago, Des
Moines, Dallas, Topeka, and San Francisco.
6 See 12 U.S.C. 1426(a)(4), 1430(a), and 1430b.
7 See 12 U.S.C. 1427.
8 Public Law No. 106–102, 113 Stat. 1338 (Nov.
12, 1999).
9 See 12 U.S.C. 1426, and 12 CFR part 1277.
4 See
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class of Bank stock, are governed by a
capital structure plan, which is
established by each Bank’s board of
directors and approved by FHFA.
The GLB Act also amended the Bank
Act to impose on the Banks new total,
leverage, and risk-based capital
requirements similar to those applicable
to depository institutions and other
housing Government Sponsored
Enterprises (GSEs) and directed the
Finance Board to adopt regulations
prescribing uniform capital standards
for the Banks.10 The Finance Board put
these regulations in place in 2001 when
it published a final capital rule, and
later adopted amendments to that rule.11
In addition to addressing minimum
capital requirements, the regulations
also established minimum liquidity
requirements for each Bank and set
limits on a Bank’s unsecured credit
exposure to individual counterparties
and groups of affiliated
counterparties.12 These Finance Board
regulations remain in effect and have
not been substantively amended since
2001.
The GLB Act amendments to the Bank
Act also defined the types of capital that
the Banks must hold—specifically
permanent and total capital. Permanent
capital consists of amounts paid by
members for Class B stock plus the
Bank’s retained earnings, as determined
in accordance with generally accepted
accounting principles (GAAP).13 Total
capital is made up of permanent capital
plus the amounts paid by members for
Class A stock, any general allowances
for losses held by a Bank under GAAP
(but not allowances or reserves held
against specific assets or specific classes
of assets), and any other amounts from
sources available to absorb losses that
are determined by regulation to be
appropriate to include in total capital.14
As a matter of practice, however, each
Bank’s total capital consists of its
permanent capital plus the amounts, if
10 See 12 U.S.C. 1426(a). In 2008, HERA amended
the risk-based capital provisions in the Bank Act to
allow FHFA greater flexibility in establishing these
requirements. Pub. Law No. 110–289, 122 Stat.
2654, 2626 (July 28, 2008) (amending 12 U.S.C.
1426(a)(3)(A)).
11 See Final Rule: Capital Requirements for
Federal Home Loan Banks, 66 FR 8262 (Jan. 30,
2001) (hereinafter Final Finance Board Capital
Rule); and Final Rule: Amendments to Capital
Requirements for Federal Home Loan Banks, 66 FR
54097 (Oct. 26, 2001). The Finance Board
regulations are found at 12 CFR part 932.
12 See id. See also, Final Rule: Unsecured Credit
Limits for the Federal Home Loan Banks, 66 FR
66718 (Dec. 27, 2001) (amending 12 CFR 932.9).
13 See 12 U.S.C. 1426(a)(5).
14 Id. Neither the Finance Board nor FHFA has
approved the inclusion within total capital of any
other amounts that are available to absorb losses,
and no Bank has any such general allowances for
losses as part of its capital.
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any, paid by its members for Class A
stock.
The Bank Act requires each Bank to
hold total capital equal to at least 4
percent of its total assets. The statute
separately requires each Bank to meet a
leverage requirement of total capital to
total assets equal to 5 percent, but
provides that in determining
compliance with this leverage
requirement, a Bank must calculate its
total capital by multiplying the amount
of its permanent capital by 1.5 and
adding to this product any other
component of total capital.15
Each Bank also must meet a riskbased capital requirement by
maintaining permanent capital in an
amount at least equal to the sum of its
credit risk, market risk, and operational
risk charges, as measured under the
2001 Finance Board regulations.16
Under these rules, a Bank must
calculate a credit risk capital charge for
each of its assets, off-balance sheet
items, and derivatives contracts. The
basic charge is based on the book value
of an asset, or other amount calculated
under the rule, multiplied by a credit
risk percentage requirement (CRPR) for
that particular asset or item, which is
derived from one of the tables set forth
in the rule. Generally, the CRPR varies
based on the rating assigned to the asset
by an NRSRO and the maturity of the
asset.17 The market risk capital charge is
calculated separately, as the maximum
loss in the Bank’s portfolio under
various stress scenarios, estimated by an
approved internal model, such that the
probability of a loss greater than that
estimated by the model is not more than
one percent.18 The operational risk
capital charge equals 30 percent of the
combined credit and market risk charges
for the Bank, although the rules allow a
Bank to demonstrate that a lower charge
should apply if FHFA approves and
other conditions are met.19
C. The Dodd-Frank Act and Bank
Capital Rules
Section 939A of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act) requires federal
agencies to: (i) Review regulations that
require the use of an assessment of the
creditworthiness of a security or money
market instrument; and (ii) to the extent
those regulations contain any references
to, or requirements based on, NRSRO
credit ratings, remove such references or
15 See 12 U.S.C. 1426(a)(2). See also 12 CFR
932.2.
16 See 12 U.S.C. 1426(a)(3) and 12 CFR 932.3,
932.4, 932.5, and 932.6.
17 See 12 CFR 932.4.
18 See 12 CFR 932.5.
19 See 12 CFR 932.6.
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requirements.20 In place of such NRSRO
rating-based requirements, agencies are
instructed to substitute appropriate
standards for determining
creditworthiness. The Dodd-Frank Act
further provides that, to the extent
feasible, an agency should adopt a
uniform standard of creditworthiness
for use in its regulations, taking into
account the entities regulated by it and
the purposes for which such regulated
entities would rely on the
creditworthiness standard.
Several provisions of the Finance
Board capital regulations include
requirements that are based on NRSRO
credit ratings, and thus must be revised
to comply with the Dodd-Frank Act
provisions related to use of NRSRO
ratings.21 Specifically, as already noted,
the credit risk capital charges for certain
Bank assets are calculated in large part
based on the credit ratings assigned by
NRSROs to a particular counterparty or
specific financial instrument. In
addition, the rule related to the
operational risk capital charge allows a
Bank to calculate an alternative capital
charge if the Bank obtains insurance to
cover operational risk from an insurer
with an NRSRO credit rating of no lower
than the second highest investment
grade rating. Finally, the capital rules
addressed by this rulemaking also
establish unsecured credit limits for the
Banks based on NRSRO credit ratings.
FHFA is proposing to amend each of
these provisions to bring them into
compliance with the Dodd-Frank Act
requirements.
III. The Proposed Rule
FHFA is proposing to amend part
1277 of its regulations by adopting, with
some revisions, the capital requirement
regulations of the Finance Board, which
are located at 12 CFR part 932.22 Most
of the provisions of the Finance Board
regulations would be adopted without
change or with only minor conforming
changes. The proposed rule, however,
would rescind § 932.1, which required
20 See § 939A, Public Law 111–203, 124 Stat.
1887 (July 21, 2010).
21 See Advance Notice of Proposed Rulemaking:
Alternatives to Use of Credit Ratings in Regulations
Governing the Federal National Mortgage
Association, the Federal Home Loan Mortgage
Corporation, and the Federal Home Loan Banks, 76
FR 5292, 5294 (Jan. 31, 2011).
22 FHFA previously transferred the Finance Board
requirements related to the Banks’ capital stock and
capital structure plans and readopted these
provisions, subject to certain amendments, as 12
CFR part 1277, subparts C and D. See Final Rule:
Federal Home Loan Bank Capital Stock and Capital
Plans, 80 FR 12753 (Mar. 11, 2015). At that time,
FHFA also transferred a number of definitions
relevant to the capital stock and capital plan
requirements from 12 CFR 930.1 to subpart A of
part 1277.
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the Banks to obtain the approval of the
Finance Board for their market risk
models prior to implementing their
capital plans, which all Banks have
done. The proposed rule also would
rescind § 932.8, regarding minimum
liquidity requirements for the Banks,
because FHFA intends to address
liquidity requirements as part of a
separate rulemaking.23 The proposal
would adopt the substance of § 932.2
and § 932.3, regarding the total capital
requirements and risk-based capital
requirements, respectively, without
change. FHFA is proposing to make
minor revisions to the Finance Board
regulations pertaining to market risk,
operational risk, and reporting
requirements, currently located at
§§ 932.5, 932.6, and 932.7, respectively.
The proposed rule would make
significant revisions to two provisions
of the Finance Board regulations:
§ 932.4, regarding credit risk capital
requirements; and § 932.9, regarding
limits on unsecured credit exposures,
principally by removing requirements
that are based on NRSRO credit ratings.
In both cases, the proposed rule would
replace the current approach with one
under which the Banks would develop
their own internal credit rating
methodology to be used in place of the
NRSRO credit ratings. With respect to
the credit risk capital charges, the
proposed rule also would revise the
CRPRs used in the current regulation’s
tables to calculate the credit risk capital
charges for advances and for nonmortgage assets, off-balance sheet items,
and derivatives contracts. With respect
to the unsecured credit limits, the
proposed rule would incorporate into
the rule text the substance of certain
regulatory interpretations that have
addressed the application of the
unsecured credit limits in particular
situations, and would make other
changes to account for developments in
the marketplace, such as the DoddFrank Act’s mandate for clearing certain
derivatives transactions. The proposed
rule would not change the basic
percentage limits used to calculate the
amount of unsecured credit that a Bank
23 The current regulation is not determinative of
the amount of the Banks’ liquidity portfolios.
Instead, Banks maintain liquid assets in accordance
with guidelines issued in March 2009 that provide
for more liquidity than the regulatory requirements.
See Letter from Stephen M. Cross, Deputy Director,
Division of FHLBank Regulation, to the FHLBank
Presidents, March 6, 2009. Under those guidelines,
the Banks maintain positive cash balances that
would be sufficient to support their operations if
they were unable to issue consolidated obligations
for a 5-day period during which they renewed all
maturing advances, and for a 15-day period during
which all maturing advances were repaid. Until
FHFA adopts a new liquidity regulation, the March
2009 guidelines will remain applicable.
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can extend to a single counterparty or
group of affiliated counterparties.
A discussion of the specific changes
that FHFA proposes to make to the
Banks’ current capital regulations as
part of this rulemaking follows.
Proposed § 1277.1—Definitions
Most of the definitions in proposed
§ 1277.1 would be carried over without
substantive change from current 12 CFR
930.1. FHFA, however, is proposing to
define seven new terms, which are:
‘‘collateralized mortgage obligation;’’
‘‘derivatives clearing organization;’’
‘‘eligible master netting agreement;’’
‘‘non-mortgage asset;’’ ‘‘non-rated
asset;’’ ‘‘residential mortgage;’’ and
‘‘residential mortgage security.’’
Three of the new terms FHFA
proposes to define pertain to the
mortgage-related assets that a Bank may
hold, which are: ‘‘collateralized
mortgage obligation,’’ ‘‘residential
mortgage,’’ and ‘‘residential mortgage
security.’’ These definitions are
straightforward and are intended to be
mutually exclusive. They will be used
to assign the particular asset to the
appropriate category of Table 1.4 that
would be used to determine the capital
charge for that asset. The term
‘‘residential mortgage’’ is intended to
include those mortgage loans that the
Banks may purchase as acquired
member assets (AMA), and would
include both whole loans and
participation interests in such loans.
These loans must be secured by a
residential structure that contains oneto- four dwelling units. The proposed
definition would encompass loans on
individual condominium or cooperative
units, as well as on manufactured
housing, whether or not the
manufactured housing is considered
real property under state law. The
definition would not include a loan
secured by a multifamily property
because the credit risk for such
properties differs from loans secured by
one-to-four family residences.
The term ‘‘residential mortgage
security’’ includes any mortgage-backed
security that represents an undivided
interest in a pool of ‘‘residential
mortgages,’’ i.e., mortgage pass-through
securities. Both residential mortgages
and residential mortgage securities
would be grouped together in Table 1.4
of the proposed rule and would have the
same credit risk capital charges,
assuming the Bank has given them the
same internal credit rating. The term
‘‘collateralized mortgage obligation’’ is
intended to include any other type of
mortgage-related security that is not
structured as a pass-through security,
i.e., any such security that has two or
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more tranches or classes. The capital
charges for collateralized mortgage
obligations would be derived from a
different portion of Table 1.4, and most
charges would be higher than those for
mortgage pass-through securities. None
of these proposed definitions would
encompass a commercial mortgagebacked security (CMBS), including one
collateralized by mortgage loans on
multi-family properties, because the risk
characteristics for such securities differ
from those on securities representing an
interest in, or otherwise backed by,
mortgage loans on one-to-four family
residential properties. Such CMBS or
multi-family property securities would
be deemed to be ‘‘non-mortgage assets’’
and the capital charge for them would
be determined by using proposed Table
1.2, which applies to internally rated
non-mortgage assets, off-balance sheet
items, and derivatives contracts.
FHFA proposes to define ‘‘derivatives
clearing organization’’ as an
organization that clears derivatives
contracts and is registered with either
the Commodity Futures Trading
Commission (CFTC) or the Securities
and Exchange Commission (SEC) or is
exempted by one of those two
Commissions from such registration.
The new definition is needed because,
as is discussed below, the proposed
credit risk capital provision and the
proposed unsecured credit provision
impose different requirements on
derivatives contracts cleared by a
derivatives clearing organization than
they impose on those not so cleared.
FHFA proposes to define ‘‘non-rated
asset’’ to include those assets that are
currently addressed by Table 1.4 of
Finance Board regulation 12 CFR 932.4,
which are cash, premises, and plant and
equipment, as well as certain
investments described in the core
mission activities regulation. Under the
proposed rule the credit risk capital
charges for ‘‘non-rated assets’’ would
derive from proposed Table 1.3, which
would be identical to Table 1.4 of the
current regulation, both in terms of the
assets covered by the table and the
capital charges assigned to each
category of assets within the table.
The proposed rule would define the
term ‘‘non-mortgage asset’’ to include
any assets held by a Bank other than
advances covered by Table 1.1, all types
of mortgage-related assets covered by
Table 1.4, non-rated assets covered by
Table 1.3, or derivatives contracts. As is
discussed in much greater detail below,
capital charges for ‘‘non-mortgage
assets’’ would be calculated based on
their stated maturity and a Bank’s
internal credit rating for the assets,
using new proposed Table 1.2. The
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charges for all types of residential
mortgage assets also would be
calculated based on the Bank’s internal
rating of those assets, rather than a
rating from an NRSRO, but the credit
risk percentage requirements will
remain the same as in the current
regulation.
The proposed rule also would add a
definition for ‘‘eligible master netting
agreement.’’ FHFA would define the
term by reference to the definition for
the term recently adopted in the FHFA
rule governing margin and capital
requirements for covered swap
entities.24 The term ‘‘eligible master
netting agreement’’ would replace the
references and definition of ‘‘qualifying
bilateral netting contract’’ now found in
the credit risk capital provision and
would be relevant to how a Bank
calculates its credit exposures under
multiple derivatives contracts with a
single party. As discussed more fully
later, the current credit exposures
arising from derivatives contracts with a
single counterparty and subject to an
eligible master netting agreement would
be calculated on a net basis, in
accordance with proposed
§ 1277.4(i)(1)(ii). Lastly, the proposed
rule would revise the existing Finance
Board definition of ‘‘operations risk’’ by
changing it to ‘‘operational risk’’ and
incorporating the definition of
operational risk currently used in FHFA
Advisory Bulletin AB–2014–02
(February 18, 2014).
Proposed § 1277.2 and § 1277.3—Total
Capital and Risk-Based Capital
Requirements
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As noted above, FHFA proposes to readopt current § 932.2 and § 932.3 of the
Finance Board regulations as § 1277.2
and § 1277.3 without change. Proposed
§ 1277.2 is identical to the existing
regulation and would set forth the
minimum total capital and leverage
ratios that each Bank must maintain
under section 6(a)(2) of the Bank Act.25
Proposed § 1277.3 also is identical to
the existing regulation, apart from crossreferences to other regulations, and
would set forth a Bank’s risk-based
capital requirement and require a Bank
to hold at all times an amount of
permanent capital equal to at least the
sum of its credit risk, market risk and
24 See, Final Rule: Margin and Capital
Requirements for Covered Swap Entities, 80 FR
74840 (Nov. 30, 2015) (hereinafter, Final Uncleared
Swaps Rule). The specific definition is found at 12
CFR 1221.2. FHFA does not propose to carry over
the current definition for ‘‘walkaway clause’’ in
current 12 CFR 930.1 as the proposed definition of
‘‘eligible master netting agreement’’ already would
sufficiently describe a walkaway clause.
25 12 U.S.C. 1426(a)(2).
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operational risk capital requirements.26
In turn, proposed §§ 1277.4, 1277.5, and
1277.6 would establish, respectively,
the requirements for calculating a
Bank’s credit risk, market risk, and
operational risk capital charges, as
described below.
Proposed § 1277.4—Credit Risk Capital
Requirements
FHFA is proposing changes to the
current credit risk capital provision,
now set forth at 12 CFR 932.4 of the
Finance Board regulations. The
principal revisions include changing
how a Bank determines the CRPRs used
to calculate capital charges for its
internally rated non-mortgage assets,
derivatives contracts, and off-balance
sheet items (under proposed Table 1.2),
and for its residential mortgage assets
(under proposed Table 1.4). In both
cases, a Bank would no longer base the
charge on an NRSRO credit rating, but
on a credit rating that the Bank
calculates internally. The proposal also
would update the CRPRs used to
calculate the applicable capital charges
for advances and non-mortgage assets,
and would change the frequency of a
Bank’s calculation of its credit risk
capital charges from monthly to
quarterly.27 Finally, as discussed in
more detail below, FHFA is also
proposing a number of other changes to
the current regulation.
General. Similar to the current
regulation, proposed § 1277.4(a) would
provide that a Bank’s credit risk capital
requirement equal the sum of the
individual credit risk capital charges for
its advances, residential mortgage
assets, non-mortgage assets, off-balance
sheet items, derivatives contracts, and
non-rated assets. Proposed § 1277.4(b)
through (e) would set forth the general
approach for calculating the credit risk
capital charges, respectively, for:
Residential mortgage assets; advances,
non-mortgage assets, and non-rated
assets; off-balance sheet items; and
derivatives contracts. The calculation of
capital charges for residential mortgage
assets is discussed below in the section
26 FHFA believes that this approach remains
consistent with the amendments made by HERA to
the risk-based capital requirements in the Bank Act.
As amended, the Bank Act provides the Director
with broad authority to establish by regulation riskbased capital standards for the Banks that ensure
the Banks operate in a safe and sound manner with
sufficient permanent capital and reserves to support
the risks arising from their operations. See 12 U.S.C.
1426(a)(3)(A).
27 FHFA also is proposing a similar conforming
change for the frequency of the calculation of the
market risk capital charge. As a result, under the
proposed rule, Banks would re-calculate their riskbased capital requirement quarterly, rather than
monthly as under the current regulation.
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entitled Credit Risk Charge for
Residential Mortgage Assets.
Valuation of Assets. For all assets,
§ 1277.4(c) of the proposed rule
generally would require that a Bank
determine the capital charge by
multiplying the amortized cost of the
asset by the CRPR assigned to the asset
under the appropriate table. The
proposed rule includes an exception to
this general approach, which would
apply for any asset carried at fair value
for which the Bank recognizes the
change in that asset’s fair value in
income. For these assets, the capital
charge would equal the fair value of the
asset multiplied by the applicable
CRPR. The proposed wording represents
a change from the current regulation,
which bases the capital charge for onbalance sheet assets on the asset’s book
value. FHFA is proposing this change to
provide greater clarity and alignment
with the intent of the rule, as amortized
cost and fair value are the current
financial instrument recognition and
measurement attributes used in relevant
accounting guidance.
Charge for Off-Balance Sheet Items.
Section 1277.4(d) of the proposed rule
would carry over the language from the
existing Finance Board regulations
regarding the capital charges for offbalance sheet items without change.
Thus, the capital charge for such items
would equal the credit equivalent
amount of the item multiplied by the
CRPR assigned to the asset by Table 1.2
of proposed § 1277.4(f)(1). A Bank
would calculate the credit equivalent
amount for any off-balance sheet item
pursuant to proposed § 1277.4(h), which
would allow a Bank to calculate the
credit equivalent amount by using either
an FHFA-approved model or the
proposed conversion factors set forth in
Table 2. The proposed conversion
factors are the same as those in the
current regulation. Proposed § 1277.4(d)
would retain the existing exception
provided by the current regulation for
standby letters of credit, under which
the CRPR would be the same as that
established under Table 1.1 for an
advance with the same remaining
maturity as the standby letter of credit.
A Bank would still need to calculate the
credit equivalent amount for the letter of
credit pursuant to proposed
§ 1277.4(h).28
Proposed § 1277.4(h), which
addresses the calculation of credit
equivalent amounts and is substantively
the same as § 932.4(f) of the Finance
28 Under proposed Table 2, the credit equivalent
amount of any letter of credit would equal the face
amount of the letter of credit multiplied by 0.5 (i.e.,
a credit conversion factor of 50 percent).
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Board regulation, would carry over the
treatment for certain off-balance sheet
commitments that otherwise would be
subject to a credit conversion factor of
20 percent or 50 percent. If such
commitments are unconditionally
cancelable or effectively provide for
cancellation upon deterioration in the
borrowers’ creditworthiness, then the
credit conversion factor would be zero,
and no credit risk capital charge would
apply to those items.
Derivatives Contracts. Proposed
§ 1277.4(e) would establish the general
requirements for calculating credit risk
capital charges for derivatives contracts.
The proposed rule would make a
number of changes to the current
regulation’s treatment of derivatives.
These changes reflect developments in
derivatives regulations brought about by
the Dodd-Frank Act, including the
clearing requirement for many
standardized over-the-counter (OTC)
derivatives contracts and the adoption
by FHFA, jointly with other federal
regulators, of the Final Rule on Margin
and Capital Requirements for covered
Swap Entities, which established
margin and capital requirements for
uncleared swap contracts. The proposed
rule also would eliminate the provision
from the current regulation that
provides special treatment for
derivatives with members so that
derivatives contracts with members
would receive the same treatment as
derivatives contracts with nonmembers. Section 1277.4(e)(4)(i) of the
proposed rule, however, would retain
the exception in the current regulation
that assigns a capital charge of zero to
any foreign exchange rate contract
(other than gold contracts) that has a
maturity of 14 days or less.
First, the proposed rule would add a
credit risk capital charge for all cleared
derivatives contracts, including
exchange-traded futures contracts.
Under the current regulation, cleared
derivatives contracts have a charge of
zero. However, when the Finance Board
adopted the current regulation, the only
cleared derivatives contracts used by the
Banks were exchange-traded futures
contracts, and the Banks did not
commonly use futures. Given the DoddFrank Act clearing requirements, Banks
will now clear a significant percentage
of their OTC derivatives contracts.29
Thus, FHFA finds it reasonable to apply
a capital charge to such contracts. The
credit risk capital charge for cleared
derivatives under the proposed rule also
29 Because a futures contract is a cleared
derivatives contract, the change in the proposed
rule with regard to capital charges for cleared
derivatives contracts would also apply to futures
contracts.
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would take account of the fact that the
amount of collateral a Bank must post
to a derivatives clearing organization
will exceed, at most times, the Bank’s
current obligation to the clearing
organization, creating an exposure to
potential loss of such excess collateral
should the clearing organization fail.
Capital rules adopted by federal banking
regulators also instituted charges for
collateral posted to the derivative
counterparties, including derivative
clearing organizations.
Specifically, § 1277.4(e)(4)(ii) of the
proposed rule would impose a capital
charge of 0.16 percent times the sum of
a Bank’s marked-to-market exposure on
the cleared derivatives contract,30 plus
its potential future exposure on the
contract, plus the amount of any
collateral posted by the Bank and held
by the clearing organization that
exceeds the amount of the Bank’s
current obligation to the clearing
organization under the contract. The
charge in the proposed rule for cleared
derivatives contracts is consistent with
the minimum total capital charge that
would be applicable to cleared
derivatives contracts under the
standardized approach in the capital
rules adopted by federal banking
regulators.31
For uncleared derivatives contracts,
the proposed rule would carry over
much of the approach in the current
regulation, in that a Bank’s charge for a
derivatives contract would equal the
sum of the Bank’s current credit
exposure and potential future credit
exposure under the derivatives contract,
multiplied by the applicable CRPR
assigned to the derivatives counterparty
under Table 1.2 of proposed § 1277.4(f).
As under the current regulation, the
proposed rule would deem that for
purposes of calculating the charge on
the current credit exposure the CRPR
should be that associated with an asset
with a maturity of one year or less and
the Bank’s internal rating for the
derivatives counterparty. The
calculation of the charge for the
potential future exposure would be
based on the CRPR associated with the
maturity category equal to the remaining
maturity of the derivatives contract.
The proposed rule, however, also
would add to the above amounts an
additional credit risk charge for the
30 Given that most clearing organizations
effectively settle a cleared derivatives contract at
the end of the day, the current exposure would
often be zero or a small amount depending on the
timing of the daily settlement.
31 FHFA, however, has not adjusted the charge to
account for any additional capital amounts needed
to comply with the capital conservation buffer
under the federal banking regulators’ rules.
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amount of collateral posted to a
counterparty that exceeds the Bank’s
current, marked-to-market obligation to
that counterparty under the derivatives
contract.32 The Bank would calculate
the specific charge for the posted excess
collateral based on a CRPR related to the
Bank’s internal rating for the custodian
or other party holding such collateral
and an applicable maturity deemed to
be one year or less. The added charge
would account for the possibility that
the party holding the collateral may fail,
and the Bank may not be able to recover
its excess collateral. Capital rules issued
by banking regulators also apply a
capital charge for collateral posted to a
third-party for uncleared derivatives
contracts.
The proposed rule would allow the
Bank to reduce its credit risk capital
charge for derivatives contracts based on
collateral posted by the counterparty,
but only if the Bank’s treatment of
collateral posted under the derivatives
contract complies with proposed
§ 1277.4(e)(3). That provision would
first require the Bank to hold such
collateral itself or in a segregated
account consistent with requirements in
the uncleared swaps margin and capital
rule.33 The proposed rule also requires
a Bank to apply the minimum discounts
set forth in the uncleared swaps margin
and capital rule to any collateral that is
eligible for posting under that rule.34
The proposed rule, however, would not
limit the collateral that a Bank may
accept to that meeting the eligibility
requirements of the uncleared swaps or
margin rule, given that not all Bank
derivative counterparties would be
subject to these requirements.35 This is
32 Generally, this amount should equal the initial
margin that a Bank would post under its derivatives
contracts with a particular counterparty. Any
amounts paid by a Bank to a derivatives clearing
organization with respect to an end-of-daysettlement would not be considered collateral held
by the clearing organization for purposes of
applying any capital charge. Thus, the capital
charge would be the sum of the current credit
exposure, the potential future credit exposure, and
the exposure related to the amount of collateral that
exceeds the Bank’s current exposure.
33 See 12 CFR 1221.7(c). The Bank, however,
would have to substitute the credit risk capital
charge associated with the collateral for that of the
derivatives contract. The proposed rule would also
allow a Bank to base the calculation of the capital
charge on the CRPR applicable to a third-party
guarantor that unconditionally guarantees a Bank’s
counterparty’s obligations under a derivatives
contract, rather than on the requirement applicable
to the counterparty.
34 See, 12 CFR part 1221, Appendix B.
35 Thus, under the proposed rule, the Bank would
need to apply at least the minimum discount listed
in Appendix B of the margin and capital rule for
uncleared swaps to any collateral listed in that
Appendix but would apply a suitable discount
determined by the Bank based on appropriate
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a change from the current regulation,
which allows Banks to take account of
collateral held against derivatives
exposures if a member or affiliate of the
member holds the collateral. The
current regulation also does not impose
specific minimum discounts on any
type of collateral but allows a Bank to
determine a suitable discount. The
proposed rule would carry over
requirements from the current
regulation that any collateral be legally
available to the Bank to absorb losses
and be of readily determinable value at
which it can be liquidated.
The proposed rule would assure that
minimum standards apply before a Bank
can reduce its derivatives credit risk
capital charge based on the protection
offered by collateral. The changes in the
proposed rule would impose slightly
higher collateral standards than under
the current regulation, but would be
consistent with the move toward stricter
requirements for derivatives that has
followed the recent financial crisis.36
Proposed § 1277.4(i) would specify
the method for calculating the current
and potential future credit exposures
under a derivatives contract. The
proposed rule would require a Bank to
calculate the current credit exposure in
the same way as under the current
regulation. Specifically, the current
credit exposure would equal the
marked-to-market value if that value is
positive and would be zero if that value
were zero or negative. The proposed
rule would allow a Bank to calculate the
current credit exposure for all
derivatives contracts subject to an
‘‘eligible master netting agreement’’ on a
net basis. As discussed previously,
FHFA proposes to align the definition of
‘‘eligible master netting agreement’’
with that in the recently-adopted margin
and capital rule for uncleared swaps.
This section of the proposed rule
would provide a Bank the option of
calculating the potential future credit
exposure by using an initial margin
model approved for use by the Bank by
FHFA under § 1221.8 of the margin and
capital rules for uncleared swaps, or
that has been approved by another
regulator for use by the Bank’s
counterparty under standards similar to
those in § 1221.8, or by using the
standard calculation set forth in
assumptions about price risk and liquidation costs
to collateral not listed in Appendix B.
36 For any derivatives transactions with swap
dealers or major swap participants, the Bank would
already have to meet these higher collateral
standards under applicable uncleared swaps margin
and capital rules, and thus, the proposed change
should not affect transactions with these types of
counterparties.
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Appendix A of the part 1221 rules.37
Thus, a Bank can rely on the initial
margin calculation done by a swap
dealer or other counterparty that uses a
model approved by the CFTC, other
federal banking regulator, or a foreign
regulator whose model rules have been
found to be comparable to the United
States rules.38 If neither the Bank nor
the Bank’s counterparty uses an
approved model to calculate initial
margin amounts, or if the Bank
otherwise chooses, the proposed rule
would allow the Bank to calculate the
potential future exposure using the
method set forth in Appendix A to the
margin and capital rules for uncleared
swaps. The conversion factors and the
calculation of relevant potential future
credit exposures for derivatives
contracts, including the net potential
future credit exposure for derivatives
subject to an ‘‘eligible master netting
agreement,’’ set forth under Appendix A
to the margin and capital rules for
uncleared swaps, are very similar to the
requirements in the current Bank capital
regulations for calculating potential
future credit exposures on derivatives
contracts.39
Determination of credit risk
percentage requirements. Proposed
§ 1221.4(f) sets forth the method and
criteria by which a Bank would
determine the CRPR that it would use to
calculate the credit risk capital charges
for all of its assets, derivatives contracts,
and off-balance sheet items. The
applicable CRPRs would be set forth in
four separate tables. Table 1.1 would
apply for advances. Table 1.2 would
apply for internally rated non-mortgage
assets, derivatives contracts, and offbalance sheet items. Proposed Table 1.3
would apply for non-rated assets, which
are cash, premises, plant and
equipment, and certain specific
investments. Proposed Table 1.4 would
apply for residential mortgages,
residential mortgage securities, and
collateralized mortgage obligations.
Each table is described below.
CRPRs for Advances: Proposed Table
1.1. The proposed rule would carry over
the existing Table 1.1, which sets forth
the CRPRs for advances. The proposed
rule would maintain the same four
maturity categories for advances as in
the current regulation, but would
37 See 12 CFR 1221.8 and 12 CFR part 1221,
Appendix A. As no Bank is currently a swap dealer
or major swap participant that otherwise needs to
develop an initial margin model, FHFA expects that
the Banks would generally rely on the calculations
done by a counterparty using its approved model
or using Appendix A to the part 1221 rules.
38 See 12 CFR 1221.9.
39 See Final Rule on Margin and Capital
Requirements for Covered Swap Entities, 80 FR
74881–882.
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slightly increase the CRPRs for each
maturity category. A comparison of the
proposed and current CRPRs for
advances follows:
Maturity of
advances
Remaining maturity ≤4 years
Remaining maturity >4 years
to 7 years ......
Remaining maturity >7 years
to 10 years ....
Remaining maturity >10
years .............
Percentage
applicable
to advances
(proposed)
Percentage
applicable
to advances
(current)
0.09
0.07
0.23
0.20
0.35
0.30
0.51
0.35
The fact that a Bank has never
experienced a loss on an advance to a
member institution creates challenges in
identifying proper CRPRs for advances.
When the Finance Board first developed
the risk-based capital rule, it determined
that appropriate requirements for
advances should be greater than zero
but less than the requirements for assets
of the highest investment grade.
Consequently, the Finance Board set the
CRPRs for advances within those
bounds by using the estimated default
rate of assets of the highest investment
grade and then applying a loss-givendefault rate (LGD) of 10 percent, a much
lower rate than the 100 percent LGD rate
applied to other assets. The Finance
Board justified the low LGD for
advances by noting the overcollateralization provided for advances
and other protections afforded advances
under the Bank Act and Finance Board
rules. The Finance Board also adjusted
downward the CRPRs for advances for
the two longest maturity categories in
Table 1.1 to ensure those advances
requirements would not exceed the
CRPRs for mortgage assets of a similar
maturity (as listed in current Table 1.2).
