Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Investment Management

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB76

Funding and Fiscal Affairs, Loan Policies and Operations, and

Funding Operations; Investment Management

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), by the FCA Board

(Board), proposes to amend the investment regulations to provide Farm

Credit System (Farm Credit, FCS, or System) banks with a broader array

of eligible investments. Under the proposed regulations, Farm Credit

banks are expected to hold only high-quality and liquid investments to

maintain a liquidity reserve, invest surplus funds, and manage interest

rate risk. The proposal provides System banks with guidance on sound

practices for managing risks associated with investment activities and

grants System banks greater flexibility to manage risk on an

institutional, portfolio, or individual instrument level. These

amendments are also designed to better enable FCS banks to adjust to

the rapid and continual changes in the financial markets.

DATES: Written comments should be received on or before August 17,

1998.

ADDRESSES: Comments may be submitted by email to FCA at ``reg-

[email protected].'' Comments may also be mailed or delivered to Patricia W.

DiMuzio, Director, Regulation and Policy Division, Office of Policy and

Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean,

Virginia 22102-5090 or sent by facsimile transmission to (703) 734-

5784. Copies of all communications received will be available for

review by interested parties in the Office of Policy and Analysis, Farm

Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Senior Policy Analyst, Office of Policy Analysis, Farm

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

or

Richard Katz, Senior Attorney, Office of General Counsel, Farm Credit

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

4444.

SUPPLEMENTARY INFORMATION:

I. Background

Petitions by System banks, various developments and innovations in

the securities markets, and improvements in risk management

technologies have all led the FCA to reexamine its investment

management regulations in subpart E of part 615. The FCA aims to

develop a regulatory framework that establishes certain fundamental

practices each Farm Credit bank should follow to fully understand and

effectively manage the risks inherent in its investment portfolio.

Although non-agricultural investments are a relatively small percentage

of the assets of Farm Credit banks, proper investment management

enables System banks to control risks stemming from their operations as

monoline providers of agricultural credit. The FCA's proposal is

specifically designed to enhance investment management practices at

Farm Credit banks, and many aspects of this proposal are consistent

with the policies that the Federal Financial Institutions Examination

Council (FFIEC) recently adopted in a document entitled ``Supervisory

Policy Statement on Investment Securities and End-User Derivatives

Activities.'' \1\

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\1\ See 63 FR 20191 (April 23, 1998).

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The proposed amendments enable FCA to relax or repeal many of the

detailed criteria that the existing regulations prescribe for specific

types of investments. As a result, Sec. 615.5140 will provide broader

parameters for various classes of investments while retaining essential

safety and soundness controls, such as credit ratings and

diversification standards.

II. Investment Portfolio Management

Board and senior management should develop and implement

comprehensive risk management processes to effectively identify,

measure, monitor, and control risks associated with investment

activities. Although risk management programs will differ among System

banks, certain elements are fundamental to all sound risk management

programs. Safe and sound banking practices require System banks to have

programs to manage the market, credit, liquidity, operational, legal,

and other risks associated with investment activities. Effective risk

management also addresses risks in individual instruments, the

investment portfolio, and the entire institution.

Proposed Sec. 615.5133 sets forth the fundamental criteria for

developing sound investment management practices at Farm Credit banks.

Senior management, under the oversight of the board of directors,

should adhere to investment practices that are appropriate for the

bank's individual circumstances and consistent with these regulations.

The failure to understand and manage the risks associated with

investment activities will generally be considered an unsafe and

unsound banking practice.

A. Investment Policy Requirements

Many aspects of the current investment management regulations are

retained in this proposal. However, the complexity of many financial

products, both on- and off-balance sheet, compels the FCA and other

Federal financial institution regulators to advocate a more

comprehensive and institution-wide approach to risk management. Thus,

the FCA is proposing to strengthen, redesign, and reorganize this

section.

1. Board and Senior Management Oversight

The introductory paragraph to proposed Sec. 615.5133 outlines the

basic responsibilities of the board of directors regarding the

investment activities of its bank. The proposed rule requires the board

to adopt written policies that specifically identify the purposes and

objectives, risk parameters, delegations of authority, and reporting

requirements for managing the bank's investment portfolio. The

investment policy should also address how investment activities affect

the institution's capital and earnings. For this reason, a Farm Credit

bank board may include its investment policy in a broader asset-

liability management (ALM) or risk management policy.

Oversight by both the board of directors and senior management of

each Farm Credit bank is an integral

[[Page 33282]]

part of an effective risk management program. The board of directors is

responsible for ensuring that management and operational personnel have

the requisite skills and resources to manage the risks associated with

investment activities in accordance with the board's policies.

Annually, the board of directors of each Farm Credit bank must review

its investment policies to determine whether objectives and risk

exposure limits continue to be appropriate for the bank. Senior

management discharges its responsibility by adhering to the board's

policies, providing advice to the board, and safely and soundly

conducting investment activities on both a strategic and operational

basis.

2. Risk Limits

Proposed Sec. 615.5133(a) requires the board's policies to define

the risk parameters for the bank's investment activities. Foremost,

risk parameters are to be based on the strength of each Farm Credit

bank's capital position and its ability to measure and manage risk. The

risk parameters should be consistent with the bank's broader business

strategies and institutional objectives. The bank's investment policies

should identify the risk characteristics of permissible investments and

establish risk limits and diversification requirements for the various

classes of eligible investments and the investment portfolio. The

policies of each Farm Credit bank should control credit, market,

liquidity, and operational risks associated with investment activities.

B. Credit Risk

A System bank should not acquire investments without assessing the

creditworthiness of issuers, obligors, or other counterparties. Credit

risk generally refers to the risk that an issuer, obligor, or other

counterparty will default on its obligation to pay the investor under

the terms of the security or instrument.

Proposed Sec. 615.5133(a)(1) requires each System bank to establish

comprehensive policies to control credit risk in its investment

portfolio. Each Farm Credit institution must maintain a well-

diversified investment portfolio. As a result, every Farm Credit bank

should limit concentrations relating to single or related

counterparties, geographical areas, industries, or obligations with

similar characteristics.

The FCA proposes to delete current Sec. 615.5133(i) relating to

specific credit risk controls on investments in collateralized mortgage

obligations (CMOs), real estate investment conduits (REMICs), and

asset-backed securities (ABS), in favor of the broader language

proposed in Sec. 615.5133(a)(1)(i). Nevertheless, the FCA continues to

expect banks to address concentration risks associated with CMOs,

REMICs, mortgage-backed securities (MBS), and ABS by establishing

appropriate portfolio limits on each of these investments. More

specifically, the policy of each Farm Credit bank should address

minimum pool size, the minimum number of loans in a pool, geographic

diversification of a pool, and maximum allowable premiums.

As part of its efforts to control credit risks, Farm Credit banks

should consider the ability of counterparties to honor their

obligations and commitments. The selection of dealers, brokers, and

investment bankers (collectively, securities firms) is an important

aspect of effective management of counterparty credit risk. Proposed

Sec. 615.5133(a)(1)(ii) requires bank boards of directors to identify

the criteria for selecting securities firms. A satisfactory approval

process includes a review of each firm's financial statements and an

evaluation of its ability to honor its commitments, including an

inquiry into the general reputation of the securities firm. In some

situations, it is also prudent for System banks to review information

from Federal or State securities regulators and industry self-

regulatory organizations such as the National Association of Securities

Dealers concerning any formal enforcement actions against the dealer,

its affiliates, or associated personnel. Proposed

Sec. 615.5133(a)(1)(ii) also requires the board of directors to set

limits on the amounts and types of transactions that the bank can

execute with authorized securities firms. The board of directors must

annually review management's selection of securities firms and

limitations on transactions with such firms.

Proposed Sec. 615.5133(a)(1)(ii) responds to requests by System

banks for modifications in the FCA's policy concerning the board's role

in selecting securities firms, financial institutions, and other

counterparties. The proposed rule would no longer require the board of

directors to approve specific depository institutions where the bank

holds certificates of deposits and Federal funds. The FCA originally

imposed this requirement on System banks at a time when small,

isolated, and financially weak commercial banks were offering brokered

deposits with high rates of return.\2\ Reforms in the commercial

banking industry and a widespread awareness of the risks inherent in

such instruments have lessened FCA's regulatory concern. Furthermore,

proposed Sec. 615.5140(a)(4)(i) sets minimum credit and maturity limits

for investments in certificates of deposits, Federal funds, and bankers

acceptances.

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\2\ See 58 FR 63034, 63040 (November 30, 1993).

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Proposed Sec. 615.5133(a)(1)(iii) requires Farm Credit banks to

establish appropriate collateral margin requirements for repurchase

agreements.\3\ The FCA is proposing this amendment, in part, because

proposed Sec. 615.5140(a)(4)(iv) would expand the types of securities

that Farm Credit banks may accept as collateral in repurchase

transactions. As a means of managing potential counterparty credit

risk, it is prudent for System banks to establish appropriate

collateral margin requirements based on the quality of the collateral

and the terms of the agreement. Farm Credit banks should also manage

their exposure to loss on repurchase agreements by regularly marking

the collateral to market and maintaining control of the collateral.\4\

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\3\ In general, whether a given agreement is termed a

``repurchase agreement'' or a ``reverse repurchase agreement''

depends largely on which party initiated the transaction. Market

participants typically view the transaction from the dealer's

perspective. In this preamble and the proposed regulation, the FCA

uses the term ``repurchase agreement'' regardless of the perspective

from which the transaction is viewed.

