Unsecured Credit Limits for Federal Home Loan Banks, 80422-80427 [2024-22865]

Download as PDF 80422 Proposed Rules Federal Register Vol. 89, No. 192 Thursday, October 3, 2024 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL HOUSING FINANCE AGENCY 12 CFR Part 1277 RIN 2590–AB41 Unsecured Credit Limits for Federal Home Loan Banks Federal Housing Finance Agency. ACTION: Notice of proposed rulemaking. AGENCY: The Federal Housing Finance Agency (FHFA or the Agency) proposes to amend its regulation on Federal Home Loan Bank (Bank) capital requirements to modify limits on Bank extensions of unsecured credit in their on- and off-balance sheet and derivative transactions. Currently, overnight federal funds are excluded from the more restrictive ‘‘general limit’’ on unsecured credit to a single counterparty and are limited only by the higher ‘‘overall limit.’’ The proposed rule would add interest bearing deposit accounts (IBDAs) and other authorized overnight investments to that exclusion, which may provide greater flexibility and improved cost to yield than overnight federal funds. DATES: Written comments must be received on or before December 2, 2024. ADDRESSES: You may submit your comments on the proposed rule, identified by regulatory information number (RIN) 2590–AB41, by any one of the following methods: • Agency website: https:// www.fhfa.gov/regulation/federalregister?comments=open. • 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 FHFA. Include the following information in the subject line of your submission: Comments/RIN 2590–AB41. ddrumheller on DSK120RN23PROD with PROPOSALS1 SUMMARY: VerDate Sep<11>2014 17:16 Oct 02, 2024 Jkt 265001 • Hand Delivered/Courier: The hand delivery address is: Clinton Jones, General Counsel, Attention: Comments/ RIN 2590–AB41, Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Deliver the package at the Seventh Street entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m. • U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service: The mailing address for comments is: Clinton Jones, General Counsel, Attention: Comments/RIN 2590–AB41, Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please note that all mail sent to FHFA via U.S. Mail is routed through a national irradiation facility, a process that may delay delivery by approximately two weeks. For any timesensitive correspondence, please plan accordingly. FOR FURTHER INFORMATION CONTACT: Jack Phelps, Associate Director, Division of Bank Regulation, Jack.Phelps@ FHFA.gov, 202–688–6348; Julie Paller, Principal Financial Analyst, Division of Bank Regulation, Julie.Paller@ FHFA.gov, 202–649–3201; or Winston Sale, Assistant General Counsel, Office of General Counsel, Winston.Sale@ fhfa.gov, 202–649–3081. These are not toll-free numbers. For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected to any of the contact numbers above. SUPPLEMENTARY INFORMATION: I. Comments FHFA invites comments on all aspects of the notice of proposed rulemaking and will take all comments into consideration before issuing a final rule. Comments will be posted to the electronic rulemaking docket on the FHFA public website at https:// www.fhfa.gov, except as described below. Commenters should submit only information that the commenter wishes to make available publicly. FHFA may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. FHFA may, in its discretion, redact or refrain from posting all or any portion of any comment that contains content that is obscene, vulgar, profane, or threatens harm. All comments, PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 including those that are redacted or not posted, will be retained in their original form in FHFA’s internal rulemaking file and considered as required by all applicable laws. Commenters that would like FHFA to consider any portion of their comment exempt from disclosure on the basis that it contains trade secrets, or financial, confidential or proprietary data or information, should follow the procedures in section IV.D. of FHFA’s Policy on Communications with Outside Parties in Connection with FHFA Rulemakings, see https://www.fhfa.gov/sites/default/ files/documents/Ex-ParteCommunications-Public-Policy_3-519.pdf. FHFA cannot guarantee that such data or information, or the identity of the commenter, will remain confidential if disclosure is sought pursuant to an applicable statute or regulation. See 12 CFR 1202.8, 12 CFR 1214.2. and https://www.fhfa.gov/about/ foia-reference-guide for additional information. II. Background A. The Federal Home Loan Banks and Limits on Unsecured Extensions of Credit The eleven Banks are wholesale financial institutions organized under the Federal Home Loan Bank Act (Bank Act).1 Each Bank is a cooperative managed by its own board of directors.2 Only members of a Bank may purchase the capital stock of a Bank and only members or certain eligible non-member housing associates (such as state housing finance agencies) may obtain access to secured loans, known as advances, or other products provided by a Bank.3 The Banks are subject to FHFA’s Bank capital regulation, located at 12 CFR part 1277, which sets requirements regarding Bank minimum capital, Bank capital stock, and Bank capital plans. Subpart B of the regulation, which governs Bank capital requirements, includes at 12 CFR 1277.7 provisions establishing limits on extensions of unsecured credit in which the Banks engage when managing their liquidity 1 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. 2 See 12 U.S.C. 1427. 3 See 12 U.S.C. 1426(a)(4) and (c)(5), 1430(a), and 1430b. E:\FR\FM\03OCP1.SGM 03OCP1 Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / Proposed Rules portfolios. Existing § 1277.7(a) establishes for the Banks two limits on unsecured extensions of credit to a single counterparty, referred to in the regulation as the ‘‘general limit’’ 4 and the ‘‘overall limit.’’ 5 The functional difference between the two limits is that the more restrictive general limit excludes sales of federal funds with a maturity of one day or less and the sales of federal funds subject to a continuing contract 6 (collectively, overnight Fed Funds) from its measurement of extensions of unsecured credit, while the higher overall limit includes overnight Fed Funds. The general limit is calculated by multiplying a maximum capital exposure limit (expressed as a percentage) associated with the applicable FHFA Credit Rating category of the counterparty by the lesser of either the Bank’s total capital, or the counterparty’s Tier 1 capital or total capital (in either case as defined by the counterparty’s principal regulator).7 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.8 The overall limit is set at not more than twice the general limit, which effectively establishes overnight Fed Funds as a special category of unsecured extensions of credit subject to a substantially higher limit than all other unsecured extensions of credit. The Federal Housing Finance Board (Finance Board), FHFA’s predecessor as regulator of the Banks, established the general and overall limits in a 2001 final rule addressing the Banks’ extensions of unsecured credit.9 The intent of the limits was to prevent undue concentration of credit in a single counterparty or group of affiliated counterparties. In the final rule, the Finance Board stated that it had considered excluding overnight Fed Funds transactions from the unsecured credit limits because other banking regulators excluded these transactions from their lending limits. However, it ultimately concluded that, given the Banks’ financial incentives to lend into 4 See 12 CFR 1277.7(a)(1). 12 CFR 1277.7(a)(2). 6 ‘‘The fed funds market is an unsecured, mostly overnight, over-the counter funding market among banks and government-sponsored enterprises.’’ See Board of Governors of the Federal Reserve System FEDS Notes (July 11, 2024). By regulation FHFA has defined ‘‘sales of federal funds subject to a continuing contract’’ as ‘‘an overnight federal funds loan that is automatically renewed each day unless terminated by either the lender or the borrower.’’ 12 CFR 1277.1. 7 See 12 CFR 1277.7(a)(1). 8 See 12 CFR 1277.7(a)(1)(ii). 9 See 66 FR 66718 (Dec. 27, 2001). ddrumheller on DSK120RN23PROD with PROPOSALS1 5 See VerDate Sep<11>2014 17:16 Oct 02, 2024 Jkt 265001 the federal funds markets (i.e., the government-sponsored enterprise (GSE) funding advantage and fewer permissible investments than are available to commercial banks), permitting such lending without limits would be imprudent.10 FHFA retained that approach when adopting the Finance Board’s capital regulations along with certain amendments in 2019.11 The special limit for overnight Fed Funds has not been substantively revised since 2001, while the Banks and the financial products in which they may invest have evolved considerably. B. Developments in Overnight Lending One of the primary functions of the Banks is to provide advances to their members. Thus, each Bank must have a large store of liquidity to meet its own needs and demands for advances from its members, even during periods of financial market disruption. Each Bank holds asset-side liquidity, or liquidity assets, on its balance sheet to supplement its liability-side liquidity, sourced from debt issued in the capital markets. These liquidity holdings include money market instruments, certain U.S. Treasury securities, and unencumbered cash. FHFA has provided guidance to the Banks on maintaining sufficient amounts of assetside liquidity to continue regular business during capital market disruptions in FHFA Advisory Bulletin (AB) 2018–07.12 This guidance states an expectation that asset-side liquidity holdings be readily convertible to cash with little or no loss in their par value. Money market instruments, including overnight Fed Funds, reverse repurchase agreements (reverse repos),13 and IBDA deposits, typically comprise the largest segment of Bank liquidity holdings to optimize adherence to the guidance set forth in AB 2018–07. These overnight money market instruments have no price risk (they are par instruments that do not fluctuate in value due to interest rate changes), but they do have small, varying amounts of credit and operational risk. Historically, Bank money market holdings consisted of overnight Fed Funds and reverse repos. Starting in 2014, new liquidity risk management requirements imposed by members’ prudential regulators made it advantageous for certain insured 10 66 FR at 66720–21. 