Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Global Debt

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB66

Funding and Fiscal Affairs, Loan Policies and Operations, and

Funding Operations; Global Debt

AGENCY: Farm Credit Administration.

ACTION: Interim rule; request for comment.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA) is issuing an interim

regulation to clarify the Federal Farm Credit Banks Funding

Corporation's (Funding Corporation) statutory authority to use more

than one fiscal agent to facilitate the sale of Systemwide debt

securities. The regulation permits the Funding Corporation to employ

fiscal agents other than Federal Reserve Banks (FRBs) for issuance of

dollar denominated Systemwide debt securities in foreign capital

markets. Thus, the rule recognizes the authority of the Funding

Corporation to issue, sell, and distribute Systemwide debt securities

on behalf of the Farm Credit banks (banks) on a global basis. Updating

existing FCA regulations allows the banks to engage in debt marketing

practices used by other Government-Sponsored Enterprises (GSEs). In

addition,

[[Page 57917]]

expanding debt marketing internationally may broaden the investor base

for Systemwide debt securities and lead to lower funding costs.

DATES: The regulations shall become effective upon the expiration of 30

days after publication during which either or both Houses of Congress

are in session. Written comments must be received on or before December

26, 1995. Notice of effective date will be published in the Federal

Register.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,

Associate Director, Regulation Development, Office of Examination, 1501

Farm Credit Drive, McLean, VA 22102-5090. Copies of all communications

received will be available for examination by interested parties in the

Office of Examination, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Office of Examination, Farm Credit

Administration, McLean, VA 22102-5090, (703) 883-4498;

or

William L. Larsen, Senior Attorney, Office of General Counsel, Farm

Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)

883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

The Farm Credit System (System) funds its lending operations

through the sale of debt securities in the domestic capital markets.

The banks currently offer Systemwide debt securities, primarily

consisting of Consolidated Systemwide bonds, medium-term notes and

discount notes.1 The Funding Corporation, acting on behalf of the

banks, issues, markets, and handles the debt obligations of the System.

The Funding Corporation also has the responsibility for establishing,

subject to FCA approval, the amount, maturities, rates of interest, and

terms and conditions of participation by the several banks in each

issue of Systemwide debt securities.2

\1\ Systemwide debt securities are the joint and several

obligations of the banks. See 12 U.S.C. 2155(a)(2) and 12 U.S.C

2153(d).

\2\ See 12 U.S.C. 2160.

---------------------------------------------------------------------------

The Funding Corporation uses a selling group of investment dealers

and dealer banks to market Systemwide debt securities. Systemwide debt

securities are generally issued in book-entry form.3 The FRBs

maintain the book-entry securities as agents of the banks.4

Pursuant to FCA regulations, Systemwide debt securities clear and

settle through the Federal Reserve Banks' Book-entry System (Fed book-

entry system).5 Foreign investors can purchase Systemwide debt

securities through institutions and depositories that have appropriate

accounts with an FRB. Currently, the banks do not issue securities

through agents other than the FRBs either domestically or in foreign

capital markets.

\3\ Securities issued in book-entry form are assigned to an

investor's account upon purchase. The investor receives a custody

receipt from his or her bank or non-bank dealer instead of receiving

a certificate. Payment of principal and interest on book-entry

securities is credited to the investor's account and does not

require presentation of a coupon or certificate. Investors may

choose, as a custodian, any bank or other financial institution that

maintains book-entry accounts with a member of the Federal Reserve

System.

\4\ See 12 CFR part 615, subpart O.

\5\ The FRBs operate a book-entry system, which provides book-

entry holding and settlement for all U.S. dollar denominated

securities issued by the U.S. Government, certain agencies,

instrumentalities (including GSEs), and international organizations

of which the United States is a member. The Fed book-entry system

enables specified depositories and other institutions, with an

appropriate account with an FRB or Branch, to hold, make payments,

and transfer securities and funds through the FRBs' Fedwire

electronic funds transfer system.

---------------------------------------------------------------------------

In contrast, other GSEs 6 have launched global debt issuance

programs to expand the sale of their debt securities into foreign

capital markets. While most GSEs have issued or sold debt securities

denominated in United States dollars (U.S. dollars) outside the United

States, three 7 also have issued debt securities denominated in

foreign currencies. The global debt programs aim at increasing the

depth and breadth of the market for the issuer's debt securities. The

GSEs are seeking to diversify and control the cost of borrowing at a

time when their overall funding needs are rising sharply. The foreign

capital markets could provide the GSEs funding opportunities at rates

that are attractive compared to domestic sources. Additionally,

international debt sales may enhance the efficiency of GSE debt sales

by expanding their sources of funding and reducing the burgeoning

supply of GSE debt in the domestic market.