It adjusted upward the CRPRs for the
shortest maturity category because as
calculated, the requirement for advances
with a maturity of four years or less
would have been zero.40
FHFA based the proposed new CRPRs
for advances on the same concepts used
by the Finance Board, but without any
adjustments to the resulting percentage
requirements. As discussed below, the
proposed rule uses the same default
rates for setting the CRPRs for advances
as the revised default rate used to
calculate the CRPRs for non-mortgage
assets of the highest investment
category. The proposed rule would
40 See Final Finance Board Bank Capital Rule, 66
FR at 8284–85.
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apply an LGD of 10 percent, the same
rate used under the current regulation,
to calculate the CRPRs for advances.
Unlike the current regulation, however,
the proposed rule would not adjust the
calculated CRPR for the longer maturity
categories, and it would use the
calculated requirement for the shortest
maturity category.41
Under the proposal, the total capital
charges for advances would rise slightly
compared to the current regulation. For
example, as of year-end 2016, the
proposed CRPRs would result in an
increased credit risk charge for
advances, although the dollar amount of
the change would not be significant
given the Banks’ overall level of
capitalization. Specifically, the
aggregate credit risk capital charges for
System-wide advances would increase
from approximately 0.071 percent of the
Banks’ total assets to approximately
0.087 percent of total assets—an
increase in dollar terms from $749
million to approximately $920 million.
To put this increase in perspective,
System-wide permanent capital
available to meet the risk-based capital
requirements exceeded $54 billion in
the fourth quarter of 2016. Further,
given that advances represented over 66
percent of the Bank System’s total assets
as of year-end 2016, the absolute
amount of credit risk capital charge
required for advances under the
proposed rule would remain modest
and in keeping with the very low risk
posed by advances.
CRPRs for Internally Rated Assets:
Proposed Table 1.2. Proposed Table 1.2
would replace Table 1.3 from the
current regulation, and would set forth
the CRPRs to be used to calculate the
capital charges for internally rated nonmortgage assets, off-balance sheet items,
and derivatives contracts.42 The current
regulation assigns CRPRs for these
assets, items, and contracts by use of a
look-up table that delineates the CRPRs
by NRSRO rating and maturity range.
The proposed rule would retain the
simplicity of this approach, but would
replace the NRSRO rating categories
with FHFA Credit Ratings categories.
Specifically, proposed Table 1.2 would
establish the CRPRs by using seven
separate ‘‘FHFA Credit Rating’’
categories, each of which would be
subdivided into five maturity categories.
The maturity categories in proposed
Table 1.2 would remain the same as
those in current Table 1.3. The FHFA
41 The proposed CRPR for the shortest maturity
category is not zero as calculated because it is based
on default data that was updated from what the
Finance Board used for the current regulation.
42 See 12 CFR 932.4.
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Credit Ratings categories are intended to
achieve the same purpose served by the
NRSRO credit ratings in the current
regulation, which is to create a
hierarchy of credit risk exposure
categories, to which a Bank would
assign each of the assets, items, and
contracts covered by proposed Table
1.2. The FHFA Credit Ratings categories,
like the NRSRO ratings categories that
they replace, would base the relative
creditworthiness of each category on
historical loss experience. Thus, current
Table 1.3 and proposed Table 1.2 both
contain CRPRs structured to correspond
to the historical loss experience of
financial instruments, categorized by
NRSRO ratings. Accordingly, the
historical loss experience for the
‘‘highest investment grade’’ category in
current Table 1.3 would correspond to
the historical loss experience for the
FHFA 1 Credit Rating category in
proposed Table 1.2, and so on. To
provide some guidance to the Banks
about the breadth of these categories,
the rule would make clear that each of
the FHFA 1 through 4 categories would
be generally comparable to the credit
risk associated with items that could
qualify as ‘‘investment quality,’’ as that
term is defined in FHFA’s investment
regulation.43 For example, a rating of
FHFA 1 would suggest the highest
credit quality and the lowest level of
credit risk; FHFA 2 would suggest high
quality and a very low level of credit
risk; and FHFA 3 would suggest an
upper-medium level of credit quality
and low credit risk. FHFA 4 would
suggest medium quality and moderate
credit risk. Categories FHFA 5 through
7 would include assets and items that
have risk characteristics that are
comparable to instruments that could
not qualify as ‘‘investment quality’’
under the FHFA investment regulation.
The proposed rule, however, differs
from the current regulation by requiring
the Bank to determine the appropriate
FHFA Credit Rating category for each
instrument covered by proposed Table
1.2. The Bank would do so by
conducting its own internal calculation
of a credit rating for that instrument,
rather than assigning it a CRPR based on
an NRSRO rating. Thus, each Bank also
would need to establish a mapping of its
internal credit ratings to the various
FHFA Credit Rating categories in
43 12 CFR part 1267.1. Generally speaking, the
term ‘‘investment quality’’ includes those
instruments for which a Bank has determined that
full and timely payment of principal and interest
is expected, and that there is minimal risk that the
timely payment of principal or interest will not
occur because of adverse changes in economic and
financial conditions during the life of the
instrument.
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proposed Table 1.2. Given the similarity
in structure and basis between proposed
Table 1.2 and current Table 1.3, and the
historical data connection of both tables
to historical loss rates, as experienced
by financial instruments categorized by
the NRSRO ratings, the Banks should be
able to map their internal credit ratings
to the appropriate categories in
proposed Table 1.2 in a straightforward
manner. Because the proposed rule
would rely on a Bank’s internal credit
ratings and its mapping of those ratings
to the appropriate FHFA Credit Rating
category, it is possible that the CRPR for
a particular instrument or counterparty
determined under the proposed rule
would differ from the CRPR that is
assigned under the current regulations.
As discussed above, the proposed rule
would require the Banks to develop a
method for assigning a rating to a
counterparty or instrument and then
map that rating to an FHFA Credit
Rating category. The proposed rule
would not require a Bank to obtain
FHFA approval of either its method of
calculating the internal credit rating or
of its mapping of such ratings to the
FHFA Credit Ratings categories. Instead,
the proposed rule would specify that a
Bank’s rating method must involve an
evaluation of counterparty or asset risk
factors, which may include measures of
the counterparty’s scale, earnings,
liquidity, asset quality, and capital
adequacy, and could incorporate, but
not rely solely upon, credit ratings
available from an NRSRO or other
sources.
FHFA intends to rely on the
examination process to review the
Banks’ internal rating methodologies
and mapping processes. FHFA finds
that approach appropriate because the
Banks have been using internal rating
methodologies for some time, and any
adjustments to those methodologies that
FHFA may direct a Bank to undertake
in the future based on its supervisory
review would not likely have a material
effect on a Bank’s overall credit risk
capital requirement. That said, the
proposed rule also includes a provision
that would allow FHFA, on a case-bycase basis, to direct a Bank to change the
calculated credit risk capital charge for
any non-mortgage asset, off-balance
sheet item, or derivatives contract, as
necessary to remedy for any deficiency
that FHFA identifies with respect to a
Bank’s internal credit rating
methodology for such instruments.
Calculation of Proposed Table 1.2
CRPRs. To generate the CRPRs in
proposed Table 1.2, FHFA updated both
the data and the methodology that the
Finance Board had used to develop the
CRPRs in current Table 1.3. As a result,
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the requirements in proposed Table 1.2
differ from, and in most cases are higher
than, those in current Table 1.3. FHFA
derived the CRPRs in proposed Table
1.2 using a modified version of the Basel
internal ratings-based (IRB) credit risk
model.44
Both the previous Finance Board
approach underlying current Table 1.3
and the current Basel credit risk model
use historical default data to determine
a distribution of potential default rates,
and then identify a stress level of
default consistent with a selected
confidence level of the default rate
distribution. The prior Finance Board
approach differs from the Basel credit
risk model in the methods used to
identify both the mean and variance of
the default rate distribution. The prior
Finance Board approach relied on a
number of key assumptions arrived at
judgmentally, whereas the laterdeveloped Basel credit risk model relies
on a sound and internally consistent
theoretical construct. Thus, the Basel
credit risk model represents a more
sound and consistent approach than the
Finance Board approach.
The application of the Basel credit
risk model has two key data inputs—
probability of default (PD) and LGD,
grouped by segments that have
homogeneous risk characteristics. To
ensure consistent determinations of PDs
and LGDs for the CRPR calculation,
FHFA selected the PDs and LGDs from
historical cumulative corporate default
data. FHFA selected PDs from a sample
period of 1970–2005 and grouped them
by asset credit quality and maturity
categories.45 These data represent the
closest data in terms of risk
characteristics to the variety of
exposures held by the Banks that would
be subject to proposed Table 1.2.
The corporate default data that FHFA
used to set PDs came from Moody’s
Investor Service. The Moody’s data are
very similar to historically comparable
data provided by other rating agencies.
More recent default rate data were
available, but any data set that included
the period post 2006 would reflect the
abnormally high default rates that
occurred during the recent financial
crisis, and represent an exceptionally
stressful period. Including the more
recent data as an input to the Basel
credit risk model would result in
overstating required capital.46 The Basel
44 The FDIC used this model for calculating risk
weights in its advanced IRB approach for
addressing Risk-Weighted Assets for General Credit
Risk. See 12 CFR part 324, subpart E.
45 To generate current Table 1.3, the Finance
Board used similar data covering 1970–2000.
46 See An Explanatory Note on the Basel II IRB
Risk Weight Functions, July 2005, Bank for
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model requires use of ‘‘average’’ PDs
that reflect expected default rates under
normal business conditions and
mathematically converts the average
PDs to the equivalent of stressed PDs for
a given confidence level (selected at
99.9 percent) as applied to an assumed
normal distribution of default rates.
The Basel credit risk model requires
already stressed LGDs as inputs. FHFA
used the same LGD for all PD categories,
and arrived at a stressed LGD by
examining Moody’s recovery rate (one
minus LGD) data from 1982 through
2011. The recovery rates were measured
based on 30-day post-default trading
prices.47 The data indicated the highest
actual annual LGD was nearly 80
percent, but annual LGD rates reached
this level just twice in 30 years. A more
commonly observed stress level of LGD
is about 65 percent, which occurred
nearly nine times during that period.
Hence, FHFA selected an LGD of 65
percent as an input to the Basel credit
risk model.
The Basel II IRB application of the
Basel credit risk model uses a
confidence level or severity of the
imposed stress of 99.9 percent.48 FHFA
also concluded that 99.9 percent is an
appropriate confidence level, after
comparing the Basel model calculated
default rates, which are based on
stressed PD rates, to actual default
history. FHFA found that across all
ratings, the calculated default rates at
the 99.9 percent confidence level were
equal to or greater than annual issuerweighted (and withdrawal adjusted) 49
corporate default rates observed for all
years since the Great Depression, with
one exception.50 Thus, FHFA proposes
International Settlements, page 5. Dr. Donald R. van
Deventer (Chairman and CEO of Kamakura
Corporation, a financial risk management firm)
points to rapidly rising default rates following the
peak of the 2007–2010 financial crises and warns
that these high recent rates will not meet the
standards required for application of the credit
model under the new Basel Capital Accords in his
March 15, 2009 blog, ‘‘The Ratings Chernobyl.’’
Moreover, even if FHFA had included some
additional post-crisis years in the PD data set, the
resulting refinements to the capital CRPRs would
have been immaterial.
47 This represents a commonly used market-based
measure of recovery and was the only measure
readily available in literature.
48 The model adopted by the FDIC also uses a
99.9 percent confidence level.
49 Issuer-weighted refers to default rates based on
the proportion of issuers who defaulted, not the
proportion of dollars issued that default.
Withdrawal adjusted corrects the bias in the default
rate that would otherwise result from the fact that
some issuers are likely to disappear from the market
and effectively default through means other than
bankruptcy, e.g., being merged or acquired.
50 The exception was for actual default rates
observed in 1989 for double-A corporate bond
issuers. The actual default rate was 0.627 and the
calculated default rate was 0.570.
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to adopt the 99.9 percent confidence
level in implementing the credit risk
model. However, FHFA proposes to use
the version of the Basel model that
accounts for both expected and
unexpected loss, rather than the version
that accounts only for unexpected loss.
FHFA believes this choice is
conservative, but may be of little
consequence, as typically expected
losses for Bank held instruments that
are subject to Table 1.2 are minimal.
Updating the methodology behind
proposed Table 1.2 would result in
proposed CRPRs generally higher than
current charges. Specifically, based on
actual System-wide data for year-end
2016, the proposed new methodology
would raise required credit risk capital,
when compared to that calculated under
the current regulation for non-advance,
non-mortgage assets, from about 0.095
percent of assets to about 0.139 percent
of assets, or by 47 percent.51 The result
reflects more the shortcomings with the
prior methodology than any heightened
concern about the credit quality of the
assets or items subject to new Table 1.2.
Overall, the increase under the
proposed rule for the Bank System in
total required risk-based capital related
to credit risk charges for rated nonmortgage, non-advance assets would be
from $1.006 billion to about $1.476
billion as of December 31, 2016, an
increase of less than one percent of
permanent capital as of that date.
Proposed Table 1.3: Non-Rated
Assets. Proposed Table 1.3 would set
forth the CRPRs for non-rated assets,
which term would be defined to include
each of the categories of assets currently
included within Table 1.4 of the current
credit risk capital rule—cash, premises,
plant and equipment, and investments
list in 12 CFR 1265.3(e) and(f). The
proposed CRPRs for these items also
would remain unchanged from the
current regulation.52
Reduced Charges for non-mortgage
assets. The rule would carry over in
proposed § 1277.4(f)(2) the provisions
from the current regulation that allow a
Bank to substitute the CRPR associated
with collateral posted for, or an
unconditional guarantee of,
performance under the terms of any
non-mortgage asset. FHFA is not
51 FHFA based this comparison on data provided
in each Bank’s 10–K filed with the SEC. FHFA did
not include a Bank’s derivatives holdings or offbalance sheet items in this calculation. FHFA,
however, estimates that derivatives and off-balance
sheet items account for less than 2 percent of the
Banks’ total credit risk capital charges, and
therefore, believes the exclusion of these from the
comparison calculation does not materially affect
the conclusion drawn from the comparison.
52 See, Final Finance Board Capital Rule, 66 FR
at 8288–89.
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proposing any substantive changes to
the current provision, although, as
already discussed above, FHFA is
proposing to adopt different collateral
standards applicable to derivatives
contracts and to non-mortgage assets.53
Proposed § 1277.4(j) would carry over
the special provisions for calculation of
the capital charge on non-mortgage
assets hedged with certain credit
derivatives, if a Bank so chooses. The
proposed provision would not alter the
substance of the current provision as to
the criteria that must be met for the
special provision to apply or the method
of calculating the capital charges.
Generally, under the proposed
provision, a Bank would be able to
substitute the capital charge associated
with the credit derivatives (as calculated
under proposed § 1277.4(e)) for all or a
portion of the capital charge calculated
for the non-mortgage assets, if the
hedging relationships meet the criteria
in the proposed provision.54
Charge for Non-Mortgage-Related
Obligations of the Enterprises. Section
1277.4(f)(3) of the proposed rule would
apply a capital charge of zero to any
non-mortgage debt security or obligation
issued by either of the Enterprises, but
only if the Enterprise is operating with
capital support or other form of direct
financial assistance from the U.S.
Government that would enable the
Enterprise to repay those obligations.
The financial support currently
provided by the U.S. Department of the
Treasury under the Senior Preferred
Stock Purchase Agreements (PSPAs)
would be included in this provision.
FHFA believes a capital charge of zero
for such obligations of the Enterprises is
appropriate given the PSPAs and the
financial support they provide for the
Enterprises with regard to their ability
to cover their obligations. Section
1277.4(g)(2) of the proposed rule
provides the same treatment for
mortgage-related assets that are
guaranteed by the Enterprises. The
proposed rule would require that the
Banks treat obligations issued by other
GSEs, including debt obligations of the
Banks, the same as other investments in
calculating the capital charges.
53 As already noted, the proposed definition of
non-mortgage asset specifically excludes derivatives
contracts so the standards governing collateral
posted for, or unconditional guarantees of, nonmortgage assets under proposed § 1277.4(f)(2)
would not apply to derivatives contracts. The rule
sets forth the collateral and third-party guarantee
standards for derivatives contracts in proposed
§ 1277.4(e)(2), although the standards applicable to
third-party guarantors are basically the same under
both proposed § 1277.4(e)(2) and proposed
§ 1277.4(f)(2).
54 See Final Finance Board Capital Rule, 66 FR at
8292–94.
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Therefore, each Bank must determine an
FHFA Credit Rating for the GSE
obligations, based on its internal credit
ratings, and then use Table 1.2 to
calculate the appropriate credit risk
capital charge.
Credit Risk Charge for Residential
Mortgage Assets. Section 1277.4(g)(1) of
the proposed rule would establish a
capital charge for residential mortgage
assets that would be equal to the
amortized cost of the asset multiplied by
the CRPR assigned to the asset under
Table 1.4 of proposed § 1277.4(g). The
proposed rule would include an
exception to this approach for any
residential mortgage asset carried at fair
value where the Bank recognizes the
change in that asset’s fair value in
income. For these residential mortgage
assets, the capital charge would be
based on the fair value of the asset,
which would be multiplied by the
applicable CRPR. This fair value
provision is the same as that to be used
when calculating the CRPRs for assets,
items, and contracts subject to Table 1.2,
and represents a change from the
current regulation, which bases the
capital charge for on-balance sheet
assets on the asset’s book value.
Proposed Table 1.4 would replace
Table 1.2 from the current regulation,
and would set forth the CRPRs to be
used to calculate the capital charges for
three categories of internally rated
residential mortgage assets—residential
mortgages, residential mortgage
securities, and collateralized mortgage
obligations—each of which would be a
defined term under the proposed rule.
The current regulation assigns CRPRs
for these assets by use of a look-up table
that delineates the CRPRs by NRSRO
rating and residential mortgage asset
type. The proposed rule would retain
this approach, but would replace the
NRSRO rating categories with FHFA
Credit Ratings categories. Proposed
Table 1.4 would include seven
categories of FHFA Credit Ratings
labeled ‘‘FHFA RMA 1 through 7,’’
which categories would apply to
residential mortgages and residential
mortgage securities. Table 1.4 would
include seven other categories, which
would be labeled ‘‘FHFA CMO 1
through 7,’’ which categories would
apply only to collateralized mortgage
obligations. As described previously,
the term ‘‘residential mortgage
securities’’ would include only those
instruments that represent an undivided
ownership interest in a pool of
residential mortgage loans, i.e.,
instruments that are structured as passthrough securities. The term
‘‘collateralized mortgage obligation’’
would include those mortgage-related
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instruments that are structured as
something other than a pass-through
security, i.e., an instrument that is
backed or collateralized by residential
mortgages or residential mortgage
securities, but that include two or more
tranches or classes. FHFA also is
proposing to replace the subheading
within the existing Table 1.2 that refers
to ‘‘subordinated classes of mortgage
assets’’ with the newly defined term
‘‘collateralized mortgage obligations.’’
The intent of this revision is to avoid
any ambiguity about the meaning of the
term ‘‘subordinated classes,’’ as used in
the current regulation. Under the
proposed table, collateralized mortgage
obligations in the two highest FHFA
CMO credit rating categories would be
assigned the same CRPR as mortgagerelated securities in the two highest
FHFA RMA categories. Collateralized
mortgage obligations in lower FHFA
CMO categories would be assigned
higher CRPRs than those for mortgagerelated securities, which reflects the
different historical loss experience
between the two types of instruments.
Proposed Table 1.4 would carry over
all of the CRPRs from the existing
Finance Board regulations without
change. As under the current regulation,
the credit risk associated with assets
placed into proposed FHFA Credit
Rating categories 1 through 4 in most
cases would likely correspond to the
credit risk that is associated with assets
having an investment grade rating from
an NRSRO. Thus, instruments assigned
to the categories of FHFA RMA 1 or
FHFA CMO 1 would suggest the highest
credit quality and the lowest level of
credit risk; categories FHFA RMA 2 or
FHFA CMO 2 would suggest high
quality and a very low level of credit
risk; and categories FHFA RMA 3 or
FHFA CMO 3 would suggest an uppermedium level of credit quality and low
credit risk. Categories FHFA RMA 4 or
FHFA CMO 4 would suggest medium
quality and moderate credit risk. The
proposed rule provides that all assets
assigned to these four categories must
have no greater level of credit risk than
associated with investments that qualify
as ‘‘AMA Investment Grade’’ under
FHFA’s AMA regulation,55 in the case of
RMAs, or as ‘‘investment quality’’ under
FHFA’s investment regulation,56 in the
case of CMOs. FHFA RMA or CMO
categories of 5 through 7 would
correspond to instruments that do not
qualify as ‘‘AMA Investment Grade’’ or
‘‘investment quality’’ under FHFA’s
AMA or investment regulations, with
55 12
56 12
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categories 6 and 7 having increasingly
greater risk than category 5 of Table 1.4.
The proposed rule, however, would
differ from the current regulation by
requiring the Bank to assign each of its
mortgage-related assets to the
appropriate FHFA Credit Rating
category based on the Bank’s internal
calculation of a credit rating for the
asset, rather than on its NRSRO rating.
The proposed rule follows the same
approach as would be required for nonmortgage assets, off-balance sheet items,
and derivatives contracts under Table
1.2, which requires that the Bank
develop a methodology to assign an
internal credit rating to each of its
mortgage-related assets, and then align
its various internal credit ratings to the
appropriate FHFA Credit Rating
categories in proposed Table 1.4. The
Bank’s methodology, as applied to
residential mortgages, must involve an
evaluation of the underlying loans and
any credit enhancements or guarantees,
as well as an assessment of the
creditworthiness of the providers of any
such enhancements or guarantees. As
applied to residential mortgage
securities and collateralized mortgage
obligations, the Bank’s methodology
must involve an evaluation of the
underlying mortgage collateral, the
structure of the security, and any credit
enhancements or guarantees, including
the creditworthiness of the providers of
such enhancements or guarantees. The
Banks’ methodologies may incorporate
NRSRO credit ratings, provided that
they do not rely solely on those ratings.
Given that both proposed Table 1.4 and
current Table 1.2 have the same
structure and are based on historical
loss rates, as experienced by financial
instruments categorized by the NRSRO
rating, the Banks should be able to map
their internal credit ratings to proposed
Table 1.4 in a straightforward manner.
Because the Bank’s internal credit
ratings will determine the appropriate
FHFA Credit Rating category for its
residential mortgage assets, it is possible
that the internally generated rating will
differ from the NRSRO rating for a
particular instrument, and that the
CRPR assigned under the proposed rule
would differ from that assigned under
the current Finance Board regulations.
As is the case with respect to the
methodology to be used in assigning
internal credit ratings to the various
FHFA Credit Ratings categories of Table
1.2, the proposed rule would not require
a Bank to obtain prior FHFA approval
of either its method of calculating the
internal credit rating or of its mapping
of such ratings to the FHFA Credit
Rating categories. FHFA intends to rely
on the examination process to review
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the Banks’ internal rating methodologies
and mapping processes for these assets.
As noted previously, the Banks have
been using internal rating
methodologies for some time, and any
adjustments to those methodologies that
FHFA may direct a Bank to undertake
in the future based on its supervisory
review would not likely have a material
effect on a Bank’s overall credit risk
capital requirement. Nonetheless, the
proposed rule would reserve to FHFA
the right to require a Bank to change the
calculated capital charges for residential
mortgage assets to account for any
deficiencies identified by FHFA with a
Bank’s internal residential mortgage
asset credit rating methodology, which
is identical to the provision relating to
assets covered by Table 1.2.
The proposed rule includes two
exceptions that provide for a capital
charge of zero for two categories of
mortgage assets. First, the proposed rule
would apply a capital charge of zero to
any residential mortgage, residential
mortgage security, or collateralized
mortgage obligation (or any portion
thereof) that is guaranteed as to the
payment of principal and interest by
one of the Enterprises, but only if the
Enterprise is operating with capital
support or other form of direct financial
assistance from the United States
government that would enable the
Enterprise to cover its guarantee. The
financial support currently provided by
the United States Department of the
Treasury under the Senior Preferred
Stock Purchase Agreements qualifies
under this provision. This exception is
identical in substance to proposed
§ 1277.4(f)(3), which pertains to nonmortgage-related debt instruments
issued by an Enterprise. Second, the
proposed rule would apply a capital
charge of zero to any residential
mortgage, residential mortgage security,
or collateralized mortgage obligation
that is guaranteed or insured by a
United States government agency or
department and is backed by the full
faith and credit of the United States.
Frequency of Calculation. FHFA
proposes to reduce the frequency with
which a Bank would have to calculate
its credit risk capital charges from
monthly to quarterly. Thus, proposed
§ 1277.4(k) would require each Bank to
calculate its credit risk capital
requirement at least quarterly based on
assets, off-balance sheet items, and
derivatives contracts held as of the last
business day of the immediately
preceding calendar quarter, unless
otherwise instructed by FHFA. The
Bank would be expected to meet the
calculated capital charge throughout the
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quarter.57 In the past, a Bank’s total
credit risk capital charge has not varied
so greatly that the change in frequency
should raise any safety or soundness
concerns. FHFA, therefore, proposes to
reduce the operational burdens on the
Banks by reducing the frequency of
calculation. The proposed rule would
reserve FHFA’s right to require more
frequent calculations if it determined
that particular circumstances warranted
such a change.
Proposed § 1277.5—Market Risk Capital
Requirement
FHFA proposes to readopt the
existing market risk capital
requirements with only the minor
revisions described below.58 The
proposed rule would include a new
provision, § 1277.5(d)(2), which would
confirm that any market risk model or
material adjustments to a model that
FHFA or the Finance Board had
previously approved remain valid
unless FHFA affirmatively amends or
revokes the prior approval. Section
1277.5(e) of the proposed rule also
would change the frequency of a Bank’s
calculation date of its market risk
capital requirement from monthly to
quarterly so that it would correspond to
the frequency of calculation for the
Bank’s credit risk capital requirement.
Thus, each Bank would calculate its
market risk capital requirement at least
quarterly, based on assets held as of the
last business day of the immediately
preceding calendar quarter, unless
otherwise instructed by FHFA. The
Bank would be expected to meet the
calculated capital charge throughout the
quarter.
FHFA proposes to repeal the
additional capital requirement that
applies whenever a Bank’s market value
of capital is less than 85 percent of its
book value of capital (85 Percent Test),
which is located at 12 CFR 932.5 of the
Finance Board regulations. This
provision has become superfluous
because FHFA can monitor a Bank’s
market value of capital and has other
authority to impose additional capital
requirements on a Bank if necessary.59
57 For example, early in the second calendar-year
quarter, a Bank would need to calculate its credit
risk capital charge based on assets, off-balance sheet
items, and derivatives contracts held as of the last
business day of the first calendar-year quarter. The
capital charge so calculated would apply for the
whole of the second calendar-year quarter.
58 FHFA believes the overall approach to market
risk adopted by the Finance Board remains valid
and continues to provide a reasonable estimate of
a Bank’s market risk exposure. See Final Finance
Board Bank Capital Rule, 66 FR at 8294–99.
59 See 12 U.S.C. 4612(c), (d), and (e); 12 CFR part
1225. The Director of FHFA has the authority to
adopt regulations establishing a higher minimum
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Hence, FHFA has no reason to retain the
provision in the rule. Furthermore, as
applied under the current regulation,
the 85 Percent Test has proven to be
both very pro-cyclical (requiring
additional capital during a market
downturn, when the Bank is least able
to raise capital) and inflexible. FHFA
can more effectively address a Bank
under stress by considering a broader
set of facts and measures prior to
making any determination as to when
and how much additional capital
should be required. FHFA also has
additional authority to deal with Banks
that become undercapitalized, which
the Finance Board did not possess when
it adopted the 85 Percent Test.60
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Proposed § 1277.6—Operational Risk
Capital Requirement
FHFA proposes to carry over the
current approach set forth in § 932.6 of
the Finance Board regulations for
calculating a Bank’s operational risk
capital requirement. As a consequence,
proposed § 1277.6 provides that a
Bank’s operational risk capital
requirement shall equal 30 percent of
the sum of the Bank’s credit risk and
market capital requirements. The
Finance Board originally based the
requirement on a statutory requirement
applicable to the Enterprises, noting that
given the difficulties of empirically
measuring operational risk, it was
reasonable to rely on the statutorily
mandated provisions for guidance.61
Congress has since repealed the specific
operational risk capital provision
related to the Enterprises and replaced
it with a provision giving the Director of
FHFA broad authority to establish riskbased capital charges that ensure the
Enterprises operate in a safe and sound
manner and maintain sufficient capital
and reserves against their risks.62
Nevertheless, FHFA believes that the 30
percent operational risk charge has
provided a reasonable capital cushion
for the Banks against operational risk
losses and has not proven excessively
burdensome.
FHFA also proposes to carry forward
the current provisions in the regulation
that allows a Bank to reduce the
operational risk charge to as low as 10
percent of the combined market and
credit risk charges if the Bank presents
capital limit for the Banks, if necessary to ensure
that they operate in safe and sound manner, as well
as to order temporary increases in the minimum
capital level for a particular Bank, and by order or
regulation to establish such capital or reserve
requirements with respect to any product or activity
of a Bank.
60 See 12 U.S.C. 4614, 4615, 4616, and 4617.
61 See Final Finance Board Bank Capital Rule, 66
FR at 8299 (citing 12 U.S.C. 4611(c) (2000)).
62 See 12 U.S.C. 4611(a).
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an alternative methodology for assessing
or quantifying operational risk that
meets with FHFA’s approval. The
proposed rule also would retain the
provision that allows a Bank, subject to
FHFA approval, to reduce the
operational risk charge to as low as 10
percent if the Bank obtains insurance
against such risk. However, to be
consistent with the Dodd-Frank Act, the
proposed rule would replace the current
requirement that any such insurer have
a credit rating from an NRSRO no lower
than the second highest investment
category with a requirement that FHFA
find the insurance provider acceptable.
Proposed § 1277.7—Limits on
Unsecured Extensions of Credit;
Reporting Requirements
With the exception of the revisions
described below, FHFA proposes to
carry over the substance of the current
Finance Board regulations pertaining to
a Bank’s unsecured extensions of credit
to a single counterparty or group of
affiliated counterparties. Section 1277.7
of the proposed rule would include
most of the provisions now found at 12
CFR 932.9 of the Finance Board
regulations. The principal revision to
the existing regulation would be to
determine unsecured credit limits based
on a Bank’s internal credit rating for a
particular counterparty and the
corresponding FHFA Credit Rating
category for such exposures, rather than
on NRSRO credit ratings. This change
would bring the rule into compliance
with the Dodd-Frank Act mandate that
agencies replace regulatory provisions
that rely on NRSRO credit ratings with
alternative standards to assess credit
quality.
FHFA Credit Ratings. Under the
proposed rule, a Bank would apply the
unsecured credit limits based on the
same FHFA Credit Ratings categories
used in proposed Table 1.2 for
determining CRPRs for non-mortgage
assets, off-balance sheet items, and
derivatives contracts. Thus, a Bank
would develop a methodology for
assigning an internal rating for each
counterparty or obligation, and would
align its various credit ratings to the
appropriate FHFA Credit Rating
categories for determining the
applicable unsecured credit limit. The
proposed amendments also would
remove from the current regulation all
distinctions between short- and longterm ratings. The Finance Board
regulations distinguished between those
ratings because the regulations relied on
NRSRO ratings, and those distinctions
have proven to create certain
complications in applying and
monitoring the regulation. Therefore,
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under the proposed rule, a Bank would
determine a single rating for a specific
counterparty or obligation when
applying the unsecured credit limits,
regardless of the term of the underlying
unsecured credit obligations. Because
the proposed rule would require a Bank
to use the same methodology to arrive
at an internal credit rating, and to align
to the FHFA Credit Rating categories as
used under Table 1.2, the end result
would be that a Bank would use the
same FHFA Credit Rating category for a
specific counterparty or obligation in
calculating both the credit risk capital
charge under proposed § 1277.4 and the
unsecured credit limit under proposed
§ 1277.7.
Limits on Exposure to a Single
Counterparty. As under the current
regulation, the general limit on
unsecured credit to a single
counterparty would be calculated under
the proposed rule by multiplying a
percentage maximum capital exposure
limit associated with a particular FHFA
Credit Rating category by the lesser of
either the Bank’s total capital, or the
counterparty’s Tier 1 capital, or total
capital, in each case as defined by the
counterparty’s primary regulator. In
cases where the counterparty does not
have a regulatory Tier 1 capital or total
capital measure, the Bank would
determine a similar capital measure to
use, as under the current regulations.