84 FR 5308 (Feb. 20, 2019). 12 Available at: https://www.fhfa.gov/sites/ default/files/2023-06/AB-2018-07-FHLB-LiquidityGuidance.pdf. 13 Reverse repos are overnight or term lending to other financial institutions secured by securities collateral. 11 See PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 80423 depositories to offer IBDAs to the Banks. IBDA deposits are non-maturity deposits (that is, deposits that the depositor is free to withdraw at any time since there is no defined contractual maturity date) that a Bank may access whenever Fedwire fund transfer capabilities are open.14 In contrast, overnight Fed Funds and reverse repos are returned to a Bank from the counterparty the next trading or banking day and often require a trade commitment early in the day. Among eligible money market instrument alternatives, IBDAs provide the most intraday liquidity flexibility for a Bank, as protocols can be established for the counterparty to return IBDA deposits to the Bank early each business day and a Bank can wait until the close of business to commit to redepositing the funds. This provides the Bank flexibility to meet unexpected, late-day member advance demand. For these reasons, IBDAs have become a preferred money market instrument to manage Bank liquidity. Under the existing Bank capital regulation, IBDA deposits are subject to the general limit on unsecured extensions of credit to a single counterparty, in addition to the larger overall limit that includes overnight Fed Funds. This restricts the amount of liquidity the Banks can manage using IBDAs. From a risk-management perspective, IBDAs are a wellestablished money market instrument among the Banks and have a similar risk profile to overnight Fed Funds. IBDAs and overnight Fed Funds are both overnight unsecured investments returned daily and the amount of exposure a Bank can have to any one counterparty in either investment type depends on the same Bank-developed internal credit rating methodology for unsecured counterparties. For these reasons and considering the importance of IBDAs to Bank liquidity management, subjecting IBDA deposits to the general limit rather than restricting them only through the higher overall limit does not provide offsetting safety and soundness benefits. Revising the regulation to exclude IBDA deposits from the more restrictive general limit would provide the Banks with greater flexibility in managing liquidity. The Federal Home Loan Bank System (Bank System) IBDA deposits have slowly increased over time relative to total liquidity holdings, averaging 7.6 percent since January 2019 and peaking 14 The Federal Reserve System facilitates financial institutions’ exchange of funds between various accounts, including from a Bank’s IBDA account to its account at its local Federal Reserve Bank. These services are generally available each business day. E:\FR\FM\03OCP1.SGM 03OCP1 80424 Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / Proposed Rules at 13.6 percent in October 2023. Overnight Fed Funds holdings averaged 43.7 percent over that same time. Despite growth in the Banks’ use of IBDAs, the overnight Fed Funds daily average across the Bank System for the first six months of 2024 ($91 billion) remains over three times the volume of IBDA deposits ($27 billion). Under the current general limit, the maximum permissible IBDA deposit to any one counterparty is only half of the limit applicable to overnight Fed Funds exposure. In November 2023, FHFA released its FHLBank System at 100: Focusing on the Future report (System at 100 Report), culminating FHFA’s comprehensive review of the Bank System.15 In the report, FHFA identified the Banks’ ability to meet short-term liquidity needs as an area that would benefit from modernization.16 This proposed rule is part of FHFA’s efforts toward this end. ddrumheller on DSK120RN23PROD with PROPOSALS1 III. The Proposed Rule A. Expanding Investments Restricted Only by the Higher Overall Limit— §§ 1277.1 and 1277.7(a)(1) FHFA is proposing to revise part 1277 of its regulations to exclude from the general limit on extensions of unsecured credit to a single counterparty set forth in § 1277.7(a)(1) investments with a maturity of one day or less where the principal is returned to the Bank each day. These would include overnight Fed Funds and deposits in banks or trust companies (such as IBDAs) as defined in § 1267.1, but would exclude demand accounts in Federal Reserve Banks, as well as other similar investments that may be approved by FHFA in accordance with § 1211.3 of its procedures regulation. As discussed further below, the proposed rule would add to § 1277.1 a new defined term, ‘‘authorized overnight investments,’’ to describe these investment options. These changes would have the effect of expanding the types of permissible investments that are subject only to the overall limit on unsecured credit extensions set forth in § 1277.7(a)(2), a status that currently applies only to overnight Fed Funds. Overnight Fed Funds are overnight unsecured investments in approved counterparties, while IBDA deposits are non-maturity deposits in approved counterparties, using the same credit standards as, and generally paying a premium compared to, overnight Fed Funds. For a Bank’s 15 The System at 100 Report is available at: https://www.fhfa.gov/sites/default/files/2024-01/ FHLBank-System-at-100-Report.pdf. 16 System at 100 Report at 32–33. VerDate Sep<11>2014 17:16 Oct 02, 2024 Jkt 265001 IBDA deposit to be considered an authorized overnight investment under the proposed rule, the Bank would be required to establish a process by which the counterparty would return its IBDA deposit daily, which is analogous to movement of overnight Fed Funds trades. While IBDA deposits have a similar risk profile to overnight Fed Funds, FHFA expects that expanding IBDA deposit capacity would benefit the Banks by increasing the flexibility of their liquidity asset management. For example, while most reverse repo and overnight Fed Funds transactions require an early morning trade commitment, IBDA deposits can move between a Bank and counterparty whenever funds transfer systems are open, including the end of the business day. By employing IBDA deposits to manage liquidity, a Bank need not attempt to accurately anticipate member advance demand before gaining a full understanding of member liquidity needs and debt issuance conditions throughout the business day. In a stressed market environment, developments during the business day can create sudden, unanticipated lateday advance demand. The proposed exclusion of ‘‘authorized overnight investments’’ from the general limit would allow the Banks to increase IBDA deposit exposure and therefore retain more cash on hand to satisfy unexpected late-day member advance needs before committing excess funds to their IBDA counterparties at the end of the business day, thereby improving their overall liquidity flexibility. FHFA expects that expanding the Banks’ ability to use IBDA deposits for liquidity management would further benefit the Banks by reducing the overall cost of holding liquidity assets due to higher yields available through IBDAs. Since 2018, the Bank System has achieved a spread on IBDA deposits above reverse repo and overnight Fed Funds sold transactions of approximately 7.5 and 6.7 basis points, respectively, indicating a lower cost to yield against instruments of comparable risk. FHFA proposes including in the new definition of ‘‘authorized overnight investments’’ set forth in § 1277.1 the ability to expand without a rulemaking the types of overnight investments excluded from the general limit, and therefore subject only to the higher overall limit, to respond to changes in financial products and market conditions. The Banks would seek approval for such investments through the approval process set forth in FHFA’s procedures regulation at 12 CFR part PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 1211. This would allow FHFA to update the instruments qualifying as authorized overnight investments without amending the regulation through rulemaking, significantly increasing the speed with which the Agency could respond to the evolving financial marketplace. FHFA requests comment on whether, as proposed, unsecured extensions of credit excluded from the general limit and subject only to the overall limit should be authorized by FHFA through the regulatory approval process, or whether any such changes should be subject to notice and comment rulemaking. FHFA has considered whether unsecured deposits in non-interestbearing deposit accounts such as settlement, payroll, or other transactional accounts should be considered unsecured extensions of credit and included in a Bank’s calculation of its unsecured credit limits. Such deposits are considered onbalance sheet transactions under existing § 1277.7(f)(1)(i) 17 and therefore must be considered unsecured extensions of credit and subject to the unsecured credit limits. Further, nothing in the existing regulation excludes such deposits from the unsecured credit limits. For purposes of this proposed rule, whether unsecured deposits in noninterest-bearing accounts such as settlement or payroll accounts would count toward the general limit or the overall limit would be determined by whether they meet the daily repayment requirement of the proposed definition of ‘‘authorized overnight investments,’’ as they would potentially qualify as ‘‘deposits in banks or trust companies’’ under that definition. FHFA is proposing that deposits that are not returned to the Bank or custodian each day would be subject to the lesser general limit, while funds that are returned to the Bank or custodian each day, as set forth in the proposed definition of ‘‘authorized overnight investments,’’ would be subject to the greater overall limit. FHFA requests comment on whether this interpretation of which accounts would be included in the definition of ‘‘authorized overnight investments’’ would create operational or other safety and soundness concerns for the Banks or their counterparties. B. Other Revisions to § 1277.7(a)(1) The proposed rule would also make several other revisions to § 1277.7(a)(1). 