\4\ For a more detailed discussion on managing risks associated

with repurchase agreements, Farm Credit banks should review the

FFIEC's modified policy statement on repurchase agreements with

securities dealers and others. See 63 FR 6935 (February, 11, 1998).

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C. Market Risk

From a safety and soundness perspective, it is crucial for the

management of a Farm Credit bank to fully understand the market risks

associated with investment securities prior to acquisition and on an

ongoing basis. Market risk is the risk to a bank's financial condition

resulting from adverse changes in value of its holdings arising from

movements in interest rates or prices. The most significant market risk

of investment activities is interest rate risk. Proposed

Sec. 615.5133(a)(2) would require bank boards to establish limits on

market risk exposure at the institutional, portfolio, or individual

instrument level. This change corresponds with pending changes in other

parts of the FCA regulations that address interest rate risk

management.\5\

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\5\ The FCA's proposed capital regulations provide more detailed

discussions of FCS institution responsibilities as they relate to

interest rate risk management. See 62 FR 49623 (September, 23,

1997).

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To manage market risk exposure, System banks should evaluate how

[[Page 33283]]

individual instruments and the investment portfolio as a whole affect

the bank's overall interest rate risk profile. Bank's should monitor

the price sensitivity of its investment portfolio and specify

institution-wide interest rate risk limits. In addition, banks may find

it useful to establish interest rate risk limits on the investment

portfolio or on certain types of securities. Risk parameters should be

commensurate with the bank's ability to measure, manage, and absorb

risk. Boards should consider the bank's level of capital and earnings

and its tolerance for market risk exposure when setting risk

parameters. Market risk limits should be established in a manner that

is consistent with all relevant regulations, policies, and guidance

issued by the FCA.

D. Liquidity Risk

The FCA expects Farm Credit banks to manage liquidity risk at both

the investment and the institutional levels. System banks may encounter

liquidity risk stemming from market conditions surrounding individual

investment activities. In this context, liquidity risk is the risk that

a bank would not be able to easily sell or liquidate an investment

quickly at a fair price. This inability may be due to inadequate market

depth or market disruption. At the institutional level, liquidity risk

is the risk that System banks could encounter a liquidity crisis if

they are unable to fund operations at reasonable rates because access

to the capital markets is impeded. This impediment may result from a

market disruption or real or perceived credit problems.

The FCA proposes to repeal a provision in existing Sec. 615.5134(b)

which requires System banks to segregate investments held in the

liquidity reserve from investments that are maintained for the other

purposes permitted by existing Sec. 615.5132. As a result of this

amendment, System banks will have greater flexibility to decide how

best to use their investments to manage exposure to risk.\6\ Since the

liquidity characteristics of an investment influence whether it is

suitable for meeting particular institutional objectives, the FCA also

proposes a conforming change to Sec. 615.5133(a)(3). Pursuant to this

amendment, the bank's policies must specify the desired liquidity

characteristics of investments that it will use for maintaining a

liquidity reserve and accomplishing other institutional objectives.

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\6\ The minimum liquidity reserve that System banks maintain

under Sec. 615.5134 must be sufficient to fund their operations for

approximately 15 days in the event that System access to the capital

markets becomes impeded.

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The bank's investment policies must also require the bank to

maintain sufficient quantities of liquid investments to comply with the

liquidity reserve requirements of Sec. 615.5134. Pursuant to

Sec. 615.5132, each Farm Credit bank's total investments, including its

liquidity reserve, cannot exceed 30 percent of its total outstanding

loans. The FCA expects the policies of each Farm Credit bank to strike

an appropriate balance between the need for a liquidity reserve, the

management of interest rate risk, and the investment of surplus funds

as it strives to accomplish its institutional objectives.

E. Operational Risk

Operational risk occurs when deficiencies in internal controls or

information systems result in unexpected loss to a financial

institution. Operational risk may arise from inadequate procedures,

human error, information system failure, or fraud. Internal controls

that effectively detect and prevent operating risks are an integral

part of prudent investment management. The ability of management to

accurately assess and control operating risks is often one of the

greatest challenges that financial institutions face from investment

activities. Therefore, proposed Sec. 615.5133(a)(4) would require the

board of directors of each Farm Credit bank to address operating risks

by establishing policies that foster effective internal controls.

Organizational structure and reporting lines should clearly

delineate responsibility and accountability for all investment

management functions, including risk measurement, risk management, and

oversight. Organizational structure should periodically be reviewed to

reveal conflicts of interest or inadequate checks and balances.

Proposed Sec. 615.5133(b) specifically requires System banks to

identify who has delegated authority to conduct investment transactions

and the extent of that authority. In addition, the proposed rule

requires a separation of duties and supervision between personnel

executing investment transactions and those responsible for approving,

revaluating, and overseeing the bank's investments. Separation of

duties promotes integrity, accuracy, and reasonable business practices

that reduce the risk of loss. Senior management must ensure that bank

investment practices and risk exposure are regularly reviewed and

evaluated by personnel who are independent from those responsible for

executing investment transactions.

Existing Sec. 615.5133(h), which the FCA proposes to modify and

redesignate as Sec. 615.5133(c), requires Farm Credit banks to

establish appropriate internal controls to monitor their investment

activities and prevent loss, fraud, embezzlement, conflicts of

interest, and unauthorized investment practices. Redesignated

Sec. 615.5133(c)(1) adds conflicts of interest as an issue that every

System bank must specifically address in its investment policies. The

policies of each Farm Credit bank should provide guidelines to prevent

or resolve conflicts of interest that may arise from employees who are

directly involved in purchasing and selling securities. Furthermore,

the bank's policies should ensure that all directors, officers, and

employees act in the best interest of the institution.

Due to the increasingly complex nature of investment instruments,

Farm Credit banks must maintain information systems that are capable of

monitoring, measuring, and evaluating the risks inherent in their

investment activities. Proposed Sec. 615.5133(c)(3) would require banks

to maintain management information systems that are commensurate with

the nature, scope, and complexity of the bank's investment activities.

Internal quantitative models and management expertise must be adequate

to analyze individual investment instruments, the investment portfolio,

and the effect investments have on the bank's cashflows, earnings, and

capital.

Farm Credit banks may also be exposed to other sources of operating

risks, such as legal risk that may result from contracts that are not

legally enforceable. The FCA expects each bank to adequately assess and

control other operational risks relating to investment activities.

Accordingly, Farm Credit banks should clearly define documentation

requirements for securities transactions, retention and safekeeping of

documents, as well as possession and control of purchased instruments.

F. Securities Valuation

Accurate and frequent securities valuation is essential to

measuring risk and monitoring compliance with the bank's objectives and

risk parameters. Proposed Sec. 615.5133(d) establishes the basic

requirements for securities valuations by Farm Credit banks.\7\

[[Page 33284]]

System banks must understand the value and price sensitivity of their

investments prior to purchase and on an ongoing basis. System banks

should rely on valuation methodologies that take into account all the

risk elements in a security to determine its price. Appropriate

securities valuation practices enable managers to fully understand the

risks and cashflow characteristics of the investments.

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\7\ Two provisions of this regulation, Sec. 615.5133(d)(1) and

(d)(2) are new, while existing Sec. 615.5140(d) has been modified

and redesignated as proposed Sec. 615.5133(d)(3).

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A critical step in sound investment management is the independent

verification of securities prices. Accordingly, proposed

Sec. 615.5133(d)(1) requires each Farm Credit bank, at the time of

purchase or sale, to verify the value of the security (except new

issues) with a source that is independent of the broker, dealer,

counterparty, or other intermediary in the specific transaction. Under

the proposed rule, independent verification of price can be as simple

as obtaining a price from an industry-recognized information provider.

Although price quotes from information providers are not actual market

prices, they confirm whether the broker's price is reasonable. In the

event that a bank is unable to obtain a second price quote on a

particular security, a price quote may be obtained on a security with

substantially similar characteristics.

Proposed Sec. 615.5133(d)(2) requires Farm Credit banks to

determine, at least monthly, the fair value of each security in their

portfolio and the fair value of the investment portfolio as a whole.

This provision is added to the regulations to ensure that management

has the necessary information to assess the performance of the bank's

investment portfolio. Additionally, this requirement enables management

to provide accurate and timely reports to the board of directors in

accordance with proposed Sec. 615.5133(e).

Existing Sec. 615.5140(c) has been modified and redesignated as

proposed Sec. 615.5133(d)(3). Currently, Sec. 615.5140(c) requires each

Farm Credit bank to perform ongoing evaluations of all eligible

investments in its portfolio and to support its evaluation with the

most recent credit rating by at least one nationally recognized

statistical rating organization (NRSRO). As amended, proposed

Sec. 615.5133(d)(3) specifically requires Farm Credit banks to perform

evaluations of the credit quality and price sensitivity to changes in

market interest rates of all investments held in its portfolio prior to

purchase and on an ongoing basis. This change emphasizes that effective

credit and interest rate risk management is vital to successful FCS

bank operations.