\6\ The Federal National Mortgage Association (Fannie Mae), the

Federal Home Loan Mortgage Corporation (Freddie Mac), the Student

Loan Marketing Association (Sallie Mae) and the Federal Home Loan

Banks (FHLBs) have introduced global debt programs.

\7\ Fannie Mae, Sallie Mae, and the FHLBs have issued non-dollar

denominated debt securities.

---------------------------------------------------------------------------

II. System Global Debt Program Proposal

The Funding Corporation proposes to establish a global debt

marketing program for issuance of Systemwide debt securities similar to

the other GSEs. The Funding Corporation has requested FCA's

confirmation that the Farm Credit Act of 1971, as amended 8 (Act),

allows the banks to issue Systemwide debt securities in foreign capital

markets using fiscal agents other than the FRBs. The proposed System

Global Debt Program (Program) contemplates three approaches to enter

into foreign capital markets that vary in scope and complexity.

\8\ 12 U.S.C. 2001-227966-6.

---------------------------------------------------------------------------

The first approach is designed to increase secondary market sales

of Systemwide debt securities outside the United States. To accomplish

this, the Funding Corporation would use international depositories and

clearing systems for maintaining and servicing book-entry Systemwide

debt securities. By expanding secondary market trading and safekeeping

to accountholders in clearing systems beyond the Fed book-entry system,

the Funding Corporation could increase and support demand by foreign

investors. Primary issuances of dollar denominated Systemwide debt

securities would continue to be issued through the FRBs in book-entry

form.

The Program's second method to heighten the System's presence in

foreign capital markets involves both primary issuance and secondary

market sales of Systemwide debt securities outside the United States.

Dollar denominated Systemwide debt securities would be issued through

fiscal agents other than the FRBs, either exclusively outside the

United States or simultaneously inside and outside the United States.

Secondary market trading and safekeeping of the debt securities would

be accomplished through international depositories and clearing

systems.

Under the third approach, Systemwide debt securities would be

denominated in foreign currencies and issued exclusively outside the

United States through fiscal agents other than the FRBs. Secondary

market trading and safekeeping would be handled through international

clearing systems. Such non-dollar denominated Systemwide debt

securities issued in foreign capital markets are the subject of an

Advance Notice of Proposed Rulemaking also adopted by the FCA Board on

November 16, 1995, and published elsewhere in today's issue of the

Federal Register.

[[Page 57918]]

III. Statutory and Regulatory Considerations

A. General

The Act grants broad authority to: (1) The banks to issue debt

obligations to fund their operations; and (2) the FCA to approve the

issuance of System debt in the capital markets. Under section 4.2,

Systemwide debt obligations must be issued solely through the Funding

Corporation, while section 4.9(b)(1) of the Act authorizes the Funding

Corporation to ``issue, market, and handle the obligations'' of the

banks. Under section 4.9(b)(2) of the Act, the Funding Corporation,

acting for the banks and subject to FCA approval, ``shall determine the

amount, maturities, rates of interest, terms, and conditions of

participation by the several banks in each issue of joint,

consolidated, or System-wide obligations.'' Sections 4.2 and 5.17(a)(4)

of the Act require FCA approval of the issuance of all System debt

obligations.

B. Secondary Market Sales Outside the United States

In general, secondary market trading and sales of Systemwide debt

securities have been limited to the United States market. However,

secondary market sales of dollar denominated Systemwide debt securities

outside the United States are compatible with current statutory and

regulatory requirements. The initial issuance of such debt securities

would be subject to the standard FCA approval process.9

\9\ See 12 U.S.C. 2153, 2252(a)(4).

---------------------------------------------------------------------------

C. Issuance of Systemwide Debt Outside the United States

The Act is silent concerning issuance of Systemwide debt outside

the United States. No provision of the Act explicitly or implicitly

prohibits the banks, acting through the Funding Corporation, from

issuing debt obligations outside the United States. Furthermore, there

appears to be no other Federal statute or judicial ruling that would

prohibit the banks from issuing Systemwide debt securities outside the

United States. Nevertheless, the laws of the various host countries may

restrict some aspects of System debt issuances within their borders.