Proposed Table 1 to § 1277.7 sets forth
the applicable maximum capital
exposure limits used to calculate the
relevant unsecured credit limit. These
limits are: (i) 15 percent for a
counterparty determined to have an
FHFA 1 rating; (ii) 14 percent for a
counterparty with an FHFA 2 rating;
(iii) nine percent for a counterparty with
an FHFA 3 rating; (iv) three percent for
a counterparty with an FHFA 4 rating;
and (v) one percent for any counterparty
rated FHFA 5 or lower. The numerical
limits are the same as those in the
current regulation, with the differences
in proposed Table 1 to § 1277.7 being
the use of the FHFA Credit Rating
categories in place of the NRSRO
ratings.63 As part of its oversight of the
Banks, FHFA monitors the role of the
Banks in the unsecured credit markets
and may propose additional
amendments to these exposure limits if
circumstances warrant.
As under the current regulation, the
general unsecured credit limit, i.e., the
63 The Finance Board explained its reasons for
setting these maximum capital exposure limits
when it proposed the current unsecured credit
regulation. See Proposed Rule: Unsecured Credit
Limits for the Federal Home Loan Banks, 66 FR
41474, 41478–80 (Aug. 8, 2001) (hereinafter,
Finance Board Proposed Unsecured Credit Rule).
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appropriate percentage of the lesser of
the Bank or counterparty’s capital,
would apply to all extensions of
unsecured credit to a single
counterparty that arise from a Bank’s
on- and off-balance sheet and
derivatives transactions, other than sales
of federal funds with a maturity of one
day or less and sales of federal funds
subject to continuing contract.64
Similarly, the proposed rule would
retain a separate overall limit, which
would apply to all unsecured extensions
of unsecured credit to a single
counterparty that arise from a Bank’s
on- and off-balance sheet and
derivatives transactions, but which
would include sales of federal funds
with a maturity of one day or less and
sales of federal funds that are subject to
a continuing contract. The amount of
the overall limit would remain
unchanged at twice the amount of the
general limit.65
The proposed rule also would retain,
with some revisions, the approach used
by the current regulation with respect to
NRSRO rating downgrades of a
counterparty or obligation. The
proposed rule would not use the term
‘‘downgrade’’ because that term is more
appropriately associated with an action
taken by a third-party ratings
organization, such as an NRSRO.
Instead, the proposed rule would
provide that if a Bank revises its internal
credit rating for a particular
counterparty or obligation, it shall
thereafter assign the counterparty or
obligation to the appropriate FHFA
Credit Rating category based on that
revised internal rating. The proposed
rule further provides that if the revised
rating results in a lower FHFA Credit
Rating category, then any subsequent
extension of unsecured credit must
comply with the new limit calculated
using the lower credit rating. The
proposed rule makes clear, however,
that a Bank need not unwind any
existing unsecured credit exposures as a
result of the lower limit, provided they
64 The proposed rule would carry over the
definition of ‘‘sales of federal funds subject to a
continuing contract’’ from § 930.1 without change.
65 The Finance Board explained its reasons for
adopting a special limit for sales of federal funds
with a maturity of one day or less and sales of
federal funds subject to continuing contract when
it adopted the current unsecured credit regulation.
The Finance Board stated that Banks have financial
incentives to lend into the federal funds markets,
i.e., the GSE funding advantage and fewer
permissible investments than are available to
commercial banks, and that permitting such lending
without limits would be imprudent. See Final Rule:
Unsecured Credit Limits for the Federal Home Loan
Banks, 66 FR 66718, 66720–21 (Dec. 27, 2001)
(hereinafter, Finance Board Final Unsecured Credit
Rule). See also, Finance Board Proposed Unsecured
Credit Rule, 66 FR at 41476.
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were originated in compliance with the
unsecured credit limits in effect at that
time. The proposed rule would continue
to consider any renewal of an existing
unsecured extension of credit, including
a decision not to terminate a sale of
federal funds subject to a continuing
contract, as a new transaction, which
would be subject to the recalculated
limit.
Affiliated Counterparties. The
proposed rule would readopt without
substantive change the current
provision limiting a Bank’s aggregate
unsecured credit exposure to groups of
affiliated counterparties. Thus, in
addition to being subject to the limits on
individual counterparties, a Bank’s
unsecured credit exposure from all
sources, including federal funds
transactions, to all affiliated
counterparties under the proposed rule
could not exceed 30 percent of the
Bank’s total capital. The proposed rule
would also readopt the current
definition of affiliated counterparty.
State, Local, or Tribal Government
Obligations. The proposed rule also
carries over without substantive change
the special provision in the current
regulation applicable to calculating
limits for certain unsecured obligations
issued by state, local, or tribal
governmental agencies. This provision,
which would be located at
§ 1277.7(a)(3), would allow the Banks to
calculate the limit for these covered
obligations based on Bank capital—
rather than on the lesser of the Bank or
counterparty’s capital—and the rating
assigned to the particular obligation. As
under the current regulation, all
obligations from the same issuer and
having the same assigned rating may not
exceed the limit associated with that
rating, and the exposure from all
obligations from that issuer cannot
exceed the limit calculated for the
highest rated obligation that a Bank
actually has purchased. As explained by
the Finance Board when it adopted the
current regulation, this special
provision reflected the fact that the
state, local, or tribal agencies at issue
often had low capital, their obligations
had some backing from collateral but
were not always fully secured in the
traditional sense, and the Banks’
purchase of these obligations had a
mission nexus.66
GSE Provision. FHFA proposes to
amend the special limit that the current
regulation applies to GSEs. Specifically,
proposed § 1277.7(c) would apply a
special limit only if the GSE
counterparty were operating with
66 See Finance Board Final Unsecured Credit
Rule, 66 FR at 66723–24.
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capital support or other form of direct
financial assistance from the U.S.
government that would enable the GSE
to repay its obligations. In such a case,
the proposed rule would set the Bank’s
unsecured credit limit, including all
federal funds transactions, at 100
percent of the Bank’s capital. That limit
is the same as the one that applies to the
Banks’ exposures to the Enterprises, as
calculated under the current regulation
pursuant to FHFA Regulatory
Interpretation 2010–RI–05, which the
proposed rule would codify into the
regulations.67 A Bank would calculate
its unsecured credit limit for any other
GSE (other than another Bank) that does
not meet these criteria the same way
that it would for any other
counterparty.68
Reporting. Proposed § 1277.7(e)
would carry over the provisions from
the current regulation that require a
Bank to report certain unsecured
exposures and violations of the
unsecured credit limits. FHFA would
expect a Bank to make these reports in
accordance with any instructions in
FHFA Data Reporting Manual or in
applicable related guidance issued by
FHFA.69
Calculation of Credit Exposures.
Proposed § 1277.7(f) would establish the
requirements for measuring a Bank’s
unsecured extensions of credit. For onbalance sheet transactions, other than
derivative transactions, the rule would
provide that the unsecured extension of
credit would equal the amortized cost of
the transaction plus net payments due
the Bank, subject to an exception for
those transactions or obligations that the
Bank carries at fair value where any
change in fair value is recognized in
income. For these items, the unsecured
extension of credit would equal the fair
value of the item. This approach is
similar to the approach applied under
proposed § 1277.4 for calculating credit
risk capital charges for non-mortgage
assets. FHFA believes that this approach
best captures the amount that a Bank
has at risk should a counterparty default
67 See https://www.fhfa.gov/
SupervisionRegulation/LegalDocuments/
Documents/Regulatory-Interpretations/2010-RI05.pdf.
68 This approach for GSEs is similar to the
approach adopted jointly by FHFA and other
prudential regulators in the margin and capital
rules for uncleared swaps. In the margin and capital
rules, agencies provide different treatment for
collateral issued by a GSE operating with explicit
United States government support from that issued
by other GSEs. See, Final Rule: Margin and Capital
Requirements for Covered Swap Entities, 80 FR
74840, 74870–71 (Nov. 30, 2015).
69 See, Advisory Bulletin: FHLBank Unsecured
Credit Exposure Reporting, AB 2015–04 (July 1,
2015).
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Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
on any unsecured credit extended by
the Bank.
For non-cleared derivatives
transactions, the total unsecured credit
exposure would equal the Bank’s
current and future potential credit
exposures calculated in accordance with
the proposed credit risk capital
provision, plus the amount of any
collateral posted by the Bank that
exceeds the amount the Bank owes to its
counterparty, but only to the extent
such excess posted collateral is not held
by a third-party custodian in accordance
with FHFA’s margin and capital rule for
uncleared swaps.70 Similar to
determining a credit exposure for a
derivatives contract under the credit
risk capital provision, the Bank would
not count as an unsecured extension of
credit any portion of the current and
future potential credit exposure that is
covered by collateral posted by a
counterparty and held by or on behalf
of the Bank, so long as the collateral is
held in accordance with the
requirements in proposed § 1277.4(e)(2)
and (e)(3).
For off-balance sheet items, the
unsecured extension of credit would
equal the credit equivalent amount for
that item, calculated in accordance with
proposed § 1277.4(g). As with the
current regulation, proposed § 1277.7(f)
also provides that any debt obligation or
debt security (other than a mortgagebacked or other asset-backed security or
acquired member asset) shall be
considered an unsecured extension of
credit. Also consistent with the current
regulation, this provision provides an
exception for any amount owed to the
Bank under a debt obligation or debt
security for which the Bank holds
collateral consistent with the
requirements of proposed
§ 1277.4(f)(2)(ii) or any other amount
that FHFA determines on a case-by-case
basis should not be considered an
unsecured extension of credit.
Exceptions to the unsecured credit
limits. Section 1277.7(g) of the proposed
rule would include four separate
exceptions to the regulatory limits on
extensions of unsecured credit. Two of
these exceptions, pertaining to
obligations of or guaranteed by the U.S.
and to extensions of credit from one
Bank to another Bank, are being carried
over without change from the current
Finance Board regulations. The
proposed rule would add a third
70 See 12 CFR 1221.7(c) and (d). Thus, the amount
of collateral that is posted by a Bank and is
segregated with a third-party custodian consistent
with the requirements of the swaps margin and
capital rule would not be included in the Bank’s
unsecured credit exposure arising from a particular
derivatives contract.
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exception, which would apply to any
derivatives transaction accepted for
clearing by a derivatives clearing
organization. FHFA proposes to exclude
cleared derivatives transactions from the
rule given the Dodd-Frank Act mandates
that parties clear certain standardized
derivatives transactions. When a Bank
submits a derivatives contract for
clearing, the derivatives clearing
organization becomes the counterparty
to the contract. Given that a limited
number of derivatives clearing
organizations, or in some cases only a
single organization, may clear specific
classes of contracts, imposing the
unsecured limits on cleared derivatives
contracts may make it difficult for the
Banks to fulfill the legal requirement to
clear these contracts and frustrate the
intent of the Dodd-Frank Act. In
addition, the derivatives clearing
organizations are subject to
comprehensive federal regulatory
oversight including regulations
designed to protect the customers that
use the clearing services. Even though
FHFA proposes to exclude cleared
derivatives contracts from coverage
under this rule, it would expect Banks
to develop internal policies to address
exposures to specific clearing
organizations that take account of the
Bank’s specific derivatives activity and
clearing options. The proposed rule
would add a fourth exception, which
would incorporate the substance of a
Finance Board regulatory interpretation,
2002–RI–05, pertaining to certain
obligations issued by state housing
finance agencies. Under that provision,
a bond issued by a state housing finance
agency would not be subject to the
unsecured credit limits if the Bank
documents that the obligation
principally secured by high-quality
mortgage loans or mortgage-backed
securities or by payments on such
assets, is not a subordinated tranche of
a bond issuance, and the Bank has
determined that it has an internal credit
rating of no lower than FHFA 2.
Proposed § 1277.8—Reporting
Requirements
Proposed § 1277.8 provides that each
Bank shall report information related to
capital or other matters addressed by
part 1277 in accordance with
instructions provided in the Data
Reporting Manual issued by FHFA, as
amended from time to time.
IV. Considerations of Differences
Between the Banks and the Enterprises
When promulgating regulations
relating to the Banks, section 1313(f) of
the Federal Housing Enterprises
Financial Safety and Soundness Act of
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30789
1992 requires the Director of FHFA
(Director) to consider the differences
between the Banks and the Enterprises
with respect to the Banks’ cooperative
ownership structure; mission of
providing liquidity to members;
affordable housing and community
development mission; capital structure;
and joint and several liability.71 FHFA,
in preparing this proposed rule,
considered the differences between the
Banks and the Enterprises as they relate
to the above factors. FHFA requests
comments from the public about
whether these differences should result
in any revisions to the proposed rule.
V. Paperwork Reduction Act
The proposed rule amendments do
not contain any collections of
information pursuant to the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
et seq.). Therefore, FHFA has not
submitted any information to the Office
of Management and Budget for review.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires that a
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified the regulation will not have
a significant economic impact on a
substantial number of small entities. 5
U.S.C. 605(b). FHFA has considered the
impact of the proposed rule under the
Regulatory Flexibility Act, and certifies
that the proposed rule, if adopted as a
final rule, would not have a significant
economic impact on a substantial
number of small entities because the
proposed rule is applicable only to the
Banks, which are not small entities for
purposes of the Regulatory Flexibility
Act.
List of Subjects
12 CFR Parts 930 and 932
Capital, Credit, Federal home loan
banks, Investments, Reporting and
recordkeeping requirements.
12 CFR Part 1277
Capital, Credit, Federal home loan
banks, Investments, Reporting and
recordkeeping requirements.
Accordingly, for reasons stated in the
Preamble, and under the authority of 12
U.S.C. 1426, 1436(a), 1440, 1443, 1446,
4511, 4513, 4514, 4526, 4612, FHFA
71 See
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Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
proposes to amend subchapter E of
chapter IX and subchapter D of chapter
XII of title 12 of the Code of Federal
Regulations as follows:
CHAPTER IX—FEDERAL HOUSING
FINANCE BOARD
Subchapter E—[Removed and Reserved]
1. Subchapter E, consisting of parts
930 and 932 is removed and reserved.
■
CHAPTER XII—FEDERAL HOUSING
FINANCE AGENCY
Subchapter D—Federal Home Loan Banks
PART 1277—FEDERAL HOME LOAN
BANK CAPITAL REQUIREMENTS,
CAPITAL STOCK AND CAPITAL
PLANS
2. The authority citation for part 1277
continues to read as follows:
■
Authority: 12 U.S.C. 1426, 1436(a), 1440,
1443, 1446, 4511, 4513, 4514, 4526, and
4612.
Subpart A—Definitions
3. Amend § 1277.1 by adding in
alphabetical order definitions for
‘‘affiliated counterparty,’’ ‘‘charges
against the capital of a Bank,’’
‘‘commitment to make an advance (or
acquire a loan) subject to certain
drawdown,’’ ‘‘collateralized mortgage
obligation,’’ ‘‘credit derivative,’’ ‘‘credit
risk,’’ ‘‘derivatives clearing
organization,’’ ‘‘derivatives contract,’’
‘‘eligible master netting agreement,’’
‘‘exchange rate contracts,’’ ‘‘Government
Sponsored Enterprise,’’ ‘‘interest rate
contracts,’’ ‘‘market risk,’’ ‘‘market value
at risk,’’ ‘‘non-mortgage asset,’’ ‘‘nonrated asset,’’ ‘‘operational risk,’’
‘‘residential mortgage,’’ ‘‘residential
mortgage security,’’ ‘‘sales of federal
funds subject to a continuing contract,’’
and ‘‘total assets’’ to read as follows:
■
§ 1277.1
Definitions.
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*
*
*
*
*
Affiliated counterparty means a
counterparty of a Bank that controls, is
controlled by, or is under common
control with another counterparty of the
Bank. For the purposes of this definition
only, direct or indirect ownership
(including beneficial ownership) of
more than 50 percent of the voting
securities or voting interests of an entity
constitutes control.
Charges against the capital of the
Bank means an other than temporary
decline in the Bank’s total equity that
causes the value of total equity to fall
below the Bank’s aggregate capital stock
amount.
*
*
*
*
*
Collateralized mortgage obligation
means any instrument backed or
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collateralized by residential mortgages
or residential mortgage securities, that
includes two or more tranches or
classes, or is otherwise structured in any
manner other than as a pass-through
security.
Commitment to make an advance (or
acquire a loan) subject to certain
drawdown means a legally binding
agreement that commits the Bank to
make an advance or acquire a loan, at
or by a specified future date.
*
*
*
*
*
Credit derivative means a derivatives
contract that transfers credit risk.
Credit risk means the risk that the
market value, or estimated fair value if
market value is not available, of an
obligation will decline as a result of
deterioration in creditworthiness.
Derivatives clearing organization
means an organization that clears
derivatives contracts and is registered
with the Commodity Futures Trading
Commission as a derivatives clearing
organization pursuant to section 5b(a) of
the Commodity Exchange Act of 1936 (7
U.S.C. 7a–1(a)), or that the Commodity
Futures Trading Commission has
exempted from registration by rule or
order pursuant to section 5b(h) of the
Commodity Exchange Act of 1936 (7
U.S.C. 7a–1(h)), or is registered with the
SEC as a clearing agency pursuant to
section 17A of the 1934 Act (15 U.S.C.
78q–1), or that the SEC has exempted
from registration as a clearing agency
under section 17A of the 1934 Act (15
U.S.C. 78q–1).
Derivatives contract means generally a
financial contract the value of which is
derived from the values of one or more
underlying assets, reference rates, or
indices of asset values, or credit-related
events. Derivatives contracts include
interest rate, foreign exchange rate,
equity, precious metals, commodity,
and credit contracts, and any other
instruments that pose similar risks.
Eligible master netting agreement has
the same meaning as set forth in
§ 1221.2 of this chapter.
Exchange rate contracts include
cross-currency interest-rate swaps,
forward foreign exchange rate contracts,
currency options purchased, and any
similar instruments that give rise to
similar risks.
*
*
*
*
*
Government Sponsored Enterprise, or
GSE, means a United States
Government-sponsored agency or
instrumentality originally established or
chartered to serve public purposes
specified by the United States Congress,
but whose obligations are not
obligations of the United States and are
not guaranteed by the United States.
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Interest rate contracts include single
currency interest-rate swaps, basis
swaps, forward rate agreements,
interest-rate options, and any similar
instrument that gives rise to similar
risks, including when-issued securities.
Market risk means the risk that the
market value, or estimated fair value if
market value is not available, of a
Bank’s portfolio will decline as a result
of changes in interest rates, foreign
exchange rates, or equity or commodity
prices.
Market value at risk is the loss in the
market value of a Bank’s portfolio
measured from a base line case, where
the loss is estimated in accordance with
§ 1277.5 of this part.
*
*
*
*
*
Non-mortgage asset means an asset
held by a Bank other than an advance,
a non-rated asset, a residential mortgage,
a residential mortgage security, a
collateralized mortgage obligation, or a
derivatives contract.
Non-rated asset means a Bank’s cash,
premises, plant and equipment, and
investments authorized pursuant to
§ 1265.3(e) and (f).
Operational risk means the risk of loss
resulting from inadequate or failed
internal processes, people and systems,
or from external events.
*
*
*
*
*
Residential mortgage means a loan
secured by a residential structure that
contains one-to-four dwelling units,
regardless of whether the structure is
attached to real property. The term
encompasses, among other things, loans
secured by individual condominium or
cooperative units and manufactured
housing, whether or not the
manufactured housing is considered
real property under state law, and
participation interests in such loans.
Residential mortgage security means
any instrument representing an
undivided interest in a pool of
residential mortgages.
Sales of federal funds subject to a
continuing contract means an overnight
federal funds loan that is automatically
renewed each day unless terminated by
either the lender or the borrower.
Total assets mean the total assets of a
Bank, as determined in accordance with
GAAP.
*
*
*
*
*
■ 4. Add Subpart B, consisting of
§§ 1277.2 through 1277.8 to read as
follows:
Subpart B—Bank Capital
Requirements
Sec.
1277.2
1277.3
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Risk-based capital requirement.
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1277.4 Credit risk capital requirement.
1277.5 Market risk capital requirement.
1277.6 Operational risk capital
requirement.
1277.7 Limits on unsecured extensions of
credit; reporting requirements.
1277.8 Reporting requirements.
§ 1277.2
Total capital requirement.
Each Bank shall maintain at all times:
(a) Total capital in an amount at least
equal to 4.0 percent of the Bank’s total
assets; and
(b) A leverage ratio of total capital to
total assets of at least 5.0 percent of the
Bank’s total assets. For purposes of
determining this leverage ratio, total
capital shall be computed by
multiplying the Bank’s permanent
capital by 1.5 and adding to this product
all other components of total capital.
§ 1277.3
Risk-based capital requirement.
Each Bank shall maintain at all times
permanent capital in an amount at least
equal to the sum of its credit risk capital
requirement, its market risk capital
requirement, and its operational risk
capital requirement, calculated in
accordance with §§ 1277.4, 1277.5, and
1277.6 of this part, respectively.
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§ 1277.4
Credit risk capital requirement.
(a) General requirement. Each Bank’s
credit risk capital requirement shall
equal the sum of the Bank’s individual
credit risk capital charges for all
advances, residential mortgage assets,
non-mortgage assets, non-rated assets,
off-balance sheet items, and derivatives
contracts, as calculated in accordance
with this section.
(b) Credit risk capital charge for
residential mortgage assets. The credit
risk capital charge for residential
mortgages, residential mortgage
securities, and collateralized mortgage
obligations shall be determined as set
forth in paragraph (g) of this section.
(c) Credit risk capital charge for
advances, non-mortgage assets, and
non-rated assets. Except as provided in
paragraph (j) of this section, each Bank’s
credit risk capital charge for advances,
non-mortgage assets, and non-rated
assets shall be equal to the amortized
cost of the asset multiplied by the credit
risk percentage requirement assigned to
that asset pursuant to paragraphs (f)(1)
or (f)(2) of this section. For any such
asset carried at fair value where any
change in fair value is recognized in the
Bank’s income, the Bank shall calculate
the capital charge based on the fair
value of the asset rather than its
amortized cost.
(d) Credit risk capital charge for offbalance sheet items. Each Bank’s credit
risk capital charge for an off-balance
sheet item shall be equal to the credit
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equivalent amount of such item, as
determined pursuant to paragraph (h) of
this section, multiplied by the credit
risk percentage requirement assigned to
that item pursuant to paragraph (f)(1)
and Table 1.2 to § 1277.4, except that
the credit risk percentage requirement
applied to the credit equivalent amount
for a standby letter of credit shall be that
for an advance with the same remaining
maturity as that of the standby letter of
credit, as specified in Table 1.1 to
§ 1277.4.
(e) Derivatives contracts. (1) Except as
provided in paragraph (e)(4), the credit
risk capital charge for a derivatives
contract entered into by a Bank shall
equal, after any adjustment allowed
under paragraph (e)(2), the sum of:
(i) The current credit exposure for the
derivatives contract, calculated in
accordance with paragraph (i)(1) of this
section, multiplied by the credit risk
percentage requirement assigned to that
derivatives contract pursuant to Table
1.2 of paragraph (f)(1) of this section,
provided that a Bank shall deem the
remaining maturity of the derivatives
contract to be less than one year for the
purpose of applying Table 1.2; plus
(ii) The potential future credit
exposure for the derivatives contract,
calculated in accordance with paragraph
(i)(2) of this section, multiplied by the
credit risk percentage requirement
assigned to that derivatives contract
pursuant to Table 1.2 of paragraph (f)(1)
of this section, where a Bank uses the
actual remaining maturity of the
derivatives contract for the purpose of
applying Table 1.2 of paragraph (f)(1) of
this section; plus
(iii) A credit risk capital charge
applicable to the amount of collateral
posted by the Bank with respect to a
derivatives contract that exceeds the
Bank’s current payment obligation
under that derivatives contract, where
the charge equals the amount of such
excess collateral multiplied by the
credit risk percentage requirement
assigned under Table 1.2 of paragraph
(f)(1) of this section for the custodian or
other party that holds the collateral, and
where a Bank deems the exposure to
have a remaining maturity of one year
or less when applying Table 1.2.
(2)(i) The credit risk capital charge
calculated under paragraph (e)(1) of this
section may be adjusted for any
collateral held by or on behalf of the
Bank in accordance with paragraph
(e)(3) of this section against an exposure
from the derivatives contract as follows:
(A) The discounted value of the
collateral shall first be applied to reduce
the current credit exposure of the
derivatives contract subject the capital
charge;
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(B) If the total discounted value of the
collateral held exceeds the current
credit exposure of the contract, any
remaining amounts may be applied to
reduce the amount of the potential
future credit exposure of the derivatives
contract subject to the capital charge;
and
(C) The amount of the collateral used
to reduce the exposure to the derivatives
contract is subject to the applicable
credit risk capital charge required by
paragraphs (b) or (c) of this section.
(ii) If a Bank’s counterparty’s payment
obligations under a derivatives contract
are unconditionally guaranteed by a
third-party, then the credit risk
percentage requirement applicable to
the derivatives contract may be that
associated with the guarantor, rather
than the Bank’s counterparty.
(3) The credit risk capital charge may
be adjusted as described in paragraph
(e)(2)(i) for collateral held against the
derivatives contract exposure only if the
collateral is:
(i) Held by, or has been paid to, the
Bank or held by an independent, thirdparty custodian on behalf of the Bank
pursuant to a custody agreement that
meets the requirements of § 1221.7(c)
and (d) of this chapter;
(ii) Legally available to absorb losses;
(iii) Of a readily determinable value at
which it can be liquidated by the Bank;
and
(iv) Subject to an appropriate discount
to protect against price decline during
the holding period and the costs likely
to be incurred in the liquidation of the
collateral, provided that such discount
shall equal at least the minimum
discount required under Appendix B to
part 1221 of this chapter for collateral
listed in that Appendix, or be estimated
by the Bank based on appropriate
assumptions about the price risks and
liquidation costs for collateral not listed
in Appendix B to part 1221.
(4) Notwithstanding any other
provision in this paragraph (e), the
credit risk capital charge for:
(i) A foreign exchange rate contract
(excluding gold contracts) with an
original maturity of 14 calendar days or
less shall be zero;
(ii) A derivatives contract cleared by
a derivatives clearing organization shall
equal 0.16 percent times the sum of the
following:
(A) The current credit exposure for
the derivatives contract, calculated in
accordance with paragraph (i)(1) of this
section;
(B) The potential future credit
exposure for the derivatives contract
calculated in accordance with paragraph
(i)(2) of this section; and
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(C) The amount of collateral that the
Bank has posted to, and is held by, the
derivatives clearing organization, but
only to the extent the amount exceeds
the Bank’s current credit exposure to the
derivatives clearing organization.
(f) Determination of credit risk
percentage requirements. (1) General. (i)
Each Bank shall determine the credit
risk percentage requirement applicable
to each advance and each non-rated
asset by identifying the appropriate
category from Tables 1.1 or 1.3 to
§ 1277.4, respectively, to which the
advance or non-rated asset belongs.
Except as provided in paragraphs (f)(2)
and (f)(3) of this section, each Bank
shall determine the credit risk
percentage requirement applicable to
each non-mortgage asset, off-balance
sheet item, and derivatives contract by
identifying the appropriate category set
forth in Table 1.2 to § 1277.4 to which
the asset, item, or contract belongs,
given its FHFA Credit Rating category,
as determined in accordance with
paragraph (f)(1)(ii) of this section, and
remaining maturity. Each Bank shall use
the applicable credit risk percentage
requirement to calculate the credit risk
capital charge for each asset, item, or
contract in accordance with paragraphs
(c), (d), or (e) of this section,
respectively. The relevant categories
and credit risk percentage requirements
are provided in the following Tables 1.1
through 1.3 to § 1277.4—
TABLE 1.1 TO § 1277.4—
REQUIREMENT FOR ADVANCES
Maturity of advances
Advances with:
Remaining maturity <=4
years ..................................
Remaining maturity >4 years
to 7 years ..........................
Remaining maturity >7 years
to 10 years ........................
Remaining maturity >10
years ..................................
Percentage
applicable
to
advances
0.09
0.23
0.35
0.51
TABLE 1.2 TO § 1277.4—REQUIREMENT FOR INTERNALLY RATED NON-MORTGAGE ASSETS, OFF-BALANCE SHEET ITEMS,
AND DERIVATIVES CONTRACTS
[Based on remaining maturity]
Applicable percentage
FHFA Credit Rating
<=1 year
U.S. Government Securities ................................................
FHFA 1 .................................................................................
FHFA 2 .................................................................................
FHFA 3 .................................................................................
FHFA 4 .................................................................................
>1 yr to 3 yrs
0.00
0.20
0.36
0.64
3.24
>3 yrs to 7 yrs
0.00
0.59
0.87
1.31
4.79
0.00
1.37
1.88
2.65
7.89
>7 yrs to 10
yrs
>10 yrs
0.00
2.28
3.07
4.22
11.51
0.00
3.32
4.42
6.01
15.64
21.08
26.99
100.00
27.00
32.49
100.00
FHFA Ratings Corresponding to Below FHFA Investment Quality
‘‘FHFA Investment Quality’’ has the meaning provided in 12 CFR 1267.1
FHFA 5 .................................................................................
FHFA 6 .................................................................................
FHFA 7 .................................................................................
9.24
15.99
100.00
an instrument that would be deemed to
be of ‘‘investment quality,’’ as that term
is defined by § 1267.1 of this chapter.
FHFA Categories 3 through 1 shall
Applicable
Type of unrated asset
percentage include assets of progressively higher
credit quality than Category 4, and
Cash .........................................
0.00
FHFA Credit Rating categories 5 through
Premises, Plant and Equipment
8.00
7 shall include assets of progressively
Investments Under 12 CFR
1265.3(e) & (f) .......................
8.00 lower credit quality. After aligning its
internal credit ratings to the appropriate
categories of Table 1.2 to § 1277.4, each
(ii) Each Bank shall develop a
Bank shall assign each counterparty,
methodology to be used to assign an
asset, item, and contract to the
internal credit risk rating to each
appropriate FHFA Credit Rating
counterparty, asset, item, and contract
category based on the applicable
that is subject to Table 1.2 to § 1277.4.
internal credit rating.
The methodology shall involve an
(2) Exception for assets subject to a
evaluation of counterparty or asset risk
guarantee or secured by collateral. (i)
factors, and may incorporate, but must
not rely solely upon, credit ratings
When determining the applicable credit
prepared by credit rating agencies. Each risk percentage requirement from Table
Bank shall align its various internal
1.2 to § 1277.4 for a non-mortgage asset
credit ratings to the appropriate
that is subject to an unconditional
categories of FHFA Credit Ratings
guarantee by a third-party guarantor or
included in Table 1.2 to § 1277.4. In
is secured as set forth in paragraph
doing so, each Bank shall ensure that
(f)(2)(ii) of this section, the Bank may
the credit risk associated with any asset substitute the credit risk percentage
assigned to FHFA Categories 1 through
requirement associated with the
4 is no greater than that associated with guarantor or the collateral, as
TABLE 1.3 TO § 1277.4—REQUIREMENT FOR NON-RATED ASSETS
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18.06
100.00
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15.90
22.18
100.00
appropriate, for the credit risk
percentage requirement associated with
that portion of the asset subject to the
guarantee or covered by the collateral.
(ii) For purposes of paragraph (f)(2)(i)
of this section, a non-mortgage asset
shall be considered to be secured if the
collateral is:
(A) Actually held by the Bank or an
independent, third-party custodian on
the Bank’s behalf, or, if posted by a
Bank member and permitted under the
Bank’s collateral agreement with that
member, by the Bank’s member or an
affiliate of that member where the term
‘‘affiliate’’ has the same meaning as in
§ 1266.1 of this chapter;
(B) Legally available to absorb losses;
(C) Of a readily determinable value at
which it can be liquidated by the Bank;
(D) Held in accordance with the
provisions of the Bank’s member
products policy established pursuant to
§ 1239.30 of this chapter, if the
collateral has been posted by a member
or an affiliate of a member; and
(E) Subject to an appropriate discount
to protect against price decline during
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the holding period and the costs likely
to be incurred in the liquidation of the
collateral.
(3) Exception for obligations of the
Enterprises. A Bank may use a credit
risk capital charge of zero for any nonmortgage-related debt instrument or
obligation issued by an Enterprise,
provided that the Enterprise receives
capital support or other form of direct
financial assistance from the United
States government that enables the
Enterprise to repay those obligations.
(4) Exception for methodology
deficiencies. FHFA may direct a Bank,
on a case-by-case basis, to change the
calculated credit risk capital charge for
any non-mortgage asset, off-balance
sheet item, or derivatives contract, as
necessary to account for any deficiency
that FHFA identifies with respect to a
Bank’s internal credit rating
methodology for such assets, items, or
contracts.