The substance and form of the evaluations are likely to vary

depending on the type of instrument. Relatively simple or standardized

instruments with readily identifiable risks require significantly less

analysis than more volatile or complex instruments. Proposed

Sec. 615.5141 contains specific stress testing guidance for evaluating

the price sensitivity of mortgage securities. Other eligible

investments that have uncertain cashflows as a result of embedded

options (such as call options, caps or floors) may require similar

analytical techniques to appropriately evaluate the instruments. For

example, prior to investing in ABS, the FCA expects a bank to conduct

or obtain an evaluation of the collateral (including type, aging of the

assets, and the credit quality of the underlying loans) and an analysis

of the securities' structure and cashflows.

System banks must continue to support their credit evaluations by

the most recent credit rating with a NRSRO. However, Farm Credit banks

should not rely exclusively on NRSRO ratings prior to purchasing

investments because there may be a lag before an adverse event is

reflected in the credit rating.

G. Reports to the Bank's Board

Adequate reporting enables bank boards to properly discharge their

fiduciary responsibilities. The investment policy should define routine

reporting requirements and the means for reporting exceptions to

policy. Management reports need to communicate effectively to the board

of directors the nature of the risks inherent in the bank's investment

activities. Reporting should occur frequently so that the board has

timely, accurate, and sufficient information to understand how changes

in the investment portfolio affect the balance sheet and the bank's

risk profile. The FCA proposes to modify the second sentence of

existing Sec. 615.5133(h) to emphasize these points and to redesignate

it as Sec. 615.5133(e).

Proposed Sec. 615.5133(e) requires quarterly reports on the

performance (i.e., gains or losses) and risk of individual investments

and the investment portfolio. Key risks should be specifically

identified and discussed in the report. More specifically, reports

should relate potential risk exposure to changes in market interest

rates and any other factors (such as credit deterioration) that may

affect the value of the bank's investment holdings. In addition,

proposed Sec. 615.5133(e) requires management reports to discuss how

investments affect the bank's overall financial condition and to

evaluate whether the performance of the investment portfolio

effectively achieves the objectives established by the board of

directors. Reports should specifically identify any deviations from the

board's policies.

III. Eligible Investments

A. Overview

Section 615.5140 lists the eligible investments that System banks

may purchase and hold to maintain a liquidity reserve, manage interest

rate risk, and invest surplus short-term funds. Associations are also

authorized to hold eligible investments listed in Sec. 615.5140 to

invest surplus funds and reduce interest rate risk pursuant to existing

Sec. 615.5141 (redesignated as Sec. 615.5142). Only investments that

can be promptly converted into cash without significant loss are

suitable for achieving these objectives. For this reason, the eligible

investments listed in both existing and proposed Sec. 615.5140

generally have short maturities and maintain a high investment grade

credit rating by an NRSRO. Furthermore, all eligible investments are

either traded in active secondary markets or are valuable as

collateral.

The proposed rule provides System institutions with a broad array

of high-quality and liquid investments. The FCA proposes to expand the

list of eligible investments and to relax or repeal certain

restrictions in existing Sec. 615.5140. These revisions reflect changes

in the financial markets as well as the FCA's desire to develop a

regulatory framework that can more readily accommodate innovations in

financial products and analytical tools.

The FCA Board proposes to restructure the format of Sec. 615.5140

to accommodate eligible investments that are newly authorized by the

FCA and to provide an organizational structure that is easy to

understand. Similar classes of investments, such as full faith and

credit obligations of Federal and State governments and short-term

money market instruments are now grouped together in proposed

Sec. 615.5140(a). The FCA proposes to reduce the number of portfolio

caps and repeal existing regulatory restrictions on the amount that

each FCS institution can invest in negotiable certificates of deposit,

Federal funds, bankers acceptances, and prime commercial paper.

Requirements that apply to several categories of eligible

investments have been relocated to Sec. 615.5140(b). For example, the

requirement that an investment must be marketable will now be covered

by a single provision in

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proposed Sec. 615.5140(b)(1). Additionally, the sovereign rating for

political and economic stability of foreign countries, which is

currently repeated several times in the existing regulation, is

relocated to proposed Sec. 615.5140(b)(2).

The FCA is proposing to revise its regulatory terminology for

credit ratings. References to the credit ratings of specific NRSROs are

omitted from the proposed rule so it more accurately encompasses the

broad universe of market ratings. Instead, the proposed regulation

requires each eligible investment listed in Sec. 615.5140(a) to

maintain a specified long-term or short-term credit rating by an NRSRO

that is recognized by the Securities and Exchange Commission (SEC).

Whereas the existing regulation refers, for example, to a Standards and

Poor's (S&P) Corporation rating of ``AA'' or its equivalent, the

proposed regulation refers to ``the highest two credit ratings by an

NRSRO.'' The following table provides a comparative illustration of

S&P's investment grades for both long-term and short-term issue credit

ratings.

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S&P ratings

Investment grade ------------------------------------

Long-term Short-term

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First.............................. AAA A-1

Second............................. AA A-2

Third.............................. A A-3

Fourth............................. BBB

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The ratings in the table are often modified by either plus or minus

signs to show relative standing within a major rating category.

Specific investment credit ratings in the proposed rule refer to the

generic rating categories, not modifiers within the generic group.

Thus, for example, a long-term rating of ``AA-'' by S&P would be, for

the purposes of FCA's regulations, within the ``two highest credit

ratings by an NRSRO.''

The following section provides a category-by-category discussion of

the FCA's proposed regulatory framework for eligible investments.

B. U.S. Treasury and Agency Securities

The FCA retains Sec. 615.5140(a)(1) without revision. This

provision authorizes each FCS institution to invest in obligations that

are backed by the full faith and credit of the United States, its

agencies, instrumentalities, and corporations. In response to frequent

questions about the scope of this provision, the FCA confirms that

Sec. 615.5140(a)(1) permits the purchase of debt obligations of other

Government-sponsored enterprises (GSEs). Private obligations that are

fully insured or guaranteed as to both principal and interest by the

United States, its agencies, instrumentalities, or corporations are

also covered by this regulation. Thus, for example, a System

institution may hold federally insured deposits, loans that are

guaranteed by either the Export-Import Bank of the United States or the

Overseas Private Investment Corporation, and certain obligations of the

Small Business Administration.

C. Municipal Securities

The FCA proposes to redesignate Sec. 615.5140(a)(10), which

authorizes the investment in the general obligations of State and

municipal governments, as Sec. 615.5140(a)(2), without significant

change. The FCA proposes to add a definition of ``general obligation of

a State or political subdivision'' to Sec. 615.5131 to codify its

recent guidance on which bonds are deemed to be backed by the full

faith and credit of a State or local government.\8\ Under this

definition, general obligation bonds are those that are: (1) Full faith

and credit obligations of a State or local government that possesses

powers of general taxation; or (2) obligations of a governmental unit

that lacks powers of general taxation if an obligor possessing general

powers of taxation unconditionally guarantees to make all payments on

these obligations.

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\8\ See FCA BL-038, ``Guidance Relating to Investment

Activities,'' (November 26, 1997).

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System banks have requested authority to invest in municipal

revenue bonds. These bonds are not supported by the taxation powers of

the obligor and are repayable from fee income and other sources of

revenue. Although many municipal revenue bonds are highly rated by

NRSROs and are actively traded in secondary markets, others are not.

The universe of municipal revenue bonds is also diverse, and effective

regulation of System investment in these securities could be difficult.

For these reasons, the FCA requests comments on how it could permit

these investments while limiting risks to System institutions.

Specifically, the FCA solicits comments on how the regulation could

establish: (1) Criteria for determining which revenue bonds are

suitable for meeting the investment purposes in Sec. 615.5132; and (2)

an appropriate limit on the amount of these investments.

D. International and Multilateral Development Banks

Obligations of the International Bank for Reconstruction and

Development (World Bank) are eligible investments under existing

Sec. 615.5140(a)(3). The FCA's proposal expands the scope of this

provision to include the obligations of other international and

multilateral development banks (such as the Inter-American Development

Bank and the North American Development Bank) in which the United

States is a voting shareholder. This amendment recognizes other highly

rated banks that work in concert with the World Bank to promote

development in various countries.

E. Money Market Instruments

Several provisions of existing Sec. 615.5140(a) authorize

investments in negotiable certificates of deposit, Federal funds,

bankers acceptances, prime commercial paper, and repurchase agreements.

These money market instruments have high credit quality and short

maturities. Additionally, they can be sold on active secondary markets

prior to maturity. These qualities make them highly liquid and valuable

as collateral. Accordingly, the FCA proposes to group all money market

instruments together into a single regulatory provision,

Sec. 615.5140(a)(4). Since these money market instruments pose limited

risks to investors, the FCA believes that this regulation should no

longer impose specific limitations on the amounts of negotiable

certificates of deposit, Federal funds, bankers acceptances, and prime

commercial paper that each FCS institution could hold in its investment

portfolio. However, Sec. 615.5140(b)(3) continues to restrict the

amount that an FCS institution could invest with a single obligor or

institution to 20 percent of its total capital. The FCA is also

proposing to omit the definitions of negotiable certificates of

deposit, Federal funds, and Term Federal funds from existing

Sec. 615.5131 because the meanings of these instruments are commonly

understood by participants in the money markets. Additionally, the FCA

has relocated the definitions of prime commercial paper and repurchase

agreements from existing Sec. 615.5131 to proposed Sec. 615.5140(a)(4)

so these regulations are easier to read.

