Statement of Policy: Financial Management Policy for the Federal Home Loan Banks

FEDERAL HOUSING FINANCE BOARD

[No. 97-21]

Statement of Policy: Financial Management Policy for the Federal

Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Policy statement.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board

(Finance Board) is proposing to adopt as a statement of policy the

``Financial Management Policy For The Federal Home Loan Bank System''

(FMP). The Finance Board is publishing the policy statement with only

minor changes from the existing version of the FMP, and is soliciting

public comments on the FMP for a period of 30 days.

DATES: The Finance Board will accept comments on the FMP until April

18, 1997.

ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Senior Attorney,

Office of General Counsel, (202) 408-2990, or Julie Paller, Senior

Financial Analyst, (202) 408-2842, Federal Housing Finance Board, 1777

F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

The FMP provides a framework within which the Federal Home Loan

Banks (Banks) may implement their financial management strategies in a

prudent and responsible manner. The FMP includes a series of guidelines

relating to the investment, funding, and hedging practices of the

Banks, as well as to the management of credit, interest rate, and

liquidity risks. Adhering to the guidelines promotes the Banks' ability

to accomplish their housing finance and community development missions

while generating sufficient income to meet their various financial

obligations. The FMP has evolved from a series of policies and

guidelines initially adopted by the Finance Board's predecessor agency,

the Federal Home Loan Bank Board (FHLBB). The FHLBB had adopted

guidelines comparable to the FMP in the 1970s and revised them a number

of times thereafter. The Finance Board adopted the FMP in 1991,

consolidating in one document the previous policies on funds

management, hedging, and interest rate swaps, and adding new guidelines

on management of unsecured credit and interest rate risks.

In recent years, the financial markets and the Banks' participation

in those markets have evolved considerably. Moreover, Congress has

altered the statutory provisions governing the Federal Home Loan Bank

System (System), principally through the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA), Public Law 101-73, 103

Stat. 415 (August 9, 1989). As a consequence of such financial and

legislative changes, the FHLBB and Finance Board periodically revised

their financial policies and guidelines so that the Banks could

continue to manage their finances prudently, profitably, and in

furtherance of their mission. In undertaking such revisions to the FMP

and its predecessor policies, the FHLBB and Finance Board in the past

accepted informal comments from the Banks as part of that process. In

some instances, staff of the Banks submitted proposals for

consideration by the agency, and in other instances staff of the Banks

and the agency worked together to analyze the existing policies and to

suggest ways in which they could be revised to reflect the changing

environment in which the Banks operate. Such informal processes and

collaborative efforts reflected the dual regulatory and managerial

responsibilities exercised by the FHLBB and the Finance Board.

More recently, however, the nature of the relationship between the

Finance Board and the System has changed, both as a result of the

changes brought about by FIRREA and of the process of devolution

undertaken by the Finance Board. As a result of the Finance Board's

determination to devolve to the Banks those managerial responsibilities

that are not vested by statute in the Finance Board, the agency has

assumed a more predominantly regulatory role with respect to the Banks.

The Finance Board intends to concentrate its efforts on its regulatory

role, overseeing the safety and soundness of the Banks and ensuring

that they adhere to their housing finance and community development

missions. In light of the changes in its role and its relationship with

the Banks, the Finance Board has determined that it would be

appropriate to issue the FMP as a statement of agency policy and to

solicit comments on the FMP from the public at large.

II. Statement of Policy

The Finance Board last revised and reissued the entire FMP in July

1996, following which Banks and other parties raised several

interpretive questions. In the version of the FMP that is being

published today the Finance Board is proposing to resolve three

interpretive questions, to incorporate into the FMP two other matters

that the Finance Board has addressed previously by separate

resolutions, and to make three additional changes that the Finance

Board deems appropriate. The publication of the FMP as a proposed

policy statement shall not suspend the effectiveness of the version of

the FMP approved by the Finance Board on July 3, 1996 pursuant to

Resolution No. 96-45, nor the separate revisions approved on December

6, 1996 by Resolution No. 96-90 (relating to inflation-indexed

consolidated obligations) or on January 14, 1997 by Resolution No. 97-

05

[[Page 13147]]

(relating to branch and agency offices). The Finance Board intends to

consider the comments received before adopting this proposed revision

to the FMP, including the six new revisions described below, in final

form.

Branch and Agency Offices

As part of the July 1996 revisions to the FMP, the Finance Board

revised the definition of ``eligible financial institution'' to exclude

the U.S. branch and agency offices of foreign commercial banks.