17 This regulatory provision characterizes these accounts as ‘‘amortized cost’’ or ‘‘fair value’’ items as described in that calculation, which is generally irrelevant in regard to whether they should be considered unsecured extensions of credit. E:\FR\FM\03OCP1.SGM 03OCP1 Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS1 FHFA proposes adding language to the introductory paragraph clarifying that measurement of unsecured credit exposure to a single counterparty also includes intra-day exposure and is not limited to overnight exposure. This language is intended to clarify FHFA’s expectations and ensure consistency among the Banks in how they manage intra-day unsecured credit extension exposure. As discussed above, existing § 1277.7(a)(1) provides that the general limit is to be calculated by multiplying the maximum capital exposure limit percentage associated with the applicable FHFA Credit Rating category of the counterparty by the lesser of either (i) the Bank’s total capital, or (ii) the counterparty’s Tier 1 capital, or (if Tier 1 capital is unavailable) total capital. To provide clarity on what measure of total capital a Bank should use for purposes of determining compliance with the general and overall limits and avoid discrepancies between FHFA’s unsecured limit calculations and the Bank’s calculations, the proposed rule would revise § 1277.7(a)(1)(i) to specify that, for purposes of this calculation, a Bank’s total capital is to be calculated as the lesser of the daily total or the most recent month-end total capital. FHFA does not expect that the proposed clarification would require the Banks to make any changes to their current methods of calculating month-end capital or daily capital. Similarly, § 1277.7(a)(1)(ii) would be revised to provide that the counterparty’s total capital would be measured based on its most recent regulatory financial report filed with its appropriate regulator, as defined in 12 CFR 1263.1. FHFA expects that this proposed revision would provide greater certainty to the Banks about the measure of capital to use when calculating the regulatory limits, facilitating compliance review during examinations. C. Limits on Extensions of Credit to Affiliated Counterparties and GSEs— §§ 1277.7(b) & 1277.7(c) Existing § 1277.7(b) provides that the total amount of unsecured extensions of credit by a Bank to a group of affiliated counterparties, including sales of Fed Funds, shall not exceed 30 percent of the Bank’s capital—a limit that applies in addition to the limits on extensions of unsecured credit to a single counterparty under § 1277.7(a). As a conforming change, FHFA proposes to revise § 1277.7(b) to replace the references to Fed Funds with references to the newly-defined ‘‘authorized overnight investments.’’ The proposed VerDate Sep<11>2014 17:16 Oct 02, 2024 Jkt 265001 rule would also clarify that, for purposes of the affiliated counterparty limits, a Bank’s total capital must be calculated in the same manner as provided for the single counterparty limits under proposed § 1277.7(a)(1)(i). Similar revisions would also be made to § 1277.7(c), which provides that unsecured extensions of credit to 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 a Bank’s total capital. D. Removing References to Sales of Federal Funds Subject to a Continuing Contract—§§ 1277.1 and 1277.7(d) Existing § 1277.7(d) provides that if a Bank revises its internal credit rating for any counterparty or obligation, it must 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, a Bank need not unwind or liquidate any existing transaction or position, but any subsequent extensions of unsecured credit must comply with the maximum capital exposure limit applicable to that lower rating category. The provision stipulates that 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. The proposed rule would remove from this provision the reference to ‘‘sales of federal funds subject to a continuing contract’’ and replace it with a reference to ‘‘any automatic renewal of an authorized overnight investment.’’ FHFA is not aware of any Bank that participates in overnight Fed Funds sales that are subject to a continuing contract and considers the term obsolete. The purpose of the change would be to ensure that the regulation would address a similar concept to the extent it would be applicable now or in the future. As described above, funds in any automatically renewing overnight investment would need to be transferred to and from the Bank daily to be eligible for treatment under the overall limit or would otherwise be subject to the lesser general limit. Existing § 1277.1 includes a definition of sales of federal funds subject to a continuing contract, which the proposed rule would delete, given that the term is obsolete and would no longer be referenced in the regulation. PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 80425 E. Clarifying Reporting Requirements Existing § 1277.7(e)(1) requires each Bank to report to FHFA monthly on secured and unsecured extensions of credit arising from on- and off-balance sheet and derivative transactions to any counterparty and group of affiliated counterparties exceeding five percent of its total capital or the counterparty’s or affiliated counterparties’ Tier 1 capital or total capital. Existing § 1277.7(e)(2) also requires each Bank to report to FHFA monthly on total secured and unsecured extensions of credit arising from on- and off-balance sheet and derivative transactions to any single counterparty or group of affiliated counterparties exceeding five percent of the Bank’s total assets. FHFA is proposing to revise § 1277.7(e)(1) and (2) to replace the descriptions of the specific reporting requirements with new language referencing FHFA’s Data Reporting Manual (DRM),18 which sets forth detailed data reporting requirements for the Banks and in accordance with which the Banks are required to report under § 1277.8. The DRM sets forth specific requirements for the reporting of unsecured credit data by each Bank, including data required to be reported under § 1277.7(e)(1) and (2). Since FHFA collects comprehensive information on secured and unsecured credit exposure through its DRM requirements, the detailed requirements in § 1277.7(e)(1) and (2) are redundant. FHFA proposes deleting them to avoid confusion and the possibility that the regulatory text may conflict with the DRM reporting requirements as FHFA’s supervisory reporting needs evolve. FHFA proposes to retain the violation self-reporting requirement of § 1277.7(e)(3), which is not currently covered in the DRM, and redesignate it as § 1277.7(e)(2). Existing § 1277.7(e)(3) requires that a Bank ‘‘report promptly to FHFA’’ any extension of unsecured credit that exceeds any limit set forth in § 1277.7(a), (b), or (c). FHFA requests comment on whether the use of the term ‘‘promptly’’ in 1277.7(e)(3) is too ambiguous and open to different interpretations given the seriousness of the context and, if so, whether it should be revised to reference a more specific timeframe such as ‘‘two business days.’’ 18 As defined in 12 CFR 1201.1 the ‘‘Data Reporting Manual or DRM’’ means a manual issued by FHFA and amended from time to time containing reporting requirements for the Regulated Entities. The DRM is one method through which FHFA implements its statutory authority under 12 U.S.C. 4514 to require regular and special reports from its regulated entities and communicates those requirements. E:\FR\FM\03OCP1.SGM 03OCP1 80426 Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / Proposed Rules FHFA also requests comment on whether the provision should explicitly address how to notify FHFA in situations where the Bank may not identify a violation until well after the event occurred. In coordination with the proposed revisions to the reporting requirements in 1277.7(e), FHFA proposes to add language clarifying FHFA’s expectations regarding credit exposure reporting to § 1277.8. To avoid any ambiguity, FHFA proposes to add language highlighting that the Banks’ reporting on matters addressed by part 1277 under the DRM includes information related to secured and unsecured credit exposures and extensions of credit in excess of limits, in addition to capital information. Banks would be required to report this information in accordance with the instructions provided in the DRM. IV. Considerations of Differences Between the Banks and the Enterprises Section 1313(f) of the Safety and Soundness Act requires the Director of FHFA, when promulgating regulations relating to the Banks, to consider the differences between the Banks and the Enterprises (Fannie Mae and Freddie Mac) as they relate to: the Banks’ cooperative ownership structure; the mission of providing liquidity to members; the affordable housing and community development mission; their