Funding and Fiscal Affairs, Loan Policies and Operations, Funding Operations; Foreign Denominated Debt

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB68

Funding and Fiscal Affairs, Loan Policies and Operations, Funding

Operations; Foreign Denominated Debt

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Farm Credit Administration (FCA) requests public comment

through an Advance Notice of Proposed Rulemaking (ANPRM) regarding the

issuance of debt securities of the Farm Credit System (System)

denominated in foreign currencies. The Federal Farm Credit Banks

Funding Corporation (Funding Corporation), on behalf of the Farm Credit

banks (banks), is considering offering Federal Farm Credit Banks

Consolidated Systemwide debt securities (Systemwide debt securities)

outside of the United States under a proposed Global Debt Program

(Program). Under the Program, Systemwide debt issuances could be

denominated in foreign currencies. The FCA specifically requests public

comment regarding any safety and soundness risks that may be posed by

the issuance of foreign denominated Systemwide debt securities.

DATES: Written comments must be received on or before January 31, 1996.

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

Associate Director, Regulation Development, Office of Examination, Farm

Credit Administration, 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:

Michael J. LaVerghetta, Senior Financial 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.

[[Page 57964]]

SUPPLEMENTARY INFORMATION:

I. Background

In a separate action published elsewhere in today's issue of the

Federal Register, the FCA issued an interim regulation to clarify the

Funding Corporation's statutory authority to use more than one fiscal

agent to facilitate the sale of Systemwide debt securities. The interim

regulation permits the Funding Corporation to employ fiscal agents that

are not Federal Reserve Banks for issuance of dollar denominated

Systemwide debt securities in foreign capital markets. The interim

regulation provides guidance on two components of the Funding

Corporation's proposed three-part Global Debt Program.1 This ANPRM

requests comments regarding the final part of the Program, pursuant to

which the banks could issue foreign denominated Systemwide debt

securities. Under the Program, non-dollar denominated Systemwide debt

would be issued exclusively outside the United States using fiscal

agents other than the Federal Reserve Banks.2 Secondary market

trading and safekeeping would be handled through international clearing

systems. Other GSEs have developed similar global debt programs, and

have issued non-dollar denominated global debt, including the Federal

National Mortgage Association (FNMA), the Federal Home Loan Banks

(FHLBs), and the Student Loan Marketing Association (Sallie Mae).3

\1\ The proposed Global Debt Program is described in greater

detail in connection with the interim regulation published

separately in today's issue of the Federal Register.

\2\ The Federal Reserve Banks may not act as fiscal agent for

Government Sponsored Enterprise (GSE) debt obligations that are

issued exclusively outside the United States.

\3\ During the past year, FNMA and the FHLBs sold foreign debt

securities in Deutche marks. Sallie Mae sold Japanese yen-

denominated bonds.

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II. Authority for Issuance of Foreign Currency Debt

As noted in the preamble discussion of the FCA's companion interim

rule on Global Debt issuance, the Farm Credit Act of 1971, as amended,

(Act) 4 provides no specific guidance on the issuance of

Systemwide debt securities outside the United States, but grants the

banks broad authority to issue Systemwide debt securities to fund their

operations.5 While no provision of the Act requires Systemwide

debt securities to be denominated in U.S. dollars, an FCA rule

specifies that Systemwide debt securities shall be issued in

denominations of $1000 and $5000 or multiples thereof. See 12 CFR

615.5450. The specification of dollar denominations in this regulation

can be interpreted to preclude the Funding Corporation from issuing

foreign denominated Systemwide debt securities.

\4\ 12 U.S.C. 2001-2279bb-6.

\5\ See sections 1.5(10), 3.1(10), and 4.2 of the Act.

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III. Assessment of Regulatory Needs

As demonstrated by its separate approval of global offerings of

dollar denominated Systemwide debt securities, the FCA believes that

the Act permits the agency latitude to recognize the increasing

globalization of the capital markets and the needs of the System to

adapt its funding techniques to changing markets. Moreover, absent

overriding safety and soundness considerations, the FCA is disinclined

to adopt a technical interpretation of its regulations that would

prevent the banks from pursuing cost-effective and efficient methods of

raising funds in the capital markets. This ANPRM is intended to assist

the FCA in identifying potential safety and soundness risks in the

issuance of foreign denominated Systemwide debt and in determining the

need for regulatory guidance regarding this aspect of the Program.