Resolution No. 96-45 (July 3, 1996). In January 1997, the Finance Board

reinstated those branch and agency offices as ``eligible financial

institutions,'' provided that the foreign commercial bank has at least

$250 million in Tier I (or tangible) capital, can be designated as at

least a Level III counterparty under the FMP, and has a country risk

rating of not lower than AA from Thomson Bankwatch. Resolution No. 97-

05 (January 14, 1997). The Finance Board has incorporated the changes

from Resolution No. 97-05 into the proposed version of the FMP,

although as noted above, the changes made by that resolution continue

in effect.

Alternative Funding Sources

On an annual basis, the Finance Board approves the authority of the

Office of Finance Board (OF Board) to approve the issuance of System

consolidated obligations (COs). The Banks' authority to participate in

such debt issuances is addressed by section IV. of the FMP. As part of

the Finance Board's approval of the Office of Finance 1997 Debt

Issuance Authorization, the Finance Board made three changes to the FMP

to allow the Banks to participate in the debt issues the OF Board is

authorized to approve. Resolution No. 96-90 (December 6, 1996). Those

changes made by Resolution 96-90 remain in effect and are included in

the version of the FMP published today.

The Banks may participate in COs for which the coupon or principal

may vary based upon the movement of an eligible financial index. The

first change to the FMP revised the definition of a financial index to

include an index that is sanctioned by a national government and serves

as an aggregate measure of inflation, including those indices derived

from aggregate measures of economic performance and prices. This

amendment permitted the Banks to participate in the issuance of

inflation-indexed COs.

Debt issues that are tied to a financial index pertaining to a

foreign country or that are denominated in a foreign currency are

subject to minimum sovereign risk rating requirements. The second

change to the FMP permitted the use of sovereign risk ratings from

Moody's or Standard & Poor's for countries not rated by Thomson

Bankwatch (Thomson). All three rating agencies focus on the assessment

of political and economic risk and their ratings generally tend to be

well correlated.

The third change to the FMP increased the minimum sovereign risk

rating required from Thomson for index and currency eligibility from A-

to AA- in order to conform the FMP to the practice of the OF. If a

country is not rated by Thomson, a Sovereign Risk Rating for long-term

bonds or deposits from Moody's of not lower than Aa3 or a Sovereign

Risk Rating for Foreign Currency from Standard & Poor's of not lower

than AA- may be used.

Obligations Guaranteed by the United States

The investment guidelines of the FMP list the types of assets that

are authorized investments pursuant to Sections 11(g), 11(h), or 16(a)

of the Federal Home Loan Bank Act, 12 U.S.C. 1431(g), (h), 1436(a). One

such type is any marketable obligation issued or guaranteed by the

United States. A question has been raised whether this provision

encompasses obligations for which the principal may be guaranteed by

the United States, but the interest may not be guaranteed or may be

guaranteed only in part.

The version of the FMP approved in 1991 provided that only the

direct obligations of the United States were authorized investments. In

1993, the Finance Board broadened the provision to include obligations

guaranteed by the United States. The inclusion of obligations

guaranteed by the United States recognizes that the full faith and

credit of the United States is not limited to obligations issued by the

United States Treasury, and that there is no difference in an

instrument's credit risk where the full faith and credit of the United

States is pledged through a guaranty, rather than directly. The Finance

Board is proposing to revise Section II.B.6. of the Investment

Guidelines to clarify that it includes only those instruments that

possess the same credit risk as a direct obligation of the United

States, meaning that the guaranty must extend to both the principal and

interest due on the obligation.

Unsecured Credit Guidelines

The July 3, 1996 revisions to the FMP made separate changes to the

Hedge Transactions Guidelines and to the Unsecured Credit Guidelines,

which have prompted a question about the inter-relationship of those

provisions. Footnote 6 of the hedging guidelines was revised to include

among the eligible counterparties certain entities with a Moody's

rating of at least Baa or a Standard & Poor's rating of at least BBB,

but only if transactions with those parties result in no unsecured

credit exposure for the Bank. The Finance Board also revised Section

VI.B. of the Unsecured Credit Guidelines to exclude from the definition

of ``unsecured extensions of credit'' certain off-balance sheet

extensions of credit that are subject to a specified type of net cross-

collateral agreement. A question has been raised as to whether the two

provisions could be read together to allow some level of unsecured

credit exposure to triple-B rated counterparties, if subject to the

required net cross-collateral requirement.

