Book-entry Procedures for Federal Agricultural Mortgage Corporation Securities

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB70

Book-entry Procedures for Federal Agricultural Mortgage

Corporation Securities

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit System Reform Act of 1996 (1996 act) provides

that the Federal Agricultural Mortgage Corporation (Farmer Mac) shall

have access to the Federal Reserve Banks' book-entry system (Fed book-

entry system). The Farm Credit Administration (FCA) is issuing a final

rule authorizing the issuance of Farmer Mac securities in book-entry

format. Farmer Mac will use the Fed book-entry system in connection

with the issuance and settlement of its unsecured debt securities and

its guaranteed securities using substantially the same procedures used

by all other Government-sponsored enterprises (GSEs).

EFFECTIVE DATE: June 13, 1996.

FOR FURTHER INFORMATION CONTACT: Larry W. Edwards, Director, Office of

Secondary Market Oversight, Farm Credit Administration, McLean, VA

22102-5090, (703) 883-4051.

SUPPLEMENTARY INFORMATION:

I. Background

Section 105 of the 1996 act amends sections 8.3(d) and (e) of the

Farm Credit Act of 1971, as amended (act), to require that Farmer Mac

have access to the Fed book-entry system and that the Federal Reserve

Banks Act as depositories for, and as fiscal agents of, Farmer

Mac.1 Congress mandated Farmer Mac's access to the Fed book-entry

system as part of a broad-based reform of Farmer Mac's charter and

statutory authority. Among other reform measures, the 1996 Act

liberalized Farmer Mac's charter to allow it to pool loans in a fashion

similar to such other GSEs as the Federal National Mortgage Association

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie

Mac), which operate in the secondary market for mortgage-backed

securities. To facilitate Farmer Mac's use of its new authority and to

help it meet its new responsibilities, Congress amended the act to

``streamline Farmer Mac's business operations,'' including ``providing

for Farmer Mac's access to

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the book-entry system of the Federal Reserve System.'' 2

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\1\ Pub. L. 104-105 (Feb. 10, 1996), 110 Stat. 163-64. 12 U.S.C.

2279aa-3(d)-(e).

\2\ H.R. Rep. No. 446, 104th Cong., 2d Sess., pt. 1, at 8

(1996).

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Currently, all Farmer Mac securities (both debt and guaranteed) are

issued, settled, and traded through the facilities of the Depository

Trust Company (DTC), one of the private depositories available to

issuers whose securities are not tradable on the Fed book-entry system.

DTC's costs (and the costs of other private depositories) are higher

than those of the Federal Reserve Banks, which results in higher costs

for Farmer Mac and its investors. Furthermore, it appears that

investors may differentiate adversely between Farmer Mac's securities

and all other GSEs' securities because Farmer Mac securities are not

issued through the Fed book-entry system. Access to the Fed book-entry

system, therefore, is viewed as an important element in the

Congressionally mandated effort to reform and revitalize Farmer Mac.

II. Implementing Regulations

To implement Farmer Mac's new statutory authority to access the Fed

book-entry system, regulations are necessary to establish a framework

for issuance and subsequent disposition of Farmer Mac securities issued

through the Fed book-entry system. Without such regulations, investors

would not know what law governs the holding, transferring, and pledging

of the Farmer Mac securities in which they have invested. This

uncertainty could create a perception of market risk that could

detrimentally affect investment in Farmer Mac securities and possibly

could place Farmer Mac securities at a marketing disadvantage compared

to the securities of other GSEs.3

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\3\ All other GSEs that utilize the Fed book-entry system,

including the Farm Credit System, have regulations in place that

govern their book-entry securities. See, e.g., 24 CFR part 81

(Fannie Mae); 1 CFR part 462 (Freddie Mac); 31 CFR part 354 (Student

Loan Marketing Association (Sallie Mae)).

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FCA regulations governing book-entry procedures with respect to

Farm Credit System (FCS) securities were adopted in 1977 and are

located at 12 CFR part 615, subpart O. The FCA's book-entry regulations

are based on the Department of the Treasury's book-entry regulations at

31 CFR part 357, subpart O. The regulations establish procedures that

permit FCS banks to utilize the Fed book-entry system in the same way

as do other GSEs. The FCA extended its book-entry regulations in 1988

by adding a new subpart R to 12 CFR part 615 to cover securities issued

by the FCS Financial Assistance Corporation. Rather than duplicating

the basic book-entry regulations found in subpart O, subpart R

incorporates by reference the pertinent book-entry provisions from

subpart O and applies them to the Financial Assistance Corporation.

The FCA is adopting the same abbreviated approach to applying book-

entry regulations to Farmer Mac in this rulemaking. The final rule

creates a new subpart S in part 615 that authorizes the issuance of

Farmer Mac securities in book-entry format pursuant to pertinent

provisions of subpart O of part 615, which are incorporated by

reference. The incorporated provisions of subpart O include:

Secs. 615.5460 (definitions), 615.5465 (authority of Reserve Banks),

615.5470 (scope and effect of book-entry procedure), 615.5475 (transfer

or pledge), 615.5480 (withdrawal of securities), 615.5485 (delivery of

securities), 615.5490 (classes of accounts), 615.5492 (identification

of accounts), and 615.5494 (servicing book-entry securities, including

payment of interest and payment at maturity or upon call).