The FCA proposes to omit specific references to Eurodollar and

Yankee certificates of deposits from Sec. 615.5131 and Sec. 615.5140

because proposed Sec. 615.5140 (a)(4)(i) is sufficiently broad to

permit investment in both of these instruments. The provision in

existing Sec. 615.5140(a)(5) regarding deposit insurance for domestic

and Yankee certificates of deposit became redundant in 1996 when the

FCA amended Sec. 615.5140(a)(1) to specifically cover Federal insurance

of private debt

[[Page 33286]]

obligations.\9\ Deposit insurance usually is not a consideration when

an FCS institution purchases negotiable Eurodollar certificates of

deposit because only a small portion of its investment is typically

insured.

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\9\ See 61 FR 67187 (December 20, 1996).

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System banks requested authority to invest in Eurodollar time

deposits. A Eurodollar time deposit is a non-negotiable deposit

denominated in United States dollars that is issued by an overseas

branch of a United States bank or by a foreign bank outside the United

States. The riskiness of Eurodollar time deposits depends on both the

creditworthiness of the issuing bank and the foreign country where the

deposit is located. Financial institutions generally use Eurodollar

time deposits as an alternative to Federal funds. Most Eurodollar time

deposits mature within 180 days.

The FCA agrees that Eurodollar time deposits are suitable for

investing short-term surplus funds and interest rate risk management.

However, the FCA proposes several safety and soundness constraints for

Eurodollar time deposits because these instruments are not negotiable

and they are held at depository institutions outside of the United

States. Specifically, proposed Sec. 615.5140(a)(4)(ii) allows each FCS

institution to invest in Eurodollar time deposits that mature within 90

days and that are issued by depository institutions that maintain the

highest short-term issuer credit rating by an NRSRO. In addition,

proposed Sec. 615.5140(b)(2) further requires Eurodollar time deposits

to be held at depository institutions located in foreign countries that

maintain the highest sovereign rating for political and economic

stability. The FCA also proposes to limit investments in Eurodollar

time deposits to 20 percent of an FCS institution's total investment

portfolio to control concentration risk in these non-negotiable

instruments.

System banks also requested authority to invest in certificates of

deposits that mature within 3 years but contain a put option that

enables the investor to require the depository institution to

repurchase the instrument. The FCA's research reveals that the market

for certificates of deposits with embedded put options is almost

nonexistent, and no commercial banks have issued these instruments in

several years. These instruments are neither liquid nor traded in

active secondary markets. Commercial banks have engineered the few

existing certificates of deposits with put options for specific

customers. Therefore, the FCA has not added these instruments to the

list of eligible investments in the proposed rule.

Prime commercial paper remains an eligible investment under the

proposed regulations. The FCA has redesignated Sec. 615.5140(a)(7) as

Sec. 615.5140(a)(4)(iii).

The FCA proposes to expand the types of collateral that support

eligible repurchase agreements. System banks have asserted that the

FCA's investment eligibility criteria limit their ability to

participate in the repurchase agreement market because market

participants are often unwilling to post collateral that specifically

complies with the investment criteria in existing Sec. 615.5140. The

FCA acknowledges that repurchase transactions can be a valuable tool

for investing short-term surplus funds, and they are relatively safe

due to short maturities, high quality of collateral, and collateral

margin requirements. For this reason, the FCA proposes to amend this

regulation. The proposed regulatory approach will allow more latitude

to participate in this market, while maintaining essential safety and

soundness controls.

Redesignated Sec. 615.5140(a)(4)(iv) permits each FCS institution

to invest in repurchase agreements where the FCS institution agrees to

purchase marketable securities subject to a legal agreement that

requires the counterparty to repurchase the same or identical

securities at a specific price within 100 days or less. Any securities

held as collateral in connection with repurchase agreements must be

either eligible investments authorized by this section or other

marketable securities that are rated in the highest credit rating

category by an NRSRO. In the event that the counterparty defaults on

the agreement and the FCS institution takes possession of the

collateral, the divestiture requirements in existing Sec. 615.5142

(redesignated as proposed Sec. 615.5143) apply to any collateral that

fails to qualify as an eligible investment under Sec. 615.5140(a).

In 1995, the FCA approved a System request to invest in Master

Notes pursuant to existing Sec. 615.5140(a)(11), which permits the FCA

to authorize additional investments on a case-by-case basis. As

requested, the FCA proposes Sec. 615.5140(a)(4)(v) to codify System

institutions' authority to invest in Master Notes.\10\ The proposed

regulation authorizes investments in Master Notes that: (1) Are

executed with a domestic counterparty that maintains the highest issuer

short-term credit rating by an NRSRO; and (2) mature overnight or

within 270 days under a callable contract. The FCA also proposes to

increase the portfolio limit on Master Notes from 15 to 20 percent of

the FCS institution's investment portfolio.

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\10\ Master Notes are interest-bearing unsecured promissory

notes that are issued by institutions to investors under a master

note agreement. The most common type of master note agreement is a

variable-amount note which is a type of open-ended commercial paper

that allows the investment and withdrawal of funds on a daily basis

and pays a daily interest rate tied to the commercial paper rate.

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F. Mortgage Securities

1. Overview

Currently, Sec. 615.5140(a)(2) authorizes investment in mortgage

securities that are issued or guaranteed by the Government National

Mortgage Association (Ginnie Mae or GNMA), the Federal National

Mortgage Association (Fannie Mae or FNMA), and the Federal Home Loan

Mortgage Corporation (Freddie Mac or FHLMC). CMOs that are

collateralized by mortgage securities of GNMA, FNMA and FHLMC are also

expressly authorized under the current regulations, even though they

are packaged, issued, and sold under a private label.\11\ Under the

existing regulation, eligible mortgage securities must either reprice

within 1 year or comply with the stress tests specified in

Sec. 615.5140(a)(2)(iii).\12\ System banks may hold mortgage securities

that are issued or fully guaranteed by Ginnie Mae without restriction

as to amount. However, the existing regulation restricts mortgage

securities that are issued or fully guaranteed by Fannie Mae and

Freddie Mac to 50 percent of each bank's total investments.

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\11\ See 58 FR 63035, (November 30, 1993). Private label

mortgage securities are issued by commercial banks, thrifts, and

private conduits. Unlike agency securities, private label mortgage

securities must be registered with the SEC.

\12\ Section 615.5174 permits Farm Credit banks and associations

to invest in mortgage-related securities that are guaranteed by the

Federal Agricultural Mortgage Corporation (Farmer Mac).

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System banks seek further opportunities to invest in the mortgage

securities market because of the high credit quality and liquidity of

these securities. In particular, Farm Credit banks have requested

authority to invest in mortgage securities that are collateralized by

loans that do not comply with the FNMA and FHLMC underwriting standards

and certain stripped mortgage-backed securities (SMBS). Recently,

System banks petitioned the FCA to repeal the portfolio limit on Fannie

Mae and Freddie Mac mortgage securities. This request also suggested

that the revised regulation authorize FCS institutions to invest in

mortgage securities that are rated within the two highest investment

credit grades by an NRSRO. The

[[Page 33287]]

proposed rule permits investment in a greater variety of mortgage

securities, subject to essential safety and soundness constraints.

2. Limits on FNMA and FHLMC Mortgage Securities

As previously noted, System banks requested that the FCA repeal the

50-percent investment portfolio limit on mortgage securities that are

issued or guaranteed as to principle and interest by FNMA and FHLMC.

System banks commented that no other financial institution regulatory

agency places restrictions on the credit exposure to GSEs and that

exposure limits on these securities should be left to the discretion of

each bank.

At this time, the FCA does not propose to repeal the existing

portfolio limits for FNMA and FHLMC mortgage securities. As explained

in greater detail below, the proposed regulation significantly expands

the authority of System institutions to purchase and hold mortgage

securities. The FCA's proposal will permit System institutions to

invest, for the first time, in non-agency mortgage securities. Under

certain circumstances, System banks would also be able to hold mortgage

derivative products, such as SMBS, for interest rate risk management.

Additionally, the new regulations will enable System institutions to

rely on alternate stress tests for measuring the price sensitivity of

mortgage securities.

The FCA agrees with System commenters that the board and management

of each FCS institution should establish risk exposure limits for all

mortgage securities. A regulatory portfolio limit on FNMA and FHLMC

mortgage securities does not absolve an institution's board or

management of its responsibility to establish risk parameters that are

based on the institution's unique risk-bearing capacity. The FCA also

expects each FCS institution to maintain a well-diversified investment

portfolio, regardless of whether these regulations impose a portfolio

cap on particular classes of investments.

Regulatory portfolio limits enhance safety and soundness by

limiting credit exposure, promoting diversification of System

investment portfolios, and curtailing investments in securities that

may exhibit considerable interest rate or liquidity risks. The FCA

invites further comment about this issue.