In making those revisions to the FMP the Finance Board intended

that they be applied independently of each other, and that transactions

with triple-B rated counterparties not result in any unsecured credit

exposure to the Banks. The Finance Board is proposing to revise Section

VI.B. of the Unsecured Credit Guidelines to state expressly that the

only off-balance sheet extensions of credit subject to a net collateral

exchange agreement that may be deemed not to be unsecured extensions of

credit are those made to institutions that meet the requirements for at

least a Level III counterparty, as defined within the Unsecured Credit

Guidelines.

Counterparty Downgrade

The Unsecured Credit Guidelines provide that when a rating agency

places a Bank's counterparty on creditwatch for a potential downgrade

the Bank should treat the counterparty as if a downgrade actually has

occurred. The Finance Board is proposing to revise Section VI.C.2.f. of

the Unsecured Credit Guidelines to clarify that for purposes of

determining the remaining available credit line for on-balance sheet

investment purposes, the Bank shall assume that the agency has assigned

to the counterparty a rating at the next lower notch, for example, a

downgrade from A-1+ to A-1, A-1 to A-2, or AA2 to AA3. The Finance

Board expects that a Bank would assume a larger downgrade than the

minimum required by the FMP, if warranted by the circumstances, and

would take the appropriate steps.

[[Page 13148]]

Interest Rate Risk Guidelines: Exclusion of FIRREA Cash Flows and Other

Amendments

Internal models employed by the Banks to calculate their duration

of equity have become increasingly sophisticated, and have effectively

supplanted reliance on the Finance Board's internal model for

calculating duration of equity. The models currently used by the Banks

have the capacity to discount cash flows associated with various assets

and liabilities at rates appropriate to the instrument. For these

reasons, the Finance Board is proposing to modify Sections VII.B.1. and

3. of the Interest Rate Risk Guidelines to: (1) Exclude specific

reference to the CO cost curve as an appropriate uniform discounting

methodology, and (2) provide that duration of equity calculations

should be performed by the Banks employing calculation methods and

assumptions that reasonably capture the interest rate risks inherent in

their on-and off-balance sheet activities.

In addition, the Finance Board is proposing to revise Section

VII.B.4. to exclude the REFCorp and AHP cash flows from Bank duration

of equity calculations. The System pays $300 million annually for

interest on the REFCorp bonds, with each Bank's portion determined by a

two-part formula. Initially, each Bank pays 20 percent of its net

income (first round). If the aggregate of those payments yields less

than $300 million, each Bank pays an additional amount based on its

share of System advances to institutions insured by the Savings

Association Insurance Fund (second round). The annual AHP payment is

the greater of $100 million or 10 percent of System net income.

When the FMP's interest rate risk guidelines were first implemented

in 1991, the REFCorp and AHP payments were not included in the cash

flows used to calculate each Bank's duration of equity. Subsequently,

some of the Banks concluded that it was appropriate to include the

REFCorp and/or AHP cash flows when calculating duration of equity and

measuring interest rate risk. They assumed that their shares of the

System's obligations could be considered fixed liabilities represented

by fixed annual payments or cash outflows, and should be explicitly

included in their asset/liability management. When the FMP was revised

in 1993, the Finance Board required that each Bank report its cash

flows and calculate its duration of equity both with and without the

projected cash flows which represent the Bank's share of the System's

REFCorp and AHP obligations. The Finance Board, in Decision Memorandum

No. 94-DM-48 dated November 10, 1994, indicated that when measuring

individual Bank compliance with the FMP's interest rate risk limits, it

would take into consideration the Bank's determination to include or

exclude the FIRREA cash flows in its interest rate risk management

strategies.

With the growth in System income since 1993, however, an increasing

share of the total REFCorp payment is generated by the first round of

the formula. In 1996, the amount of the obligation generated by the

second round represented only eight percent of the total REFCorp

payment. By comparison, in 1995, 1994 and 1993 the second round share

represented 17, 30, and 40 percent of the total, respectively. In 1996,

each Bank's contribution to the AHP represented 10 percent of its

income.

As System income increases, the percentage of income each Bank pays

to REFCorp and AHP will converge to the System average. To the extent

that the REFCorp and AHP obligations represent a fixed percentage of

each Bank's income, they are, in effect, a tax, which ordinarily is not

considered when estimating a Bank's duration and market value of

equity. Because the percentage paid by each Bank is currently very

close to the System average (no Bank paid more than 1.1 percent more or

less than the System average in 1996), the Finance Board considers it

appropriate to treat the payment as if it were a tax and is proposing

to exclude the REFCorp and AHP cash flows from Bank duration of equity

calculations. Any Bank that exceeds the duration limits as a result of

this change will be expected to develop a plan for returning to

compliance.