capital structure; and their joint and several liability.19 The Director also may consider any other differences that are deemed appropriate. In preparing this proposed rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors and determined that the rule is appropriate. FHFA requests comments regarding whether differences related to those factors should result in any revisions to the proposed rule. ddrumheller on DSK120RN23PROD with PROPOSALS1 V. Paperwork Reduction Act The proposed rule would not contain any changes to information collection requirements that would require the approval of the Office of Management and Budget (OMB) under the Paperwork Reduction Act.20 Therefore, FHFA has not submitted any information to OMB for review. VI. Regulatory Flexibility Act The Regulatory Flexibility Act 21 (RFA) requires that a regulation that has a significant economic impact on a substantial number of small entities, 12 U.S.C. 4513. U.S.C. 3501 et seq. 21 5 U.S.C. 601 et seq. small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation’s impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities.22 FHFA has considered the impact of the proposed rule under the RFA. FHFA 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 applies only to the Banks, which are not small entities for purposes of the RFA. VII. Providing Accountability Through Transparency Act of 2023 The Providing Accountability Through Transparency Act of 2023 23 requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website under section 206(d) of the E-Government Act of 2002 24 (commonly known as Regulations.gov). FHFA’s proposal and the required summary can be found at https://www.regulations.gov. List of Subjects for 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 proposes to amend subchapter D of chapter XII of title 12 of the Code of Federal Regulations as follows: PART 1277—FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS, CAPITAL STOCK AND CAPITAL PLANS 1. 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. 2. Amend § 1277.1 by removing the definition of ‘‘Sales of federal funds subject to a continuing contract’’ and adding the definition of ‘‘Authorized overnight investments’’ in alphabetical order to read as follows: ■ 19 See 22 5 20 44 23 5 VerDate Sep<11>2014 17:16 Oct 02, 2024 U.S.C. 605(b). U.S.C. 553(b)(4). 24 44 U.S.C. 3501 note. Jkt 265001 PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 § 1277.1 Definitions. * * * * * Authorized overnight investments means an investment with a maturity of one day or less where the principal is returned to the Bank or custodian each day, including sales of federal funds (known as Federal funds sold), deposits in banks or trust companies as defined in § 1267.1 of this chapter, but excluding demand accounts in Federal Reserve Banks, and other similar investments approved by FHFA in accordance with § 1211.3 of this chapter. * * * * * ■ 3. Amend § 1277.7 by revising paragraphs (a)(1) and (2), and (b), (c), (d), and (e) to read as follows: § 1277.7 Limits on unsecured extensions of credit; reporting requirements. (a) * * * (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 derivative transactions, including intraday exposure (but excluding authorized overnight investments) shall not exceed the product of the maximum capital exposure limit applicable to such counterparty, as determined in accordance with the following Table 1 to this section, multiplied by the lesser of: (i) The Bank’s total capital calculated as the lesser of the daily total or the most recent month end; 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 appropriate regulator, as defined in § 1263.1 of this chapter) or some similar comparable measure identified by the Bank based on the counterparty’s most recent regulatory financial report filed with its appropriate regulator. (2) Overall limits including authorized overnight investments. All unsecured extensions of credit by a Bank to a single counterparty that arise from the Bank’s on- and off-balance sheet and derivative transactions, including authorized overnight investments, shall not exceed twice the limit calculated pursuant to paragraph (a)(1) of this section. * * * * * (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 derivative transactions, including authorized overnight E:\FR\FM\03OCP1.SGM 03OCP1 ddrumheller on DSK120RN23PROD with PROPOSALS1 Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / Proposed Rules investments, shall not exceed 30 percent of the Bank’s total capital as calculated in accordance with paragraph (a)(1)(i) of this section. (2) Relation to individual limits. The aggregate limits calculated under paragraph (b)(1) of this section 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 derivative transactions, including from the purchase of any authorized overnight investments, 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 as calculated in accordance with paragraph (a)(1)(i) of this section. (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 purposes of this paragraph (d), the renewal of an existing unsecured extension of credit, including any decision not to terminate any automatic renewal of an authorized overnight investment, shall be considered a subsequent extension of unsecured credit that can be undertaken only in accordance with the lower limit. (e) Reporting requirements—(1) Secured and unsecured extensions of credit. Each Bank shall report to FHFA information concerning the Bank’s secured and unsecured extensions of credit arising from on- and off-balance sheet and derivative transactions to any counterparty and group of affiliated counterparties, including information related to the Bank’s total capital, the counterparty’s total capital, and assigned FHFA Credit Rating category per Table 1 to § 1277.7 of this part, in accordance with instructions provided in the FHFA Data Reporting Manual as required in § 1277.8. (2) Extensions of credit in excess of limits. A Bank shall report promptly to VerDate Sep<11>2014 17:16 Oct 02, 2024 Jkt 265001 FHFA any extension of unsecured credit that exceeds any limit set forth in paragraph (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 a brief explanation of the circumstances that caused the limit to be exceeded. * * * * * ■ 4. Revise § 1277.8 to read as follows: § 1277.8 Reporting requirements. Each Bank shall report information related to capital, secured and unsecured credit exposures, extensions of credit in excess of limits, and other matters addressed by this part in accordance with instructions provided in the Data Reporting Manual issued by FHFA, as amended from time to time. Sandra L. Thompson, Director, Federal Housing Finance Agency. [FR Doc. 2024–22865 Filed 10–2–24; 8:45 am] BILLING CODE 8070–01–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA–2024–2326; Project Identifier MCAI–2023–01048–T] RIN 2120–AA64 Airworthiness Directives; Airbus Canada Limited Partnership (Type Certificate Previously Held by C Series Aircraft Limited Partnership (CSALP); Bombardier, Inc.) Airplanes Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). AGENCY: The FAA proposes to supersede Airworthiness Directive (AD) 2022–19–09, which applies to all Airbus Canada Limited Partnership Model BD– 500–1A10 and BD–500–1A11 airplanes. AD 2022–19–09 requires repetitive inspections of the left and right main landing gear (MLG) lower spindle pins to detect corrosion, and applicable repair or replacement. Since the FAA issued AD 2022–19–09, the tracking of flight cycles for inspections was changed from the usage of the MLG to SUMMARY: PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 80427 the usage of MLG lower spindle assemblies and a replacement was developed, which would terminate the inspections. This proposed AD continues to require certain actions in AD 2022–19–09, would change the tracking of flight cycles for inspections from the usage of the MLG to the usage of MLG lower spindle assemblies, and would require replacement of affected MLG lower spindle assemblies, as specified in a Transport Canada AD, which is proposed for incorporation by reference (IBR). This proposed AD also would remove airplanes from the applicability. This proposed AD would also prohibit the installation of affected parts under certain conditions. The FAA is proposing this AD to address the unsafe condition on these products. DATES: The FAA must receive comments on this proposed AD by November 18, 2024. ADDRESSES: You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods: • Federal eRulemaking Portal: Go to regulations.gov. Follow the instructions for submitting comments. • Fax: 202–493–2251. • Mail: U.S. Department of Transportation, Docket Operations, M– 30, West Building Ground Floor, Room W12–140, 1200 New Jersey Avenue SE, Washington, DC 20590. • Hand Delivery: Deliver to Mail address above between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. AD Docket: You may examine the AD docket at regulations.gov under Docket No. FAA–2024–2326; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this NPRM, the mandatory continuing airworthiness information (MCAI), any comments received, and other information. The street address for Docket Operations is listed above. Material Incorporated by Reference: • For Transport Canada material identified in this proposed AD, contact Transport Canada, Transport Canada National Aircraft Certification, 159 Cleopatra Drive, Nepean, Ontario K1A 0N5, Canada; telephone 888–663–3639; email TC.AirworthinessDirectivesConsignesdenavigabilite.TC@tc.gc.ca. You may find this material on the Transport Canada website at tc.canada.ca/en/aviation. It is also available at regulations.gov under Docket No. FAA–2024–2326. • You may view this material at the FAA, Airworthiness Products Section, Operational Safety Branch, 2200 South E:\FR\FM\03OCP1.SGM 03OCP1