3. Non-agency Mortgage Securities

The size and liquidity of the non-agency mortgage securities market

has increased markedly since the implementation of the current

regulations in 1993. The largest sector of the non-agency market is

comprised of securities that are collateralized by ``jumbo'' mortgages

with principal amounts that exceed the maximum limits for FNMA and

FHLMC programs.\13\

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\13\ Several other asset classes in the non-agency MBS market

exist, including: (1) Housing and Urban Development paper; (2) high

loan-to-value loans; (3) Community Reinvestment Act loans; and (4)

loans to borrowers with conforming loan balances with other features

that prevent agency securitization, such as low documentation, self-

employment, and unique property features.

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The credit quality and liquidity of any particular non-agency

mortgage security are dependent upon a myriad of factors, including the

type of collateral and the structure, term, and originator of the

issue. Non-agency mortgage securities are not explicitly or implicitly

guaranteed by the United States, so these instruments typically require

credit enhancements to receive a high rating. Credit enhancement is

usually provided by some combination of issuer or third-party

guarantee, letter of credit, over-collateralization, pool insurance, or

subordination. As a result of these credit enhancements, highly rated

non-agency mortgage securities enjoy low default rates.

The FCA determines that non-agency mortgage securities that

maintain the highest credit rating by an NRSRO have sufficient

protections against default risk. Proposed Sec. 615.5140(a)(5)(ii)

permits each System institution to invest in mortgage securities that

are offered by private sector entities. Under this proposal, privately

issued mortgage securities are eligible investments for System

institutions if they are rated in the highest rating category by an

NRSRO and they are collateralized by qualifying residential mortgages,

meeting the requirements of the Secondary Mortgage Market Enhancement

Act of 1984 (SMMEA).\14\ Prior to investing in such securities, every

System bank must subject each non-agency mortgage security to stress

testing in accordance with Sec. 615.5141. Non-agency mortgage

securities cannot exceed 15 percent of each institution's total

investments. Furthermore, mortgage securities that are issued by any

party other than Ginnie Mae cannot exceed 50 percent of each

institutions' total investments. This amendment balances the System's

request for a broader selection of mortgage securities with appropriate

safety and soundness restraints.

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\14\ The proposed rule allows investments in mortgage securities

that are offered and sold pursuant to section 4 (5) of the

Securities Act of 1933, 15 U.S.C. 77d(5), or are residential

mortgage related securities within the meaning of section 3 (a) (41)

of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a) (41). SMMEA

amended several statutes to encourage private sector investment in

certain mortgage-related securities. See Pub. L. 98-440, 98 Stat.

1689, October 3, 1984.

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4. Fixed-rate Mortgage Pass-through Securities

Currently, fixed-rate mortgage securities are eligible investments

for System institutions if they satisfy the three-pronged stress test

in existing Sec. 615.5140(a)(2)(ii).\15\ This stress test provides a

basic method for measuring the price sensitivity of a mortgage security

to changes in interest rates.\16\ System banks requested that the FCA

repeal the requirement in existing Sec. 615.5140(a)(2) that subjects

mortgage pass-through securities to the stress test. The Farm Credit

banks asserted that interest rate risk in mortgage pass-through

securities is easier to model and analyze and other federally regulated

financial institutions are not subject to similar requirements.

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\15\ A recent FCA bookletter explains the authority of System

banks to invest in fixed-rate mortgage securities that convert to

adjustable rate securities. See BL-038, ``Guidance Relating to

Investment Activities,'' (November 26, 1997).

\16\ Under existing Sec. 615.5140(a)(2)(ii), each fixed-rate

mortgage security must have a weighted average life (WAL) of 5 years

or less, and changes in its WAL and price cannot exceed specified

percentages, assuming parallel and sustained shift in interest rates

of 300 basis points.

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The FCA believes that stress testing of all mortgage securities is

a necessary discipline that enables each System institution to better

understand and manage the risks inherent in these instruments.

Therefore, the FCA does not incorporate the System's suggestion in this

proposal. However, as discussed below, the FCA proposes significant

changes to the stress-testing requirements for mortgage securities.

5. Other Mortgage-derivative Products

The FCA also plans to repeal existing Secs. 615.5131(r) and (s),

615.5140(a)(2)(v), and certain provisions in Sec. 615.5174(c) that

explicitly ban investments in SMBS and inverse floating-rate debt

classes.\17\ System banks claim that the explicit ban on SMBS is overly

broad and, as a

[[Page 33288]]

result, it excludes securities with limited interest rate risk. The FCA

concludes that the explicit regulatory ban on certain mortgage-

derivative products is unnecessary because all mortgage securities are

subject to stress-testing requirements under both the current and

proposed rules. The degree of price sensitivity that a mortgage

security exhibits to changes in market interest rates is influenced by

its unique characteristics. A System institution should determine

whether a particular mortgage security meets its risk management

objectives by using analytical techniques and methodologies that

effectively evaluate how interest rate changes will affect prepayments

and cashflows of the instrument.

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\17\ Existing Sec. 615.5131(r) defines SMBS as ``securities

created by segregating the cashflows from the underlying mortgages

or mortgage securities to create two or more new securities, each

with a specified percentage of the underlying security's principal

payments, interest payments, or combination of the two.''

Furthermore, existing Sec. 615.5140(a)(2)(v)(A) and 615.5174(c)

specifically prohibit System banks from acquiring SMBS that are

issued by GNMA, FNMA, FHLMC, and the Farmer Mac. When the existing

regulations were adopted, the FCA reasoned that SMBS exhibit extreme

price volatility to shifting interest rates, and therefore, these

instruments were not suitable for maintaining a liquidity reserve or

managing interest rate risk. See 56 FR 65091, 65096 (December 18,

1991); 58 FR 63034, 63046 (November 30, 1993).

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Repeal of these regulatory restrictions will afford each System

institution greater latitude to manage interest rate risks in the

investment portfolio and its balance sheet. Although certain mortgage

derivative products are risky because their prices may be subject to

substantial fluctuations, the FCA recognizes that they can also be

useful tools for reducing interest rate risk. Successful risk

management of these instruments requires a thorough understanding of

the principles that govern the pricing of these instruments. In

general, FCA would view it as an unsafe and unsound practice to hold

SMBS and inverse floaters for any purpose other than to reduce specific

interest rate risks. Management must document, prior to purchase and

each quarter thereafter, that the mortgage derivative product is

reducing the interest rate risk of a designated group of assets or

liabilities and the interest rate risk of the institution. However, if

such an instrument exhibits only minimal price sensitivity under the

stress test in proposed Sec. 615.5141, a System institution would be

allowed to purchase and hold the instrument for other purposes

permitted by existing Sec. 615.5132.

6. Stress-testing Requirements

Although credit risk on highly rated mortgage securities is

minimal, these securities may expose investors to significant interest

rate risk. Since borrowers may prepay their mortgages, investors may

not receive the expected cashflows and returns on these securities.

Numerous factors influence the cashflow pattern and price sensitivity

of mortgage securities. Prepayments on these securities are affected by

the spread between market rates and the actual interest rates of

mortgages in the pool, the path of interest rates, and the unpaid

balances and remaining terms to maturity on the mortgage collateral.

The price behavior of a mortgage security also depends on whether the

security was purchased at a premium or at a discount. Therefore, each

System institution needs to employ appropriate analytical techniques

and methodologies to measure and evaluate interest rate risk inherent

in mortgage securities. More specifically, prudent risk management

practices require every System institution to examine the performance

of each mortgage security under a wide array of possible interest rate

scenarios. For these reasons, the FCA continues to believe that

appropriate stress testing of all mortgage securities is necessary to

gain a full understanding of the risks inherent in the instruments.

Originally, FCS banks requested technical modifications to FCA's

existing regulatory stress test. System banks subsequently requested

that the FCA repeal the regulatory stress test after the FFIEC

rescinded a policy statement that required depository institutions to

stress test mortgage derivative products.\18\ The System banks

commented that the FCA should make its regulatory approach consistent

with the FFIEC's new policy.

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\18\ See 63 FR 20191 (April 23, 1998).

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In response, the FCA proposes significant changes to existing

requirements for evaluating the price sensitivity of mortgage

securities and determining their suitability. The FCA's revised

regulatory approach reflects improvements in prepayment models and

methodologies for evaluating and measuring the price sensitivity of a

security. Specifically, this proposal would enable each FCS institution

to choose between two alternative approaches for measuring and

evaluating the price sensitivity of mortgage securities to interest

rate fluctuations.

Under the first option, an FCS institution may continue to use a

modified version of the existing three-pronged stress test. The FCA

proposes to modify the third prong of the stress test, which

establishes a price sensitivity limit for mortgage securities. Under

proposed Sec. 615.5141(a)(3), the estimated change in the price of the

security cannot exceed 13 percent due to an immediate and sustained

parallel shift in the yield curve of plus or minus 300 basis points.

This revision, which was originally requested by System banks, corrects

an inconsistency in the test that may arise under certain interest rate

scenarios. This change affords more latitude for investment in mortgage

securities.