Housing and Community Development Investments

The Finance Board has encouraged the Banks to submit proposals to

engage in pilot programs for new mission-related activities. The

Finance Board has determined that the pilot program structure is the

most effective way to encourage the Banks and their members to test the

viability and benefits of any new activities in a controlled manner

that limits the risks to a Bank and to the System. As part of the July

1996 revisions to the FMP, the Finance Board established a detailed set

of criteria under which to evaluate any such proposals. The Finance

Board has employed those criteria most recently in approving pilot

programs proposed by the New York, Atlanta, and Chicago Banks,

respectively.

The FMP criteria provide that any such new investments to support

housing and community development must: (1) Ensure the appropriate

levels of expertise and controls necessary to manage risk and preserve

the triple-A rating; (2) ensure that the Bank's involvement assists in

providing financing that may not otherwise be available or may be

available only on less attractive terms; and (3) ensure that the

investment promotes, or does not detract from, the cooperative nature

of the System. Prior to entering into such an investment, a Bank must

provide a complete description of the contemplated investment activity,

including a comprehensive analysis of how the above criteria are

fulfilled, and must obtain from the Finance Board written confirmation

that the criteria have been satisfied.

These criteria follow closely the criteria recommended by the

General Accounting Office (GAO) for the consideration of new products

and services for the Banks. GAO Report No. 94-38, at pages 97-99. The

GAO developed six criteria for evaluating proposals for new products

and services, which it viewed as necessary to maintain the safety and

soundness and missions of the System. Those criteria are: (1) Avoiding

competition with members; (2) possessing the expertise to conduct the

new activities profitably; (3) conforming to the housing finance,

affordable housing, and community development missions; (4) addressing

a need that others are not adequately meeting; (5) pricing the product

to provide an adequate rate of return; and (6) maintaining the System's

triple-A rating. The Finance Board believes that the FMP criteria are

consistent with those developed by GAO and establish a prudent

analytical framework within which to evaluate proposals from the Banks.

The text of the proposed FMP follows:

Federal Housing Finance Board--Statement of Policy

Financial Management Policy for the Federal Home Loan Bank System

I. Policy Objective

The Federal Housing Finance Board (Finance Board) Financial

Management Policy (FMP) for the Federal Home Loan Bank System has been

established to provide a framework within which the Federal Home Loan

Banks (Banks) are allowed to implement prudent and responsible

financial management strategies that assist them in accomplishing their

mission, and in

[[Page 13149]]

generating income sufficient to meet their financial obligations, in a

safe, sound, and profitable manner. The specific objectives of each

section of the FMP are listed below.

A. Investment Guidelines

1. Establish policy with respect to the use of funds not required

for the Banks' advances programs or operating requirements.

2. Specify permissible investment assets.

3. Establish eligibility requirements for investment

counterparties.

4. Establish requirements with respect to the characteristics of

permissible investments.

5. Establish limits for permissible investment assets.

B. Liquidity Guidelines

1. Implement the provisions of the Federal Home Loan Bank Act

(Act), as amended, with respect to required deposit reserves.

2. Establish additional liquidity requirements.

3. Specify the types and characteristics of investment assets which

may be used to satisfy the reserve and liquidity requirements.

C. Funding Guidelines

1. Identify authorized funding sources.

2. Prescribe the conditions under which the Banks may enter into

non-U.S. dollar denominated and other non-standard financing

arrangements.

3. Establish individual Bank leverage limits.

D. Hedge Transaction Guidelines

1. Define authorized hedging transactions and counterparties.

2. Establish requirements and limitations for authorized hedging

transactions.

3. Establish a framework for the valuation and collateralization of

interest rate swap and option transactions.

4. Establish standards for hedge documentation.

E. Unsecured Credit Guidelines

1. Establish minimum standards for counterparties receiving

extensions of unsecured credit.

2. Establish limits on the amount of unsecured credit a Bank may

extend.

3. Establish a method for measuring unsecured credit risk.

F. Interest Rate Risk Guidelines

1. Establish limits on the aggregate interest rate risk a Bank may

incur.