Agencies

[Federal Register Volume 89, Number 192 (Thursday, October 3, 2024)]
[Proposed Rules]
[Pages 80422-80427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22865]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 / 
Proposed Rules

[[Page 80422]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1277

RIN 2590-AB41


Unsecured Credit Limits for Federal Home Loan Banks

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) 
proposes to amend its regulation on Federal Home Loan Bank (Bank) 
capital requirements to modify limits on Bank extensions of unsecured 
credit in their on- and off-balance sheet and derivative transactions. 
Currently, overnight federal funds are excluded from the more 
restrictive ``general limit'' on unsecured credit to a single 
counterparty and are limited only by the higher ``overall limit.'' The 
proposed rule would add interest bearing deposit accounts (IBDAs) and 
other authorized overnight investments to that exclusion, which may 
provide greater flexibility and improved cost to yield than overnight 
federal funds.

DATES: Written comments must be received on or before December 2, 2024.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AB41, by any one 
of the following methods:
     Agency website: https://www.fhfa.gov/regulation/federal-register?comments=open.
     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 [email protected] to ensure timely receipt by FHFA. 
Include the following information in the subject line of your 
submission: Comments/RIN 2590-AB41.
     Hand Delivered/Courier: The hand delivery address is: 
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB41, 
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 
20219. Deliver the package at the Seventh Street entrance Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Clinton Jones, 
General Counsel, Attention: Comments/RIN 2590-AB41, Federal Housing 
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please 
note that all mail sent to FHFA via U.S. Mail 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: Jack Phelps, Associate Director, 
Division of Bank Regulation, [email protected], 202-688-6348; Julie 
Paller, Principal Financial Analyst, Division of Bank Regulation, 
[email protected], 202-649-3201; or Winston Sale, Assistant General 
Counsel, Office of General Counsel, [email protected], 202-649-
3081. These are not toll-free numbers. For TTY/TRS users with hearing 
and speech disabilities, dial 711 and ask to be connected to any of the 
contact numbers above.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the notice of proposed 
rulemaking and will take all comments into consideration before issuing 
a final rule. Comments will be posted to the electronic rulemaking 
docket on the FHFA public website at https://www.fhfa.gov, except as 
described below. Commenters should submit only information that the 
commenter wishes to make available publicly. FHFA may post only a 
single representative example of identical or substantially identical 
comments, and in such cases will generally identify the number of 
identical or substantially identical comments represented by the posted 
example. FHFA may, in its discretion, redact or refrain from posting 
all or any portion of any comment that contains content that is 
obscene, vulgar, profane, or threatens harm. All comments, including 
those that are redacted or not posted, will be retained in their 
original form in FHFA's internal rulemaking file and considered as 
required by all applicable laws. Commenters that would like FHFA to 
consider any portion of their comment exempt from disclosure on the 
basis that it contains trade secrets, or financial, confidential or 
proprietary data or information, should follow the procedures in 
section IV.D. of FHFA's Policy on Communications with Outside Parties 
in Connection with FHFA Rulemakings, see https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf. FHFA cannot guarantee that such data or information, or the 
identity of the commenter, will remain confidential if disclosure is 
sought pursuant to an applicable statute or regulation. See 12 CFR 
1202.8, 12 CFR 1214.2. and https://www.fhfa.gov/about/foia-reference-guide for additional information.

II. Background

A. The Federal Home Loan Banks and Limits on Unsecured Extensions of 
Credit

    The eleven Banks are wholesale financial institutions organized 
under the Federal Home Loan Bank Act (Bank Act).\1\ Each Bank is a 
cooperative managed by its own board of directors.\2\ Only members of a 
Bank may purchase the capital stock of a Bank and only members or 
certain eligible non-member housing associates (such as state housing 
finance agencies) may obtain access to secured loans, known as 
advances, or other products provided by a Bank.\3\
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    \1\ 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.
    \2\ See 12 U.S.C. 1427.
    \3\ See 12 U.S.C. 1426(a)(4) and (c)(5), 1430(a), and 1430b.
---------------------------------------------------------------------------

    The Banks are subject to FHFA's Bank capital regulation, located at 
12 CFR part 1277, which sets requirements regarding Bank minimum 
capital, Bank capital stock, and Bank capital plans. Subpart B of the 
regulation, which governs Bank capital requirements, includes at 12 CFR 
1277.7 provisions establishing limits on extensions of unsecured credit 
in which the Banks engage when managing their liquidity

[[Page 80423]]

portfolios. Existing Sec.  1277.7(a) establishes for the Banks two 
limits on unsecured extensions of credit to a single counterparty, 
referred to in the regulation as the ``general limit'' \4\ and the 
``overall limit.'' \5\ The functional difference between the two limits 
is that the more restrictive general limit excludes sales of federal 
funds with a maturity of one day or less and the sales of federal funds 
subject to a continuing contract \6\ (collectively, overnight Fed 
Funds) from its measurement of extensions of unsecured credit, while 
the higher overall limit includes overnight Fed Funds.
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    \4\ See 12 CFR 1277.7(a)(1).
    \5\ See 12 CFR 1277.7(a)(2).
    \6\ ``The fed funds market is an unsecured, mostly overnight, 
over-the counter funding market among banks and government-sponsored 
enterprises.'' See Board of Governors of the Federal Reserve System 
FEDS Notes (July 11, 2024). By regulation FHFA has defined ``sales 
of federal funds subject to a continuing contract'' as ``an 
overnight federal funds loan that is automatically renewed each day 
unless terminated by either the lender or the borrower.'' 12 CFR 
1277.1.
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    The general limit is calculated by multiplying a maximum capital 
exposure limit (expressed as a percentage) associated with the 
applicable FHFA Credit Rating category of the counterparty by the 
lesser of either the Bank's total capital, or the counterparty's Tier 1 
capital or total capital (in either case as defined by the 
counterparty's principal regulator).\7\ 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.\8\ The overall 
limit is set at not more than twice the general limit, which 
effectively establishes overnight Fed Funds as a special category of 
unsecured extensions of credit subject to a substantially higher limit 
than all other unsecured extensions of credit.
---------------------------------------------------------------------------

    \7\ See 12 CFR 1277.7(a)(1).
    \8\ See 12 CFR 1277.7(a)(1)(ii).
---------------------------------------------------------------------------

    The Federal Housing Finance Board (Finance Board), FHFA's 
predecessor as regulator of the Banks, established the general and 
overall limits in a 2001 final rule addressing the Banks' extensions of 
unsecured credit.\9\ The intent of the limits was to prevent undue 
concentration of credit in a single counterparty or group of affiliated 
counterparties. In the final rule, the Finance Board stated that it had 
considered excluding overnight Fed Funds transactions from the 
unsecured credit limits because other banking regulators excluded these 
transactions from their lending limits. However, it ultimately 
concluded that, given the Banks' financial incentives to lend into the 
federal funds markets (i.e., the government-sponsored enterprise (GSE) 
funding advantage and fewer permissible investments than are available 
to commercial banks), permitting such lending without limits would be 
imprudent.\10\ FHFA retained that approach when adopting the Finance 
Board's capital regulations along with certain amendments in 2019.\11\ 
The special limit for overnight Fed Funds has not been substantively 
revised since 2001, while the Banks and the financial products in which 
they may invest have evolved considerably.
---------------------------------------------------------------------------