(g) Credit risk capital charges for
residential mortgage assets—(1) Bank
determination of credit risk percentage.
(i) Each Bank’s credit risk capital charge
for a residential mortgage, residential
mortgage security, or collateralized
mortgage obligation shall be equal to the
asset’s amortized cost multiplied by the
credit risk percentage requirement
assigned to that asset pursuant to
paragraphs (g)(1)(ii) or (g)(2) of this
section. For any such asset carried at
fair value where any change in fair
value is recognized in the Bank’s
income, the Bank shall calculate the
capital charge based on the fair value of
the asset rather than its amortized cost.
(ii) Each Bank shall determine the
credit risk percentage requirement
applicable to each residential mortgage
and residential mortgage security by
identifying the appropriate FHFA RMA
category set forth in Table 1.4 to
§ 1277.4 to which the asset belongs, and
shall determine the credit risk
percentage requirement applicable to
each collateralized mortgage obligation
by identifying the appropriate FHFA
CMO category set forth in Table 1.4 to
§ 1277.4 to which the asset belongs,
with the appropriate categories being
determined in accordance with
paragraph (g)(1)(iii) of this section.
(iii) Each Bank shall develop a
methodology to be used to assign an
internal credit risk rating to each of its
residential mortgages, residential
mortgage securities, and collateralized
mortgage obligations. For residential
mortgages, the methodology shall
involve an evaluation of the residential
mortgages and any credit enhancements
or guarantees, including an assessment
of the creditworthiness of the providers
of such enhancements or guarantees. In
the case of a residential mortgage
security or collateralized mortgage
obligation, the methodology shall
30793
involve an evaluation of the underlying
mortgage collateral, the structure of the
security, and any credit enhancements
or guarantees, including an assessment
of the creditworthiness of the providers
of such enhancements or guarantees.
Such methodologies may incorporate,
but may not rely solely upon, credit
ratings prepared by credit ratings
agencies. Each Bank shall align its
various internal credit ratings to the
appropriate categories of FHFA Credit
Ratings included in Table 1.4 to
§ 1277.4. In doing so, each Bank shall
ensure that the credit risk associated
with any asset assigned to categories
FHFA RMA 1 through 4 or FHFA CMO
1 through 4 is no greater than that
associated with an instrument that
would be deemed to be of ‘‘investment
quality,’’ as that term is defined by 12
CFR 1267.1. FHFA Categories 3 through
1 shall include assets of progressively
higher credit quality than Category 4,
and FHFA Categories 5 through 7 shall
include assets of progressively lower
credit quality. After aligning its internal
credit ratings to the appropriate
categories of Table 1.4 to § 1277.4, each
Bank shall assign each of its residential
mortgages, residential mortgage
securities, and collateralized mortgage
obligation to the appropriate FHFA
Credit Ratings category based on the
Bank’s internal credit rating of that
asset.
TABLE 1.4 TO § 1277.4—INTERNALLY RATED RESIDENTIAL MORTGAGE ASSETS
Percentage
applicable
Categories for residential mortgages and residential mortgage securities
Ratings Above ‘‘AMA Investment Grade’’ *:
FHFA RMA 1 ................................................................................................................................................................................
FHFA RMA 2 ................................................................................................................................................................................
FHFA RMA 3 ................................................................................................................................................................................
FHFA RMA 4 ................................................................................................................................................................................
Ratings Below ‘‘AMA Investment Grade’’:
FHFA RMA 5 ................................................................................................................................................................................
FHFA RMA 6 ................................................................................................................................................................................
FHFA RMA 7 ................................................................................................................................................................................
0.37
0.60
0.86
1.20
2.40
4.80
34.00
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Categories For Collateralized Mortgage Obligations
Ratings Above ‘‘FHFA Investment Quality’’ **:
FHFA CMO 1 ................................................................................................................................................................................
FHFA CMO 2 ................................................................................................................................................................................
FHFA CMO 3 ................................................................................................................................................................................
FHFA CMO 4 ................................................................................................................................................................................
Ratings Below ‘‘FHFA Investment Quality’’:
FHFA CMO 5 ................................................................................................................................................................................
FHFA CMO 6 ................................................................................................................................................................................
FHFA CMO 7 ................................................................................................................................................................................
0.37
0.60
1.60
4.45
13.00
34.00
100.00
* ‘‘AMA Investment Grade’’ has the meaning provided in 12 CFR 1268.1.
** ‘‘FHFA Investment Quality’’ has the same meaning as ‘‘investment quality’’ as provided in 12 CFR 1267.1.
(2) Exceptions to Table 1.4 to § 1277.4
credit risk percentages. (i) A Bank may
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for any residential mortgage, residential
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mortgage obligation, or portion thereof,
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guaranteed by an Enterprise as to
payment of principal and interest,
provided that the Enterprise receives
capital support or other form of direct
financial assistance from the United
States government that enables the
Enterprise to repay those obligations;
(ii) A Bank may use a credit risk
capital charge of zero for a residential
mortgage, residential mortgage security,
or collateralized mortgage obligation, or
any portion thereof, guaranteed or
insured as to payment of principal and
interest by a department or agency of
the United States government that is
backed by the full faith and credit of the
United States; and
(iii) FHFA may direct a Bank, on a
case-by-case basis, to change the
calculated credit risk capital charge for
any residential mortgage, residential
mortgage security, or collateralized
mortgage obligation, as necessary to
account for any deficiency that FHFA
identifies with respect to a Bank’s
internal credit rating methodology for
residential mortgages, residential
mortgage securities, or collateralized
mortgage obligations.
(h) Calculation of credit equivalent
amount for off-balance sheet items. (1)
General requirement. The credit
equivalent amount for an off-balance
sheet item shall be determined by an
FHFA-approved model or shall be equal
to the face amount of the instrument
multiplied by the credit conversion
factor assigned to such risk category of
instruments, subject to the exceptions in
paragraph (h)(2) of this section,
provided in the following Table 2 to
§ 1277.4:
TABLE 2 TO § 1277.4—CREDIT CONVERSION FACTORS FOR OFF-BALANCE SHEET ITEMS
Credit
conversion
factor
(in percent)
Asset sales with recourse where the credit risk remains with the Bank ............................................................................................
Commitments to make advances subject to certain drawdown
Commitments to acquire loans subject to certain drawdown
Standby letters of credit .......................................................................................................................................................................
Other commitments with original maturity of over one year
Other commitments with original maturity of one year or less ...........................................................................................................
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Instrument
100
........................
........................
50
........................
20
(2) Exceptions. The credit conversion
factor shall be zero for Other
Commitments With Original Maturity of
Over One Year and Other Commitments
With Original Maturity of One Year or
Less, for which Table 2 to § 1277.4
would otherwise apply credit
conversion factors of 50 percent or 20
percent, respectively, if the
commitments are unconditionally
cancelable, or effectively provide for
automatic cancellation, due to the
deterioration in a borrower’s
creditworthiness, at any time by the
Bank without prior notice.
(i) Calculation of credit exposures for
derivatives contracts. (1) Current credit
exposure. (i) Single derivatives contract.
The current credit exposure for
derivatives contracts that are not subject
to an eligible master netting agreement
shall be:
(A) If the mark-to-market value of the
contract is positive, the mark-to-market
value of the contract; or
(B) If the mark-to-market value of the
contract is zero or negative, zero.
(ii) Derivatives contracts subject to an
eligible master netting agreement. The
current credit exposure for multiple
derivatives contracts executed with a
single counterparty and subject to an
eligible master netting agreement shall
be calculated on a net basis and shall
equal:
(A) The net sum of all positive and
negative mark-to-market values of the
individual derivatives contracts subject
to the eligible master netting agreement,
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if the net sum of the mark-to-market
values is positive; or
(B) Zero, if the net sum of the markto-market values is zero or negative.
(2) Potential future credit exposure.
The potential future credit exposure for
derivatives contracts, including
derivatives contracts with a negative
mark-to-market value, shall be
calculated:
(i) Using an internal initial margin
model that meets the requirements of
§ 1221.8 of this chapter and is approved
by FHFA for use by the Bank, or that has
been approved under regulations similar
to § 1221.8 of this chapter for use by the
Bank’s counterparty to calculate initial
margin for those derivatives contracts
for which the calculation is being done;
or
(ii) By applying the standardized
approach in Appendix A to Part 1221 of
this chapter.
(j) Credit risk capital charge for nonmortgage assets hedged with credit
derivatives. (1) Credit derivatives with a
remaining maturity of one year or more.
The credit risk capital charge for a nonmortgage asset that is hedged with a
credit derivative that has a remaining
maturity of one year or more may be
reduced only in accordance with
paragraph (j)(3) or (j)(4) of this section
and only if the credit derivative
provides substantial protection against
credit losses.
(2) Credit derivatives with a remaining
maturity of less than one year. The
credit risk capital charge for a non-
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mortgage asset that is hedged with a
credit derivative that has a remaining
maturity of less than one year may be
reduced only in accordance with
paragraph (j)(3) of this section and only
if the remaining maturity on the credit
derivative is identical to or exceeds the
remaining maturity of the hedged nonmortgage asset and the credit derivative
provides substantial protection against
credit losses.
(3) Capital charge reduced to zero.
The credit risk capital charge for a nonmortgage asset shall be zero if a credit
derivative is used to hedge the credit
risk on that asset in accordance with
paragraph (j)(1) or (j)(2) of this section,
provided that:
(i) The remaining maturity for the
credit derivative used for the hedge is
identical to or exceeds the remaining
maturity for the hedged non-mortgage
asset, and either:
(A) The asset referenced in the credit
derivative is identical to the hedged
non-mortgage asset; or
(B) The asset referenced in the credit
derivative is different from the hedged
non-mortgage asset, but only if the asset
referenced in the credit derivative and
the hedged non-mortgage asset have
been issued by the same obligor, the
asset referenced in the credit derivative
ranks pari passu to, or more junior than,
the hedged non-mortgage asset and has
the same maturity as the hedged nonmortgage asset, and cross-default
clauses apply; and
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(ii) The credit risk capital charge for
the credit derivatives contract
calculated pursuant to paragraph (e) of
this section is still applied.
(4) Capital charge reduction in certain
other cases. The credit risk capital
charge for a non-mortgage asset hedged
with a credit derivative in accordance
with paragraph (j)(1) of this section shall
equal the sum of the credit risk capital
charges for the hedged and unhedged
portion of the non-mortgage asset
provided that:
(i) The remaining maturity for the
credit derivative is less than the
remaining maturity for the hedged nonmortgage asset and either:
(A) The non-mortgage asset referenced
in the credit derivative is identical to
the hedged asset; or
(B) The asset referenced in the credit
derivative is different from the hedged
non-mortgage asset, but only if the asset
referenced in the credit derivative and
the hedged non-mortgage asset have
been issued by the same obligor, the
asset referenced in the credit derivative
ranks pari passu to, or more junior than,
the hedged non-mortgage asset and has
the same maturity as the hedged nonmortgage asset, and cross-default
clauses apply; and
(ii) The credit risk capital charge for
the unhedged portion of the nonmortgage asset equals:
(A) The credit risk capital charge for
the hedged non-mortgage asset,
calculated as the book value of the
hedged non-mortgage asset multiplied
by that asset’s credit risk percentage
requirement assigned pursuant to
paragraph (f)(1) of this section where the
appropriate credit rating is that for the
hedged non-mortgage asset and the
appropriate maturity is the remaining
maturity of the hedged non-mortgage
asset; minus
(B) The credit risk capital charge for
the hedged non-mortgage asset,
calculated as the book value of the
hedged non-mortgage asset multiplied
by that asset’s credit risk percentage
requirement assigned pursuant to
paragraph (f)(1) of this section where the
appropriate credit rating is that for the
hedged non-mortgage asset but the
appropriate maturity is deemed to be
the remaining maturity of the credit
derivative; and
(iii) The credit risk capital charge for
the hedged portion of the non-mortgage
asset is equal to the credit risk capital
charge for the credit derivative,
calculated in accordance with paragraph
(e) of this section.
(k) Frequency of calculations. Each
Bank shall perform all calculations
required by this section at least
quarterly, unless otherwise directed by
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FHFA, using the advances, residential
mortgages, residential mortgage
securities, collateralized mortgage
obligations, non-rated assets, nonmortgage assets, off-balance sheet items,
and derivatives contracts held by the
Bank, and, if applicable, the values of,
or FHFA Credit Ratings categories for,
such assets, off-balance sheet items, or
derivatives contracts as of the close of
business of the last business day of the
calendar period for which the credit risk
capital charge is being calculated.
§ 1277.5
Market risk capital requirement.
(a) General requirement. (1) Each
Bank’s market risk capital requirement
shall equal the market value of the
Bank’s portfolio at risk from movements
in interest rates, foreign exchange rates,
commodity prices, and equity prices
that could occur during periods of
market stress, where the market value of
the Bank’s portfolio at risk is
determined using an internal market
risk model that fulfills the requirements
of paragraph (b) of this section and that
has been approved by FHFA.
(2) A Bank may substitute an internal
cash flow model to derive a market risk
capital requirement in place of that
calculated using an internal market risk
model under paragraph (a)(1) of this
section, provided that:
(i) The Bank obtains FHFA approval
of the internal cash flow model and of
the assumptions to be applied to the
model; and
(ii) The Bank demonstrates to FHFA
that the internal cash flow model
subjects the Bank’s assets and liabilities,
off-balance sheet items, and derivatives
contracts, including related options, to a
comparable degree of stress for such
factors as will be required for an
internal market risk model.
(b) Measurement of market value at
risk under a Bank’s internal market risk
model. (1) Except as provided under
paragraph (a)(2) of this section, each
Bank shall use an internal market risk
model that estimates the market value of
the Bank’s assets and liabilities, offbalance sheet items, and derivatives
contracts, including any related options,
and measures the market value of the
Bank’s portfolio at risk of its assets and
liabilities, off-balance sheet items, and
derivatives contracts, including related
options, from all sources of the Bank’s
market risks, except that the Bank’s
model need only incorporate those risks
that are material.
(2) The Bank’s internal market risk
model may use any generally accepted
measurement technique, such as
variance-covariance models, historical
simulations, or Monte Carlo
simulations, for estimating the market
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30795
value of the Bank’s portfolio at risk,
provided that any measurement
technique used must cover the Bank’s
material risks.
(3) The measures of the market value
of the Bank’s portfolio at risk shall
include the risks arising from the nonlinear price characteristics of options
and the sensitivity of the market value
of options to changes in the volatility of
the options’ underlying rates or prices.
(4) The Bank’s internal market risk
model shall use interest rate and market
price scenarios for estimating the market
value of the Bank’s portfolio at risk, but
at a minimum:
(i) The Bank’s internal market risk
model shall provide an estimate of the
market value of the Bank’s portfolio at
risk such that the probability of a loss
greater than that estimated shall be no
more than one percent;
(ii) The Bank’s internal market risk
model shall incorporate scenarios that
reflect changes in interest rates, interest
rate volatility, option-adjusted spreads,
and shape of the yield curve, and
changes in market prices, equivalent to
those that have been observed over 120business day periods of market stress.
For interest rates, the relevant historical
observations should be drawn from the
period that starts at the end of the
previous month and goes back to the
beginning of 1978;
(iii) The total number of, and specific
historical observations identified by the
Bank as, stress scenarios shall be:
(A) Satisfactory to FHFA;
(B) Representative of the periods of
the greatest potential market stress given
the Bank’s portfolio, and
(C) Comprehensive given the
modeling capabilities available to the
Bank; and
(iv) The measure of the market value
of the Bank’s portfolio at risk may
incorporate empirical correlations
among interest rates.
(5) For any consolidated obligations
denominated in a currency other than
U.S. Dollars or linked to equity or
commodity prices, each Bank shall, in
addition to fulfilling the criteria of
paragraph (b)(4) of this section,
calculate an estimate of the market
value of its portfolio at risk resulting
from material foreign exchange, equity
price or commodity price risk, such
that, at a minimum:
(i) The probability of a loss greater
than that estimated shall not exceed one
percent;
(ii) The scenarios reflect changes in
foreign exchange, equity, or commodity
market prices that have been observed
over 120-business day periods of market
stress, as determined using historical
data that is from an appropriate period;
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(iii) The total number of, and specific
historical observations identified by the
Bank as, stress scenarios shall be:
(A) Satisfactory to FHFA;
(B) Representative of the periods of
greatest potential stress given the Bank’s
portfolio; and
(C) Comprehensive given the
modeling capabilities available to the
Bank; and
(iv) The measure of the market value
of the Bank’s portfolio at risk may
incorporate empirical correlations
within or among foreign exchange rates,
equity prices, or commodity prices.
(c) Independent validation of Bank
internal market risk model or internal
cash flow model. (1) Each Bank shall
conduct an independent validation of
its internal market risk model or
internal cash flow model within the
Bank that is carried out by personnel
not reporting to the business line
responsible for conducting business
transactions for the Bank. Alternatively,
the Bank may obtain independent
validation by an outside party qualified
to make such determinations.
Validations shall be done periodically,
commensurate with the risk associated
with the use of the model, or as
frequently as required by FHFA.
(2) The results of such independent
validations shall be reviewed by the
Bank’s board of directors and provided
promptly to FHFA.
(d) FHFA approval of Bank internal
market risk model or internal cash flow
model. (1) Each Bank shall obtain FHFA
approval of an internal market risk
model or an internal cash flow model,
including subsequent material
adjustments to the model made by the
Bank, prior to the use of any model.
Each Bank shall make such adjustments
to its model as may be directed by
FHFA.
(2) A model and any material
adjustments to such model that were
approved by FHFA or the Federal
Housing Finance Board shall meet the
requirements of paragraph (d)(1) of this
section, unless such approval is revoked
or amended by FHFA.
(e) Frequency of calculations. Each
Bank shall perform any calculations or
estimates required under this section at
least quarterly, unless otherwise
directed by FHFA, using the assets,
liabilities, and off-balance sheet items,
including derivatives contracts, and
options held by the Bank, and if
applicable, the values of any such
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holdings, as of the close of business of
the last business day of the calendar
period for which the market risk capital
requirement is being calculated.
§ 1277.6 Operational risk capital
requirement.
(a) General requirement. Except as
authorized under paragraph (b) of this
section, each Bank’s operational risk
capital requirement shall at all times
equal 30 percent of the sum of the
Bank’s credit risk capital requirement
and market risk capital requirement.
(b) Alternative requirements. With the
approval of FHFA, each Bank may have
an operational risk capital requirement
equal to less than 30 percent but no less
than 10 percent of the sum of the Bank’s
credit risk capital requirement and
market risk capital requirement if:
(1) The Bank provides an alternative
methodology for assessing and
quantifying an operational risk capital
requirement; or
(2) The Bank obtains insurance to
cover operational risk from an insurer
acceptable to FHFA.
§ 1277.7 Limits on unsecured extensions
of credit; reporting requirements.
(a) Unsecured extensions of credit to
a single counterparty. A Bank shall not
extend unsecured credit to any single
counterparty (other than a GSE
described in and subject to the
requirements of paragraph (c) of this
section) in an amount that would
exceed the limits of this paragraph. If a
third-party provides an irrevocable,
unconditional guarantee of repayment
of a credit (or any part thereof), the
third-party guarantor shall be
considered the counterparty for
purposes of calculating and applying
the unsecured credit limits of this
section with respect to the guaranteed
portion of the transaction.
(1) General Limits. All unsecured
extensions of credit by a Bank to a
single counterparty that arise from the
Bank’s on- and off-balance sheet and
derivatives transactions (but excluding
the amount of sales of federal funds
with a maturity of one day or less and
sales of federal funds subject to a
continuing contract) shall not exceed
the product of the maximum capital
exposure limit applicable to such
counterparty, as determined in
accordance with Table 1 of paragraph
(a)(4) of § 1277.7, multiplied by the
lesser of:
(i) The Bank’s total capital; or
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(ii) The counterparty’s Tier 1 capital,
or if Tier 1 capital is not available, total
capital (in each case as defined by the
counterparty’s principal regulator) or
some similar comparable measure
identified by the Bank.
(2) Overall limits including sales of
overnight federal funds. All unsecured
extensions of credit by a Bank to a
single counterparty that arise from the
Bank’s on- and off-balance sheet and
derivatives transactions, including the
amounts of sales of federal funds with
a maturity of one day or less and sales
of federal funds subject to a continuing
contract, shall not exceed twice the
limit calculated pursuant to paragraph
(a)(1) of this section.
(3) Limits for certain obligations
issued by state, local, or tribal
governmental agencies. The limit set
forth in paragraph (a)(1) of this section,
when applied to the marketable direct
obligations of state, local, or tribal
government units or agencies that are
excluded from the prohibition against
investments in whole mortgage loans or
other types of whole loans, or interests
in such loans, by § 1267.3(a)(4)(iii) of
this chapter, shall be calculated based
on the Bank’s total capital and the
internal credit rating assigned to the
particular obligation, as determined in
accordance with paragraph (a)(5) of this
section. If a Bank owns series or classes
of obligations issued by a particular
state, local, or tribal government unit or
agency, or has extended other forms of
unsecured credit to such entity falling
into different rating categories, the total
amount of unsecured credit extended by
the Bank to that government unit or
agency shall not exceed the limit
associated with the highest-rated
obligation issued by the entity and
actually purchased by the Bank.
(4) Bank determination of applicable
maximum capital exposure limits. (i)
Except as set forth in paragraph (a)(4)(ii)
of this section, a Bank shall determine
the maximum capital exposure limit for
each counterparty by assigning the
counterparty to the appropriate FHFA
Credit Rating category of Table 1 to
§ 1277.7, based upon the Bank’s internal
counterparty credit rating, as
determined in accordance with
paragraph (a)(5) of this section, and the
Bank’s alignment of its counterparty
credit ratings to each of the FHFA Credit
Rating categories provided in the
following Table 1 to § 1277.7:
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TABLE 1 TO § 1277.7—MAXIMUM LIMITS ON UNSECURED EXTENSIONS OF CREDIT TO A SINGLE COUNTERPARTY BY FHFA
CREDIT RATING CATEGORY
Maximum
Capital
exposure limit
(in percent)
FHFA Credit Rating of counterparty
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FHFA 1 ........................................................................................................................................................................................
FHFA 2 ........................................................................................................................................................................................
FHFA 3 ........................................................................................................................................................................................
FHFA 4 ........................................................................................................................................................................................
Ratings Below ‘‘FHFA Investment Quality’’ (‘‘FHFA Investment Quality’’ has the same meaning as ‘‘investment quality’’ as
provided by 12 CFR 1267.1) ...................................................................................................................................................
FHFA 5 and Below ......................................................................................................................................................................
(ii) If a Bank determines that a
specific debt obligation issued by a
counterparty has a lower FHFA Credit
Rating category than that applicable to
the counterparty, the total amount of the
lower-rated obligation held by the Bank
may not exceed a sub-limit calculated in
accordance with paragraph (a)(1) of this
section. The Bank shall use the lower
credit rating associated with the specific
obligation to determine the applicable
maximum capital exposure sub-limit.
For purposes of this paragraph, the
internal credit rating of the debt
obligation shall be determined in
accordance with paragraph (a)(5) of this
section.
(5) Bank determination of applicable
credit ratings. A Bank shall determine
an internal credit rating for each
counterparty, and shall align each such
credit rating to the FHFA Credit Rating
categories of Table 1 to § 1277.7, using
the same methodology for calculating
the internal ratings and aligning such
ratings to the FHFA Credit Rating
categories as the Bank uses for
calculating the credit risk capital charge
for a counterparty or asset under Table
1.2 of § 1277.4(f). As a consequence, the
Bank shall use the same FHFA Credit
Rating category for a particular
counterparty for purposes of applying
the unsecured credit limit under this
section as used for calculating the credit
risk capital charge for obligations issued
by that counterparty under Table 1.2 of
§ 1277.4.
(b) Unsecured extensions of credit to
affiliated counterparties. (1) In general.
The total amount of unsecured
extensions of credit by a Bank to a group
of affiliated counterparties that arise
from the Bank’s on- and off-balance
sheet and derivatives transactions,
including sales of federal funds with a
maturity of one day or less and sales of
federal funds subject to a continuing
contract, shall not exceed 30 percent of
the Bank’s total capital.
(2) Relation to individual limits. The
aggregate limits calculated under
paragraph (b)(1) shall apply in addition
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to the limits on extensions of unsecured
credit to a single counterparty imposed
by paragraph (a) of this section.
(c) Special limits for certain GSEs.
Unsecured extensions of credit by a
Bank that arise from the Bank’s on- and
off-balance sheet and derivatives
transactions, including from the
purchase of any debt or from any sales
of federal funds with a maturity of one
day or less and from sales of federal
funds subject to a continuing contract,
with a GSE that is operating with capital
support or another form of direct
financial assistance from the United
States government that enables the GSE
to repay those obligations shall not
exceed the Bank’s total capital.
(d) Extensions of unsecured credit
after reduced rating. If a Bank revises its
internal credit rating for any
counterparty or obligation, it shall
assign the counterparty or obligation to
the appropriate FHFA Credit Rating
category based on the revised rating. If
the revised internal rating results in a
lower FHFA Credit Rating category,
then any subsequent extensions of
unsecured credit shall comply with the
maximum capital exposure limit
applicable to that lower rating category,
but a Bank need not unwind or liquidate
any existing transaction or position that
complied with the limits of this section
at the time it was entered. For the
purposes of this paragraph, the renewal
of an existing unsecured extension of
credit, including any decision not to
terminate any sales of federal funds
subject to a continuing contract, shall be
considered a subsequent extension of
unsecured credit that can be undertaken
only in accordance with the lower limit.
(e) Reporting requirements—(1) Total
unsecured extensions of credit. Each
Bank shall report monthly to FHFA the
amount of the Bank’s total unsecured
extensions of credit arising from on- and
off-balance sheet and derivatives
transactions to any single counterparty
or group of affiliated counterparties that
exceeds 5 percent of:
(i) The Bank’s total capital; or
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15
14
9
3
................................
1
(ii) The counterparty’s, or affiliated
counterparties’ combined, Tier 1 capital,
or if Tier 1 capital is not available, total
capital (in each case as defined by the
counterparty’s principal regulator), or
some similar comparable measure
identified by the Bank.
(2) Total secured and unsecured
extensions of credit. Each Bank shall
report monthly to FHFA the amount of
the Bank’s total secured and unsecured
extensions of credit arising from on- and
off-balance sheet and derivatives
transactions to any single counterparty
or group of affiliated counterparties that
exceeds 5 percent of the Bank’s total
assets.
(3) Extensions of credit in excess of
limits. A Bank shall report promptly to
FHFA any extension of unsecured credit
that exceeds any limit set forth in
paragraphs (a), (b), or (c) of this section.
In making this report, a Bank shall
provide the name of the counterparty or
group of affiliated counterparties to
which the excess unsecured credit has
been extended, the dollar amount of the
applicable limit which has been
exceeded, the dollar amount by which
the Bank’s extension of unsecured credit
exceeds such limit, the dates for which
the Bank was not in compliance with
the limit, and, if applicable, a brief
explanation of any extenuating
circumstances which caused the limit to
be exceeded.
(f) Measurement of unsecured
extensions of credit—(1) In general. For
purposes of this section, unsecured
extensions of credit will be measured as
follows:
(i) For on-balance sheet transactions
(other than a derivatives transaction
addressed by paragraph (f)(1)(iii)) of this
section, an amount equal to the sum of
the amortized cost of the item plus net
payments due the Bank. For any such
item carried at fair value where any
change in fair value would be
recognized in the Bank’s income, the
Bank shall measure the unsecured
extension of credit based on the fair
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value of the item, rather than its
amortized cost;
(ii) For off-balance sheet transactions,
an amount equal to the credit equivalent
amount of such item, calculated in
accordance with § 1277.4(g); and
(iii) For derivatives transactions not
cleared by a derivatives clearing
organization, an amount equal to the
sum of:
(A) The Bank’s current and potential
future credit exposures under the
derivatives contract, where those values
are calculated in accordance with
§ 1277.4(i)(1) and (i)(2) respectively,
adjusted by the amount of any collateral
held by or on behalf of the Bank against
the credit exposure from the derivatives
contract, as allowed in accordance with
the requirements of § 1277.4(e)(2) and
(e)(3); and
(B) The value of any collateral posted
by the Bank that exceeds the current
amount owed by the Bank to its
counterparty under the derivatives
contract, where the collateral is not held
by a third-party custodian in accordance
with § 1221.7(c) and (d) of this chapter.
(2) Status of debt obligations
purchased by the Bank. Any debt
obligation or debt security (other than
mortgage-backed or other asset-backed
securities or acquired member assets)
purchased by a Bank shall be
considered an unsecured extension of
credit for the purposes of this section,
except for:
(i) Any amount owed the Bank against
which the Bank holds collateral in
accordance with § 1277.4(f)(2)(ii); or
(ii) Any amount which FHFA has
determined on a case-by-case basis shall
not be considered an unsecured
extension of credit.
(g) Exceptions to unsecured credit
limits. The following items are not
subject to the limits of this section:
(1) Obligations of, or guaranteed by,
the United States;
(2) A derivatives transaction accepted
for clearing by a derivatives clearing
organization;
(3) Any extension of credit from one
Bank to another Bank; and
(4) A bond issued by a state housing
finance agency if the Bank documents
that the obligation in question is:
(i) Principally secured by high quality
mortgage loans or high quality
mortgage-backed securities (or funds
derived from payments on such assets
or from payments from any guarantees
or insurance associated with such
assets);
(ii) The most senior class of
obligation, if the bond has more than
one class; and
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(iii) Determined by the Bank to be
rated no lower than FHFA 2, in
accordance with this section.
§ 1277.8
Reporting requirements.
Each Bank shall report information
related to capital and other matters
addressed by this part 1277 in
accordance with instructions provided
in the Data Reporting Manual issued by
FHFA, as amended from time to time.
Dated: June 22, 2017.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2017–13560 Filed 6–30–17; 8:45 am]
BILLING CODE 8070–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 23
[Docket No.FAA–2017–0651; Notice No. 23–
17–02–SC]
Special Conditions: Game Composites
Ltd, GB1 Airplane; Acrobatic Category
Aerodynamic Stability
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed special
conditions.
AGENCY:
This action proposes special
conditions for the Game Composites
Ltd. GB1 airplane. This airplane will
have a novel or unusual design
feature(s) associated with static stability.
This airplane can perform at the highest
level of aerobatic competition. To be
competitive, the airplane is designed
with its lateral and directional axes
being decoupled from each other;
providing more precise maneuvering.
The applicable airworthiness
regulations do not contain adequate or
appropriate safety standards for this
design feature. These proposed special
conditions contain the additional safety
standards the Administrator considers
necessary to establish a level of safety
equivalent to that established by the
existing airworthiness standards.
DATES: Send your comments on or
before August 2, 2017.
ADDRESSES: Send comments identified
by docket number FAA–2017–0651
using any of the following methods:
b Federal eRegulations Portal: Go to
https://www.regulations.gov and follow
the online instructions for sending your
comments electronically.
b Mail: Send comments to Docket
Operations, M–30, U.S. Department of
Transportation (DOT), 1200 New Jersey
Avenue SE., Room W12–140, West
SUMMARY:
PO 00000
Frm 00025
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Building Ground Floor, Washington, DC
20590–0001.
b Hand Delivery of Courier: Take
comments to Docket Operations in
Room W12–140 of the West Building
Ground Floor at 1200 New Jersey
Avenue SE., Washington, DC, between 9
a.m., and 5 p.m., Monday through
Friday, except Federal holidays.
b Fax: Fax comments to Docket
Operations at 202–493–2251.
Privacy: The FAA will post all
comments it receives, without change,
to https://regulations.gov, including any
personal information the commenter
provides. Using the search function of
the docket Web site, anyone can find
and read the electronic form of all
comments received into any FAA
docket, including the name of the
individual sending the comment (or
signing the comment for an association,
business, labor union, etc.). DOT’s
complete Privacy Act Statement can be
found in the Federal Register published
on April 11, 2000 (65 FR 19477–19478),
as well as at https://DocketsInfo.dot.gov.
Docket: Background documents or
comments received may be read at
https://www.regulations.gov at any time.
Follow the online instructions for
accessing the docket or go to the Docket
Operations in Room W12–140 of the
West Building Ground Floor at 1200
New Jersey Avenue SE., Washington,
DC, between 9 a.m., and 5 p.m., Monday
through Friday, except Federal holidays.
FOR FURTHER INFORMATION CONTACT: Mr.
Ross Schaller, Federal Aviation
Administration, Small Airplane
Directorate, Aircraft Certification
Service, 901 Locust; Kansas City,
Missouri 64106; telephone (816) 329–
4162; facsimile (816) 329–4090.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite interested people to take
part in this rulemaking by sending
written comments, data, or views. The
most helpful comments reference a
specific portion of the special
conditions, explain the reason for any
recommended change, and include
supporting data. We ask that you send
us two copies of written comments.