IV. Potential Safety and Soundness Issues

The principal form of risk to an issuer of foreign denominated debt

is foreign exchange risk. Before System banks and associations can loan

the proceeds of sale of foreign denominated Systemwide debt securities

to American farmers, ranchers, aquatic producers, rural homeowners,

cooperatives, and rural utilities, the proceeds must be converted into

U.S. dollars. Moreover, while the foreign denominated Systemwide debt

securities are outstanding, the banks periodically must make payments

in foreign currency of principal and interest to securityholders. In

these instances when currency exchange transactions are necessary,

fluctuations in currency exchange rates pose foreign exchange risks for

the banks.

The banks may use various techniques to hedge against this foreign

exchange risk. One commonly used technique is to execute a currency

swap agreement under which another party agrees to supply the amount of

foreign currency necessary to make future payments of principal and

interest on debt obligations. While a currency swap agreement may

provide an effective hedge against foreign exchange risk, the success

of the currency swap depends on whether the counterparty will fulfill

its obligations under the agreement. Thus, where foreign currency swap

agreements are used to hedge against foreign exchange risk,

``counterparty risk'' becomes the most significant type of risk. Other

techniques for hedging against foreign exchange risk, such as options

and futures contracts, may present other risks that need to be

identified.

In light of the potential exchange, counterparty, and other risks

that may be involved in the issuance of foreign denominated Systemwide

debt securities, the FCA is requesting additional information from the

Funding Corporation, Farm Credit institutions, and other interested

parties regarding the existence and containment of such risks. In

particular, the FCA requests that comments address the following

questions:

A. General

1. Under what economic and market scenarios will the banks consider

it advantageous to assume the additional risks of issuing foreign

denominated Systemwide debt securities instead of raising loan funds

through the sale of dollar denominated debt?

2. How should the FCA adapt its current debt approval procedures to

encompass foreign currency debt offerings? 6

\6\ See 12 CFR 615.5101(d).

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B. Currency Selection and Risk

1. What criteria should be used to determine suitability of

particular foreign currencies for Systemwide debt issuances?

2. What internal procedures and approvals should the System use to

apply such criteria?

3. Should there be limits on total System and individual bank

exposure to each foreign currency?

4. How could total System and individual bank exposure to foreign

currencies be monitored and who should have the responsibility within

the System to do so? 7

\7\ The banks currently maintain, on a voluntary basis, a

listing of investment credit exposures to financial and corporate

institutions. This listing is prepared and published by the Funding

Corporation.

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5. Describe any other controls that can be employed to minimize or

manage foreign currency exposure?

C. Counterparty Risk

1. What standards should be used to establish, evaluate, and manage

counterparty risk in currency swaps undertaken to offset foreign

currency exposure?

2. What role should the Funding Corporation play in monitoring

total System risk exposure to counterparties

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in currency swap transactions and otherwise?

3. What procedures should be established to demonstrate that the

banks have adequate management expertise and internal controls to

effectively evaluate counterparty risk prior to engaging in foreign

currency deals?

D. Lead Managers and Performance Risk

After a foreign currency debt offering has been initiated and the

securities have been allocated to the global dealers, performance risk

becomes largely the responsibility of the ``lead manager(s)'' or lead

global dealer(s). Lead managers can take back securities for their own

account or reallocate them to other global dealers for sale.

Are there any risks unique to the selection of lead managers for

non-dollar denominated debt offerings? If so, how should lead managers

be selected for such offerings?

E. Other Risks of Non-dollar Denominated Offerings

There may be other risks of non-dollar denominated offerings, such

as daylight overdrafts, market exposure, and performance of other

agents (e.g., paying, settlement, transfer, exchange, calculation

agents).

1. How should such risks be managed and quantified?

2. What factors should be considered in developing criteria for

selection and performance of other agents and who should approve their

activities?

F. Other Comments and Information

The FCA invites any other pertinent comments and information that

may assist it in developing appropriate guidance in the area of foreign

denominated Systemwide debt security offerings.

Dated: November 17, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration.

[FR Doc. 95-28585 Filed 11-22-95; 8:45 am]

BILLING CODE 6705-01-P