    \9\ See 66 FR 66718 (Dec. 27, 2001).
    \10\ 66 FR at 66720-21.
    \11\ See 84 FR 5308 (Feb. 20, 2019).
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B. Developments in Overnight Lending

    One of the primary functions of the Banks is to provide advances to 
their members. Thus, each Bank must have a large store of liquidity to 
meet its own needs and demands for advances from its members, even 
during periods of financial market disruption. Each Bank holds asset-
side liquidity, or liquidity assets, on its balance sheet to supplement 
its liability-side liquidity, sourced from debt issued in the capital 
markets. These liquidity holdings include money market instruments, 
certain U.S. Treasury securities, and unencumbered cash. FHFA has 
provided guidance to the Banks on maintaining sufficient amounts of 
asset-side liquidity to continue regular business during capital market 
disruptions in FHFA Advisory Bulletin (AB) 2018-07.\12\ This guidance 
states an expectation that asset-side liquidity holdings be readily 
convertible to cash with little or no loss in their par value.
---------------------------------------------------------------------------

    \12\ Available at: https://www.fhfa.gov/sites/default/files/2023-06/AB-2018-07-FHLB-Liquidity-Guidance.pdf.
---------------------------------------------------------------------------

    Money market instruments, including overnight Fed Funds, reverse 
repurchase agreements (reverse repos),\13\ and IBDA deposits, typically 
comprise the largest segment of Bank liquidity holdings to optimize 
adherence to the guidance set forth in AB 2018-07. These overnight 
money market instruments have no price risk (they are par instruments 
that do not fluctuate in value due to interest rate changes), but they 
do have small, varying amounts of credit and operational risk.
---------------------------------------------------------------------------

    \13\ Reverse repos are overnight or term lending to other 
financial institutions secured by securities collateral.
---------------------------------------------------------------------------

    Historically, Bank money market holdings consisted of overnight Fed 
Funds and reverse repos. Starting in 2014, new liquidity risk 
management requirements imposed by members' prudential regulators made 
it advantageous for certain insured depositories to offer IBDAs to the 
Banks. IBDA deposits are non-maturity deposits (that is, deposits that 
the depositor is free to withdraw at any time since there is no defined 
contractual maturity date) that a Bank may access whenever Fedwire fund 
transfer capabilities are open.\14\ In contrast, overnight Fed Funds 
and reverse repos are returned to a Bank from the counterparty the next 
trading or banking day and often require a trade commitment early in 
the day. Among eligible money market instrument alternatives, IBDAs 
provide the most intraday liquidity flexibility for a Bank, as 
protocols can be established for the counterparty to return IBDA 
deposits to the Bank early each business day and a Bank can wait until 
the close of business to commit to redepositing the funds. This 
provides the Bank flexibility to meet unexpected, late-day member 
advance demand. For these reasons, IBDAs have become a preferred money 
market instrument to manage Bank liquidity.
---------------------------------------------------------------------------

    \14\ The Federal Reserve System facilitates financial 
institutions' exchange of funds between various accounts, including 
from a Bank's IBDA account to its account at its local Federal 
Reserve Bank. These services are generally available each business 
day.
---------------------------------------------------------------------------

    Under the existing Bank capital regulation, IBDA deposits are 
subject to the general limit on unsecured extensions of credit to a 
single counterparty, in addition to the larger overall limit that 
includes overnight Fed Funds. This restricts the amount of liquidity 
the Banks can manage using IBDAs. From a risk-management perspective, 
IBDAs are a well-established money market instrument among the Banks 
and have a similar risk profile to overnight Fed Funds. IBDAs and 
overnight Fed Funds are both overnight unsecured investments returned 
daily and the amount of exposure a Bank can have to any one 
counterparty in either investment type depends on the same Bank-
developed internal credit rating methodology for unsecured 
counterparties. For these reasons and considering the importance of 
IBDAs to Bank liquidity management, subjecting IBDA deposits to the 
general limit rather than restricting them only through the higher 
overall limit does not provide offsetting safety and soundness 
benefits. Revising the regulation to exclude IBDA deposits from the 
more restrictive general limit would provide the Banks with greater 
flexibility in managing liquidity.
    The Federal Home Loan Bank System (Bank System) IBDA deposits have 
slowly increased over time relative to total liquidity holdings, 
averaging 7.6 percent since January 2019 and peaking

[[Page 80424]]

at 13.6 percent in October 2023. Overnight Fed Funds holdings averaged 
43.7 percent over that same time. Despite growth in the Banks' use of 
IBDAs, the overnight Fed Funds daily average across the Bank System for 
the first six months of 2024 ($91 billion) remains over three times the 
volume of IBDA deposits ($27 billion). Under the current general limit, 
the maximum permissible IBDA deposit to any one counterparty is only 
half of the limit applicable to overnight Fed Funds exposure.
    In November 2023, FHFA released its FHLBank System at 100: Focusing 
on the Future report (System at 100 Report), culminating FHFA's 
comprehensive review of the Bank System.\15\ In the report, FHFA 
identified the Banks' ability to meet short-term liquidity needs as an 
area that would benefit from modernization.\16\ This proposed rule is 
part of FHFA's efforts toward this end.
---------------------------------------------------------------------------

    \15\ The System at 100 Report is available at: https://www.fhfa.gov/sites/default/files/2024-01/FHLBank-System-at-100-Report.pdf.
    \16\ System at 100 Report at 32-33.
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III. The Proposed Rule

A. Expanding Investments Restricted Only by the Higher Overall Limit--
Sec. Sec.  1277.1 and 1277.7(a)(1)

    FHFA is proposing to revise part 1277 of its regulations to exclude 
from the general limit on extensions of unsecured credit to a single 
counterparty set forth in Sec.  1277.7(a)(1) investments with a 
maturity of one day or less where the principal is returned to the Bank 
each day. These would include overnight Fed Funds and deposits in banks 
or trust companies (such as IBDAs) as defined in Sec.  1267.1, but 
would exclude demand accounts in Federal Reserve Banks, as well as 
other similar investments that may be approved by FHFA in accordance 
with Sec.  1211.3 of its procedures regulation. As discussed further 
below, the proposed rule would add to Sec.  1277.1 a new defined term, 
``authorized overnight investments,'' to describe these investment 
options.
    These changes would have the effect of expanding the types of 
permissible investments that are subject only to the overall limit on 
unsecured credit extensions set forth in Sec.  1277.7(a)(2), a status 
that currently applies only to overnight Fed Funds. Overnight Fed Funds 
are overnight unsecured investments in approved counterparties, while 
IBDA deposits are non-maturity deposits in approved counterparties, 
using the same credit standards as, and generally paying a premium 
compared to, overnight Fed Funds. For a Bank's IBDA deposit to be 
considered an authorized overnight investment under the proposed rule, 
the Bank would be required to establish a process by which the 
counterparty would return its IBDA deposit daily, which is analogous to 
movement of overnight Fed Funds trades.
    While IBDA deposits have a similar risk profile to overnight Fed 
Funds, FHFA expects that expanding IBDA deposit capacity would benefit 
the Banks by increasing the flexibility of their liquidity asset 
management. For example, while most reverse repo and overnight Fed 
Funds transactions require an early morning trade commitment, IBDA 
deposits can move between a Bank and counterparty whenever funds 
transfer systems are open, including the end of the business day. By 
employing IBDA deposits to manage liquidity, a Bank need not attempt to 
accurately anticipate member advance demand before gaining a full 
understanding of member liquidity needs and debt issuance conditions 
throughout the business day. In a stressed market environment, 
developments during the business day can create sudden, unanticipated 
late-day advance demand. The proposed exclusion of ``authorized 
overnight investments'' from the general limit would allow the Banks to 
increase IBDA deposit exposure and therefore retain more cash on hand 
to satisfy unexpected late-day member advance needs before committing 
excess funds to their IBDA counterparties at the end of the business 
day, thereby improving their overall liquidity flexibility.
    FHFA expects that expanding the Banks' ability to use IBDA deposits 
for liquidity management would further benefit the Banks by reducing 
the overall cost of holding liquidity assets due to higher yields 
available through IBDAs. Since 2018, the Bank System has achieved a 
spread on IBDA deposits above reverse repo and overnight Fed Funds sold 
transactions of approximately 7.5 and 6.7 basis points, respectively, 
indicating a lower cost to yield against instruments of comparable 
risk.
    FHFA proposes including in the new definition of ``authorized 
overnight investments'' set forth in Sec.  1277.1 the ability to expand 
without a rulemaking the types of overnight investments excluded from 
the general limit, and therefore subject only to the higher overall 
limit, to respond to changes in financial products and market 
conditions. The Banks would seek approval for such investments through 
the approval process set forth in FHFA's procedures regulation at 12 
CFR part 1211. This would allow FHFA to update the instruments 
qualifying as authorized overnight investments without amending the 
regulation through rulemaking, significantly increasing the speed with 
which the Agency could respond to the evolving financial marketplace. 
FHFA requests comment on whether, as proposed, unsecured extensions of 
credit excluded from the general limit and subject only to the overall 
limit should be authorized by FHFA through the regulatory approval 
process, or whether any such changes should be subject to notice and 
comment rulemaking.
    FHFA has considered whether unsecured deposits in non-interest-
bearing deposit accounts such as settlement, payroll, or other 
transactional accounts should be considered unsecured extensions of 
credit and included in a Bank's calculation of its unsecured credit 
limits. Such deposits are considered on-balance sheet transactions 
under existing Sec.  1277.7(f)(1)(i) \17\ and therefore must be 
considered unsecured extensions of credit and subject to the unsecured 
credit limits. Further, nothing in the existing regulation excludes 
such deposits from the unsecured credit limits.
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    \17\ This regulatory provision characterizes these accounts as 
``amortized cost'' or ``fair value'' items as described in that 
calculation, which is generally irrelevant in regard to whether they 
should be considered unsecured extensions of credit.
---------------------------------------------------------------------------