We will consider all comments we
receive on or before the closing date for
comments. We will consider comments
filed late if it is possible to do so
without incurring expense or delay. We
may change these special conditions
based on the comments we receive.
Background
On March 10, 2014, Game Composite
Ltd. applied for a type certificate for
their new GB1 airplane. The GB1 is a
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]]>Agencies
[Federal Register Volume 82, Number 126 (Monday, July 3, 2017)]
[Proposed Rules]
[Pages 30776-30798]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13560]
=======================================================================
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 930 and 932
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1277
RIN 2590-AA70
Federal Home Loan Bank Capital Requirements
AGENCY: Federal Housing Finance Board; Federal Housing Finance Agency.
ACTION: Proposed rule.
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[[Page 30777]]
SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to
adopt, with amendments, the regulations of the Federal Housing Finance
Board (Finance Board) pertaining to the capital requirements for the
Federal Home Loan Banks (Banks). The proposed rule would carry over
most of the existing regulations without material change, but would
substantively revise the credit risk component of the risk-based
capital requirement, as well as the limitations on extensions of
unsecured credit. The principal revisions to those provisions would
remove requirements that the Banks calculate credit risk capital
charges and unsecured credit limits based on ratings issued by a
Nationally Recognized Statistical Rating Organization (NRSRO), and
would instead require that the Banks use their own internal rating
methodology. The proposed rule also would revise the percentages used
in the tables to calculate the credit risk capital charges for advances
and non-mortgage assets. FHFA would retain the percentages used in the
existing table to calculate the capital charges for mortgage-related
assets, but intends to address the appropriate methodology for
determining the credit risk capital charges for residential mortgage
assets as part of a subsequent rulemaking.
DATES: FHFA must receive written comments on or before September 1,
2017. For additional information, see SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your comments, identified by Regulatory
Information Number (RIN) 2590-AA70, by any of the following methods:
Agency Web site: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at RegComments@fhfa.gov to ensure timely receipt by the agency.
Please include Comments/RIN 2590-AA70 in the subject line of the
message.
Courier/Hand Delivery: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA70,
Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20219. Deliver the package to the Seventh Street
entrance Guard Desk, First Floor, on business days between 9 a.m. and 5
p.m.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA70, Federal
Housing Finance Agency, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20219. Please note that all mail sent to FHFA via the
U.S. Mail service is routed through a national irradiation facility, a
process that may delay delivery by approximately two weeks. For any
time-sensitive correspondence, please plan accordingly.
FOR FURTHER INFORMATION CONTACT: Scott Smith, Associate Director,
Office of Policy Analysis and Research, Scott.Smith@FHFA.gov, 202-649-
3193; Julie Paller, Principal Financial Analyst, Division of Bank
Regulation, Julie.Paller@FHFA.gov, 202-649-3201; or Neil R. Crowley,
Deputy General Counsel, Neil.Crowley@FHFA.gov, 202-649-3055 (these are
not toll-free numbers), Federal Housing Finance Agency, 400 Seventh
Street SW., Washington, DC 20219. The telephone number for the
Telecommunications Device for the Hearing Impaired is 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of the proposed rule and will
take all comments into consideration before issuing a final rule.
Copies of all comments will be posted without change, on the FHFA Web
site at https://www.fhfa.gov, and will include any personal information
you provide, such as your name, address, email address, and telephone
number.
II. Background
A. Establishment of the Federal Housing Finance Agency
Effective July 30, 2008, the Housing and Economic Recovery Act of
2008 (HERA) \1\ created FHFA as a new independent agency of the Federal
Government, and transferred to FHFA the supervisory and oversight
responsibilities of the Office of Federal Housing Enterprise Oversight
(OFHEO) over the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation (collectively, the Enterprises), the
oversight responsibilities of the Finance Board over the Banks and the
Office of Finance (OF) (which acts as the Banks' fiscal agent), and
certain functions of the Department of Housing and Urban
Development.\2\ Under the legislation, the Enterprises, the Banks, and
the OF continue to operate under regulations promulgated by OFHEO and
the Finance Board, respectively, until such regulations are superseded
by regulations issued by FHFA.\3\ While FHFA has previously adopted
regulations addressing the capital structure of the Banks and the
Banks' capital plans, the Finance Board regulations establishing the
Banks' total, leverage, and risk-based capital requirements continue to
apply to the Banks pursuant to this provision, and would be superseded
by this rulemaking.\4\
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\1\ Public Law No. 110-289, 122 Stat. 2654.
\2\ See 12 U.S.C. 4511.
\3\ See 12 U.S.C. 4511, note.
\4\ See 80 FR 12755 (March 11, 2015) (FHFA rulemaking); 12 CFR
part 932 (Finance Board capital requirement regulations).
---------------------------------------------------------------------------
B. Federal Home Loan Bank Capital and Capital Requirements
The eleven Banks are wholesale financial institutions organized
under the Federal Home Loan Bank Act (Bank Act).\5\ The Banks are
cooperatives. Only members of a Bank may purchase the capital stock of
a Bank, and only members or certain eligible housing associates (such
as state housing finance agencies) may obtain access to secured loans,
known as advances, or other products provided by a Bank.\6\ Each Bank
is managed by its own board of directors and serves the public interest
by enhancing the availability of residential mortgage and community
lending credit through its member institutions.\7\
---------------------------------------------------------------------------
\5\ See 12 U.S.C. 1423 and 1432(a). The eleven Banks are located
in: Boston, New York, Pittsburgh, Atlanta, Cincinnati, Indianapolis,
Chicago, Des Moines, Dallas, Topeka, and San Francisco.
\6\ See 12 U.S.C. 1426(a)(4), 1430(a), and 1430b.
\7\ See 12 U.S.C. 1427.
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In 1999, the Gramm-Leach-Bliley Act (GLB Act) \8\ amended the Bank
Act to replace the subscription capital structure of the Bank System.
It required the Banks to replace their existing capital stock with new
classes of capital stock that would have different terms from the stock
then held by Bank System members. Specifically, the GLB Act authorized
the Banks to issue new Class A stock, which the GLB Act defined as
redeemable six months after filing of a notice by a member, and Class B
stock, defined as redeemable five years after filing of a notice by a
member. The GLB Act allowed Banks to issue Class A and Class B stock in
any combination and to establish terms and preferences for each class
or subclass of stock issued, consistent with the Bank Act and
regulations adopted by the Finance Board.\9\ The classes of stock to be
issued, as well as the terms, rights, and preferences associated with
each
[[Page 30778]]
class of Bank stock, are governed by a capital structure plan, which is
established by each Bank's board of directors and approved by FHFA.
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\8\ Public Law No. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
\9\ See 12 U.S.C. 1426, and 12 CFR part 1277.
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The GLB Act also amended the Bank Act to impose on the Banks new
total, leverage, and risk-based capital requirements similar to those
applicable to depository institutions and other housing Government
Sponsored Enterprises (GSEs) and directed the Finance Board to adopt
regulations prescribing uniform capital standards for the Banks.\10\
The Finance Board put these regulations in place in 2001 when it
published a final capital rule, and later adopted amendments to that
rule.\11\ In addition to addressing minimum capital requirements, the
regulations also established minimum liquidity requirements for each
Bank and set limits on a Bank's unsecured credit exposure to individual
counterparties and groups of affiliated counterparties.\12\ These
Finance Board regulations remain in effect and have not been
substantively amended since 2001.
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\10\ See 12 U.S.C. 1426(a). In 2008, HERA amended the risk-based
capital provisions in the Bank Act to allow FHFA greater flexibility
in establishing these requirements. Pub. Law No. 110-289, 122 Stat.
2654, 2626 (July 28, 2008) (amending 12 U.S.C. 1426(a)(3)(A)).
\11\ See Final Rule: Capital Requirements for Federal Home Loan
Banks, 66 FR 8262 (Jan. 30, 2001) (hereinafter Final Finance Board
Capital Rule); and Final Rule: Amendments to Capital Requirements
for Federal Home Loan Banks, 66 FR 54097 (Oct. 26, 2001). The
Finance Board regulations are found at 12 CFR part 932.
\12\ See id. See also, Final Rule: Unsecured Credit Limits for
the Federal Home Loan Banks, 66 FR 66718 (Dec. 27, 2001) (amending
12 CFR 932.9).
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The GLB Act amendments to the Bank Act also defined the types of
capital that the Banks must hold--specifically permanent and total
capital. Permanent capital consists of amounts paid by members for
Class B stock plus the Bank's retained earnings, as determined in
accordance with generally accepted accounting principles (GAAP).\13\
Total capital is made up of permanent capital plus the amounts paid by
members for Class A stock, any general allowances for losses held by a
Bank under GAAP (but not allowances or reserves held against specific
assets or specific classes of assets), and any other amounts from
sources available to absorb losses that are determined by regulation to
be appropriate to include in total capital.\14\ As a matter of
practice, however, each Bank's total capital consists of its permanent
capital plus the amounts, if any, paid by its members for Class A
stock.
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\13\ See 12 U.S.C. 1426(a)(5).
\14\ Id. Neither the Finance Board nor FHFA has approved the
inclusion within total capital of any other amounts that are
available to absorb losses, and no Bank has any such general
allowances for losses as part of its capital.
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The Bank Act requires each Bank to hold total capital equal to at
least 4 percent of its total assets. The statute separately requires
each Bank to meet a leverage requirement of total capital to total
assets equal to 5 percent, but provides that in determining compliance
with this leverage requirement, a Bank must calculate its total capital
by multiplying the amount of its permanent capital by 1.5 and adding to
this product any other component of total capital.\15\
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\15\ See 12 U.S.C. 1426(a)(2). See also 12 CFR 932.2.
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Each Bank also must meet a risk-based capital requirement by
maintaining permanent capital in an amount at least equal to the sum of
its credit risk, market risk, and operational risk charges, as measured
under the 2001 Finance Board regulations.\16\ Under these rules, a Bank
must calculate a credit risk capital charge for each of its assets,
off-balance sheet items, and derivatives contracts. The basic charge is
based on the book value of an asset, or other amount calculated under
the rule, multiplied by a credit risk percentage requirement (CRPR) for
that particular asset or item, which is derived from one of the tables
set forth in the rule. Generally, the CRPR varies based on the rating
assigned to the asset by an NRSRO and the maturity of the asset.\17\
The market risk capital charge is calculated separately, as the maximum
loss in the Bank's portfolio under various stress scenarios, estimated
by an approved internal model, such that the probability of a loss
greater than that estimated by the model is not more than one
percent.\18\ The operational risk capital charge equals 30 percent of
the combined credit and market risk charges for the Bank, although the
rules allow a Bank to demonstrate that a lower charge should apply if
FHFA approves and other conditions are met.\19\
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\16\ See 12 U.S.C. 1426(a)(3) and 12 CFR 932.3, 932.4, 932.5,
and 932.6.
\17\ See 12 CFR 932.4.
\18\ See 12 CFR 932.5.
\19\ See 12 CFR 932.6.
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C. The Dodd-Frank Act and Bank Capital Rules
Section 939A of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) requires federal agencies to: (i)
Review regulations that require the use of an assessment of the
creditworthiness of a security or money market instrument; and (ii) to
the extent those regulations contain any references to, or requirements
based on, NRSRO credit ratings, remove such references or
requirements.\20\ In place of such NRSRO rating-based requirements,
agencies are instructed to substitute appropriate standards for
determining creditworthiness. The Dodd-Frank Act further provides that,
to the extent feasible, an agency should adopt a uniform standard of
creditworthiness for use in its regulations, taking into account the
entities regulated by it and the purposes for which such regulated
entities would rely on the creditworthiness standard.
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\20\ See Sec. 939A, Public Law 111-203, 124 Stat. 1887 (July
21, 2010).
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Several provisions of the Finance Board capital regulations include
requirements that are based on NRSRO credit ratings, and thus must be
revised to comply with the Dodd-Frank Act provisions related to use of
NRSRO ratings.\21\ Specifically, as already noted, the credit risk
capital charges for certain Bank assets are calculated in large part
based on the credit ratings assigned by NRSROs to a particular
counterparty or specific financial instrument. In addition, the rule
related to the operational risk capital charge allows a Bank to
calculate an alternative capital charge if the Bank obtains insurance
to cover operational risk from an insurer with an NRSRO credit rating
of no lower than the second highest investment grade rating. Finally,
the capital rules addressed by this rulemaking also establish unsecured
credit limits for the Banks based on NRSRO credit ratings. FHFA is
proposing to amend each of these provisions to bring them into
compliance with the Dodd-Frank Act requirements.
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\21\ See Advance Notice of Proposed Rulemaking: Alternatives to
Use of Credit Ratings in Regulations Governing the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation,
and the Federal Home Loan Banks, 76 FR 5292, 5294 (Jan. 31, 2011).
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III. The Proposed Rule
FHFA is proposing to amend part 1277 of its regulations by
adopting, with some revisions, the capital requirement regulations of
the Finance Board, which are located at 12 CFR part 932.\22\ Most of
the provisions of the Finance Board regulations would be adopted
without change or with only minor conforming changes. The proposed
rule, however, would rescind Sec. 932.1, which required
[[Page 30779]]
the Banks to obtain the approval of the Finance Board for their market
risk models prior to implementing their capital plans, which all Banks
have done. The proposed rule also would rescind Sec. 932.8, regarding
minimum liquidity requirements for the Banks, because FHFA intends to
address liquidity requirements as part of a separate rulemaking.\23\
The proposal would adopt the substance of Sec. 932.2 and Sec. 932.3,
regarding the total capital requirements and risk-based capital
requirements, respectively, without change. FHFA is proposing to make
minor revisions to the Finance Board regulations pertaining to market
risk, operational risk, and reporting requirements, currently located
at Sec. Sec. 932.5, 932.6, and 932.7, respectively. The proposed rule
would make significant revisions to two provisions of the Finance Board
regulations: Sec. 932.4, regarding credit risk capital requirements;
and Sec. 932.9, regarding limits on unsecured credit exposures,
principally by removing requirements that are based on NRSRO credit
ratings. In both cases, the proposed rule would replace the current
approach with one under which the Banks would develop their own
internal credit rating methodology to be used in place of the NRSRO
credit ratings. With respect to the credit risk capital charges, the
proposed rule also would revise the CRPRs used in the current
regulation's tables to calculate the credit risk capital charges for
advances and for non-mortgage assets, off-balance sheet items, and
derivatives contracts. With respect to the unsecured credit limits, the
proposed rule would incorporate into the rule text the substance of
certain regulatory interpretations that have addressed the application
of the unsecured credit limits in particular situations, and would make
other changes to account for developments in the marketplace, such as
the Dodd-Frank Act's mandate for clearing certain derivatives
transactions. The proposed rule would not change the basic percentage
limits used to calculate the amount of unsecured credit that a Bank can
extend to a single counterparty or group of affiliated counterparties.
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\22\ FHFA previously transferred the Finance Board requirements
related to the Banks' capital stock and capital structure plans and
readopted these provisions, subject to certain amendments, as 12 CFR
part 1277, subparts C and D. See Final Rule: Federal Home Loan Bank
Capital Stock and Capital Plans, 80 FR 12753 (Mar. 11, 2015). At
that time, FHFA also transferred a number of definitions relevant to
the capital stock and capital plan requirements from 12 CFR 930.1 to
subpart A of part 1277.
\23\ The current regulation is not determinative of the amount
of the Banks' liquidity portfolios. Instead, Banks maintain liquid
assets in accordance with guidelines issued in March 2009 that
provide for more liquidity than the regulatory requirements. See
Letter from Stephen M. Cross, Deputy Director, Division of FHLBank
Regulation, to the FHLBank Presidents, March 6, 2009. Under those
guidelines, the Banks maintain positive cash balances that would be
sufficient to support their operations if they were unable to issue
consolidated obligations for a 5-day period during which they
renewed all maturing advances, and for a 15-day period during which
all maturing advances were repaid. Until FHFA adopts a new liquidity
regulation, the March 2009 guidelines will remain applicable.
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A discussion of the specific changes that FHFA proposes to make to
the Banks' current capital regulations as part of this rulemaking
follows.
Proposed Sec. 1277.1--Definitions
Most of the definitions in proposed Sec. 1277.1 would be carried
over without substantive change from current 12 CFR 930.1. FHFA,
however, is proposing to define seven new terms, which are:
``collateralized mortgage obligation;'' ``derivatives clearing
organization;'' ``eligible master netting agreement;'' ``non-mortgage
asset;'' ``non-rated asset;'' ``residential mortgage;'' and
``residential mortgage security.''
Three of the new terms FHFA proposes to define pertain to the
mortgage-related assets that a Bank may hold, which are:
``collateralized mortgage obligation,'' ``residential mortgage,'' and
``residential mortgage security.'' These definitions are
straightforward and are intended to be mutually exclusive. They will be
used to assign the particular asset to the appropriate category of
Table 1.4 that would be used to determine the capital charge for that
asset. The term ``residential mortgage'' is intended to include those
mortgage loans that the Banks may purchase as acquired member assets
(AMA), and would include both whole loans and participation interests
in such loans. These loans must be secured by a residential structure
that contains one-to- four dwelling units. The proposed definition
would encompass loans on individual condominium or cooperative units,
as well as on manufactured housing, whether or not the manufactured
housing is considered real property under state law. The definition
would not include a loan secured by a multifamily property because the
credit risk for such properties differs from loans secured by one-to-
four family residences.
The term ``residential mortgage security'' includes any mortgage-
backed security that represents an undivided interest in a pool of
``residential mortgages,'' i.e., mortgage pass-through securities. Both
residential mortgages and residential mortgage securities would be
grouped together in Table 1.4 of the proposed rule and would have the
same credit risk capital charges, assuming the Bank has given them the
same internal credit rating. The term ``collateralized mortgage
obligation'' is intended to include any other type of mortgage-related
security that is not structured as a pass-through security, i.e., any
such security that has two or more tranches or classes. The capital
charges for collateralized mortgage obligations would be derived from a
different portion of Table 1.4, and most charges would be higher than
those for mortgage pass-through securities. None of these proposed
definitions would encompass a commercial mortgage-backed security
(CMBS), including one collateralized by mortgage loans on multi-family
properties, because the risk characteristics for such securities differ
from those on securities representing an interest in, or otherwise
backed by, mortgage loans on one-to-four family residential properties.
Such CMBS or multi-family property securities would be deemed to be
``non-mortgage assets'' and the capital charge for them would be
determined by using proposed Table 1.2, which applies to internally
rated non-mortgage assets, off-balance sheet items, and derivatives
contracts.
FHFA proposes to define ``derivatives clearing organization'' as an
organization that clears derivatives contracts and is registered with
either the Commodity Futures Trading Commission (CFTC) or the
Securities and Exchange Commission (SEC) or is exempted by one of those
two Commissions from such registration. The new definition is needed
because, as is discussed below, the proposed credit risk capital
provision and the proposed unsecured credit provision impose different
requirements on derivatives contracts cleared by a derivatives clearing
organization than they impose on those not so cleared.
FHFA proposes to define ``non-rated asset'' to include those assets
that are currently addressed by Table 1.4 of Finance Board regulation
12 CFR 932.4, which are cash, premises, and plant and equipment, as
well as certain investments described in the core mission activities
regulation. Under the proposed rule the credit risk capital charges for
``non-rated assets'' would derive from proposed Table 1.3, which would
be identical to Table 1.4 of the current regulation, both in terms of
the assets covered by the table and the capital charges assigned to
each category of assets within the table.
The proposed rule would define the term ``non-mortgage asset'' to
include any assets held by a Bank other than advances covered by Table
1.1, all types of mortgage-related assets covered by Table 1.4, non-
rated assets covered by Table 1.3, or derivatives contracts. As is
discussed in much greater detail below, capital charges for ``non-
mortgage assets'' would be calculated based on their stated maturity
and a Bank's internal credit rating for the assets, using new proposed
Table 1.2. The
[[Page 30780]]
charges for all types of residential mortgage assets also would be
calculated based on the Bank's internal rating of those assets, rather
than a rating from an NRSRO, but the credit risk percentage
requirements will remain the same as in the current regulation.
The proposed rule also would add a definition for ``eligible master
netting agreement.'' FHFA would define the term by reference to the
definition for the term recently adopted in the FHFA rule governing
margin and capital requirements for covered swap entities.\24\ The term
``eligible master netting agreement'' would replace the references and
definition of ``qualifying bilateral netting contract'' now found in
the credit risk capital provision and would be relevant to how a Bank
calculates its credit exposures under multiple derivatives contracts
with a single party. As discussed more fully later, the current credit
exposures arising from derivatives contracts with a single counterparty
and subject to an eligible master netting agreement would be calculated
on a net basis, in accordance with proposed Sec. 1277.4(i)(1)(ii).
Lastly, the proposed rule would revise the existing Finance Board
definition of ``operations risk'' by changing it to ``operational
risk'' and incorporating the definition of operational risk currently
used in FHFA Advisory Bulletin AB-2014-02 (February 18, 2014).
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\24\ See, Final Rule: Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (hereinafter,
Final Uncleared Swaps Rule). The specific definition is found at 12
CFR 1221.2. FHFA does not propose to carry over the current
definition for ``walkaway clause'' in current 12 CFR 930.1 as the
proposed definition of ``eligible master netting agreement'' already
would sufficiently describe a walkaway clause.
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Proposed Sec. 1277.2 and Sec. 1277.3--Total Capital and Risk-Based
Capital Requirements
As noted above, FHFA proposes to re-adopt current Sec. 932.2 and
Sec. 932.3 of the Finance Board regulations as Sec. 1277.2 and Sec.
1277.3 without change. Proposed Sec. 1277.2 is identical to the
existing regulation and would set forth the minimum total capital and
leverage ratios that each Bank must maintain under section 6(a)(2) of
the Bank Act.\25\ Proposed Sec. 1277.3 also is identical to the
existing regulation, apart from cross-references to other regulations,
and would set forth a Bank's risk-based capital requirement and require
a Bank to hold at all times an amount of permanent capital equal to at
least the sum of its credit risk, market risk and operational risk
capital requirements.\26\ In turn, proposed Sec. Sec. 1277.4, 1277.5,
and 1277.6 would establish, respectively, the requirements for
calculating a Bank's credit risk, market risk, and operational risk
capital charges, as described below.
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\25\ 12 U.S.C. 1426(a)(2).
\26\ FHFA believes that this approach remains consistent with
the amendments made by HERA to the risk-based capital requirements
in the Bank Act. As amended, the Bank Act provides the Director with
broad authority to establish by regulation risk-based capital
standards for the Banks that ensure the Banks operate in a safe and
sound manner with sufficient permanent capital and reserves to
support the risks arising from their operations. See 12 U.S.C.
1426(a)(3)(A).
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Proposed Sec. 1277.4--Credit Risk Capital Requirements
FHFA is proposing changes to the current credit risk capital
provision, now set forth at 12 CFR 932.4 of the Finance Board
regulations. The principal revisions include changing how a Bank
determines the CRPRs used to calculate capital charges for its
internally rated non-mortgage assets, derivatives contracts, and off-
balance sheet items (under proposed Table 1.2), and for its residential
mortgage assets (under proposed Table 1.4). In both cases, a Bank would
no longer base the charge on an NRSRO credit rating, but on a credit
rating that the Bank calculates internally. The proposal also would
update the CRPRs used to calculate the applicable capital charges for
advances and non-mortgage assets, and would change the frequency of a
Bank's calculation of its credit risk capital charges from monthly to
quarterly.\27\ Finally, as discussed in more detail below, FHFA is also
proposing a number of other changes to the current regulation.
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\27\ FHFA also is proposing a similar conforming change for the
frequency of the calculation of the market risk capital charge. As a
result, under the proposed rule, Banks would re-calculate their
risk-based capital requirement quarterly, rather than monthly as
under the current regulation.
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General. Similar to the current regulation, proposed Sec.
1277.4(a) would provide that a Bank's credit risk capital requirement
equal the sum of the individual credit risk capital charges for its
advances, residential mortgage assets, non-mortgage assets, off-balance
sheet items, derivatives contracts, and non-rated assets. Proposed
Sec. 1277.4(b) through (e) would set forth the general approach for
calculating the credit risk capital charges, respectively, for:
Residential mortgage assets; advances, non-mortgage assets, and non-
rated assets; off-balance sheet items; and derivatives contracts. The
calculation of capital charges for residential mortgage assets is
discussed below in the section entitled Credit Risk Charge for
Residential Mortgage Assets.
Valuation of Assets. For all assets, Sec. 1277.4(c) of the
proposed rule generally would require that a Bank determine the capital
charge by multiplying the amortized cost of the asset by the CRPR
assigned to the asset under the appropriate table. The proposed rule
includes an exception to this general approach, which would apply for
any asset carried at fair value for which the Bank recognizes the
change in that asset's fair value in income. For these assets, the
capital charge would equal the fair value of the asset multiplied by
the applicable CRPR. The proposed wording represents a change from the
current regulation, which bases the capital charge for on-balance sheet
assets on the asset's book value. FHFA is proposing this change to
provide greater clarity and alignment with the intent of the rule, as
amortized cost and fair value are the current financial instrument
recognition and measurement attributes used in relevant accounting
guidance.
Charge for Off-Balance Sheet Items. Section 1277.4(d) of the
proposed rule would carry over the language from the existing Finance
Board regulations regarding the capital charges for off-balance sheet
items without change. Thus, the capital charge for such items would
equal the credit equivalent amount of the item multiplied by the CRPR
assigned to the asset by Table 1.2 of proposed Sec. 1277.4(f)(1). A
Bank would calculate the credit equivalent amount for any off-balance
sheet item pursuant to proposed Sec. 1277.4(h), which would allow a
Bank to calculate the credit equivalent amount by using either an FHFA-
approved model or the proposed conversion factors set forth in Table 2.
The proposed conversion factors are the same as those in the current
regulation. Proposed Sec. 1277.4(d) would retain the existing
exception provided by the current regulation for standby letters of
credit, under which the CRPR would be the same as that established
under Table 1.1 for an advance with the same remaining maturity as the
standby letter of credit. A Bank would still need to calculate the
credit equivalent amount for the letter of credit pursuant to proposed
Sec. 1277.4(h).\28\
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\28\ Under proposed Table 2, the credit equivalent amount of any
letter of credit would equal the face amount of the letter of credit
multiplied by 0.5 (i.e., a credit conversion factor of 50 percent).
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Proposed Sec. 1277.4(h), which addresses the calculation of credit
equivalent amounts and is substantively the same as Sec. 932.4(f) of
the Finance
[[Page 30781]]
Board regulation, would carry over the treatment for certain off-
balance sheet commitments that otherwise would be subject to a credit
conversion factor of 20 percent or 50 percent. If such commitments are
unconditionally cancelable or effectively provide for cancellation upon
deterioration in the borrowers' creditworthiness, then the credit
conversion factor would be zero, and no credit risk capital charge
would apply to those items.
Derivatives Contracts. Proposed Sec. 1277.4(e) would establish the
general requirements for calculating credit risk capital charges for
derivatives contracts. The proposed rule would make a number of changes
to the current regulation's treatment of derivatives. These changes
reflect developments in derivatives regulations brought about by the
Dodd-Frank Act, including the clearing requirement for many
standardized over-the-counter (OTC) derivatives contracts and the
adoption by FHFA, jointly with other federal regulators, of the Final
Rule on Margin and Capital Requirements for covered Swap Entities,
which established margin and capital requirements for uncleared swap
contracts. The proposed rule also would eliminate the provision from
the current regulation that provides special treatment for derivatives
with members so that derivatives contracts with members would receive
the same treatment as derivatives contracts with non-members. Section
1277.4(e)(4)(i) of the proposed rule, however, would retain the
exception in the current regulation that assigns a capital charge of
zero to any foreign exchange rate contract (other than gold contracts)
that has a maturity of 14 days or less.
First, the proposed rule would add a credit risk capital charge for
all cleared derivatives contracts, including exchange-traded futures
contracts. Under the current regulation, cleared derivatives contracts
have a charge of zero. However, when the Finance Board adopted the
current regulation, the only cleared derivatives contracts used by the
Banks were exchange-traded futures contracts, and the Banks did not
commonly use futures. Given the Dodd-Frank Act clearing requirements,
Banks will now clear a significant percentage of their OTC derivatives
contracts.\29\ Thus, FHFA finds it reasonable to apply a capital charge
to such contracts. The credit risk capital charge for cleared
derivatives under the proposed rule also would take account of the fact
that the amount of collateral a Bank must post to a derivatives
clearing organization will exceed, at most times, the Bank's current
obligation to the clearing organization, creating an exposure to
potential loss of such excess collateral should the clearing
organization fail. Capital rules adopted by federal banking regulators
also instituted charges for collateral posted to the derivative
counterparties, including derivative clearing organizations.
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\29\ Because a futures contract is a cleared derivatives
contract, the change in the proposed rule with regard to capital
charges for cleared derivatives contracts would also apply to
futures contracts.
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Specifically, Sec. 1277.4(e)(4)(ii) of the proposed rule would
impose a capital charge of 0.16 percent times the sum of a Bank's
marked-to-market exposure on the cleared derivatives contract,\30\ plus
its potential future exposure on the contract, plus the amount of any
collateral posted by the Bank and held by the clearing organization
that exceeds the amount of the Bank's current obligation to the
clearing organization under the contract. The charge in the proposed
rule for cleared derivatives contracts is consistent with the minimum
total capital charge that would be applicable to cleared derivatives
contracts under the standardized approach in the capital rules adopted
by federal banking regulators.\31\
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\30\ Given that most clearing organizations effectively settle a
cleared derivatives contract at the end of the day, the current
exposure would often be zero or a small amount depending on the
timing of the daily settlement.
\31\ FHFA, however, has not adjusted the charge to account for
any additional capital amounts needed to comply with the capital
conservation buffer under the federal banking regulators' rules.
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For uncleared derivatives contracts, the proposed rule would carry
over much of the approach in the current regulation, in that a Bank's
charge for a derivatives contract would equal the sum of the Bank's
current credit exposure and potential future credit exposure under the
derivatives contract, multiplied by the applicable CRPR assigned to the
derivatives counterparty under Table 1.2 of proposed Sec. 1277.4(f).
As under the current regulation, the proposed rule would deem that for
purposes of calculating the charge on the current credit exposure the
CRPR should be that associated with an asset with a maturity of one
year or less and the Bank's internal rating for the derivatives
counterparty. The calculation of the charge for the potential future
exposure would be based on the CRPR associated with the maturity
category equal to the remaining maturity of the derivatives contract.
The proposed rule, however, also would add to the above amounts an
additional credit risk charge for the amount of collateral posted to a
counterparty that exceeds the Bank's current, marked-to-market
obligation to that counterparty under the derivatives contract.\32\ The
Bank would calculate the specific charge for the posted excess
collateral based on a CRPR related to the Bank's internal rating for
the custodian or other party holding such collateral and an applicable
maturity deemed to be one year or less. The added charge would account
for the possibility that the party holding the collateral may fail, and
the Bank may not be able to recover its excess collateral. Capital
rules issued by banking regulators also apply a capital charge for
collateral posted to a third-party for uncleared derivatives contracts.
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\32\ Generally, this amount should equal the initial margin that
a Bank would post under its derivatives contracts with a particular
counterparty. Any amounts paid by a Bank to a derivatives clearing
organization with respect to an end-of-day-settlement would not be
considered collateral held by the clearing organization for purposes
of applying any capital charge. Thus, the capital charge would be
the sum of the current credit exposure, the potential future credit
exposure, and the exposure related to the amount of collateral that
exceeds the Bank's current exposure.
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The proposed rule would allow the Bank to reduce its credit risk
capital charge for derivatives contracts based on collateral posted by
the counterparty, but only if the Bank's treatment of collateral posted
under the derivatives contract complies with proposed Sec.
1277.4(e)(3). That provision would first require the Bank to hold such
collateral itself or in a segregated account consistent with
requirements in the uncleared swaps margin and capital rule.\33\ The
proposed rule also requires a Bank to apply the minimum discounts set
forth in the uncleared swaps margin and capital rule to any collateral
that is eligible for posting under that rule.\34\ The proposed rule,
however, would not limit the collateral that a Bank may accept to that
meeting the eligibility requirements of the uncleared swaps or margin
rule, given that not all Bank derivative counterparties would be
subject to these requirements.\35\ This is
[[Page 30782]]
a change from the current regulation, which allows Banks to take
account of collateral held against derivatives exposures if a member or
affiliate of the member holds the collateral. The current regulation
also does not impose specific minimum discounts on any type of
collateral but allows a Bank to determine a suitable discount. The
proposed rule would carry over requirements from the current regulation
that any collateral be legally available to the Bank to absorb losses
and be of readily determinable value at which it can be liquidated.