Proposed Sec. 615.5141(b) allows the use of alternative stress

tests to evaluate the price sensitivity of investments in mortgage

securities. The FCA is permitting alternative stress tests because new

risk management technologies better enable investors to measure

interest rate risks in complex mortgage securities. Alternative stress

tests must be able to measure the price sensitivity of mortgage

instruments over different interest rate/yield curve scenarios prior to

purchase and each quarter thereafter. The methodology that an FCS

institution uses to analyze mortgage securities must be commensurate

with the complexity of the instrument's structure and cashflows. For

example, a pre-purchase analysis may show the effect of an immediate

and parallel shift in the yield curve of plus and minus 100, 200, and

300 basis points. Depending on the instrument's complexity, such

analysis may encompass a wider range of scenarios, including non-

parallel changes in the yield curve. A comprehensive analysis may also

take into consideration other relevant factors, such as interest rate

volatility and changes in credit spreads. The methodology used to

evaluate an instrument's price sensitivity should enable management to

determine that the particular mortgage security: (1) Is compatible with

the objectives and risk limits in the institution's investment

policies; and (2) does not expose capital and earnings to excessive

risk.

An FCS institution employing internal models for valuation and risk

measurement of mortgage securities should have adequate procedures to

validate the models and periodically review all elements of the

modeling process, including assumptions and risk measurement

methodologies and techniques. Any FCS institution that relies on third

parties for valuation and risk measurement must understand the

assumptions and techniques used. All analysis must be available for

review by the Office of Examination of the FCA.

7. Other Technical Changes

The FCA proposes to replace the definitions of ``CMOs,''

``mortgage-backed securities,'' and ``REMICs'' in existing

Sec. 615.5131(e), (l), and (p) with a single definition of ``mortgage

securities'' in proposed Sec. 615.5131(i), which encompasses mortgage

pass-through securities and all mortgage derivative products. Although

proposed Sec. 615.5131(i) continues to refer to CMOs and REMICS, the

FCA has omitted specific regulatory definitions for these securities

from the regulation because

[[Page 33289]]

their meanings are commonly understood in the financial markets.

The FCA proposes to relocate the applicable regulatory provision

governing ARM securities from Sec. 615.5140(a)(2)(ii) to Sec. 615.5141

and to delete the definition of ``adjustable-rate mortgage'' in

existing Sec. 615.5131(b) because it is redundant.

G. Corporate Debt Obligations and ABS

Currently, corporate debt obligations and ABS are subject to a

single regulatory provision, existing Sec. 615.5140(a)(8). Under the

existing regulation, corporate bonds and ABS, combined, cannot exceed

15 percent of the total investments of each FCS institution. Under this

proposal, corporate bonds and ABS would be governed by separate

regulatory provisions, and the portfolio cap for each category would be

20 percent of total outstanding investments. The FCA's proposal to

expand the portfolio limits for these two investments provides every

FCS institution with greater flexibility to invest in these securities

within reasonable risk diversification parameters.

Existing Sec. 615.5140(a)(8)(ii) authorizes each FCS institution to

invest in ABS that mature in 5 years, are collateralized by loans on

new automobiles (CARs) or credit card receivables (CARDs), and maintain

the highest investment grade credit rating by an NRSRO. The FCA adopted

Sec. 615.5140(a)(8)(ii) in 1993 when CARs and CARDs comprised

approximately 80 percent of the ABS market and other types of ABS were

not actively traded in the secondary markets.\19\

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\19\ See 58 FR 63034, 63050 (November 30, 1993).

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The scope and depth of the ABS market has expanded rapidly since

1993. As a result, System banks have requested authority to invest in

ABS that are collateralized by other types of assets. Originally,

System banks petitioned the FCA for authority to purchase and hold ABS

that are secured by home equity loans, manufactured housing loans,

agricultural equipment loans, student loans, and wholesale dealer

automobile loans. Subsequently, System banks requested that the FCA

amend the regulation so it places no restrictions on the types of

collateral that securitize ABS. System banks assert that a high credit

rating is more indicative of an ABS's liquidity than its underlying

collateral. Farm Credit banks also suggested that the FCA revise the

maturity limits on ABS to permit fixed-rate ABS that have both a final

maturity of 7 years or less and a WAL of 5 years or less, and floating-

rate ABS that have both a final maturity of 10 years or less and a WAL

of 7 years or less.

This proposal adopts a modified version of the System's original

recommendation.\20\ Proposed Sec. 615.5140(a)(6) would authorize

investment in ABS that are collateralized by CARs, CARDs, home equity

loans, manufactured housing loans, equipment loans, student loans, and

wholesale dealer automobile loans. The FCA emphasizes that securities

collateralized by home equity loans are ABS, not mortgage securities,

under this proposal. The FCA finds that the market for these types of

ABS is sufficiently developed and that these securities are suitable

for meeting the objectives of Sec. 615.5132. This broad array of ABS

should provide FCS institutions with an ample selection of highly

rated, fixed-income investments that have relatively stable cashflows.

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\20\ Although the System's recommendation did not address the

credit rating for ABS, the FCA proposes to retain the requirement in

the existing regulation that all eligible ABS maintain the highest

credit rating by an NRSRO.

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Under proposed Sec. 615.5140(a)(6), FCA specifies that the WAL for

all eligible ABS cannot exceed 5 years and the final maturity cannot

exceed 7 years. The FCA proposes to extend the final maturity from 5 to

7 years in recognition that ABS with final maturities of 7 years

typically have much shorter WALs. This approach has the added advantage

of facilitating comparisons between amortizing ABS and other fixed-

income securities. The FCA does not adopt the System's suggestion

regarding the maturity of adjustable-rate ABS for two reasons. Most ABS

have final maturities that are shorter than the timeframe recommended

by Farm Credit banks. Other factors, such as the frequency of

repricing, periodic and life-time interest rate caps and the index to

which the instrument is tied are important determinants of how the

instrument will perform. Therefore, the FCA requests comments on how

the regulations could address maturity limits for adjustable ABS.

The FCA anticipates that there will be further growth in the ABS

market and active secondary markets will ultimately develop for ABS

that are backed by other types of collateral. Thus, the FCA also

requests comments on how it could develop a more flexible final

regulation that would enable the regulator to establish criteria for

determining the suitability of new types of ABS that financial markets

may create.

The FCA proposes no substantive changes to the regulatory

provisions that govern investments in corporate debt obligations. Under

this proposal, existing Sec. 615.5140(a)(8)(i) will be redesignated as

Sec. 615.5140(a)(7).

H. Shares in Investment Companies

The FCA believes that investment companies provide System

institutions with another convenient method to diversify and manage

risks. Therefore, the FCA proposes to authorize investment in shares of

any investment company that is registered under section 8 of the

Investment Company Act of 1940, 15 U.S.C. 80a-8, as long as the

investment company's portfolio consists exclusively of securities that

are authorized by Sec. 615.5140. Prior to investing in a particular

investment company, an FCS institution would be required by proposed

Sec. 615.5140(a)(8) to evaluate the investment company's risk and

return objectives. As part of this evaluation, the FCS institution

should determine whether the investment company's use of financial

derivatives is consistent with its investment policies. For instance,

the FCA would generally view it an unsafe and unsound practice for an

FCS institution to invest in an investment company that uses financial

derivatives for speculative purposes rather than as a risk management

tool. Every System institution should maintain appropriate

documentation on each investment, including a prospectus and analysis,

so its investment and selection process can be audited and examined.

Proposed Sec. 615.5140(b)(5) addresses how the obligor and

portfolio limitations in Sec. 615.5140(b)(3) and (b)(4) apply to an FCS

institution's interest in an investment company. Generally, proposed

Sec. 615.5140(b)(5)(i) requires combining the institution's direct

holdings of an eligible investment with its pro rata interest in the

same type of instrument in the portfolio of an investment company for

the purpose of complying with Sec. 615.5140(b)(3), (b)(4)(i), and

(b)(4)(ii). The FCA notes that aggregation is required only if this

regulation subjects a particular investment to an obligor or portfolio

limit. For example, prime commercial paper is subject to an obligor

limit, but not a portfolio limit. As a result, the regulation requires

aggregation to ensure that no more than 20 percent of an FCS

institution's total capital is invested in the prime commercial paper

of any single obligor. However, no regulatory restriction applies to

the amount of prime commercial paper that an FCS institution may hold

in its investment portfolio, either directly or through an investment

company.

Proposed Sec. 615.5140(b)(5)(ii) carves out two exceptions to this

aggregation rule. The first exception applies to the

[[Page 33290]]

obligor limit, while the second exemption covers portfolio

restrictions. Under Sec. 615.5140(b)(5)(ii)(A), an FCS institution may

elect not to combine its pro rata interest in a particular security in

an investment company with its direct holdings of securities that are

issued by the same obligor if the investment company's holdings of the

securities of any one issuer do not exceed 5 percent of its total

portfolio. Pursuant to Sec. 615.5140(b)(5)(ii)(B), an FCS institution

may elect not to combine its pro rata interest in a type of security in

an investment company with its direct holding of a class of securities

that are subject to the portfolio limits if its shares in a particular

investment company do not exceed 10 percent of its total investments.

I. Other Eligible Investments

The FCA proposes to redesignate existing Sec. 615.5140(a)(11) as

Sec. 615.5140(a)(9). This proposal contains no substantive amendments

to this provision, which allows the purchase of other short-term

investments, as authorized by the FCA that are marketable and highly

rated by an NRSRO. Whenever possible, the FCA seeks to repeal

regulatory prior-approval requirements that are not mandated by the

Act. The FCA requests comments on how the final regulation could permit

FCS institutions, under certain circumstances, to invest in short-term,

highly rated, marketable securities that are not expressly authorized

by Sec. 615.5140 without requiring Agency approval.