    For purposes of this proposed rule, whether unsecured deposits in 
non-interest-bearing accounts such as settlement or payroll accounts 
would count toward the general limit or the overall limit would be 
determined by whether they meet the daily repayment requirement of the 
proposed definition of ``authorized overnight investments,'' as they 
would potentially qualify as ``deposits in banks or trust companies'' 
under that definition. FHFA is proposing that deposits that are not 
returned to the Bank or custodian each day would be subject to the 
lesser general limit, while funds that are returned to the Bank or 
custodian each day, as set forth in the proposed definition of 
``authorized overnight investments,'' would be subject to the greater 
overall limit. FHFA requests comment on whether this interpretation of 
which accounts would be included in the definition of ``authorized 
overnight investments'' would create operational or other safety and 
soundness concerns for the Banks or their counterparties.

B. Other Revisions to Sec.  1277.7(a)(1)

    The proposed rule would also make several other revisions to Sec.  
1277.7(a)(1).

[[Page 80425]]

FHFA proposes adding language to the introductory paragraph clarifying 
that measurement of unsecured credit exposure to a single counterparty 
also includes intra-day exposure and is not limited to overnight 
exposure. This language is intended to clarify FHFA's expectations and 
ensure consistency among the Banks in how they manage intra-day 
unsecured credit extension exposure.
    As discussed above, existing Sec.  1277.7(a)(1) provides that the 
general limit is to be calculated by multiplying the maximum capital 
exposure limit percentage associated with the applicable FHFA Credit 
Rating category of the counterparty by the lesser of either (i) the 
Bank's total capital, or (ii) the counterparty's Tier 1 capital, or (if 
Tier 1 capital is unavailable) total capital. To provide clarity on 
what measure of total capital a Bank should use for purposes of 
determining compliance with the general and overall limits and avoid 
discrepancies between FHFA's unsecured limit calculations and the 
Bank's calculations, the proposed rule would revise Sec.  
1277.7(a)(1)(i) to specify that, for purposes of this calculation, a 
Bank's total capital is to be calculated as the lesser of the daily 
total or the most recent month-end total capital. FHFA does not expect 
that the proposed clarification would require the Banks to make any 
changes to their current methods of calculating month-end capital or 
daily capital. Similarly, Sec.  1277.7(a)(1)(ii) would be revised to 
provide that the counterparty's total capital would be measured based 
on its most recent regulatory financial report filed with its 
appropriate regulator, as defined in 12 CFR 1263.1. FHFA expects that 
this proposed revision would provide greater certainty to the Banks 
about the measure of capital to use when calculating the regulatory 
limits, facilitating compliance review during examinations.

C. Limits on Extensions of Credit to Affiliated Counterparties and 
GSEs--Sec. Sec.  1277.7(b) & 1277.7(c)

    Existing Sec.  1277.7(b) provides that the total amount of 
unsecured extensions of credit by a Bank to a group of affiliated 
counterparties, including sales of Fed Funds, shall not exceed 30 
percent of the Bank's capital--a limit that applies in addition to the 
limits on extensions of unsecured credit to a single counterparty under 
Sec.  1277.7(a). As a conforming change, FHFA proposes to revise Sec.  
1277.7(b) to replace the references to Fed Funds with references to the 
newly-defined ``authorized overnight investments.'' The proposed rule 
would also clarify that, for purposes of the affiliated counterparty 
limits, a Bank's total capital must be calculated in the same manner as 
provided for the single counterparty limits under proposed Sec.  
1277.7(a)(1)(i). Similar revisions would also be made to Sec.  
1277.7(c), which provides that unsecured extensions of credit to 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 a Bank's total capital.

D. Removing References to Sales of Federal Funds Subject to a 
Continuing Contract--Sec. Sec.  1277.1 and 1277.7(d)

    Existing Sec.  1277.7(d) provides that if a Bank revises its 
internal credit rating for any counterparty or obligation, it must 
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, a Bank need not 
unwind or liquidate any existing transaction or position, but any 
subsequent extensions of unsecured credit must comply with the maximum 
capital exposure limit applicable to that lower rating category. The 
provision stipulates that 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.
    The proposed rule would remove from this provision the reference to 
``sales of federal funds subject to a continuing contract'' and replace 
it with a reference to ``any automatic renewal of an authorized 
overnight investment.'' FHFA is not aware of any Bank that participates 
in overnight Fed Funds sales that are subject to a continuing contract 
and considers the term obsolete. The purpose of the change would be to 
ensure that the regulation would address a similar concept to the 
extent it would be applicable now or in the future. As described above, 
funds in any automatically renewing overnight investment would need to 
be transferred to and from the Bank daily to be eligible for treatment 
under the overall limit or would otherwise be subject to the lesser 
general limit.
    Existing Sec.  1277.1 includes a definition of sales of federal 
funds subject to a continuing contract, which the proposed rule would 
delete, given that the term is obsolete and would no longer be 
referenced in the regulation.