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\33\ See 12 CFR 1221.7(c). The Bank, however, would have to
substitute the credit risk capital charge associated with the
collateral for that of the derivatives contract. The proposed rule
would also allow a Bank to base the calculation of the capital
charge on the CRPR applicable to a third-party guarantor that
unconditionally guarantees a Bank's counterparty's obligations under
a derivatives contract, rather than on the requirement applicable to
the counterparty.
\34\ See, 12 CFR part 1221, Appendix B.
\35\ Thus, under the proposed rule, the Bank would need to apply
at least the minimum discount listed in Appendix B of the margin and
capital rule for uncleared swaps to any collateral listed in that
Appendix but would apply a suitable discount determined by the Bank
based on appropriate assumptions about price risk and liquidation
costs to collateral not listed in Appendix B.
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The proposed rule would assure that minimum standards apply before
a Bank can reduce its derivatives credit risk capital charge based on
the protection offered by collateral. The changes in the proposed rule
would impose slightly higher collateral standards than under the
current regulation, but would be consistent with the move toward
stricter requirements for derivatives that has followed the recent
financial crisis.\36\
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\36\ For any derivatives transactions with swap dealers or major
swap participants, the Bank would already have to meet these higher
collateral standards under applicable uncleared swaps margin and
capital rules, and thus, the proposed change should not affect
transactions with these types of counterparties.
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Proposed Sec. 1277.4(i) would specify the method for calculating
the current and potential future credit exposures under a derivatives
contract. The proposed rule would require a Bank to calculate the
current credit exposure in the same way as under the current
regulation. Specifically, the current credit exposure would equal the
marked-to-market value if that value is positive and would be zero if
that value were zero or negative. The proposed rule would allow a Bank
to calculate the current credit exposure for all derivatives contracts
subject to an ``eligible master netting agreement'' on a net basis. As
discussed previously, FHFA proposes to align the definition of
``eligible master netting agreement'' with that in the recently-adopted
margin and capital rule for uncleared swaps.
This section of the proposed rule would provide a Bank the option
of calculating the potential future credit exposure by using an initial
margin model approved for use by the Bank by FHFA under Sec. 1221.8 of
the margin and capital rules for uncleared swaps, or that has been
approved by another regulator for use by the Bank's counterparty under
standards similar to those in Sec. 1221.8, or by using the standard
calculation set forth in Appendix A of the part 1221 rules.\37\ Thus, a
Bank can rely on the initial margin calculation done by a swap dealer
or other counterparty that uses a model approved by the CFTC, other
federal banking regulator, or a foreign regulator whose model rules
have been found to be comparable to the United States rules.\38\ If
neither the Bank nor the Bank's counterparty uses an approved model to
calculate initial margin amounts, or if the Bank otherwise chooses, the
proposed rule would allow the Bank to calculate the potential future
exposure using the method set forth in Appendix A to the margin and
capital rules for uncleared swaps. The conversion factors and the
calculation of relevant potential future credit exposures for
derivatives contracts, including the net potential future credit
exposure for derivatives subject to an ``eligible master netting
agreement,'' set forth under Appendix A to the margin and capital rules
for uncleared swaps, are very similar to the requirements in the
current Bank capital regulations for calculating potential future
credit exposures on derivatives contracts.\39\
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\37\ See 12 CFR 1221.8 and 12 CFR part 1221, Appendix A. As no
Bank is currently a swap dealer or major swap participant that
otherwise needs to develop an initial margin model, FHFA expects
that the Banks would generally rely on the calculations done by a
counterparty using its approved model or using Appendix A to the
part 1221 rules.
\38\ See 12 CFR 1221.9.
\39\ See Final Rule on Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74881-882.
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Determination of credit risk percentage requirements. Proposed
Sec. 1221.4(f) sets forth the method and criteria by which a Bank
would determine the CRPR that it would use to calculate the credit risk
capital charges for all of its assets, derivatives contracts, and off-
balance sheet items. The applicable CRPRs would be set forth in four
separate tables. Table 1.1 would apply for advances. Table 1.2 would
apply for internally rated non-mortgage assets, derivatives contracts,
and off-balance sheet items. Proposed Table 1.3 would apply for non-
rated assets, which are cash, premises, plant and equipment, and
certain specific investments. Proposed Table 1.4 would apply for
residential mortgages, residential mortgage securities, and
collateralized mortgage obligations. Each table is described below.
CRPRs for Advances: Proposed Table 1.1. The proposed rule would
carry over the existing Table 1.1, which sets forth the CRPRs for
advances. The proposed rule would maintain the same four maturity
categories for advances as in the current regulation, but would
slightly increase the CRPRs for each maturity category. A comparison of
the proposed and current CRPRs for advances follows:
------------------------------------------------------------------------
Percentage Percentage
applicable applicable
Maturity of advances to advances to advances
(proposed) (current)
------------------------------------------------------------------------
Remaining maturity <=4 years.................. 0.09 0.07
Remaining maturity >4 years to 7 years........ 0.23 0.20
Remaining maturity >7 years to 10 years....... 0.35 0.30
Remaining maturity >10 years.................. 0.51 0.35
------------------------------------------------------------------------
The fact that a Bank has never experienced a loss on an advance to
a member institution creates challenges in identifying proper CRPRs for
advances. When the Finance Board first developed the risk-based capital
rule, it determined that appropriate requirements for advances should
be greater than zero but less than the requirements for assets of the
highest investment grade. Consequently, the Finance Board set the CRPRs
for advances within those bounds by using the estimated default rate of
assets of the highest investment grade and then applying a loss-given-
default rate (LGD) of 10 percent, a much lower rate than the 100
percent LGD rate applied to other assets. The Finance Board justified
the low LGD for advances by noting the over-collateralization provided
for advances and other protections afforded advances under the Bank Act
and Finance Board rules. The Finance Board also adjusted downward the
CRPRs for advances for the two longest maturity categories in Table 1.1
to ensure those advances requirements would not exceed the CRPRs for
mortgage assets of a similar maturity (as listed in current Table 1.2).
It adjusted upward the CRPRs for the shortest maturity category because
as calculated, the requirement for advances with a maturity of four
years or less would have been zero.\40\
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\40\ See Final Finance Board Bank Capital Rule, 66 FR at 8284-
85.
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FHFA based the proposed new CRPRs for advances on the same concepts
used by the Finance Board, but without any adjustments to the resulting
percentage requirements. As discussed below, the proposed rule uses the
same default rates for setting the CRPRs for advances as the revised
default rate used to calculate the CRPRs for non-mortgage assets of the
highest investment category. The proposed rule would
[[Page 30783]]
apply an LGD of 10 percent, the same rate used under the current
regulation, to calculate the CRPRs for advances. Unlike the current
regulation, however, the proposed rule would not adjust the calculated
CRPR for the longer maturity categories, and it would use the
calculated requirement for the shortest maturity category.\41\
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\41\ The proposed CRPR for the shortest maturity category is not
zero as calculated because it is based on default data that was
updated from what the Finance Board used for the current regulation.
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Under the proposal, the total capital charges for advances would
rise slightly compared to the current regulation. For example, as of
year-end 2016, the proposed CRPRs would result in an increased credit
risk charge for advances, although the dollar amount of the change
would not be significant given the Banks' overall level of
capitalization. Specifically, the aggregate credit risk capital charges
for System-wide advances would increase from approximately 0.071
percent of the Banks' total assets to approximately 0.087 percent of
total assets--an increase in dollar terms from $749 million to
approximately $920 million. To put this increase in perspective,
System-wide permanent capital available to meet the risk-based capital
requirements exceeded $54 billion in the fourth quarter of 2016.
Further, given that advances represented over 66 percent of the Bank
System's total assets as of year-end 2016, the absolute amount of
credit risk capital charge required for advances under the proposed
rule would remain modest and in keeping with the very low risk posed by
advances.
CRPRs for Internally Rated Assets: Proposed Table 1.2. Proposed
Table 1.2 would replace Table 1.3 from the current regulation, and
would set forth the CRPRs to be used to calculate the capital charges
for internally rated non-mortgage assets, off-balance sheet items, and
derivatives contracts.\42\ The current regulation assigns CRPRs for
these assets, items, and contracts by use of a look-up table that
delineates the CRPRs by NRSRO rating and maturity range. The proposed
rule would retain the simplicity of this approach, but would replace
the NRSRO rating categories with FHFA Credit Ratings categories.
Specifically, proposed Table 1.2 would establish the CRPRs by using
seven separate ``FHFA Credit Rating'' categories, each of which would
be subdivided into five maturity categories. The maturity categories in
proposed Table 1.2 would remain the same as those in current Table 1.3.
The FHFA Credit Ratings categories are intended to achieve the same
purpose served by the NRSRO credit ratings in the current regulation,
which is to create a hierarchy of credit risk exposure categories, to
which a Bank would assign each of the assets, items, and contracts
covered by proposed Table 1.2. The FHFA Credit Ratings categories, like
the NRSRO ratings categories that they replace, would base the relative
creditworthiness of each category on historical loss experience. Thus,
current Table 1.3 and proposed Table 1.2 both contain CRPRs structured
to correspond to the historical loss experience of financial
instruments, categorized by NRSRO ratings. Accordingly, the historical
loss experience for the ``highest investment grade'' category in
current Table 1.3 would correspond to the historical loss experience
for the FHFA 1 Credit Rating category in proposed Table 1.2, and so on.
To provide some guidance to the Banks about the breadth of these
categories, the rule would make clear that each of the FHFA 1 through 4
categories would be generally comparable to the credit risk associated
with items that could qualify as ``investment quality,'' as that term
is defined in FHFA's investment regulation.\43\ For example, a rating
of FHFA 1 would suggest the highest credit quality and the lowest level
of credit risk; FHFA 2 would suggest high quality and a very low level
of credit risk; and FHFA 3 would suggest an upper-medium level of
credit quality and low credit risk. FHFA 4 would suggest medium quality
and moderate credit risk. Categories FHFA 5 through 7 would include
assets and items that have risk characteristics that are comparable to
instruments that could not qualify as ``investment quality'' under the
FHFA investment regulation.
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\42\ See 12 CFR 932.4.
\43\ 12 CFR part 1267.1. Generally speaking, the term
``investment quality'' includes those instruments for which a Bank
has determined that full and timely payment of principal and
interest is expected, and that there is minimal risk that the timely
payment of principal or interest will not occur because of adverse
changes in economic and financial conditions during the life of the
instrument.
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The proposed rule, however, differs from the current regulation by
requiring the Bank to determine the appropriate FHFA Credit Rating
category for each instrument covered by proposed Table 1.2. The Bank
would do so by conducting its own internal calculation of a credit
rating for that instrument, rather than assigning it a CRPR based on an
NRSRO rating. Thus, each Bank also would need to establish a mapping of
its internal credit ratings to the various FHFA Credit Rating
categories in proposed Table 1.2. Given the similarity in structure and
basis between proposed Table 1.2 and current Table 1.3, and the
historical data connection of both tables to historical loss rates, as
experienced by financial instruments categorized by the NRSRO ratings,
the Banks should be able to map their internal credit ratings to the
appropriate categories in proposed Table 1.2 in a straightforward
manner. Because the proposed rule would rely on a Bank's internal
credit ratings and its mapping of those ratings to the appropriate FHFA
Credit Rating category, it is possible that the CRPR for a particular
instrument or counterparty determined under the proposed rule would
differ from the CRPR that is assigned under the current regulations.
As discussed above, the proposed rule would require the Banks to
develop a method for assigning a rating to a counterparty or instrument
and then map that rating to an FHFA Credit Rating category. The
proposed rule would not require a Bank to obtain FHFA approval of
either its method of calculating the internal credit rating or of its
mapping of such ratings to the FHFA Credit Ratings categories. Instead,
the proposed rule would specify that a Bank's rating method must
involve an evaluation of counterparty or asset risk factors, which may
include measures of the counterparty's scale, earnings, liquidity,
asset quality, and capital adequacy, and could incorporate, but not
rely solely upon, credit ratings available from an NRSRO or other
sources.
FHFA intends to rely on the examination process to review the
Banks' internal rating methodologies and mapping processes. FHFA finds
that approach appropriate because the Banks have been using internal
rating methodologies for some time, and any adjustments to those
methodologies that FHFA may direct a Bank to undertake in the future
based on its supervisory review would not likely have a material effect
on a Bank's overall credit risk capital requirement. That said, the
proposed rule also includes a provision that would allow FHFA, on a
case-by-case basis, to direct a Bank to change the calculated credit
risk capital charge for any non-mortgage asset, off-balance sheet item,
or derivatives contract, as necessary to remedy for any deficiency that
FHFA identifies with respect to a Bank's internal credit rating
methodology for such instruments.
Calculation of Proposed Table 1.2 CRPRs. To generate the CRPRs in
proposed Table 1.2, FHFA updated both the data and the methodology that
the Finance Board had used to develop the CRPRs in current Table 1.3.
As a result,
[[Page 30784]]
the requirements in proposed Table 1.2 differ from, and in most cases
are higher than, those in current Table 1.3. FHFA derived the CRPRs in
proposed Table 1.2 using a modified version of the Basel internal
ratings-based (IRB) credit risk model.\44\
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\44\ The FDIC used this model for calculating risk weights in
its advanced IRB approach for addressing Risk-Weighted Assets for
General Credit Risk. See 12 CFR part 324, subpart E.
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Both the previous Finance Board approach underlying current Table
1.3 and the current Basel credit risk model use historical default data
to determine a distribution of potential default rates, and then
identify a stress level of default consistent with a selected
confidence level of the default rate distribution. The prior Finance
Board approach differs from the Basel credit risk model in the methods
used to identify both the mean and variance of the default rate
distribution. The prior Finance Board approach relied on a number of
key assumptions arrived at judgmentally, whereas the later-developed
Basel credit risk model relies on a sound and internally consistent
theoretical construct. Thus, the Basel credit risk model represents a
more sound and consistent approach than the Finance Board approach.
The application of the Basel credit risk model has two key data
inputs--probability of default (PD) and LGD, grouped by segments that
have homogeneous risk characteristics. To ensure consistent
determinations of PDs and LGDs for the CRPR calculation, FHFA selected
the PDs and LGDs from historical cumulative corporate default data.
FHFA selected PDs from a sample period of 1970-2005 and grouped them by
asset credit quality and maturity categories.\45\ These data represent
the closest data in terms of risk characteristics to the variety of
exposures held by the Banks that would be subject to proposed Table
1.2.
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\45\ To generate current Table 1.3, the Finance Board used
similar data covering 1970-2000.
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The corporate default data that FHFA used to set PDs came from
Moody's Investor Service. The Moody's data are very similar to
historically comparable data provided by other rating agencies. More
recent default rate data were available, but any data set that included
the period post 2006 would reflect the abnormally high default rates
that occurred during the recent financial crisis, and represent an
exceptionally stressful period. Including the more recent data as an
input to the Basel credit risk model would result in overstating
required capital.\46\ The Basel model requires use of ``average'' PDs
that reflect expected default rates under normal business conditions
and mathematically converts the average PDs to the equivalent of
stressed PDs for a given confidence level (selected at 99.9 percent) as
applied to an assumed normal distribution of default rates.
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\46\ See An Explanatory Note on the Basel II IRB Risk Weight
Functions, July 2005, Bank for International Settlements, page 5.
Dr. Donald R. van Deventer (Chairman and CEO of Kamakura
Corporation, a financial risk management firm) points to rapidly
rising default rates following the peak of the 2007-2010 financial
crises and warns that these high recent rates will not meet the
standards required for application of the credit model under the new
Basel Capital Accords in his March 15, 2009 blog, ``The Ratings
Chernobyl.'' Moreover, even if FHFA had included some additional
post-crisis years in the PD data set, the resulting refinements to
the capital CRPRs would have been immaterial.
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The Basel credit risk model requires already stressed LGDs as
inputs. FHFA used the same LGD for all PD categories, and arrived at a
stressed LGD by examining Moody's recovery rate (one minus LGD) data
from 1982 through 2011. The recovery rates were measured based on 30-
day post-default trading prices.\47\ The data indicated the highest
actual annual LGD was nearly 80 percent, but annual LGD rates reached
this level just twice in 30 years. A more commonly observed stress
level of LGD is about 65 percent, which occurred nearly nine times
during that period. Hence, FHFA selected an LGD of 65 percent as an
input to the Basel credit risk model.
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\47\ This represents a commonly used market-based measure of
recovery and was the only measure readily available in literature.
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The Basel II IRB application of the Basel credit risk model uses a
confidence level or severity of the imposed stress of 99.9 percent.\48\
FHFA also concluded that 99.9 percent is an appropriate confidence
level, after comparing the Basel model calculated default rates, which
are based on stressed PD rates, to actual default history. FHFA found
that across all ratings, the calculated default rates at the 99.9
percent confidence level were equal to or greater than annual issuer-
weighted (and withdrawal adjusted) \49\ corporate default rates
observed for all years since the Great Depression, with one
exception.\50\ Thus, FHFA proposes to adopt the 99.9 percent confidence
level in implementing the credit risk model. However, FHFA proposes to
use the version of the Basel model that accounts for both expected and
unexpected loss, rather than the version that accounts only for
unexpected loss. FHFA believes this choice is conservative, but may be
of little consequence, as typically expected losses for Bank held
instruments that are subject to Table 1.2 are minimal.
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\48\ The model adopted by the FDIC also uses a 99.9 percent
confidence level.
\49\ Issuer-weighted refers to default rates based on the
proportion of issuers who defaulted, not the proportion of dollars
issued that default. Withdrawal adjusted corrects the bias in the
default rate that would otherwise result from the fact that some
issuers are likely to disappear from the market and effectively
default through means other than bankruptcy, e.g., being merged or
acquired.
\50\ The exception was for actual default rates observed in 1989
for double-A corporate bond issuers. The actual default rate was
0.627 and the calculated default rate was 0.570.
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Updating the methodology behind proposed Table 1.2 would result in
proposed CRPRs generally higher than current charges. Specifically,
based on actual System-wide data for year-end 2016, the proposed new
methodology would raise required credit risk capital, when compared to
that calculated under the current regulation for non-advance, non-
mortgage assets, from about 0.095 percent of assets to about 0.139
percent of assets, or by 47 percent.\51\ The result reflects more the
shortcomings with the prior methodology than any heightened concern
about the credit quality of the assets or items subject to new Table
1.2. Overall, the increase under the proposed rule for the Bank System
in total required risk-based capital related to credit risk charges for
rated non-mortgage, non-advance assets would be from $1.006 billion to
about $1.476 billion as of December 31, 2016, an increase of less than
one percent of permanent capital as of that date.
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\51\ FHFA based this comparison on data provided in each Bank's
10-K filed with the SEC. FHFA did not include a Bank's derivatives
holdings or off-balance sheet items in this calculation. FHFA,
however, estimates that derivatives and off-balance sheet items
account for less than 2 percent of the Banks' total credit risk
capital charges, and therefore, believes the exclusion of these from
the comparison calculation does not materially affect the conclusion
drawn from the comparison.
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Proposed Table 1.3: Non-Rated Assets. Proposed Table 1.3 would set
forth the CRPRs for non-rated assets, which term would be defined to
include each of the categories of assets currently included within
Table 1.4 of the current credit risk capital rule--cash, premises,
plant and equipment, and investments list in 12 CFR 1265.3(e) and(f).
The proposed CRPRs for these items also would remain unchanged from the
current regulation.\52\
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\52\ See, Final Finance Board Capital Rule, 66 FR at 8288-89.
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Reduced Charges for non-mortgage assets. The rule would carry over
in proposed Sec. 1277.4(f)(2) the provisions from the current
regulation that allow a Bank to substitute the CRPR associated with
collateral posted for, or an unconditional guarantee of, performance
under the terms of any non-mortgage asset. FHFA is not
[[Page 30785]]
proposing any substantive changes to the current provision, although,
as already discussed above, FHFA is proposing to adopt different
collateral standards applicable to derivatives contracts and to non-
mortgage assets.\53\
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\53\ As already noted, the proposed definition of non-mortgage
asset specifically excludes derivatives contracts so the standards
governing collateral posted for, or unconditional guarantees of,
non-mortgage assets under proposed Sec. 1277.4(f)(2) would not
apply to derivatives contracts. The rule sets forth the collateral
and third-party guarantee standards for derivatives contracts in
proposed Sec. 1277.4(e)(2), although the standards applicable to
third-party guarantors are basically the same under both proposed
Sec. 1277.4(e)(2) and proposed Sec. 1277.4(f)(2).
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Proposed Sec. 1277.4(j) would carry over the special provisions
for calculation of the capital charge on non-mortgage assets hedged
with certain credit derivatives, if a Bank so chooses. The proposed
provision would not alter the substance of the current provision as to
the criteria that must be met for the special provision to apply or the
method of calculating the capital charges. Generally, under the
proposed provision, a Bank would be able to substitute the capital
charge associated with the credit derivatives (as calculated under
proposed Sec. 1277.4(e)) for all or a portion of the capital charge
calculated for the non-mortgage assets, if the hedging relationships
meet the criteria in the proposed provision.\54\
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\54\ See Final Finance Board Capital Rule, 66 FR at 8292-94.
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Charge for Non-Mortgage-Related Obligations of the Enterprises.
Section 1277.4(f)(3) of the proposed rule would apply a capital charge
of zero to any non-mortgage debt security or obligation issued by
either of the Enterprises, but only if the Enterprise is operating with
capital support or other form of direct financial assistance from the
U.S. Government that would enable the Enterprise to repay those
obligations. The financial support currently provided by the U.S.
Department of the Treasury under the Senior Preferred Stock Purchase
Agreements (PSPAs) would be included in this provision. FHFA believes a
capital charge of zero for such obligations of the Enterprises is
appropriate given the PSPAs and the financial support they provide for
the Enterprises with regard to their ability to cover their
obligations. Section 1277.4(g)(2) of the proposed rule provides the
same treatment for mortgage-related assets that are guaranteed by the
Enterprises. The proposed rule would require that the Banks treat
obligations issued by other GSEs, including debt obligations of the
Banks, the same as other investments in calculating the capital
charges. Therefore, each Bank must determine an FHFA Credit Rating for
the GSE obligations, based on its internal credit ratings, and then use
Table 1.2 to calculate the appropriate credit risk capital charge.
Credit Risk Charge for Residential Mortgage Assets. Section
1277.4(g)(1) of the proposed rule would establish a capital charge for
residential mortgage assets that would be equal to the amortized cost
of the asset multiplied by the CRPR assigned to the asset under Table
1.4 of proposed Sec. 1277.4(g). The proposed rule would include an
exception to this approach for any residential mortgage asset carried
at fair value where the Bank recognizes the change in that asset's fair
value in income. For these residential mortgage assets, the capital
charge would be based on the fair value of the asset, which would be
multiplied by the applicable CRPR. This fair value provision is the
same as that to be used when calculating the CRPRs for assets, items,
and contracts subject to Table 1.2, and represents a change from the
current regulation, which bases the capital charge for on-balance sheet
assets on the asset's book value.
Proposed Table 1.4 would replace Table 1.2 from the current
regulation, and would set forth the CRPRs to be used to calculate the
capital charges for three categories of internally rated residential
mortgage assets--residential mortgages, residential mortgage
securities, and collateralized mortgage obligations--each of which
would be a defined term under the proposed rule. The current regulation
assigns CRPRs for these assets by use of a look-up table that
delineates the CRPRs by NRSRO rating and residential mortgage asset
type. The proposed rule would retain this approach, but would replace
the NRSRO rating categories with FHFA Credit Ratings categories.
Proposed Table 1.4 would include seven categories of FHFA Credit
Ratings labeled ``FHFA RMA 1 through 7,'' which categories would apply
to residential mortgages and residential mortgage securities. Table 1.4
would include seven other categories, which would be labeled ``FHFA CMO
1 through 7,'' which categories would apply only to collateralized
mortgage obligations. As described previously, the term ``residential
mortgage securities'' would include only those instruments that
represent an undivided ownership interest in a pool of residential
mortgage loans, i.e., instruments that are structured as pass-through
securities. The term ``collateralized mortgage obligation'' would
include those mortgage-related instruments that are structured as
something other than a pass-through security, i.e., an instrument that
is backed or collateralized by residential mortgages or residential
mortgage securities, but that include two or more tranches or classes.
FHFA also is proposing to replace the subheading within the existing
Table 1.2 that refers to ``subordinated classes of mortgage assets''
with the newly defined term ``collateralized mortgage obligations.''
The intent of this revision is to avoid any ambiguity about the meaning
of the term ``subordinated classes,'' as used in the current
regulation. Under the proposed table, collateralized mortgage
obligations in the two highest FHFA CMO credit rating categories would
be assigned the same CRPR as mortgage-related securities in the two
highest FHFA RMA categories. Collateralized mortgage obligations in
lower FHFA CMO categories would be assigned higher CRPRs than those for
mortgage-related securities, which reflects the different historical
loss experience between the two types of instruments.
Proposed Table 1.4 would carry over all of the CRPRs from the
existing Finance Board regulations without change. As under the current
regulation, the credit risk associated with assets placed into proposed
FHFA Credit Rating categories 1 through 4 in most cases would likely
correspond to the credit risk that is associated with assets having an
investment grade rating from an NRSRO. Thus, instruments assigned to
the categories of FHFA RMA 1 or FHFA CMO 1 would suggest the highest
credit quality and the lowest level of credit risk; categories FHFA RMA
2 or FHFA CMO 2 would suggest high quality and a very low level of
credit risk; and categories FHFA RMA 3 or FHFA CMO 3 would suggest an
upper-medium level of credit quality and low credit risk. Categories
FHFA RMA 4 or FHFA CMO 4 would suggest medium quality and moderate
credit risk. The proposed rule provides that all assets assigned to
these four categories must have no greater level of credit risk than
associated with investments that qualify as ``AMA Investment Grade''
under FHFA's AMA regulation,\55\ in the case of RMAs, or as
``investment quality'' under FHFA's investment regulation,\56\ in the
case of CMOs. FHFA RMA or CMO categories of 5 through 7 would
correspond to instruments that do not qualify as ``AMA Investment
Grade'' or ``investment quality'' under FHFA's AMA or investment
regulations, with
[[Page 30786]]
categories 6 and 7 having increasingly greater risk than category 5 of
Table 1.4.
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\55\ 12 CFR 1268.1
\56\ 12 CFR 1267.1.
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The proposed rule, however, would differ from the current
regulation by requiring the Bank to assign each of its mortgage-related
assets to the appropriate FHFA Credit Rating category based on the
Bank's internal calculation of a credit rating for the asset, rather
than on its NRSRO rating. The proposed rule follows the same approach
as would be required for non-mortgage assets, off-balance sheet items,
and derivatives contracts under Table 1.2, which requires that the Bank
develop a methodology to assign an internal credit rating to each of
its mortgage-related assets, and then align its various internal credit
ratings to the appropriate FHFA Credit Rating categories in proposed
Table 1.4. The Bank's methodology, as applied to residential mortgages,
must involve an evaluation of the underlying loans and any credit
enhancements or guarantees, as well as an assessment of the
creditworthiness of the providers of any such enhancements or
guarantees. As applied to residential mortgage securities and
collateralized mortgage obligations, the Bank's methodology must
involve an evaluation of the underlying mortgage collateral, the
structure of the security, and any credit enhancements or guarantees,
including the creditworthiness of the providers of such enhancements or
guarantees. The Banks' methodologies may incorporate NRSRO credit
ratings, provided that they do not rely solely on those ratings. Given
that both proposed Table 1.4 and current Table 1.2 have the same
structure and are based on historical loss rates, as experienced by
financial instruments categorized by the NRSRO rating, the Banks should
be able to map their internal credit ratings to proposed Table 1.4 in a
straightforward manner. Because the Bank's internal credit ratings will
determine the appropriate FHFA Credit Rating category for its
residential mortgage assets, it is possible that the internally
generated rating will differ from the NRSRO rating for a particular
instrument, and that the CRPR assigned under the proposed rule would
differ from that assigned under the current Finance Board regulations.
As is the case with respect to the methodology to be used in
assigning internal credit ratings to the various FHFA Credit Ratings
categories of Table 1.2, the proposed rule would not require a Bank to
obtain prior FHFA approval of either its method of calculating the
internal credit rating or of its mapping of such ratings to the FHFA
Credit Rating categories. FHFA intends to rely on the examination
process to review the Banks' internal rating methodologies and mapping
processes for these assets. As noted previously, the Banks have been
using internal rating methodologies for some time, and any adjustments
to those methodologies that FHFA may direct a Bank to undertake in the
future based on its supervisory review would not likely have a material
effect on a Bank's overall credit risk capital requirement.
Nonetheless, the proposed rule would reserve to FHFA the right to
require a Bank to change the calculated capital charges for residential
mortgage assets to account for any deficiencies identified by FHFA with
a Bank's internal residential mortgage asset credit rating methodology,
which is identical to the provision relating to assets covered by Table
1.2.
The proposed rule includes two exceptions that provide for a
capital charge of zero for two categories of mortgage assets. First,
the proposed rule would apply a capital charge of zero to any
residential mortgage, residential mortgage security, or collateralized
mortgage obligation (or any portion thereof) that is guaranteed as to
the payment of principal and interest by one of the Enterprises, but
only if the Enterprise is operating with capital support or other form
of direct financial assistance from the United States government that
would enable the Enterprise to cover its guarantee. The financial
support currently provided by the United States Department of the
Treasury under the Senior Preferred Stock Purchase Agreements qualifies
under this provision. This exception is identical in substance to
proposed Sec. 1277.4(f)(3), which pertains to non-mortgage-related
debt instruments issued by an Enterprise. Second, the proposed rule
would apply a capital charge of zero to any residential mortgage,
residential mortgage security, or collateralized mortgage obligation
that is guaranteed or insured by a United States government agency or
department and is backed by the full faith and credit of the United
States.
Frequency of Calculation. FHFA proposes to reduce the frequency
with which a Bank would have to calculate its credit risk capital
charges from monthly to quarterly. Thus, proposed Sec. 1277.4(k) would
require each Bank to calculate its credit risk capital requirement at
least quarterly based on assets, off-balance sheet items, and
derivatives contracts held as of the last business day of the
immediately preceding calendar quarter, unless otherwise instructed by
FHFA. The Bank would be expected to meet the calculated capital charge
throughout the quarter.\57\ In the past, a Bank's total credit risk
capital charge has not varied so greatly that the change in frequency
should raise any safety or soundness concerns. FHFA, therefore,
proposes to reduce the operational burdens on the Banks by reducing the
frequency of calculation. The proposed rule would reserve FHFA's right
to require more frequent calculations if it determined that particular
circumstances warranted such a change.
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\57\ For example, early in the second calendar-year quarter, a
Bank would need to calculate its credit risk capital charge based on
assets, off-balance sheet items, and derivatives contracts held as
of the last business day of the first calendar-year quarter. The
capital charge so calculated would apply for the whole of the second
calendar-year quarter.
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Proposed Sec. 1277.5--Market Risk Capital Requirement
FHFA proposes to readopt the existing market risk capital
requirements with only the minor revisions described below.\58\ The
proposed rule would include a new provision, Sec. 1277.5(d)(2), which
would confirm that any market risk model or material adjustments to a
model that FHFA or the Finance Board had previously approved remain
valid unless FHFA affirmatively amends or revokes the prior approval.
Section 1277.5(e) of the proposed rule also would change the frequency
of a Bank's calculation date of its market risk capital requirement
from monthly to quarterly so that it would correspond to the frequency
of calculation for the Bank's credit risk capital requirement. Thus,
each Bank would calculate its market risk capital requirement at least
quarterly, based on assets held as of the last business day of the
immediately preceding calendar quarter, unless otherwise instructed by
FHFA. The Bank would be expected to meet the calculated capital charge
throughout the quarter.
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\58\ FHFA believes the overall approach to market risk adopted
by the Finance Board remains valid and continues to provide a
reasonable estimate of a Bank's market risk exposure. See Final
Finance Board Bank Capital Rule, 66 FR at 8294-99.
---------------------------------------------------------------------------
FHFA proposes to repeal the additional capital requirement that
applies whenever a Bank's market value of capital is less than 85
percent of its book value of capital (85 Percent Test), which is
located at 12 CFR 932.5 of the Finance Board regulations. This
provision has become superfluous because FHFA can monitor a Bank's
market value of capital and has other authority to impose additional
capital requirements on a Bank if necessary.\59\
[[Page 30787]]
Hence, FHFA has no reason to retain the provision in the rule.
Furthermore, as applied under the current regulation, the 85 Percent
Test has proven to be both very pro-cyclical (requiring additional
capital during a market downturn, when the Bank is least able to raise
capital) and inflexible. FHFA can more effectively address a Bank under
stress by considering a broader set of facts and measures prior to
making any determination as to when and how much additional capital
should be required. FHFA also has additional authority to deal with
Banks that become undercapitalized, which the Finance Board did not
possess when it adopted the 85 Percent Test.\60\
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\59\ See 12 U.S.C. 4612(c), (d), and (e); 12 CFR part 1225. The
Director of FHFA has the authority to adopt regulations establishing
a higher minimum capital limit for the Banks, if necessary to ensure
that they operate in safe and sound manner, as well as to order
temporary increases in the minimum capital level for a particular
Bank, and by order or regulation to establish such capital or
reserve requirements with respect to any product or activity of a
Bank.