IV. Technical Amendments

The FCA proposes several conforming amendments to Sec. 615.5174

relating to investments in securities issued by Farmer Mac. The

terminology for mortgage securities has been revised so that it is

consistent with proposed amendments to Sec. 615.5131.

The FCA proposes to repeal the definitions of ``asset-liability

management,'' ``Federal funds,'' ``interest rate risk,'' ``market value

of equity,'' ``net interest income,'' ``total capital,'' and ``weighted

average maturity'' in Sec. 615.5131 because the meanings of these terms

are commonly understood in financial markets. Separately, the FCA has

redefined ``absolute final maturity'' in Sec. 615.5131(a) as ``final

maturity'' in proposed Sec. 615.5131(c).

The FCA also proposes to repeal Sec. 615.5142(a) and remove the

designation from paragraph (b) because this provision is obsolete.

Existing Sec. 615.5142(a) pertains to the divestiture of investments

that were rendered ineligible when the FCA originally adopted these

regulations in 1993.

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 proposed to be 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 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, 8.3, 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.

2. Subpart E is amended by revising the heading to read as follows:

Subpart E--Investment Portfolio Management

3. Section 615.5131 is revised to read as follows:

Sec. 615.5131 Definitions.

For purposes of this subpart, the following definitions shall

apply:

(a) Asset-backed securities (ABS) mean investment securities that

provide for ownership of a fractional undivided interest or collateral

interests in specific assets of a trust that are sold and traded in the

capital markets. For the purposes of this subpart, ABS exclude mortgage

securities that are defined in Sec. 615.5131(i).

(b) Eurodollar time deposit means a non-negotiable deposit

denominated in United States dollars and issued by an overseas branch

of a United States bank or by a foreign bank outside the United States.

(c) Final maturity means the last date on which the remaining

principal amount of a security is due and payable (matures) to the

registered owner. It shall not mean the call date, the expected average

life, the duration, or the weighted average maturity.

(d) General obligations of a State or political subdivision means:

(1) The full faith and credit obligations of a State, the District

of Columbia, the Commonwealth of Puerto Rico, a territory or possession

of the United States, or a political subdivision thereof that possesses

general powers of taxation, including property taxation; or

(2) An obligation payable from a special fund or by an obligor not

possessing general powers of taxation when an obligor possessing

general powers of taxation, including property taxation, has

unconditionally promised to make payments into the fund or otherwise

provide funds to cover all required payments on the obligation.

(e) Liquid investments are assets that can be promptly converted

into cash without significant loss to the investor. In the money

market, a security is liquid if the spread between bid and ask prices

is narrow and a reasonable amount can be sold at those prices.

(f) Loans are defined by Sec. 621.2(f) of this chapter and are

calculated quarterly (as of the last day of March, June, September, and

December) by using the average daily balance of loans for the quarter

then ended.

(g) Market risk means the risk to the bank's financial condition

resulting from a decline in value of its holdings arising from changes

in interest rates or market prices. A bank's exposure to market risk

can be measured by assessing the effect of changing rates and prices on

either earnings or economic value of an individual instrument, a

portfolio, or the entire institution.

(h) Marketable investment means an asset that can be sold with

reasonable promptness at a price that reasonably reflects its fair

value in an active and universally recognized secondary market.

(i) Mortgage securities means securities that are either:

(1) Collateralized with residential mortgage loans (excluding home

equity loans) that represent ownership of a fractional undivided

interest in a specific pool of mortgages (commonly known as pass-

through securities or participation certificates), or

(2) A multi-class, pay-through bond backed by a pool of residential

mortgage pass-through securities or residential mortgage loans

(including securities commonly known as collateralized mortgage

obligations and real estate mortgage investment conduits).

(j) Nationally Recognized Statistical Rating Organization (NRSRO)

means a rating organization that the Securities and Exchange Commission

has recognized as an NRSRO.

(k) Weighted average life (WAL) means the average time to receipt

of principal, weighted by the size of each principal payment. Weighted

average

[[Page 33291]]

life for mortgage and asset-backed securities is calculated under

specific prepayment assumptions.

4. Section 615.5133 is revised to read as follows:

Sec. 615.5133 Investment portfolio management.

The board of directors of each Farm Credit bank is responsible for

adopting written policies for managing the bank's investment

activities. The board of directors shall also ensure that the bank's

investments are safely and soundly managed in accordance with the

written policies and that appropriate internal controls are in place to

preclude investment actions that undermine the solvency and liquidity

of the bank. Written investment policies must address the purposes and

objectives of investments, risk parameters, delegations of authority,

and reporting requirements. Annually, the board of directors of each

Farm Credit bank shall review its investment policies to determine

whether objectives and risk exposure limits continue to be appropriate

for the bank.

(a) Risk parameters. The investment policies shall establish risk

limits and diversification requirements for the various classes of

eligible investments and the entire investment portfolio. Risk

parameters shall be based on the Farm Credit bank's institutional

objectives, capital position, and its tolerance for risk. The policies

must identify the types and quantity of investments that the bank will

hold to achieve its objectives and control credit, market liquidity,

and operational risks.

(1) Credit risk. The bank's investment policies shall establish:

(i) Credit quality standards, limits on counterparty risk, and risk

diversification requirements that limit concentrations based on a

single or related counterparties, a geographical area, industries or

obligations with similar characteristics.

(ii) Criteria for selecting brokers, dealers, and investment

bankers (collectively, securities firms). The policy shall also set

limits on the amounts and types of transactions that the bank shall

execute with authorized securities firms. The board of directors shall

annually review management's selection of securities firms and

limitations on transactions with such securities firms.

(iii) Collateral margin requirements on repurchase agreements.

(2) Market risk. The bank's investment policies shall set market

risk limits for the institution, the investment portfolio or specific

types of investments pursuant to the regulations in this chapter and

guidance by the Farm Credit Administration.

(3) Liquidity risk. The bank's policies shall describe the

liquidity characteristics of investments used to accomplish

institutional objectives and its liquidity needs sufficient to comply

with the requirements of Sec. 615.5134.

(4) Operational risk. The bank's policy shall address operational

risks, including delegations of authority and internal controls in

accordance with paragraphs (b) and (c) of this section.

(b) Delegations of authorities. All delegations of the management

of the bank's investments to specific personnel or committees shall

state the extent of management's authority and responsibilities.

(c) Internal controls. Each Farm Credit bank shall:

(1) Establish appropriate internal controls to detect and prevent

loss, fraud, embezzlement, conflicts of interest, and unauthorized

investments and ensure compliance with policies established by the

board.

(2) Ensure that a separation of duties and supervision exists

between personnel executing investment transactions and those

responsible for approving, revaluating, and overseeing the bank's

investments.

(3) Maintain management information systems that are commensurate

with the level and complexity of the bank's investment activities.

(d) Securities valuation. Each Farm Credit bank shall:

(1) Verify the value of any security (except new issues) that it

purchases or sells from a source that is independent of the broker,

dealer, counterparty, or other intermediary in the specific

transaction.

(2) Determine, at least monthly, the fair value of each security in

its portfolio and the fair value of the portfolio as a whole.

(3) Perform evaluations of the credit quality and price sensitivity

to changes in market interest rates of all investments held in its

portfolio prior to purchase and on an ongoing basis.

(e) Reports to the board. Reports on the performance and risk of

each investment and the investment portfolio shall be made to the board

of directors or a committee thereof each quarter. Reports shall

identify potential risk exposure to changes in market interest rates

and other factors that may affect the value of the bank's investment

holdings. Each report shall discuss how investments affect the bank's

overall financial condition and evaluate whether the performance of the

investment portfolio effectively achieves the objectives established by

the board of directors. Any deviations from the board's policies shall

be specifically identified in the report.

5. Section 615.5134 is amended by revising paragraph (b) to read as

follows:

Sec. 615.5134 Liquidity reserve requirement.

* * * * *

(b) All investments held for the purpose of meeting the liquidity

reserve requirement under this section shall be free of lien.

* * * * *

6. Section 615.5140 is revised to read as follows:

Sec. 615.5140 Eligible investments.

(a) Farm Credit banks are authorized to hold the following types of

eligible investments, denominated in United States dollars, to comply

with the requirements of Secs. 615.5132, 615.5134, and 615.5135 of this

subpart:

(1) Treasury and agency securities. Obligations of the United

States; full-recourse obligations, other than mortgage securities, of

agencies, instrumentalities or corporations of the United States, or

debt obligations of other obligors that are fully insured or guaranteed

as to both principal and interest by the United States, its agencies,

instrumentalities, or corporations.

(2) General obligations of a State or political subdivision that

mature within 10 years and are rated in one of the three highest credit

rating categories by an NRSRO.

(3) Obligations of international and multilateral development banks

in which the United States is a voting shareholder.

(4) Money market instruments: (i) Negotiable certificates of

deposit that mature within 1 year or less, Federal funds, term Federal

funds that have a callable contract with a term to maturity of 100 days

or less, and bankers acceptances that are issued by depository

institutions. All issuers of money market instruments listed in

paragraph (a)(4)(i) of this section shall maintain a rating in one of

the two highest short-term credit rating categories by an NRSRO.

(ii) Eurodollar time deposits that mature within 90 days and are

held at depository institutions that maintain a rating in the highest

short-term credit rating category by an NRSRO.