E. Clarifying Reporting Requirements

    Existing Sec.  1277.7(e)(1) requires each Bank to report to FHFA 
monthly on secured and unsecured extensions of credit arising from on- 
and off-balance sheet and derivative transactions to any counterparty 
and group of affiliated counterparties exceeding five percent of its 
total capital or the counterparty's or affiliated counterparties' Tier 
1 capital or total capital. Existing Sec.  1277.7(e)(2) also requires 
each Bank to report to FHFA monthly on total secured and unsecured 
extensions of credit arising from on- and off-balance sheet and 
derivative transactions to any single counterparty or group of 
affiliated counterparties exceeding five percent of the Bank's total 
assets. FHFA is proposing to revise Sec.  1277.7(e)(1) and (2) to 
replace the descriptions of the specific reporting requirements with 
new language referencing FHFA's Data Reporting Manual (DRM),\18\ which 
sets forth detailed data reporting requirements for the Banks and in 
accordance with which the Banks are required to report under Sec.  
1277.8.
---------------------------------------------------------------------------

    \18\ As defined in 12 CFR 1201.1 the ``Data Reporting Manual or 
DRM'' means a manual issued by FHFA and amended from time to time 
containing reporting requirements for the Regulated Entities. The 
DRM is one method through which FHFA implements its statutory 
authority under 12 U.S.C. 4514 to require regular and special 
reports from its regulated entities and communicates those 
requirements.
---------------------------------------------------------------------------

    The DRM sets forth specific requirements for the reporting of 
unsecured credit data by each Bank, including data required to be 
reported under Sec.  1277.7(e)(1) and (2). Since FHFA collects 
comprehensive information on secured and unsecured credit exposure 
through its DRM requirements, the detailed requirements in Sec.  
1277.7(e)(1) and (2) are redundant. FHFA proposes deleting them to 
avoid confusion and the possibility that the regulatory text may 
conflict with the DRM reporting requirements as FHFA's supervisory 
reporting needs evolve. FHFA proposes to retain the violation self-
reporting requirement of Sec.  1277.7(e)(3), which is not currently 
covered in the DRM, and redesignate it as Sec.  1277.7(e)(2).
    Existing Sec.  1277.7(e)(3) requires that a Bank ``report promptly 
to FHFA'' any extension of unsecured credit that exceeds any limit set 
forth in Sec.  1277.7(a), (b), or (c). FHFA requests comment on whether 
the use of the term ``promptly'' in 1277.7(e)(3) is too ambiguous and 
open to different interpretations given the seriousness of the context 
and, if so, whether it should be revised to reference a more specific 
timeframe such as ``two business days.''

[[Page 80426]]

FHFA also requests comment on whether the provision should explicitly 
address how to notify FHFA in situations where the Bank may not 
identify a violation until well after the event occurred.
    In coordination with the proposed revisions to the reporting 
requirements in 1277.7(e), FHFA proposes to add language clarifying 
FHFA's expectations regarding credit exposure reporting to Sec.  
1277.8. To avoid any ambiguity, FHFA proposes to add language 
highlighting that the Banks' reporting on matters addressed by part 
1277 under the DRM includes information related to secured and 
unsecured credit exposures and extensions of credit in excess of 
limits, in addition to capital information. Banks would be required to 
report this information in accordance with the instructions provided in 
the DRM.

IV. Considerations of Differences Between the Banks and the Enterprises

    Section 1313(f) of the Safety and Soundness Act requires the 
Director of FHFA, when promulgating regulations relating to the Banks, 
to consider the differences between the Banks and the Enterprises 
(Fannie Mae and Freddie Mac) as they relate to: the Banks' cooperative 
ownership structure; the mission of providing liquidity to members; the 
affordable housing and community development mission; their capital 
structure; and their joint and several liability.\19\ The Director also 
may consider any other differences that are deemed appropriate. In 
preparing this proposed rule, the Director considered the differences 
between the Banks and the Enterprises as they relate to the above 
factors and determined that the rule is appropriate. FHFA requests 
comments regarding whether differences related to those factors should 
result in any revisions to the proposed rule.
---------------------------------------------------------------------------

    \19\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The proposed rule would not contain any changes to information 
collection requirements that would require the approval of the Office 
of Management and Budget (OMB) under the Paperwork Reduction Act.\20\ 
Therefore, FHFA has not submitted any information to OMB for review.
---------------------------------------------------------------------------

    \20\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act \21\ (RFA) 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. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities.\22\ FHFA has considered the impact of the proposed rule under 
the RFA. FHFA 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 applies only to the 
Banks, which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \21\ 5 U.S.C. 601 et seq.
    \22\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VII. Providing Accountability Through Transparency Act of 2023

    The Providing Accountability Through Transparency Act of 2023 \23\ 
requires that a notice of proposed rulemaking include the internet 
address of a summary of not more than 100 words in length of a proposed 
rule, in plain language, that shall be posted on the internet website 
under section 206(d) of the E-Government Act of 2002 \24\ (commonly 
known as Regulations.gov). FHFA's proposal and the required summary can 
be found at https://www.regulations.gov.
---------------------------------------------------------------------------

    \23\ 5 U.S.C. 553(b)(4).
    \24\ 44 U.S.C. 3501 note.
---------------------------------------------------------------------------

List of Subjects for 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 proposes to amend subchapter D of chapter XII of 
title 12 of the Code of Federal Regulations as follows:

PART 1277--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS, CAPITAL 
STOCK AND CAPITAL PLANS

0
1. 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.

0
2. Amend Sec.  1277.1 by removing the definition of ``Sales of federal 
funds subject to a continuing contract'' and adding the definition of 
``Authorized overnight investments'' in alphabetical order to read as 
follows:


Sec.  1277.1  Definitions.

* * * * *
    Authorized overnight investments means an investment with a 
maturity of one day or less where the principal is returned to the Bank 
or custodian each day, including sales of federal funds (known as 
Federal funds sold), deposits in banks or trust companies as defined in 
Sec.  1267.1 of this chapter, but excluding demand accounts in Federal 
Reserve Banks, and other similar investments approved by FHFA in 
accordance with Sec.  1211.3 of this chapter.
* * * * *
0
3. Amend Sec.  1277.7 by revising paragraphs (a)(1) and (2), and (b), 
(c), (d), and (e) to read as follows:


Sec.  1277.7  Limits on unsecured extensions of credit; reporting 
requirements.

    (a) * * *
    (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 derivative transactions, including intra-day exposure (but 
excluding authorized overnight investments) shall not exceed the 
product of the maximum capital exposure limit applicable to such 
counterparty, as determined in accordance with the following Table 1 to 
this section, multiplied by the lesser of:
    (i) The Bank's total capital calculated as the lesser of the daily 
total or the most recent month end; 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 
appropriate regulator, as defined in Sec.  1263.1 of this chapter) or 
some similar comparable measure identified by the Bank based on the 
counterparty's most recent regulatory financial report filed with its 
appropriate regulator.
    (2) Overall limits including authorized overnight investments. All 
unsecured extensions of credit by a Bank to a single counterparty that 
arise from the Bank's on- and off-balance sheet and derivative 
transactions, including authorized overnight investments, shall not 
exceed twice the limit calculated pursuant to paragraph (a)(1) of this 
section.
* * * * *
    (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 derivative transactions, including 
authorized overnight

[[Page 80427]]

investments, shall not exceed 30 percent of the Bank's total capital as 
calculated in accordance with paragraph (a)(1)(i) of this section.
    (2) Relation to individual limits. The aggregate limits calculated 
under paragraph (b)(1) of this section 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 
derivative transactions, including from the purchase of any authorized 
overnight investments, 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 as calculated in accordance 
with paragraph (a)(1)(i) of this section.
    (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 purposes of this paragraph (d), the 
renewal of an existing unsecured extension of credit, including any 
decision not to terminate any automatic renewal of an authorized 
overnight investment, shall be considered a subsequent extension of 
unsecured credit that can be undertaken only in accordance with the 
lower limit.
    (e) Reporting requirements--(1) Secured and unsecured extensions of 
credit. Each Bank shall report to FHFA information concerning the 
Bank's secured and unsecured extensions of credit arising from on- and 
off-balance sheet and derivative transactions to any counterparty and 
group of affiliated counterparties, including information related to 
the Bank's total capital, the counterparty's total capital, and 
assigned FHFA Credit Rating category per Table 1 to Sec.  1277.7 of 
this part, in accordance with instructions provided in the FHFA Data 
Reporting Manual as required in Sec.  1277.8.
    (2) 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 paragraph (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 a brief explanation 
of the circumstances that caused the limit to be exceeded.
* * * * *
0
4. Revise Sec.  1277.8 to read as follows:


Sec.  1277.8  Reporting requirements.

    Each Bank shall report information related to capital, secured and 
unsecured credit exposures, extensions of credit in excess of limits, 
and other matters addressed by this part in accordance with 
instructions provided in the Data Reporting Manual issued by FHFA, as 
amended from time to time.

Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2024-22865 Filed 10-2-24; 8:45 am]
BILLING CODE 8070-01-P
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