D. Use of Issuing and Servicing Agents Other Than the FRBs

Section 4.8(a) of the Act, which governs the issuance and sale of

System obligations through fiscal agents, clearly contemplates that the

banks can issue their debt obligations through one or more fiscal

agents. Section 4.8(a) states:

Each bank of the System * * * may provide for the sale of

obligations issued by it, consolidated obligations, or System-wide

obligations, through a fiscal agent or agents, by negotiation,

offer, bid, syndicate sale, and to deliver such obligations by book

entry, wire transfer, or such other means as may be appropriate.

(Emphasis added.)

Section 4.8(a) does not, however, identify a fiscal agent or agents

that the banks are authorized to use for debt issuances.

The FCA regulations governing the issuance, maintenance, and

servicing of Farm Credit securities refer only to the authority of FRBs

to act as agents for the banks.10 The absence of any reference in

the regulations to fiscal agents other than the FRBs may appear to

restrict the authority of the Funding Corporation to select a fiscal

agent other than an FRB. In light of the apparent latitude permitted

under section 4.8(a), the FCA believes the authority of the Funding

Corporation to employ fiscal agents other than FRBs should be

clarified.

\10\ See 12 CFR part 615, subpart O which authorizes each FRB to

issue and maintain book-entry Farm Credit securities, service book-

entry Farm Credit securities by making payment of interest and

payment at maturity or upon call, transfer or pledge Farm Credit

securities to any transferee or pledgee eligible to maintain an

appropriate book-entry account in its name with an FRB and provide

other services as fiscal agent.

---------------------------------------------------------------------------

IV. Need for Amended Regulations

The FCA regulations governing issuance of Systemwide debt

securities were promulgated nearly 20 years ago. The existing

regulations reflect a period when the FRBs served as the exclusive

fiscal agents for GSE debt issuances in a predominantly domestic

market. Since then, global debt markets and international clearing

systems have evolved and become more closely integrated with the United

States domestic securities market. Due to substantial increases in GSE

debt issuances, the domestic GSE debt market has become highly

competitive. As a result, the GSEs are seeking to expand their market

horizon and lower their cost of funds by using international delivery

systems to reach foreign investors.

The FRBs may not act as fiscal agents for GSE debt obligations that

are issued outside of the United States. Therefore, GSEs that embark

upon global debt programs must employ fiscal agents that have the

capability of issuing, maintaining, and servicing international debt

offerings. As noted, the Act does not restrict the issuance of

Systemwide debt securities to domestic markets or the use of fiscal

agents to the FRBs. To clarify this authority, the FCA is adopting a

new subpart P in 12 CFR part 615 dealing with issuance of Global

Systemwide debt securities. The FCA regulations governing the authority

of the FRBs to issue book-entry Farm Credit securities are not affected

by the new rules and remain in effect.11

\11\ See 12 CFR part 615, subpart O.

---------------------------------------------------------------------------

The FCA believes the new regulations will preserve the flexibility

provided to the banks under the Act by allowing them to pursue the most

cost-effective and efficient method of raising funds in the capital

markets. The FCA also recognizes the increasingly global nature of

capital markets and supports the objectives of the proposed Program. By

developing the capability to issue debt internationally, the System may

increase its name recognition, broaden its investor base, diversify its

sources of funding, and obtain more cost-effective financing.

The new subpart differentiates Systemwide debt securities

distributed outside the United States from those issued through the

FRBs under existing Funding Corporation programs. The regulation

defines a Global agent as any fiscal agent, other than the FRBs, used

by the Funding Corporation to facilitate the sale of global debt

securities. Global debt securities are defined as obligations issued by

the Funding Corporation on behalf of the Farm Credit banks under

section 4.2(d) of the Act through a fiscal agent or agent and

distributed either exclusively outside the United States or

simultaneously inside and outside the United States. Issuances of

global debt securities will be subject to the standard FCA approval

process.

The FCA believes that it is unlikely that any substantial

operational or business risks to the System will be posed by clearance

and settlement of transactions in the systems outside the Fed book-

entry system. Systemwide debt securities issued internationally would

likely be handled through established and interconnected international

clearinghouses, all of which have book-entry systems available to

distribute and settle primary sales and to transfer beneficial

interests in secondary market sales among their respective holding

institutions, participants, and accountholders. In general, book-entry

systems are considered superior to other means for evidencing ownership

and are universally accepted by investors in the global marketplace.