(iii) Prime commercial paper that has a maturity of 270 days or

less and is rated in the highest short-term credit rating category by

an NRSRO.

(iv) Repurchase agreements where a Farm Credit bank agrees to

purchase marketable securities subject to an agreement that requires a

counterparty

[[Page 33292]]

to repurchase the same or identical securities at a specific time

within 100 days or less. The collateral for repurchase agreements shall

be either eligible investments authorized by this section or other

marketable securities that are rated in the highest credit rating

category by an NRSRO.

(v) Master notes that mature overnight, or have a callable feature

and mature within 270 days, and are executed with domestic

counterparties that maintain a rating in the highest short-term credit

rating category by an NRSRO.

(5) Mortgage securities that are rated in the highest credit rating

category by an NRSRO and are either:

(i) Agency mortgage securities that are issued or guaranteed as to

principal and interest by the Government National Mortgage Association,

the Federal National Mortgage Association, Federal Home Loan Mortgage

Corporation, or

(ii) Non-agency mortgage securities that are offered and sold

pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.

77d(5) or are residential mortgage-related securities within the

meaning of section 3(a)(41) of the Securities Exchange Act of 1934, 15

U.S.C. 78c(a)(41).

(iii) Mortgage securities shall not be consider eligible

investments, unless they comply with the requirements of Sec. 615.5141

of this subpart.

(6) Asset-backed securities that are collateralized by credit card

receivables, automobile loans, home equity loans, manufactured housing

loans, equipment loans, student loans, or wholesale dealer automobile

loans that are rated in the highest credit rating category by an NRSRO.

The expected WAL on eligible ABS shall not exceed 5 years and the final

maturity shall not exceed 7 years.

(7) Corporate debt securities that are rated within the two highest

credit rating categories by an NRSRO, mature within 5 years and are not

convertible into equity securities.

(8) Investment companies. Shares of an investment company

registered under section 8 of the Investment Company Act of 1940, 15

U.S.C. 80a-8 (including mutual funds, unit investment trusts, and

collective investment funds maintained by a national bank under 12 CFR

part 9), provided that the portfolio of the investment company consists

exclusively of eligible investments that are authorized by this section

or Sec. 615.5174 of this part. In addition, Farm Credit banks must

evaluate the investment company's risk and return objectives and use of

derivatives to ensure that the investment company's objectives and

strategies for achieving its objectives are consistent with the bank's

investment policies and the requirements of this subpart.

(9) Other investments, as authorized by the Farm Credit

Administration, that have a short maturity and are rated investment

grade by an NRSRO. A Farm Credit bank seeking approval of an investment

under this paragraph should provide the Farm Credit Administration with

documentation that describes the risk characteristics of the investment

and explains the bank's purpose and objectives for making the

investment.

(b) The authority of Farm Credit banks to hold the investments

listed in paragraph (a) of this section is subject to the following

requirements:

(1) Marketable securities. Except for the money market instruments

listed in paragraph (a)(4) of this section, all other eligible

investments shall be marketable within the meaning of Sec. 615.5131(h).

(2) Rating of foreign countries. Whenever the obligor or issuer of

an eligible investment is located outside of the United States, the

host country shall maintain the highest sovereign rating for political

and economic stability by an NRSRO.

(3) Obligor limits. Except for eligible investments covered by

paragraph (a)(1) of this section and mortgage securities that are

issued by or guaranteed as to principal and interest by the Government

National Mortgage Association, Federal National Mortgage Association,

or the Federal Home Loan Mortgage Corporation under paragraph (a)(5)(i)

of this section, each Farm Credit bank shall not invest more than

twenty (20) percent of its total capital in eligible investments issued

by any single institution, issuer, or obligor.

(4) Portfolio limits. Subject to Sec. 615.5132, each Farm Credit

System bank is authorized to hold eligible investments listed in

paragraph (a) of this section without limitation as to amount except:

(i) Mortgage securities shall not exceed fifty (50) percent of the

bank's total investments authorized under this section provided that

mortgage securities that are issued under paragraph (a)(5)(ii) of this

section shall not exceed fifteen (15) percent of the bank's total

investments. Mortgage securities that are issued by the Government

National Mortgage Association shall not be subject to any restriction

on amount.

(ii) Each of the following types of investments shall not exceed

twenty (20) percent of the bank's total investments authorized under

this section:

(A) Eurodollar time deposits;

(B) Master notes;

(C) Asset-backed securities; and

(D) Corporate bonds.

(5) Limit on investment company holdings. (i) General. A Farm

Credit bank shall combine its direct holdings of eligible investments

with its pro rata interest in the same type of instrument or obligor in

the portfolio of an investment company for the purpose of complying

with the obligor and portfolio limitations of paragraphs (b)(3),

(b)(4)(i), and (b)(4)(ii) of this section.

(ii) Alternate diversification requirements for investment

companies. (A) Exemption from the obligor limit. A Farm Credit bank may

elect not to combine its pro rata interest in a particular security in

an investment company with the bank's direct holdings of securities

that are subject to the obligor limit in paragraph (b)(3) of this

section if the investment company's holdings of the securities of any

one issuer do not exceed five (5) percent of its total portfolio.

(B) Exemption from the portfolio limits. A Farm Credit bank may

elect not to combine its pro rata interest in a type of security in an

investment company with the bank's direct holding of a class of

securities that are subject to the portfolio limits in paragraphs

(b)(4)(i) and (b)(4)(ii) of this section if the bank's shares in an

investment company do not exceed ten (10) percent of its total

investments.

Sec. 615.5141 through 615.5143 [Redesignated]

7. Sections 615.5141, 615.5142, and 615.5143 are redesignated as

Secs. 615.5142, 615.5143, and 615.5144, respectively, and a new

Sec. 615.5141 is added to read as follows:

Sec. 615.5141 Stress tests for mortgage securities.

Each Farm Credit bank shall perform stress tests to determine how

interest rate fluctuations will affect the cashflows and price of all

mortgage securities that it purchases and holds under

Sec. 615.5140(a)(5), as well as their overall affect on the earnings

and capital of the bank. Adjustable mortgage securities that have a

repricing mechanism of 12 months or less and tied to an index are not

subject to stress testing. Farm Credit banks may conduct the stress

tests in accordance with either paragraph (a) or (b) of this section.

(a) Mortgage securities shall comply with the following three tests

at the time of purchase and each quarter thereafter:

(1) Average Life Test. The expected WAL of the instrument does not

exceed 5 years.

(2) Average Life Sensitivity Test. The expected WAL does not extend

for more

[[Page 33293]]

than 2 years, assuming an immediate and sustained parallel shift in the

yield curve of plus 300 basis points, nor shorten for more than 3

years, assuming an immediate and sustained parallel shift in the yield

curve of minus 300 basis points.

(3) Price Sensitivity Test. The estimated change in price is not

more than thirteen (13) percent due to an immediate and sustained

parallel shift in the yield curve of plus or minus 300 basis points.

(4) Exemption. A floating-rate mortgage security shall not be

subject to paragraphs (a)(1) and (2) of this section if at the time of

purchase, and each subsequent quarter, it bears a rate of interest that

is below the contractual cap on the instrument.

(b) A Farm Credit bank may use alternative stress tests to evaluate

the price sensitivity of its investments in mortgage securities.

Alternative stress tests must be able to measure the price sensitivity

of mortgage instruments over different interest rate/yield curve

scenarios prior to purchase and each quarter thereafter. The

methodology used to analyze mortgage securities shall be commensurate

with the complexity of the instrument's structure and cashflows. Prior

to purchase and quarterly thereafter, the stress test should determine

that the mortgage security's risk is compatible with the bank's

investment policies and the investment does not expose the bank's

capital and earnings to excessive risks.

(c) In applying the stress tests in either paragraphs (a) or (b) of

this section, each Farm Credit bank shall rely on verifiable

information to support all of its assumptions, including prepayment and

interest-rate volatility assumptions. All assumptions that form the

basis of the bank's evaluation of the security and its underlying

collateral shall be available for review by the Office of Examination

of the Farm Credit Administration. Subsequent changes in the bank's

assumptions shall be documented. If at any time after purchase, a

mortgage security no longer complies with requirements in this section,

the bank shall divest the security in accordance with Sec. 615.5143 of

this part.

Sec. 615.5143 [Amended]

8. Newly designated Sec. 615.5143 is amended by removing paragraph

(a) and the paragraph designation from paragraph (b).

Subpart F--Property and Other Investments

Sec. 615.5174 [Amended]

9. Section 615.5174 is amended by removing the words ``mortgage-

backed securities (MBSs), as defined by Sec. 615.5131(l),

collateralized mortgage obligations (CMOs), as defined by

Sec. 615.5131(e), and Real Estate Mortgage Investment Conduits

(REMICs), as defined by Sec. 615.5131(p)'' in paragraph (a), and adding

in their place, the words ``mortgage securities as defined by

Sec. 615.5131(l);'' by removing the words, ``as defined by

Sec. 615.5131(b),'' from paragraph (b)(1); by removing paragraph (c);

and redesignating paragraphs (d) and (e) as paragraphs (c) and (d),

respectively.

Dated: June 15, 1998.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 98-16208 Filed 6-17-98; 8:45 am]

BILLING CODE 6705-01-P