2. Establish a method for measuring interest rate risk.

G. Implementation Guidelines

1. Define the responsibilities of a Bank's board of directors,

management, and internal audit staff.

2. Define the responsibilities of the Federal Housing Finance

Board.

II. Investment Guidelines

A. Purpose

To establish policy on the use of funds not required for credit

programs or operations, to explicitly permit the purchase of mission-

related and liquid assets, and to provide a safe and sound mechanism

for generating income during periods of reduced credit demand to ensure

that financial commitments can be met and that dividends can be

maintained at levels sufficient to attract and retain members. Each

Bank will be responsible for determining the extent to which its

investment authority will be used to augment income from advances,

consistent with Finance Board regulations and policies.

B. Permissible Investments

To the extent they are specifically authorized under Sections

ll(g), ll(h) or 16(a) of the Act, or to the extent a Bank has

determined that they are securities in which fiduciary or trust funds

may invest under the laws of the state in which the Bank is located,

the following investments are permitted:

1. Overnight and term funds, that on the settlement date have a

remaining term to maturity not exceeding 9 months, placed with eligible

financial institutions.\1\

2. Overnight and term resale agreements, that on the settlement

date have a remaining term to maturity not exceeding 9 months, with

eligible counterparties, using for collateral securities which are

eligible investments under this section, and Federal Housing

Administration (FHA) and Veterans' Administration (VA) mortgages.\2\

3. U.S. dollar deposits, that on the settlement date have a

remaining term to maturity not exceeding 9 months, placed with eligible

financial institutions.

4. Commercial paper, bank notes, and thrift notes traded in U.S.

financial markets and rated both P-1 by Moody's and A-1 by Standard &

Poor's, that on the settlement date have a remaining term to maturity

not exceeding 9 months.\3\

5. Bankers' acceptances, drawn on and accepted by eligible

financial institutions, that on the settlement date have a remaining

term to maturity not exceeding 9 months.

6. Marketable obligations issued or guaranteed as to both principal

and interest by the United States.

7. Marketable direct obligations of U.S. Government Sponsored

Agencies and Instrumentalities for which the credit of such

institutions is pledged for repayment of both principal and interest.

8. Securities representing an interest in pools of mortgages (MBS)

issued, guaranteed or fully insured by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC),

or the Federal National Mortgage Association (FNMA), or Collateralized

Mortgage Obligations (CMOs), including Real Estate Mortgage Investment

Conduits (REMICs), backed by such securities.

9. Other MBS, CMOs, and REMICs rated Aaa by Moody's or AAA by

Standard & Poor's.

10. Asset-backed securities collateralized by manufactured housing

loans or home equity loans and rated Aaa by Moody's or AAA by Standard

& Poor's.

11. Marketable direct obligations of state or local government

units or agencies, rated at least Aa by Moody's or AA by Standard &

Poor's, where the purchase of such obligations by a FHLBank provides to

the issuer the customized terms, necessary liquidity, or favorable

pricing required to generate needed funding for housing or community

development.

12. Other investments that support housing and community

development, provided that prior to entering into such investments, the

Bank:

a. ensures the appropriate levels of expertise, establishes

policies, procedures, and controls, and provides for any reserves

required to effectively limit and manage risk exposure and preserve the

Bank's and the System's triple-A rating;

b. ensures that its involvement in such investment activity assists

in providing housing and community development financing that is not

generally available, or that is available at lower levels or under less

attractive terms;

c. ensures that such investment activity promotes (or at the very

least, does not detract from) the cooperative nature of the System;

d. provides a complete description of the contemplated investment

activity (including a comprehensive analysis of how the above three

requirements are fulfilled) to the Finance Board; and

e. receives written confirmation from the Finance Board, prior to

entering into such investments, that the above

[[Page 13150]]

investment eligibility standards and requirements have been satisfied.

C. Limitations on Authorized Investments

1. Investments in other than U.S. Dollar denominated securities are

prohibited.

2. A Bank may enter into agreements to purchase MBS, CMOs, REMICs,

and eligible asset-backed securities so long as such purchases will not

cause the aggregate book value of such securities held by the Bank to

exceed 300 percent of the Bank's capital. A Bank may not increase its

holdings of such securities in any one calendar quarter by more than 50

percent of its total capital at the beginning of that quarter.\4\

3. The purchase of Interest Only or Principal Only stripped MBS,

CMOs, REMICs, and eligible asset-backed securities is prohibited.

4. The purchase of residual interest or interest accrual classes of

CMOs, REMICs, and eligible asset-backed securities is prohibited.