\60\ See 12 U.S.C. 4614, 4615, 4616, and 4617.
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Proposed Sec. 1277.6--Operational Risk Capital Requirement
FHFA proposes to carry over the current approach set forth in Sec.
932.6 of the Finance Board regulations for calculating a Bank's
operational risk capital requirement. As a consequence, proposed Sec.
1277.6 provides that a Bank's operational risk capital requirement
shall equal 30 percent of the sum of the Bank's credit risk and market
capital requirements. The Finance Board originally based the
requirement on a statutory requirement applicable to the Enterprises,
noting that given the difficulties of empirically measuring operational
risk, it was reasonable to rely on the statutorily mandated provisions
for guidance.\61\ Congress has since repealed the specific operational
risk capital provision related to the Enterprises and replaced it with
a provision giving the Director of FHFA broad authority to establish
risk-based capital charges that ensure the Enterprises operate in a
safe and sound manner and maintain sufficient capital and reserves
against their risks.\62\ Nevertheless, FHFA believes that the 30
percent operational risk charge has provided a reasonable capital
cushion for the Banks against operational risk losses and has not
proven excessively burdensome.
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\61\ See Final Finance Board Bank Capital Rule, 66 FR at 8299
(citing 12 U.S.C. 4611(c) (2000)).
\62\ See 12 U.S.C. 4611(a).
---------------------------------------------------------------------------
FHFA also proposes to carry forward the current provisions in the
regulation that allows a Bank to reduce the operational risk charge to
as low as 10 percent of the combined market and credit risk charges if
the Bank presents an alternative methodology for assessing or
quantifying operational risk that meets with FHFA's approval. The
proposed rule also would retain the provision that allows a Bank,
subject to FHFA approval, to reduce the operational risk charge to as
low as 10 percent if the Bank obtains insurance against such risk.
However, to be consistent with the Dodd-Frank Act, the proposed rule
would replace the current requirement that any such insurer have a
credit rating from an NRSRO no lower than the second highest investment
category with a requirement that FHFA find the insurance provider
acceptable.
Proposed Sec. 1277.7--Limits on Unsecured Extensions of Credit;
Reporting Requirements
With the exception of the revisions described below, FHFA proposes
to carry over the substance of the current Finance Board regulations
pertaining to a Bank's unsecured extensions of credit to a single
counterparty or group of affiliated counterparties. Section 1277.7 of
the proposed rule would include most of the provisions now found at 12
CFR 932.9 of the Finance Board regulations. The principal revision to
the existing regulation would be to determine unsecured credit limits
based on a Bank's internal credit rating for a particular counterparty
and the corresponding FHFA Credit Rating category for such exposures,
rather than on NRSRO credit ratings. This change would bring the rule
into compliance with the Dodd-Frank Act mandate that agencies replace
regulatory provisions that rely on NRSRO credit ratings with
alternative standards to assess credit quality.
FHFA Credit Ratings. Under the proposed rule, a Bank would apply
the unsecured credit limits based on the same FHFA Credit Ratings
categories used in proposed Table 1.2 for determining CRPRs for non-
mortgage assets, off-balance sheet items, and derivatives contracts.
Thus, a Bank would develop a methodology for assigning an internal
rating for each counterparty or obligation, and would align its various
credit ratings to the appropriate FHFA Credit Rating categories for
determining the applicable unsecured credit limit. The proposed
amendments also would remove from the current regulation all
distinctions between short- and long-term ratings. The Finance Board
regulations distinguished between those ratings because the regulations
relied on NRSRO ratings, and those distinctions have proven to create
certain complications in applying and monitoring the regulation.
Therefore, under the proposed rule, a Bank would determine a single
rating for a specific counterparty or obligation when applying the
unsecured credit limits, regardless of the term of the underlying
unsecured credit obligations. Because the proposed rule would require a
Bank to use the same methodology to arrive at an internal credit
rating, and to align to the FHFA Credit Rating categories as used under
Table 1.2, the end result would be that a Bank would use the same FHFA
Credit Rating category for a specific counterparty or obligation in
calculating both the credit risk capital charge under proposed Sec.
1277.4 and the unsecured credit limit under proposed Sec. 1277.7.
Limits on Exposure to a Single Counterparty. As under the current
regulation, the general limit on unsecured credit to a single
counterparty would be calculated under the proposed rule by multiplying
a percentage maximum capital exposure limit associated with a
particular FHFA Credit Rating category by the lesser of either the
Bank's total capital, or the counterparty's Tier 1 capital, or total
capital, in each case as defined by the counterparty's primary
regulator. In cases where the counterparty does not have a regulatory
Tier 1 capital or total capital measure, the Bank would determine a
similar capital measure to use, as under the current regulations.
Proposed Table 1 to Sec. 1277.7 sets forth the applicable maximum
capital exposure limits used to calculate the relevant unsecured credit
limit. These limits are: (i) 15 percent for a counterparty determined
to have an FHFA 1 rating; (ii) 14 percent for a counterparty with an
FHFA 2 rating; (iii) nine percent for a counterparty with an FHFA 3
rating; (iv) three percent for a counterparty with an FHFA 4 rating;
and (v) one percent for any counterparty rated FHFA 5 or lower. The
numerical limits are the same as those in the current regulation, with
the differences in proposed Table 1 to Sec. 1277.7 being the use of
the FHFA Credit Rating categories in place of the NRSRO ratings.\63\ As
part of its oversight of the Banks, FHFA monitors the role of the Banks
in the unsecured credit markets and may propose additional amendments
to these exposure limits if circumstances warrant.
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\63\ The Finance Board explained its reasons for setting these
maximum capital exposure limits when it proposed the current
unsecured credit regulation. See Proposed Rule: Unsecured Credit
Limits for the Federal Home Loan Banks, 66 FR 41474, 41478-80 (Aug.
8, 2001) (hereinafter, Finance Board Proposed Unsecured Credit
Rule).
---------------------------------------------------------------------------
As under the current regulation, the general unsecured credit
limit, i.e., the
[[Page 30788]]
appropriate percentage of the lesser of the Bank or counterparty's
capital, would apply to all extensions of unsecured credit to a single
counterparty that arise from a Bank's on- and off-balance sheet and
derivatives transactions, other than sales of federal funds with a
maturity of one day or less and sales of federal funds subject to
continuing contract.\64\ Similarly, the proposed rule would retain a
separate overall limit, which would apply to all unsecured extensions
of unsecured credit to a single counterparty that arise from a Bank's
on- and off-balance sheet and derivatives transactions, but which would
include sales of federal funds with a maturity of one day or less and
sales of federal funds that are subject to a continuing contract. The
amount of the overall limit would remain unchanged at twice the amount
of the general limit.\65\
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\64\ The proposed rule would carry over the definition of
``sales of federal funds subject to a continuing contract'' from
Sec. 930.1 without change.
\65\ The Finance Board explained its reasons for adopting a
special limit for sales of federal funds with a maturity of one day
or less and sales of federal funds subject to continuing contract
when it adopted the current unsecured credit regulation. The Finance
Board stated that Banks have financial incentives to lend into the
federal funds markets, i.e., the GSE funding advantage and fewer
permissible investments than are available to commercial banks, and
that permitting such lending without limits would be imprudent. See
Final Rule: Unsecured Credit Limits for the Federal Home Loan Banks,
66 FR 66718, 66720-21 (Dec. 27, 2001) (hereinafter, Finance Board
Final Unsecured Credit Rule). See also, Finance Board Proposed
Unsecured Credit Rule, 66 FR at 41476.
---------------------------------------------------------------------------
The proposed rule also would retain, with some revisions, the
approach used by the current regulation with respect to NRSRO rating
downgrades of a counterparty or obligation. The proposed rule would not
use the term ``downgrade'' because that term is more appropriately
associated with an action taken by a third-party ratings organization,
such as an NRSRO. Instead, the proposed rule would provide that if a
Bank revises its internal credit rating for a particular counterparty
or obligation, it shall thereafter assign the counterparty or
obligation to the appropriate FHFA Credit Rating category based on that
revised internal rating. The proposed rule further provides that if the
revised rating results in a lower FHFA Credit Rating category, then any
subsequent extension of unsecured credit must comply with the new limit
calculated using the lower credit rating. The proposed rule makes
clear, however, that a Bank need not unwind any existing unsecured
credit exposures as a result of the lower limit, provided they were
originated in compliance with the unsecured credit limits in effect at
that time. The proposed rule would continue to consider any renewal of
an existing unsecured extension of credit, including a decision not to
terminate a sale of federal funds subject to a continuing contract, as
a new transaction, which would be subject to the recalculated limit.
Affiliated Counterparties. The proposed rule would readopt without
substantive change the current provision limiting a Bank's aggregate
unsecured credit exposure to groups of affiliated counterparties. Thus,
in addition to being subject to the limits on individual
counterparties, a Bank's unsecured credit exposure from all sources,
including federal funds transactions, to all affiliated counterparties
under the proposed rule could not exceed 30 percent of the Bank's total
capital. The proposed rule would also readopt the current definition of
affiliated counterparty.
State, Local, or Tribal Government Obligations. The proposed rule
also carries over without substantive change the special provision in
the current regulation applicable to calculating limits for certain
unsecured obligations issued by state, local, or tribal governmental
agencies. This provision, which would be located at Sec. 1277.7(a)(3),
would allow the Banks to calculate the limit for these covered
obligations based on Bank capital--rather than on the lesser of the
Bank or counterparty's capital--and the rating assigned to the
particular obligation. As under the current regulation, all obligations
from the same issuer and having the same assigned rating may not exceed
the limit associated with that rating, and the exposure from all
obligations from that issuer cannot exceed the limit calculated for the
highest rated obligation that a Bank actually has purchased. As
explained by the Finance Board when it adopted the current regulation,
this special provision reflected the fact that the state, local, or
tribal agencies at issue often had low capital, their obligations had
some backing from collateral but were not always fully secured in the
traditional sense, and the Banks' purchase of these obligations had a
mission nexus.\66\
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\66\ See Finance Board Final Unsecured Credit Rule, 66 FR at
66723-24.
---------------------------------------------------------------------------
GSE Provision. FHFA proposes to amend the special limit that the
current regulation applies to GSEs. Specifically, proposed Sec.
1277.7(c) would apply a special limit only if the GSE counterparty were
operating with capital support or other form of direct financial
assistance from the U.S. government that would enable the GSE to repay
its obligations. In such a case, the proposed rule would set the Bank's
unsecured credit limit, including all federal funds transactions, at
100 percent of the Bank's capital. That limit is the same as the one
that applies to the Banks' exposures to the Enterprises, as calculated
under the current regulation pursuant to FHFA Regulatory Interpretation
2010-RI-05, which the proposed rule would codify into the
regulations.\67\ A Bank would calculate its unsecured credit limit for
any other GSE (other than another Bank) that does not meet these
criteria the same way that it would for any other counterparty.\68\
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\67\ See https://www.fhfa.gov/SupervisionRegulation/LegalDocuments/Documents/Regulatory-Interpretations/2010-RI-05.pdf.
\68\ This approach for GSEs is similar to the approach adopted
jointly by FHFA and other prudential regulators in the margin and
capital rules for uncleared swaps. In the margin and capital rules,
agencies provide different treatment for collateral issued by a GSE
operating with explicit United States government support from that
issued by other GSEs. See, Final Rule: Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840, 74870-71 (Nov.
30, 2015).
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Reporting. Proposed Sec. 1277.7(e) would carry over the provisions
from the current regulation that require a Bank to report certain
unsecured exposures and violations of the unsecured credit limits. FHFA
would expect a Bank to make these reports in accordance with any
instructions in FHFA Data Reporting Manual or in applicable related
guidance issued by FHFA.\69\
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\69\ See, Advisory Bulletin: FHLBank Unsecured Credit Exposure
Reporting, AB 2015-04 (July 1, 2015).
---------------------------------------------------------------------------
Calculation of Credit Exposures. Proposed Sec. 1277.7(f) would
establish the requirements for measuring a Bank's unsecured extensions
of credit. For on-balance sheet transactions, other than derivative
transactions, the rule would provide that the unsecured extension of
credit would equal the amortized cost of the transaction plus net
payments due the Bank, subject to an exception for those transactions
or obligations that the Bank carries at fair value where any change in
fair value is recognized in income. For these items, the unsecured
extension of credit would equal the fair value of the item. This
approach is similar to the approach applied under proposed Sec. 1277.4
for calculating credit risk capital charges for non-mortgage assets.
FHFA believes that this approach best captures the amount that a Bank
has at risk should a counterparty default
[[Page 30789]]
on any unsecured credit extended by the Bank.
For non-cleared derivatives transactions, the total unsecured
credit exposure would equal the Bank's current and future potential
credit exposures calculated in accordance with the proposed credit risk
capital provision, plus the amount of any collateral posted by the Bank
that exceeds the amount the Bank owes to its counterparty, but only to
the extent such excess posted collateral is not held by a third-party
custodian in accordance with FHFA's margin and capital rule for
uncleared swaps.\70\ Similar to determining a credit exposure for a
derivatives contract under the credit risk capital provision, the Bank
would not count as an unsecured extension of credit any portion of the
current and future potential credit exposure that is covered by
collateral posted by a counterparty and held by or on behalf of the
Bank, so long as the collateral is held in accordance with the
requirements in proposed Sec. 1277.4(e)(2) and (e)(3).
---------------------------------------------------------------------------
\70\ See 12 CFR 1221.7(c) and (d). Thus, the amount of
collateral that is posted by a Bank and is segregated with a third-
party custodian consistent with the requirements of the swaps margin
and capital rule would not be included in the Bank's unsecured
credit exposure arising from a particular derivatives contract.
---------------------------------------------------------------------------
For off-balance sheet items, the unsecured extension of credit
would equal the credit equivalent amount for that item, calculated in
accordance with proposed Sec. 1277.4(g). As with the current
regulation, proposed Sec. 1277.7(f) also provides that any debt
obligation or debt security (other than a mortgage-backed or other
asset-backed security or acquired member asset) shall be considered an
unsecured extension of credit. Also consistent with the current
regulation, this provision provides an exception for any amount owed to
the Bank under a debt obligation or debt security for which the Bank
holds collateral consistent with the requirements of proposed Sec.
1277.4(f)(2)(ii) or any other amount that FHFA determines on a case-by-
case basis should not be considered an unsecured extension of credit.
Exceptions to the unsecured credit limits. Section 1277.7(g) of the
proposed rule would include four separate exceptions to the regulatory
limits on extensions of unsecured credit. Two of these exceptions,
pertaining to obligations of or guaranteed by the U.S. and to
extensions of credit from one Bank to another Bank, are being carried
over without change from the current Finance Board regulations. The
proposed rule would add a third exception, which would apply to any
derivatives transaction accepted for clearing by a derivatives clearing
organization. FHFA proposes to exclude cleared derivatives transactions
from the rule given the Dodd-Frank Act mandates that parties clear
certain standardized derivatives transactions. When a Bank submits a
derivatives contract for clearing, the derivatives clearing
organization becomes the counterparty to the contract. Given that a
limited number of derivatives clearing organizations, or in some cases
only a single organization, may clear specific classes of contracts,
imposing the unsecured limits on cleared derivatives contracts may make
it difficult for the Banks to fulfill the legal requirement to clear
these contracts and frustrate the intent of the Dodd-Frank Act. In
addition, the derivatives clearing organizations are subject to
comprehensive federal regulatory oversight including regulations
designed to protect the customers that use the clearing services. Even
though FHFA proposes to exclude cleared derivatives contracts from
coverage under this rule, it would expect Banks to develop internal
policies to address exposures to specific clearing organizations that
take account of the Bank's specific derivatives activity and clearing
options. The proposed rule would add a fourth exception, which would
incorporate the substance of a Finance Board regulatory interpretation,
2002-RI-05, pertaining to certain obligations issued by state housing
finance agencies. Under that provision, a bond issued by a state
housing finance agency would not be subject to the unsecured credit
limits if the Bank documents that the obligation principally secured by
high-quality mortgage loans or mortgage-backed securities or by
payments on such assets, is not a subordinated tranche of a bond
issuance, and the Bank has determined that it has an internal credit
rating of no lower than FHFA 2.
Proposed Sec. 1277.8--Reporting Requirements
Proposed Sec. 1277.8 provides that each Bank shall report
information related to capital or other matters addressed by part 1277
in accordance with instructions provided in the Data Reporting Manual
issued by FHFA, as amended from time to time.
IV. Considerations of Differences Between the Banks and the Enterprises
When promulgating regulations relating to the Banks, section
1313(f) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 requires the Director of FHFA (Director) to
consider the differences between the Banks and the Enterprises with
respect to the Banks' cooperative ownership structure; mission of
providing liquidity to members; affordable housing and community
development mission; capital structure; and joint and several
liability.\71\ FHFA, in preparing this proposed rule, considered the
differences between the Banks and the Enterprises as they relate to the
above factors. FHFA requests comments from the public about whether
these differences should result in any revisions to the proposed rule.
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\71\ See 12 U.S.C. 4513.
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V. Paperwork Reduction Act
The proposed rule amendments do not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). Therefore, FHFA has not submitted any information to the
Office of Management and Budget for review.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified the regulation will not have a
significant economic impact on a substantial number of small entities.
5 U.S.C. 605(b). FHFA has considered the impact of the proposed rule
under the Regulatory Flexibility Act, and certifies that the proposed
rule, if adopted as a final rule, would not have a significant economic
impact on a substantial number of small entities because the proposed
rule is applicable only to the Banks, which are not small entities for
purposes of the Regulatory Flexibility Act.
List of Subjects
12 CFR Parts 930 and 932
Capital, Credit, Federal home loan banks, Investments, Reporting
and recordkeeping requirements.
12 CFR Part 1277
Capital, Credit, Federal home loan banks, Investments, Reporting
and recordkeeping requirements.
Accordingly, for reasons stated in the Preamble, and under the
authority of 12 U.S.C. 1426, 1436(a), 1440, 1443, 1446, 4511, 4513,
4514, 4526, 4612, FHFA
[[Page 30790]]
proposes to amend subchapter E of chapter IX and subchapter D of
chapter XII of title 12 of the Code of Federal Regulations as follows:
CHAPTER IX--FEDERAL HOUSING FINANCE BOARD
Subchapter E--[Removed and Reserved]
0
1. Subchapter E, consisting of parts 930 and 932 is removed and
reserved.
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
Subchapter D--Federal Home Loan Banks
PART 1277--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS, CAPITAL
STOCK AND CAPITAL PLANS
0
2. The authority citation for part 1277 continues to read as follows:
Authority: 12 U.S.C. 1426, 1436(a), 1440, 1443, 1446, 4511,
4513, 4514, 4526, and 4612.
Subpart A--Definitions
0
3. Amend Sec. 1277.1 by adding in alphabetical order definitions for
``affiliated counterparty,'' ``charges against the capital of a Bank,''
``commitment to make an advance (or acquire a loan) subject to certain
drawdown,'' ``collateralized mortgage obligation,'' ``credit
derivative,'' ``credit risk,'' ``derivatives clearing organization,''
``derivatives contract,'' ``eligible master netting agreement,''
``exchange rate contracts,'' ``Government Sponsored Enterprise,''
``interest rate contracts,'' ``market risk,'' ``market value at risk,''
``non-mortgage asset,'' ``non-rated asset,'' ``operational risk,''
``residential mortgage,'' ``residential mortgage security,'' ``sales of
federal funds subject to a continuing contract,'' and ``total assets''
to read as follows:
Sec. 1277.1 Definitions.
* * * * *
Affiliated counterparty means a counterparty of a Bank that
controls, is controlled by, or is under common control with another
counterparty of the Bank. For the purposes of this definition only,
direct or indirect ownership (including beneficial ownership) of more
than 50 percent of the voting securities or voting interests of an
entity constitutes control.
Charges against the capital of the Bank means an other than
temporary decline in the Bank's total equity that causes the value of
total equity to fall below the Bank's aggregate capital stock amount.
* * * * *
Collateralized mortgage obligation means any instrument backed or
collateralized by residential mortgages or residential mortgage
securities, that includes two or more tranches or classes, or is
otherwise structured in any manner other than as a pass-through
security.
Commitment to make an advance (or acquire a loan) subject to
certain drawdown means a legally binding agreement that commits the
Bank to make an advance or acquire a loan, at or by a specified future
date.
* * * * *
Credit derivative means a derivatives contract that transfers
credit risk.
Credit risk means the risk that the market value, or estimated fair
value if market value is not available, of an obligation will decline
as a result of deterioration in creditworthiness.
Derivatives clearing organization means an organization that clears
derivatives contracts and is registered with the Commodity Futures
Trading Commission as a derivatives clearing organization pursuant to
section 5b(a) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(a)),
or that the Commodity Futures Trading Commission has exempted from
registration by rule or order pursuant to section 5b(h) of the
Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(h)), or is registered
with the SEC as a clearing agency pursuant to section 17A of the 1934
Act (15 U.S.C. 78q-1), or that the SEC has exempted from registration
as a clearing agency under section 17A of the 1934 Act (15 U.S.C. 78q-
1).
Derivatives contract means generally a financial contract the value
of which is derived from the values of one or more underlying assets,
reference rates, or indices of asset values, or credit-related events.
Derivatives contracts include interest rate, foreign exchange rate,
equity, precious metals, commodity, and credit contracts, and any other
instruments that pose similar risks.
Eligible master netting agreement has the same meaning as set forth
in Sec. 1221.2 of this chapter.
Exchange rate contracts include cross-currency interest-rate swaps,
forward foreign exchange rate contracts, currency options purchased,
and any similar instruments that give rise to similar risks.
* * * * *
Government Sponsored Enterprise, or GSE, means a United States
Government-sponsored agency or instrumentality originally established
or chartered to serve public purposes specified by the United States
Congress, but whose obligations are not obligations of the United
States and are not guaranteed by the United States.
Interest rate contracts include single currency interest-rate
swaps, basis swaps, forward rate agreements, interest-rate options, and
any similar instrument that gives rise to similar risks, including
when-issued securities.
Market risk means the risk that the market value, or estimated fair
value if market value is not available, of a Bank's portfolio will
decline as a result of changes in interest rates, foreign exchange
rates, or equity or commodity prices.
Market value at risk is the loss in the market value of a Bank's
portfolio measured from a base line case, where the loss is estimated
in accordance with Sec. 1277.5 of this part.
* * * * *
Non-mortgage asset means an asset held by a Bank other than an
advance, a non-rated asset, a residential mortgage, a residential
mortgage security, a collateralized mortgage obligation, or a
derivatives contract.
Non-rated asset means a Bank's cash, premises, plant and equipment,
and investments authorized pursuant to Sec. 1265.3(e) and (f).
Operational risk means the risk of loss resulting from inadequate
or failed internal processes, people and systems, or from external
events.
* * * * *
Residential mortgage means a loan secured by a residential
structure that contains one-to-four dwelling units, regardless of
whether the structure is attached to real property. The term
encompasses, among other things, loans secured by individual
condominium or cooperative units and manufactured housing, whether or
not the manufactured housing is considered real property under state
law, and participation interests in such loans.
Residential mortgage security means any instrument representing an
undivided interest in a pool of residential mortgages.
Sales of federal funds subject to a continuing contract means an
overnight federal funds loan that is automatically renewed each day
unless terminated by either the lender or the borrower.
Total assets mean the total assets of a Bank, as determined in
accordance with GAAP.
* * * * *
0
4. Add Subpart B, consisting of Sec. Sec. 1277.2 through 1277.8 to
read as follows:
Subpart B--Bank Capital Requirements
Sec.
1277.2 Total capital requirement.
1277.3 Risk-based capital requirement.
[[Page 30791]]
1277.4 Credit risk capital requirement.
1277.5 Market risk capital requirement.
1277.6 Operational risk capital requirement.
1277.7 Limits on unsecured extensions of credit; reporting
requirements.
1277.8 Reporting requirements.
Sec. 1277.2 Total capital requirement.
Each Bank shall maintain at all times:
(a) Total capital in an amount at least equal to 4.0 percent of the
Bank's total assets; and
(b) A leverage ratio of total capital to total assets of at least
5.0 percent of the Bank's total assets. For purposes of determining
this leverage ratio, total capital shall be computed by multiplying the
Bank's permanent capital by 1.5 and adding to this product all other
components of total capital.
Sec. 1277.3 Risk-based capital requirement.
Each Bank shall maintain at all times permanent capital in an
amount at least equal to the sum of its credit risk capital
requirement, its market risk capital requirement, and its operational
risk capital requirement, calculated in accordance with Sec. Sec.
1277.4, 1277.5, and 1277.6 of this part, respectively.
Sec. 1277.4 Credit risk capital requirement.
(a) General requirement. Each Bank's credit risk capital
requirement shall equal the sum of the Bank's individual credit risk
capital charges for all advances, residential mortgage assets, non-
mortgage assets, non-rated assets, off-balance sheet items, and
derivatives contracts, as calculated in accordance with this section.
(b) Credit risk capital charge for residential mortgage assets. The
credit risk capital charge for residential mortgages, residential
mortgage securities, and collateralized mortgage obligations shall be
determined as set forth in paragraph (g) of this section.
(c) Credit risk capital charge for advances, non-mortgage assets,
and non-rated assets. Except as provided in paragraph (j) of this
section, each Bank's credit risk capital charge for advances, non-
mortgage assets, and non-rated assets shall be equal to the amortized
cost of the asset multiplied by the credit risk percentage requirement
assigned to that asset pursuant to paragraphs (f)(1) or (f)(2) of this
section. For any such asset carried at fair value where any change in
fair value is recognized in the Bank's income, the Bank shall calculate
the capital charge based on the fair value of the asset rather than its
amortized cost.
(d) Credit risk capital charge for off-balance sheet items. Each
Bank's credit risk capital charge for an off-balance sheet item shall
be equal to the credit equivalent amount of such item, as determined
pursuant to paragraph (h) of this section, multiplied by the credit
risk percentage requirement assigned to that item pursuant to paragraph
(f)(1) and Table 1.2 to Sec. 1277.4, except that the credit risk
percentage requirement applied to the credit equivalent amount for a
standby letter of credit shall be that for an advance with the same
remaining maturity as that of the standby letter of credit, as
specified in Table 1.1 to Sec. 1277.4.
(e) Derivatives contracts. (1) Except as provided in paragraph
(e)(4), the credit risk capital charge for a derivatives contract
entered into by a Bank shall equal, after any adjustment allowed under
paragraph (e)(2), the sum of:
(i) The current credit exposure for the derivatives contract,
calculated in accordance with paragraph (i)(1) of this section,
multiplied by the credit risk percentage requirement assigned to that
derivatives contract pursuant to Table 1.2 of paragraph (f)(1) of this
section, provided that a Bank shall deem the remaining maturity of the
derivatives contract to be less than one year for the purpose of
applying Table 1.2; plus
(ii) The potential future credit exposure for the derivatives
contract, calculated in accordance with paragraph (i)(2) of this
section, multiplied by the credit risk percentage requirement assigned
to that derivatives contract pursuant to Table 1.2 of paragraph (f)(1)
of this section, where a Bank uses the actual remaining maturity of the
derivatives contract for the purpose of applying Table 1.2 of paragraph
(f)(1) of this section; plus
(iii) A credit risk capital charge applicable to the amount of
collateral posted by the Bank with respect to a derivatives contract
that exceeds the Bank's current payment obligation under that
derivatives contract, where the charge equals the amount of such excess
collateral multiplied by the credit risk percentage requirement
assigned under Table 1.2 of paragraph (f)(1) of this section for the
custodian or other party that holds the collateral, and where a Bank
deems the exposure to have a remaining maturity of one year or less
when applying Table 1.2.
(2)(i) The credit risk capital charge calculated under paragraph
(e)(1) of this section may be adjusted for any collateral held by or on
behalf of the Bank in accordance with paragraph (e)(3) of this section
against an exposure from the derivatives contract as follows:
(A) The discounted value of the collateral shall first be applied
to reduce the current credit exposure of the derivatives contract
subject the capital charge;
(B) If the total discounted value of the collateral held exceeds
the current credit exposure of the contract, any remaining amounts may
be applied to reduce the amount of the potential future credit exposure
of the derivatives contract subject to the capital charge; and
(C) The amount of the collateral used to reduce the exposure to the
derivatives contract is subject to the applicable credit risk capital
charge required by paragraphs (b) or (c) of this section.
(ii) If a Bank's counterparty's payment obligations under a
derivatives contract are unconditionally guaranteed by a third-party,
then the credit risk percentage requirement applicable to the
derivatives contract may be that associated with the guarantor, rather
than the Bank's counterparty.
(3) The credit risk capital charge may be adjusted as described in
paragraph (e)(2)(i) for collateral held against the derivatives
contract exposure only if the collateral is:
(i) Held by, or has been paid to, the Bank or held by an
independent, third-party custodian on behalf of the Bank pursuant to a
custody agreement that meets the requirements of Sec. 1221.7(c) and
(d) of this chapter;
(ii) Legally available to absorb losses;
(iii) Of a readily determinable value at which it can be liquidated
by the Bank; and
(iv) Subject to an appropriate discount to protect against price
decline during the holding period and the costs likely to be incurred
in the liquidation of the collateral, provided that such discount shall
equal at least the minimum discount required under Appendix B to part
1221 of this chapter for collateral listed in that Appendix, or be
estimated by the Bank based on appropriate assumptions about the price
risks and liquidation costs for collateral not listed in Appendix B to
part 1221.
(4) Notwithstanding any other provision in this paragraph (e), the
credit risk capital charge for:
(i) A foreign exchange rate contract (excluding gold contracts)
with an original maturity of 14 calendar days or less shall be zero;
(ii) A derivatives contract cleared by a derivatives clearing
organization shall equal 0.16 percent times the sum of the following:
(A) The current credit exposure for the derivatives contract,
calculated in accordance with paragraph (i)(1) of this section;
(B) The potential future credit exposure for the derivatives
contract calculated in accordance with paragraph (i)(2) of this
section; and
[[Page 30792]]
(C) The amount of collateral that the Bank has posted to, and is
held by, the derivatives clearing organization, but only to the extent
the amount exceeds the Bank's current credit exposure to the
derivatives clearing organization.
(f) Determination of credit risk percentage requirements. (1)
General. (i) Each Bank shall determine the credit risk percentage
requirement applicable to each advance and each non-rated asset by
identifying the appropriate category from Tables 1.1 or 1.3 to Sec.
1277.4, respectively, to which the advance or non-rated asset belongs.
Except as provided in paragraphs (f)(2) and (f)(3) of this section,
each Bank shall determine the credit risk percentage requirement
applicable to each non-mortgage asset, off-balance sheet item, and
derivatives contract by identifying the appropriate category set forth
in Table 1.2 to Sec. 1277.4 to which the asset, item, or contract
belongs, given its FHFA Credit Rating category, as determined in
accordance with paragraph (f)(1)(ii) of this section, and remaining
maturity. Each Bank shall use the applicable credit risk percentage
requirement to calculate the credit risk capital charge for each asset,
item, or contract in accordance with paragraphs (c), (d), or (e) of
this section, respectively. The relevant categories and credit risk
percentage requirements are provided in the following Tables 1.1
through 1.3 to Sec. 1277.4--
Table 1.1 to Sec. 1277.4--Requirement for Advances
------------------------------------------------------------------------
Percentage
Maturity of advances applicable
to advances
------------------------------------------------------------------------
Advances with:
Remaining maturity <=4 years............................. 0.09
Remaining maturity >4 years to 7 years................... 0.23
Remaining maturity >7 years to 10 years.................. 0.35
Remaining maturity >10 years............................. 0.51
------------------------------------------------------------------------
Table 1.2 to Sec. 1277.4--Requirement for Internally Rated Non-Mortgage Assets, Off-Balance Sheet Items, and
Derivatives Contracts
[Based on remaining maturity]
----------------------------------------------------------------------------------------------------------------
Applicable percentage
-------------------------------------------------------------------------------
FHFA Credit Rating >3 yrs to 7 >7 yrs to 10
<=1 year >1 yr to 3 yrs yrs yrs >10 yrs
----------------------------------------------------------------------------------------------------------------
U.S. Government Securities...... 0.00 0.00 0.00 0.00 0.00
FHFA 1.......................... 0.20 0.59 1.37 2.28 3.32
FHFA 2.......................... 0.36 0.87 1.88 3.07 4.42
FHFA 3.......................... 0.64 1.31 2.65 4.22 6.01
FHFA 4.......................... 3.24 4.79 7.89 11.51 15.64
----------------------------------------------------------------------------------------------------------------
FHFA Ratings Corresponding to Below FHFA Investment Quality
``FHFA Investment Quality'' has the meaning provided in 12 CFR 1267.1
----------------------------------------------------------------------------------------------------------------
FHFA 5.......................... 9.24 11.46 15.90 21.08 27.00
FHFA 6.......................... 15.99 18.06 22.18 26.99 32.49
FHFA 7.......................... 100.00 100.00 100.00 100.00 100.00
----------------------------------------------------------------------------------------------------------------
Table 1.3 to Sec. 1277.4--Requirement for Non-Rated Assets
------------------------------------------------------------------------
Applicable
Type of unrated asset percentage
------------------------------------------------------------------------
Cash....................................................... 0.00
Premises, Plant and Equipment.............................. 8.00
Investments Under 12 CFR 1265.3(e) & (f)................... 8.00
------------------------------------------------------------------------
(ii) Each Bank shall develop a methodology to be used to assign an
internal credit risk rating to each counterparty, asset, item, and
contract that is subject to Table 1.2 to Sec. 1277.4. The methodology
shall involve an evaluation of counterparty or asset risk factors, and
may incorporate, but must not rely solely upon, credit ratings prepared
by credit rating agencies. Each Bank shall align its various internal
credit ratings to the appropriate categories of FHFA Credit Ratings
included in Table 1.2 to Sec. 1277.4. In doing so, each Bank shall
ensure that the credit risk associated with any asset assigned to FHFA
Categories 1 through 4 is no greater than that associated with an
instrument that would be deemed to be of ``investment quality,'' as
that term is defined by Sec. 1267.1 of this chapter. FHFA Categories 3
through 1 shall include assets of progressively higher credit quality
than Category 4, and FHFA Credit Rating categories 5 through 7 shall
include assets of progressively lower credit quality. After aligning
its internal credit ratings to the appropriate categories of Table 1.2
to Sec. 1277.4, each Bank shall assign each counterparty, asset, item,
and contract to the appropriate FHFA Credit Rating category based on
the applicable internal credit rating.