III. Necessity for Immediate Regulatory Action

In passing the 1996 act, Congress recognized the difficulties

Farmer Mac has had in meeting its statutory mandate and the resulting

deterioration in its core capital.4 In what the House Committee on

Agriculture termed ``the most extensive attempt yet to make Farmer Mac

a viable secondary market for agricultural real estate and moderate

rural housing loans,'' 5 the 1996 act eases prior statutory

operating requirements and expands the activities in which Farmer Mac

can engage. It is clear that Congress also expects Farmer Mac to act

quickly to stabilize its financial position and rebuild its core

capital. Section 117 of the 1996 act requires that, if Farmer Mac does

not complete mandatory recapitalization of its core capital within 2

years, its activities will be critically restricted. If the 2-year goal

is not met, Farmer Mac will not be allowed to purchase a new qualified

loan or issue or guarantee a new loan-backed security.6

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\4\ H.R. Rep. No. 446, supra note 2, at 9.

\5\ Id. at 8.

\6\ Pub. L. 104-105, supra note 1, Sec. 117.

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In the very near future, Farmer Mac plans to issue debt securities

backed by mortgages purchased by Farmer Mac pursuant to its new

authority under the 1996 act. Farmer Mac intends to utilize the Fed

book-entry system to issue the securities, as sanctioned by the 1996

act. To avoid creating any ambiguities regarding Farmer Mac's authority

to obtain access to the Fed book-entry system and to ensure that the

book-entry treatment of Farmer Mac's securities will be the same as

that of other GSEs, the FCA is taking expedited action to adopt book-

entry regulations covering Farmer Mac.

In view of the clear Congressional mandate expressed in the 1996

act that Farmer Mac have access to the Fed book-entry system and the

equally clear Congressional intent that Farmer Mac utilize its new

authorities to rebuild its core capital and meet its other statutory

mandates as soon as possible, the FCA believes that expedited

rulemaking action is warranted for book-entry regulations covering

Farmer Mac. Moreover, the regulations adopted are minor, technical, and

noncontroversial. For these reasons, the FCA finds good cause to omit

notice and comment as impracticable, unnecessary, and contrary to the

public interest pursuant to section 553(b)(B) of the Administrative

Procedure Act, 5 U.S.C. 553-59 (APA). The same reasons and, in

particular, the time limit Congress has imposed on Farmer Mac to

recapitalize its core capital base, provide good cause to adopt an

effective date for the regulations that is less than 30 days after

publication in the Federal Register. 5 U.S.C. 553(d). The FCA's finding

of good cause for expedited rulemaking action also supports specifying

an effective date for the regulations that is prior to the date of

filing of the report to Congress required by the Small Business

Regulatory Enforcement Fairness Act, 5 U.S.C. 801-808. See 5 U.S.C.

808. Finally, consistent with the reasons for its expedited actions

under the APA, the FCA finds that, pursuant to section 5.17(c)(2) of

the act, an emergency exists that requires that these regulations take

effect prior to the expiration of the 30-day Congressional notice and

waiting period for final agency regulatory action.

The FCA notes that the U. S. Treasury Department recently proposed

TRADES (Treasury/Reserve Automated Debt Entry System) regulations (61

FR 8420, March 4, 1996), which will govern book-entry treatment of

Treasury securities. Since FCA's book-entry regulations are based on

the Treasury's book-entry regulations, the FCA expects to revise all of

its book-entry regulations, including those covering Farmer Mac, to

conform with the Treasury's TRADE regulations when they are finalized.

Accordingly, there will be opportunity for public comment on FCA book-

entry regulations at that time.

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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 to read as

follows:

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

AND FUNDING OPERATIONS

1. The authority citation for part 615 is revised 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-3, 2279aa-4, 2279aa-6, 2279aa-

7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233,

101 Stat. 1568, 1608; sec. 105 of Pub. L. 104-105, 110 Stat. 162,

163-64.

2. Subpart S is added to read as follows:

Subpart S--Federal Agricultural Mortgage Corporation Securities

Sec.

615.5570 Book-entry procedures for Federal Agricultural Mortgage

Corporation securities.

Subpart S--Federal Agricultural Mortgage Corporation Securities

Sec. 615.5570 Book-entry procedures for Federal Agricultural Mortgage

Corporation Securities.

(a) The Federal Agricultural Mortgage Corporation (Farmer Mac) is a

Federally chartered instrumentality of the United States and an

institution of the Farm Credit System, subject to the examination and

regulation of the Farm Credit Administration.

(b) Farmer Mac, either in its own name or through an affiliate

controlled or owned by Farmer Mac, is authorized by section 8.6 of the

Act:

(1) To issue and/or guarantee the timely payment of principal and

interest on securities representing interests in or obligations backed

by pools of agricultural real estate loans (guaranteed securities); and

(2) to issue debt obligations (which, together with the guaranteed

securities described in paragraph (b)(1) of this section, are referred

to as Farmer Mac securities). Farmer Mac may prescribe the forms, the

denominations, the rates of interest, the conditions, the manner of

issuance, and the prices of Farmer Mac securities.

(c) Farmer Mac securities shall be governed by Secs. 615.5460,

615.5465, 615.5470, 615.5475, 615.5480, 615.5485, 615.5490, 615.5492,

and 615.5494. In interpreting those sections for purposes of this

section, the term ``Farmer Mac securities'' shall be read for ``Farm

Credit securities,'' and ``Farmer Mac'' shall be read for ``banks of

the Farm Credit System'' and ``Farm Credit bank.''

Dated: June 14, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration.

[FR Doc. 96-15733 Filed 6-19-96; 8:45 am]

BILLING CODE 6705-01-P