All issuers of debt or equity securities must employ an entity to

issue, hold, trade, and clear book-entry securities in the name of

accountholders, unless the securities are issued in definitive (i.e.,

tangible) form to facilitate sales. To date, the

[[Page 57919]]

experience of the other GSEs engaged in global debt marketing programs

also suggests that using international clearing systems is an

acceptable business practice.

Nevertheless, the FCA believes that the operational risk inherent

in the development of a global debt program is significant enough to

warrant the requirement that the Funding Corporation Board of Directors

approve each prospective global agent and clearing system.

Additionally, the Funding Corporation must establish appropriate

selection criteria for global agents. The FCA expects that selection

criteria will be based on factors such as credit ratings, capital,

reputation, experience, and management capabilities to ensure that the

entity is suitable to assume and carry out the functions of a fiscal

agent, including the appointment of subordinate agents if

necessary.12

\12\ Depending upon the agreement between the Funding

Corporation and the entity acting as global agent, a global agent

may only retain primary responsibility over certain fiscal functions

and thus may need to appoint other agents, such as paying agent,

transfer agent, calculation agent, exchange agent, or register agent

to perform other functions necessary for clearance and settlement of

transactions.

---------------------------------------------------------------------------

Promulgation of new subpart P of 12 CFR part 615 effectively

approves the first two aspects of the proposed Program as previously

outlined. Thus, the Funding Corporation may engage global agent(s) to

issue and service dollar denominated global debt securities and

facilitate their secondary market trading in foreign capital markets by

using international clearing systems.

The FCA has decided that the third aspect of the proposed Program--

issuance of non-dollar denominated Systemwide debt securities--presents

issues that need to be addressed through conventional notice-and-

comment rulemaking rather than in the present expedited rulemaking. The

Act does not restrict the issuance of Systemwide debt securities to

dollar denominated securities. However, issuance of non-dollar debt

obligations could raise safety and soundness concerns for the banks,

including currency and counterparty risks. The FCA, therefore, intends

to explore these potential safety and soundness issues through an

Advance Notice of Proposed Rulemaking prior to developing regulations.

V. Expedited Rulemaking Procedure

The Act permits the Funding Corporation to market debt securities

on a global basis and use global agents to issue and service such

securities. Moreover, marketing and issuance of dollar denominated debt

by GSEs is an established practice that appears to present minimal

safety and soundness risk. Accordingly, the FCA finds that pre-

promulgation notice and comment on a new subpart P that merely

clarifies existing authority is unnecessary and is not in the public

interest.13 Thus, this regulation shall take effect as a final

regulation in accordance with section 5.17(c)(1) of the Act, upon the

expiration of 30 days after publication in the Federal Register, during

which either or both Houses of Congress are in session. The FCA

solicits and will consider comments on whether the requirements of new

subpart P need further clarification.

\13\ See 5 U.S.C. 553(b)(B).

---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,

Investments, Rural areas.

For the reasons stated in the preamble, part 615 of chapter VI,

title 12 of the Code of Federal Regulations is amended as follows:

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

AND FUNDING OPERATIONS

1. The authority citation for part 615 continues to read as

follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,

2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,

6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit

Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076,

2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243,

2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-

8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat.

1568, 1608.

2. Subpart P is added to read as follows:

Subpart P--Global Debt Securities

Sec. 615.5500 Definitions.

In this subpart, unless the context otherwise requires or

indicates:

(a) Global debt securities means consolidated Systemwide debt

securities issued by the Funding Corporation on behalf of the Farm

Credit banks under section 4.2(d) of the Act through a fiscal agent or

agents and distributed either exclusively outside the United States or

simultaneously inside and outside the United States.

(b) Global agent means any fiscal agent, other than the Federal

Reserve Banks, used by the Funding Corporation to facilitate the sale

of global debt securities.

Sec. 615.5502 Issuance of global debt securities.

(a) The Funding Corporation may provide for the sale of global debt

securities on behalf of the Farm Credit banks through a global agent or

agents by negotiation, offer, bid, or syndicate sale, and deliver such

obligations by book-entry, wire transfer, or such other means as may be

appropriate.

(b) The Funding Corporation Board of Directors shall establish

appropriate criteria for the selection of global agents and shall

approve each global agent.

Dated: November 17, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-28584 Filed 11-22-95; 8:45 am]

BILLING CODE 6705-01-P