(2) Exception for assets subject to a guarantee or secured by
collateral. (i) When determining the applicable credit risk percentage
requirement from Table 1.2 to Sec. 1277.4 for a non-mortgage asset
that is subject to an unconditional guarantee by a third-party
guarantor or is secured as set forth in paragraph (f)(2)(ii) of this
section, the Bank may substitute the credit risk percentage requirement
associated with the guarantor or the collateral, as appropriate, for
the credit risk percentage requirement associated with that portion of
the asset subject to the guarantee or covered by the collateral.
(ii) For purposes of paragraph (f)(2)(i) of this section, a non-
mortgage asset shall be considered to be secured if the collateral is:
(A) Actually held by the Bank or an independent, third-party
custodian on the Bank's behalf, or, if posted by a Bank member and
permitted under the Bank's collateral agreement with that member, by
the Bank's member or an affiliate of that member where the term
``affiliate'' has the same meaning as in Sec. 1266.1 of this chapter;
(B) Legally available to absorb losses;
(C) Of a readily determinable value at which it can be liquidated
by the Bank;
(D) Held in accordance with the provisions of the Bank's member
products policy established pursuant to Sec. 1239.30 of this chapter,
if the collateral has been posted by a member or an affiliate of a
member; and
(E) Subject to an appropriate discount to protect against price
decline during
[[Page 30793]]
the holding period and the costs likely to be incurred in the
liquidation of the collateral.
(3) Exception for obligations of the Enterprises. A Bank may use a
credit risk capital charge of zero for any non-mortgage-related debt
instrument or obligation issued by an Enterprise, provided that the
Enterprise receives capital support or other form of direct financial
assistance from the United States government that enables the
Enterprise to repay those obligations.
(4) Exception for methodology deficiencies. FHFA may direct a Bank,
on a case-by-case basis, to change the calculated credit risk capital
charge for any non-mortgage asset, off-balance sheet item, or
derivatives contract, as necessary to account for any deficiency that
FHFA identifies with respect to a Bank's internal credit rating
methodology for such assets, items, or contracts.
(g) Credit risk capital charges for residential mortgage assets--
(1) Bank determination of credit risk percentage. (i) Each Bank's
credit risk capital charge for a residential mortgage, residential
mortgage security, or collateralized mortgage obligation shall be equal
to the asset's amortized cost multiplied by the credit risk percentage
requirement assigned to that asset pursuant to paragraphs (g)(1)(ii) or
(g)(2) of this section. For any such asset carried at fair value where
any change in fair value is recognized in the Bank's income, the Bank
shall calculate the capital charge based on the fair value of the asset
rather than its amortized cost.
(ii) Each Bank shall determine the credit risk percentage
requirement applicable to each residential mortgage and residential
mortgage security by identifying the appropriate FHFA RMA category set
forth in Table 1.4 to Sec. 1277.4 to which the asset belongs, and
shall determine the credit risk percentage requirement applicable to
each collateralized mortgage obligation by identifying the appropriate
FHFA CMO category set forth in Table 1.4 to Sec. 1277.4 to which the
asset belongs, with the appropriate categories being determined in
accordance with paragraph (g)(1)(iii) of this section.
(iii) Each Bank shall develop a methodology to be used to assign an
internal credit risk rating to each of its residential mortgages,
residential mortgage securities, and collateralized mortgage
obligations. For residential mortgages, the methodology shall involve
an evaluation of the residential mortgages and any credit enhancements
or guarantees, including an assessment of the creditworthiness of the
providers of such enhancements or guarantees. In the case of a
residential mortgage security or collateralized mortgage obligation,
the methodology shall involve an evaluation of the underlying mortgage
collateral, the structure of the security, and any credit enhancements
or guarantees, including an assessment of the creditworthiness of the
providers of such enhancements or guarantees. Such methodologies may
incorporate, but may not rely solely upon, credit ratings prepared by
credit ratings agencies. Each Bank shall align its various internal
credit ratings to the appropriate categories of FHFA Credit Ratings
included in Table 1.4 to Sec. 1277.4. In doing so, each Bank shall
ensure that the credit risk associated with any asset assigned to
categories FHFA RMA 1 through 4 or FHFA CMO 1 through 4 is no greater
than that associated with an instrument that would be deemed to be of
``investment quality,'' as that term is defined by 12 CFR 1267.1. FHFA
Categories 3 through 1 shall include assets of progressively higher
credit quality than Category 4, and FHFA Categories 5 through 7 shall
include assets of progressively lower credit quality. After aligning
its internal credit ratings to the appropriate categories of Table 1.4
to Sec. 1277.4, each Bank shall assign each of its residential
mortgages, residential mortgage securities, and collateralized mortgage
obligation to the appropriate FHFA Credit Ratings category based on the
Bank's internal credit rating of that asset.
Table 1.4 to Sec. 1277.4--Internally Rated Residential Mortgage Assets
------------------------------------------------------------------------
Percentage
applicable
------------------------------------------------------------------------
Categories for residential mortgages and residential mortgage securities
------------------------------------------------------------------------
Ratings Above ``AMA Investment Grade'' *:
FHFA RMA 1.......................................... 0.37
FHFA RMA 2.......................................... 0.60
FHFA RMA 3.......................................... 0.86
FHFA RMA 4.......................................... 1.20
Ratings Below ``AMA Investment Grade'':
FHFA RMA 5.......................................... 2.40
FHFA RMA 6.......................................... 4.80
FHFA RMA 7.......................................... 34.00
------------------------------------------------------------------------
Categories For Collateralized Mortgage Obligations
------------------------------------------------------------------------
Ratings Above ``FHFA Investment Quality'' **:
FHFA CMO 1.......................................... 0.37
FHFA CMO 2.......................................... 0.60
FHFA CMO 3.......................................... 1.60
FHFA CMO 4.......................................... 4.45
Ratings Below ``FHFA Investment Quality'':
FHFA CMO 5.......................................... 13.00
FHFA CMO 6.......................................... 34.00
FHFA CMO 7.......................................... 100.00
------------------------------------------------------------------------
* ``AMA Investment Grade'' has the meaning provided in 12 CFR 1268.1.
** ``FHFA Investment Quality'' has the same meaning as ``investment
quality'' as provided in 12 CFR 1267.1.
(2) Exceptions to Table 1.4 to Sec. 1277.4 credit risk
percentages. (i) A Bank may use a credit risk capital charge of zero
for any residential mortgage, residential mortgage security, or
collateralized mortgage obligation, or portion thereof,
[[Page 30794]]
guaranteed by an Enterprise as to payment of principal and interest,
provided that the Enterprise receives capital support or other form of
direct financial assistance from the United States government that
enables the Enterprise to repay those obligations;
(ii) A Bank may use a credit risk capital charge of zero for a
residential mortgage, residential mortgage security, or collateralized
mortgage obligation, or any portion thereof, guaranteed or insured as
to payment of principal and interest by a department or agency of the
United States government that is backed by the full faith and credit of
the United States; and
(iii) FHFA may direct a Bank, on a case-by-case basis, to change
the calculated credit risk capital charge for any residential mortgage,
residential mortgage security, or collateralized mortgage obligation,
as necessary to account for any deficiency that FHFA identifies with
respect to a Bank's internal credit rating methodology for residential
mortgages, residential mortgage securities, or collateralized mortgage
obligations.
(h) Calculation of credit equivalent amount for off-balance sheet
items. (1) General requirement. The credit equivalent amount for an
off-balance sheet item shall be determined by an FHFA-approved model or
shall be equal to the face amount of the instrument multiplied by the
credit conversion factor assigned to such risk category of instruments,
subject to the exceptions in paragraph (h)(2) of this section, provided
in the following Table 2 to Sec. 1277.4:
Table 2 to Sec. 1277.4--Credit Conversion Factors for Off-Balance
Sheet Items
------------------------------------------------------------------------
Credit
conversion
Instrument factor (in
percent)
------------------------------------------------------------------------
Asset sales with recourse where the credit risk remains 100
with the Bank..........................................
Commitments to make advances subject to certain drawdown ..............
Commitments to acquire loans subject to certain drawdown ..............
Standby letters of credit............................... 50
Other commitments with original maturity of over one ..............
year
Other commitments with original maturity of one year or 20
less...................................................
------------------------------------------------------------------------
(2) Exceptions. The credit conversion factor shall be zero for
Other Commitments With Original Maturity of Over One Year and Other
Commitments With Original Maturity of One Year or Less, for which Table
2 to Sec. 1277.4 would otherwise apply credit conversion factors of 50
percent or 20 percent, respectively, if the commitments are
unconditionally cancelable, or effectively provide for automatic
cancellation, due to the deterioration in a borrower's
creditworthiness, at any time by the Bank without prior notice.
(i) Calculation of credit exposures for derivatives contracts. (1)
Current credit exposure. (i) Single derivatives contract. The current
credit exposure for derivatives contracts that are not subject to an
eligible master netting agreement shall be:
(A) If the mark-to-market value of the contract is positive, the
mark-to-market value of the contract; or
(B) If the mark-to-market value of the contract is zero or
negative, zero.
(ii) Derivatives contracts subject to an eligible master netting
agreement. The current credit exposure for multiple derivatives
contracts executed with a single counterparty and subject to an
eligible master netting agreement shall be calculated on a net basis
and shall equal:
(A) The net sum of all positive and negative mark-to-market values
of the individual derivatives contracts subject to the eligible master
netting agreement, if the net sum of the mark-to-market values is
positive; or
(B) Zero, if the net sum of the mark-to-market values is zero or
negative.
(2) Potential future credit exposure. The potential future credit
exposure for derivatives contracts, including derivatives contracts
with a negative mark-to-market value, shall be calculated:
(i) Using an internal initial margin model that meets the
requirements of Sec. 1221.8 of this chapter and is approved by FHFA
for use by the Bank, or that has been approved under regulations
similar to Sec. 1221.8 of this chapter for use by the Bank's
counterparty to calculate initial margin for those derivatives
contracts for which the calculation is being done; or
(ii) By applying the standardized approach in Appendix A to Part
1221 of this chapter.
(j) Credit risk capital charge for non-mortgage assets hedged with
credit derivatives. (1) Credit derivatives with a remaining maturity of
one year or more. The credit risk capital charge for a non-mortgage
asset that is hedged with a credit derivative that has a remaining
maturity of one year or more may be reduced only in accordance with
paragraph (j)(3) or (j)(4) of this section and only if the credit
derivative provides substantial protection against credit losses.
(2) Credit derivatives with a remaining maturity of less than one
year. The credit risk capital charge for a non-mortgage asset that is
hedged with a credit derivative that has a remaining maturity of less
than one year may be reduced only in accordance with paragraph (j)(3)
of this section and only if the remaining maturity on the credit
derivative is identical to or exceeds the remaining maturity of the
hedged non-mortgage asset and the credit derivative provides
substantial protection against credit losses.
(3) Capital charge reduced to zero. The credit risk capital charge
for a non-mortgage asset shall be zero if a credit derivative is used
to hedge the credit risk on that asset in accordance with paragraph
(j)(1) or (j)(2) of this section, provided that:
(i) The remaining maturity for the credit derivative used for the
hedge is identical to or exceeds the remaining maturity for the hedged
non-mortgage asset, and either:
(A) The asset referenced in the credit derivative is identical to
the hedged non-mortgage asset; or
(B) The asset referenced in the credit derivative is different from
the hedged non-mortgage asset, but only if the asset referenced in the
credit derivative and the hedged non-mortgage asset have been issued by
the same obligor, the asset referenced in the credit derivative ranks
pari passu to, or more junior than, the hedged non-mortgage asset and
has the same maturity as the hedged non-mortgage asset, and cross-
default clauses apply; and
[[Page 30795]]
(ii) The credit risk capital charge for the credit derivatives
contract calculated pursuant to paragraph (e) of this section is still
applied.
(4) Capital charge reduction in certain other cases. The credit
risk capital charge for a non-mortgage asset hedged with a credit
derivative in accordance with paragraph (j)(1) of this section shall
equal the sum of the credit risk capital charges for the hedged and
unhedged portion of the non-mortgage asset provided that:
(i) The remaining maturity for the credit derivative is less than
the remaining maturity for the hedged non-mortgage asset and either:
(A) The non-mortgage asset referenced in the credit derivative is
identical to the hedged asset; or
(B) The asset referenced in the credit derivative is different from
the hedged non-mortgage asset, but only if the asset referenced in the
credit derivative and the hedged non-mortgage asset have been issued by
the same obligor, the asset referenced in the credit derivative ranks
pari passu to, or more junior than, the hedged non-mortgage asset and
has the same maturity as the hedged non-mortgage asset, and cross-
default clauses apply; and
(ii) The credit risk capital charge for the unhedged portion of the
non-mortgage asset equals:
(A) The credit risk capital charge for the hedged non-mortgage
asset, calculated as the book value of the hedged non-mortgage asset
multiplied by that asset's credit risk percentage requirement assigned
pursuant to paragraph (f)(1) of this section where the appropriate
credit rating is that for the hedged non-mortgage asset and the
appropriate maturity is the remaining maturity of the hedged non-
mortgage asset; minus
(B) The credit risk capital charge for the hedged non-mortgage
asset, calculated as the book value of the hedged non-mortgage asset
multiplied by that asset's credit risk percentage requirement assigned
pursuant to paragraph (f)(1) of this section where the appropriate
credit rating is that for the hedged non-mortgage asset but the
appropriate maturity is deemed to be the remaining maturity of the
credit derivative; and
(iii) The credit risk capital charge for the hedged portion of the
non-mortgage asset is equal to the credit risk capital charge for the
credit derivative, calculated in accordance with paragraph (e) of this
section.
(k) Frequency of calculations. Each Bank shall perform all
calculations required by this section at least quarterly, unless
otherwise directed by FHFA, using the advances, residential mortgages,
residential mortgage securities, collateralized mortgage obligations,
non-rated assets, non-mortgage assets, off-balance sheet items, and
derivatives contracts held by the Bank, and, if applicable, the values
of, or FHFA Credit Ratings categories for, such assets, off-balance
sheet items, or derivatives contracts as of the close of business of
the last business day of the calendar period for which the credit risk
capital charge is being calculated.
Sec. 1277.5 Market risk capital requirement.
(a) General requirement. (1) Each Bank's market risk capital
requirement shall equal the market value of the Bank's portfolio at
risk from movements in interest rates, foreign exchange rates,
commodity prices, and equity prices that could occur during periods of
market stress, where the market value of the Bank's portfolio at risk
is determined using an internal market risk model that fulfills the
requirements of paragraph (b) of this section and that has been
approved by FHFA.
(2) A Bank may substitute an internal cash flow model to derive a
market risk capital requirement in place of that calculated using an
internal market risk model under paragraph (a)(1) of this section,
provided that:
(i) The Bank obtains FHFA approval of the internal cash flow model
and of the assumptions to be applied to the model; and
(ii) The Bank demonstrates to FHFA that the internal cash flow
model subjects the Bank's assets and liabilities, off-balance sheet
items, and derivatives contracts, including related options, to a
comparable degree of stress for such factors as will be required for an
internal market risk model.
(b) Measurement of market value at risk under a Bank's internal
market risk model. (1) Except as provided under paragraph (a)(2) of
this section, each Bank shall use an internal market risk model that
estimates the market value of the Bank's assets and liabilities, off-
balance sheet items, and derivatives contracts, including any related
options, and measures the market value of the Bank's portfolio at risk
of its assets and liabilities, off-balance sheet items, and derivatives
contracts, including related options, from all sources of the Bank's
market risks, except that the Bank's model need only incorporate those
risks that are material.
(2) The Bank's internal market risk model may use any generally
accepted measurement technique, such as variance-covariance models,
historical simulations, or Monte Carlo simulations, for estimating the
market value of the Bank's portfolio at risk, provided that any
measurement technique used must cover the Bank's material risks.
(3) The measures of the market value of the Bank's portfolio at
risk shall include the risks arising from the non-linear price
characteristics of options and the sensitivity of the market value of
options to changes in the volatility of the options' underlying rates
or prices.
(4) The Bank's internal market risk model shall use interest rate
and market price scenarios for estimating the market value of the
Bank's portfolio at risk, but at a minimum:
(i) The Bank's internal market risk model shall provide an estimate
of the market value of the Bank's portfolio at risk such that the
probability of a loss greater than that estimated shall be no more than
one percent;
(ii) The Bank's internal market risk model shall incorporate
scenarios that reflect changes in interest rates, interest rate
volatility, option-adjusted spreads, and shape of the yield curve, and
changes in market prices, equivalent to those that have been observed
over 120-business day periods of market stress. For interest rates, the
relevant historical observations should be drawn from the period that
starts at the end of the previous month and goes back to the beginning
of 1978;
(iii) The total number of, and specific historical observations
identified by the Bank as, stress scenarios shall be:
(A) Satisfactory to FHFA;
(B) Representative of the periods of the greatest potential market
stress given the Bank's portfolio, and
(C) Comprehensive given the modeling capabilities available to the
Bank; and
(iv) The measure of the market value of the Bank's portfolio at
risk may incorporate empirical correlations among interest rates.
(5) For any consolidated obligations denominated in a currency
other than U.S. Dollars or linked to equity or commodity prices, each
Bank shall, in addition to fulfilling the criteria of paragraph (b)(4)
of this section, calculate an estimate of the market value of its
portfolio at risk resulting from material foreign exchange, equity
price or commodity price risk, such that, at a minimum:
(i) The probability of a loss greater than that estimated shall not
exceed one percent;
(ii) The scenarios reflect changes in foreign exchange, equity, or
commodity market prices that have been observed over 120-business day
periods of market stress, as determined using historical data that is
from an appropriate period;
[[Page 30796]]
(iii) The total number of, and specific historical observations
identified by the Bank as, stress scenarios shall be:
(A) Satisfactory to FHFA;
(B) Representative of the periods of greatest potential stress
given the Bank's portfolio; and
(C) Comprehensive given the modeling capabilities available to the
Bank; and
(iv) The measure of the market value of the Bank's portfolio at
risk may incorporate empirical correlations within or among foreign
exchange rates, equity prices, or commodity prices.
(c) Independent validation of Bank internal market risk model or
internal cash flow model. (1) Each Bank shall conduct an independent
validation of its internal market risk model or internal cash flow
model within the Bank that is carried out by personnel not reporting to
the business line responsible for conducting business transactions for
the Bank. Alternatively, the Bank may obtain independent validation by
an outside party qualified to make such determinations. Validations
shall be done periodically, commensurate with the risk associated with
the use of the model, or as frequently as required by FHFA.
(2) The results of such independent validations shall be reviewed
by the Bank's board of directors and provided promptly to FHFA.
(d) FHFA approval of Bank internal market risk model or internal
cash flow model. (1) Each Bank shall obtain FHFA approval of an
internal market risk model or an internal cash flow model, including
subsequent material adjustments to the model made by the Bank, prior to
the use of any model. Each Bank shall make such adjustments to its
model as may be directed by FHFA.
(2) A model and any material adjustments to such model that were
approved by FHFA or the Federal Housing Finance Board shall meet the
requirements of paragraph (d)(1) of this section, unless such approval
is revoked or amended by FHFA.
(e) Frequency of calculations. Each Bank shall perform any
calculations or estimates required under this section at least
quarterly, unless otherwise directed by FHFA, using the assets,
liabilities, and off-balance sheet items, including derivatives
contracts, and options held by the Bank, and if applicable, the values
of any such holdings, as of the close of business of the last business
day of the calendar period for which the market risk capital
requirement is being calculated.
Sec. 1277.6 Operational risk capital requirement.
(a) General requirement. Except as authorized under paragraph (b)
of this section, each Bank's operational risk capital requirement shall
at all times equal 30 percent of the sum of the Bank's credit risk
capital requirement and market risk capital requirement.
(b) Alternative requirements. With the approval of FHFA, each Bank
may have an operational risk capital requirement equal to less than 30
percent but no less than 10 percent of the sum of the Bank's credit
risk capital requirement and market risk capital requirement if:
(1) The Bank provides an alternative methodology for assessing and
quantifying an operational risk capital requirement; or
(2) The Bank obtains insurance to cover operational risk from an
insurer acceptable to FHFA.
Sec. 1277.7 Limits on unsecured extensions of credit; reporting
requirements.
(a) Unsecured extensions of credit to a single counterparty. A Bank
shall not extend unsecured credit to any single counterparty (other
than a GSE described in and subject to the requirements of paragraph
(c) of this section) in an amount that would exceed the limits of this
paragraph. If a third-party provides an irrevocable, unconditional
guarantee of repayment of a credit (or any part thereof), the third-
party guarantor shall be considered the counterparty for purposes of
calculating and applying the unsecured credit limits of this section
with respect to the guaranteed portion of the transaction.
(1) General Limits. All unsecured extensions of credit by a Bank to
a single counterparty that arise from the Bank's on- and off-balance
sheet and derivatives transactions (but excluding the amount of sales
of federal funds with a maturity of one day or less and sales of
federal funds subject to a continuing contract) shall not exceed the
product of the maximum capital exposure limit applicable to such
counterparty, as determined in accordance with Table 1 of paragraph
(a)(4) of Sec. 1277.7, multiplied by the lesser of:
(i) The Bank's total capital; or
(ii) The counterparty's Tier 1 capital, or if Tier 1 capital is not
available, total capital (in each case as defined by the counterparty's
principal regulator) or some similar comparable measure identified by
the Bank.
(2) Overall limits including sales of overnight federal funds. All
unsecured extensions of credit by a Bank to a single counterparty that
arise from the Bank's on- and off-balance sheet and derivatives
transactions, including the amounts of sales of federal funds with a
maturity of one day or less and sales of federal funds subject to a
continuing contract, shall not exceed twice the limit calculated
pursuant to paragraph (a)(1) of this section.
(3) Limits for certain obligations issued by state, local, or
tribal governmental agencies. The limit set forth in paragraph (a)(1)
of this section, when applied to the marketable direct obligations of
state, local, or tribal government units or agencies that are excluded
from the prohibition against investments in whole mortgage loans or
other types of whole loans, or interests in such loans, by Sec.
1267.3(a)(4)(iii) of this chapter, shall be calculated based on the
Bank's total capital and the internal credit rating assigned to the
particular obligation, as determined in accordance with paragraph
(a)(5) of this section. If a Bank owns series or classes of obligations
issued by a particular state, local, or tribal government unit or
agency, or has extended other forms of unsecured credit to such entity
falling into different rating categories, the total amount of unsecured
credit extended by the Bank to that government unit or agency shall not
exceed the limit associated with the highest-rated obligation issued by
the entity and actually purchased by the Bank.
(4) Bank determination of applicable maximum capital exposure
limits. (i) Except as set forth in paragraph (a)(4)(ii) of this
section, a Bank shall determine the maximum capital exposure limit for
each counterparty by assigning the counterparty to the appropriate FHFA
Credit Rating category of Table 1 to Sec. 1277.7, based upon the
Bank's internal counterparty credit rating, as determined in accordance
with paragraph (a)(5) of this section, and the Bank's alignment of its
counterparty credit ratings to each of the FHFA Credit Rating
categories provided in the following Table 1 to Sec. 1277.7:
[[Page 30797]]
Table 1 to Sec. 1277.7--Maximum Limits on Unsecured Extensions of
Credit to a Single Counterparty by FHFA Credit Rating Category
------------------------------------------------------------------------
Maximum Capital
FHFA Credit Rating of counterparty exposure limit (in
percent)
------------------------------------------------------------------------
FHFA 1.............................................. 15
FHFA 2.............................................. 14
FHFA 3.............................................. 9
FHFA 4.............................................. 3
Ratings Below ``FHFA Investment Quality'' (``FHFA ..................
Investment Quality'' has the same meaning as
``investment quality'' as provided by 12 CFR
1267.1)............................................
FHFA 5 and Below.................................... 1
------------------------------------------------------------------------
(ii) If a Bank determines that a specific debt obligation issued by
a counterparty has a lower FHFA Credit Rating category than that
applicable to the counterparty, the total amount of the lower-rated
obligation held by the Bank may not exceed a sub-limit calculated in
accordance with paragraph (a)(1) of this section. The Bank shall use
the lower credit rating associated with the specific obligation to
determine the applicable maximum capital exposure sub-limit. For
purposes of this paragraph, the internal credit rating of the debt
obligation shall be determined in accordance with paragraph (a)(5) of
this section.
(5) Bank determination of applicable credit ratings. A Bank shall
determine an internal credit rating for each counterparty, and shall
align each such credit rating to the FHFA Credit Rating categories of
Table 1 to Sec. 1277.7, using the same methodology for calculating the
internal ratings and aligning such ratings to the FHFA Credit Rating
categories as the Bank uses for calculating the credit risk capital
charge for a counterparty or asset under Table 1.2 of Sec. 1277.4(f).
As a consequence, the Bank shall use the same FHFA Credit Rating
category for a particular counterparty for purposes of applying the
unsecured credit limit under this section as used for calculating the
credit risk capital charge for obligations issued by that counterparty
under Table 1.2 of Sec. 1277.4.
(b) Unsecured extensions of credit to affiliated counterparties.
(1) In general. The total amount of unsecured extensions of credit by a
Bank to a group of affiliated counterparties that arise from the Bank's
on- and off-balance sheet and derivatives transactions, including sales
of federal funds with a maturity of one day or less and sales of
federal funds subject to a continuing contract, shall not exceed 30
percent of the Bank's total capital.
(2) Relation to individual limits. The aggregate limits calculated
under paragraph (b)(1) shall apply in addition to the limits on
extensions of unsecured credit to a single counterparty imposed by
paragraph (a) of this section.
(c) Special limits for certain GSEs. Unsecured extensions of credit
by a Bank that arise from the Bank's on- and off-balance sheet and
derivatives transactions, including from the purchase of any debt or
from any sales of federal funds with a maturity of one day or less and
from sales of federal funds subject to a continuing contract, with a
GSE that is operating with capital support or another form of direct
financial assistance from the United States government that enables the
GSE to repay those obligations shall not exceed the Bank's total
capital.
(d) Extensions of unsecured credit after reduced rating. If a Bank
revises its internal credit rating for any counterparty or obligation,
it shall assign the counterparty or obligation to the appropriate FHFA
Credit Rating category based on the revised rating. If the revised
internal rating results in a lower FHFA Credit Rating category, then
any subsequent extensions of unsecured credit shall comply with the
maximum capital exposure limit applicable to that lower rating
category, but a Bank need not unwind or liquidate any existing
transaction or position that complied with the limits of this section
at the time it was entered. For the purposes of this paragraph, the
renewal of an existing unsecured extension of credit, including any
decision not to terminate any sales of federal funds subject to a
continuing contract, shall be considered a subsequent extension of
unsecured credit that can be undertaken only in accordance with the
lower limit.
(e) Reporting requirements--(1) Total unsecured extensions of
credit. Each Bank shall report monthly to FHFA the amount of the Bank's
total unsecured extensions of credit arising from on- and off-balance
sheet and derivatives transactions to any single counterparty or group
of affiliated counterparties that exceeds 5 percent of:
(i) The Bank's total capital; or
(ii) The counterparty's, or affiliated counterparties' combined,
Tier 1 capital, or if Tier 1 capital is not available, total capital
(in each case as defined by the counterparty's principal regulator), or
some similar comparable measure identified by the Bank.
(2) Total secured and unsecured extensions of credit. Each Bank
shall report monthly to FHFA the amount of the Bank's total secured and
unsecured extensions of credit arising from on- and off-balance sheet
and derivatives transactions to any single counterparty or group of
affiliated counterparties that exceeds 5 percent of the Bank's total
assets.
(3) Extensions of credit in excess of limits. A Bank shall report
promptly to FHFA any extension of unsecured credit that exceeds any
limit set forth in paragraphs (a), (b), or (c) of this section. In
making this report, a Bank shall provide the name of the counterparty
or group of affiliated counterparties to which the excess unsecured
credit has been extended, the dollar amount of the applicable limit
which has been exceeded, the dollar amount by which the Bank's
extension of unsecured credit exceeds such limit, the dates for which
the Bank was not in compliance with the limit, and, if applicable, a
brief explanation of any extenuating circumstances which caused the
limit to be exceeded.
(f) Measurement of unsecured extensions of credit--(1) In general.
For purposes of this section, unsecured extensions of credit will be
measured as follows:
(i) For on-balance sheet transactions (other than a derivatives
transaction addressed by paragraph (f)(1)(iii)) of this section, an
amount equal to the sum of the amortized cost of the item plus net
payments due the Bank. For any such item carried at fair value where
any change in fair value would be recognized in the Bank's income, the
Bank shall measure the unsecured extension of credit based on the fair
[[Page 30798]]
value of the item, rather than its amortized cost;
(ii) For off-balance sheet transactions, an amount equal to the
credit equivalent amount of such item, calculated in accordance with
Sec. 1277.4(g); and
(iii) For derivatives transactions not cleared by a derivatives
clearing organization, an amount equal to the sum of:
(A) The Bank's current and potential future credit exposures under
the derivatives contract, where those values are calculated in
accordance with Sec. 1277.4(i)(1) and (i)(2) respectively, adjusted by
the amount of any collateral held by or on behalf of the Bank against
the credit exposure from the derivatives contract, as allowed in
accordance with the requirements of Sec. 1277.4(e)(2) and (e)(3); and
(B) The value of any collateral posted by the Bank that exceeds the
current amount owed by the Bank to its counterparty under the
derivatives contract, where the collateral is not held by a third-party
custodian in accordance with Sec. 1221.7(c) and (d) of this chapter.
(2) Status of debt obligations purchased by the Bank. Any debt
obligation or debt security (other than mortgage-backed or other asset-
backed securities or acquired member assets) purchased by a Bank shall
be considered an unsecured extension of credit for the purposes of this
section, except for:
(i) Any amount owed the Bank against which the Bank holds
collateral in accordance with Sec. 1277.4(f)(2)(ii); or
(ii) Any amount which FHFA has determined on a case-by-case basis
shall not be considered an unsecured extension of credit.
(g) Exceptions to unsecured credit limits. The following items are
not subject to the limits of this section:
(1) Obligations of, or guaranteed by, the United States;
(2) A derivatives transaction accepted for clearing by a
derivatives clearing organization;
(3) Any extension of credit from one Bank to another Bank; and
(4) A bond issued by a state housing finance agency if the Bank
documents that the obligation in question is:
(i) Principally secured by high quality mortgage loans or high
quality mortgage-backed securities (or funds derived from payments on
such assets or from payments from any guarantees or insurance
associated with such assets);
(ii) The most senior class of obligation, if the bond has more than
one class; and
(iii) Determined by the Bank to be rated no lower than FHFA 2, in
accordance with this section.
Sec. 1277.8 Reporting requirements.
Each Bank shall report information related to capital and other
matters addressed by this part 1277 in accordance with instructions
provided in the Data Reporting Manual issued by FHFA, as amended from
time to time.
Dated: June 22, 2017.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2017-13560 Filed 6-30-17; 8:45 am]
BILLING CODE 8070-01-P