5. The purchase of fixed rate MBS, CMOs, REMICs, and eligible

asset-backed securities, or floating rate MBS, CMOs, REMICs, and

eligible asset-backed securities that on the trade date are at rates

equal to their contractual cap, with average lives that vary more than

six years under an assumed instantaneous interest rate change of 300

basis points, is prohibited.

III. Liquidity Guidelines

A. Purpose

To implement statutory requirements and to ensure each Bank's

ability to meet potential funding needs arising from credit demands,

deposit withdrawals, and debt redemptions without incurring material

losses.

B. Statutory Deposit Reserve Requirements

Each Bank is required to maintain an amount equal to the total

deposits received from its members invested in:

1. Obligations of the United States.

2. Deposits in banks or trust companies (as defined in Finance

Board regulation) which are eligible financial institutions.

3. Advances that mature in 5 years or less to members.

C. Additional Liquidity Requirements

1. Each Bank is required to maintain a daily average liquidity

level each month in an amount not less than:

a. 20 percent of the sum of its daily average demand and overnight

deposits and other overnight borrowings during the month, plus

b. 10 percent of the sum of its daily average term deposits,

Consolidated Obligations (COs) and other borrowings that mature within

one year.

2. Eligible Investments: The following investments, to the extent

permitted under subsection II.B, are eligible for compliance with

subsection III.C.1 liquidity requirements:

a. Overnight funds and overnight deposits, as otherwise described

in subsection II.B.1.

b. Resale agreements, which mature in 31 days or less, as otherwise

described in subsection II.B.2.

c. Negotiable certificates of deposit, bankers' acceptances,

commercial paper, bank notes, and thrift notes as described in

subsections II.B.3, 4, and 5.

d. Marketable obligations of the United States as described in

subsection II.B.6 which mature in 36 months or less.

e. Marketable direct obligations of U.S. Government Sponsored

Agencies and Instrumentalities as described in subsection II.B.7 which

mature in 36 months or less.

f. Cash and collected balances held at Federal Reserve Banks and

eligible financial institutions, net of member pass-throughs.

3. Limitation: A security that has been pledged under a repurchase

agreement cannot be used to satisfy liquidity requirements.

IV. Funding Guidelines

A. Purpose

To establish parameters for the use of alternative funding sources

and structures in order that each Bank may fund its activities in a

prudent, cost effective manner.

B. Bank Specific Liabilities

1. Deposits: A Bank may accept deposits from members, from any

institution for which it is providing correspondent services, from

another Federal Home Loan Bank, and from other instrumentalities of the

United States, subject to provisions of the Act and the Finance Board's

regulatory and policy requirements.

2. Federal Funds: A Bank may purchase federal funds from any

financial institution that participates in the federal funds market.

3. Repurchase Agreements: Repurchase agreements requiring the

delivery of collateral by a Bank are permitted with any Federal Reserve

Bank, U.S. Government Sponsored Agencies and Instrumentalities, primary

dealers recognized by the Federal Reserve Bank of New York, eligible

financial institutions, and states and municipalities with a Moody's

Investment Grade rating of 1 or 2. Repurchase agreements not requiring

the delivery of collateral by the Bank may be entered into with any

supplier of funds.

C. Consolidated Obligations

A Bank may participate in COs, so long as entering into such

transactions will not cause the Bank's total COs and unsecured

liabilities, as defined in Section 910.0 of the Finance Board's

regulations (but excluding interBank loans), to exceed 20 times the

Bank's total capital. Each Bank shall make every effort to manage its

liabilities and capital to ensure compliance with the 20:1 leverage

limit.

1. A Bank may participate in the following types of standard debt

issues:

a. Debt with a fixed rate and fixed maturity, in either coupon or

discount form.

b. Debt with a fixed maturity whose coupon rate may vary in

predetermined increments or based upon the movement of U.S. Treasury

securities, U.S. Dollar LIBOR, the 11th District Cost of Funds Index,

or FHLBank COs.

c. Debt whose principal may be called or redeemed in whole or in

part at the discretion of the Bank, at the discretion of the investor,

or based upon the movement of U.S. Treasury securities, U.S. Dollar

LIBOR, the 11th District Cost of Funds Index, or FHLBank COs.

d. Debt whose principal amortizes according to a predetermined

schedule.

e. Debt with a coupon rate that may change from fixed to floating,

or vice versa, at the discretion of the Bank, according to a

predetermined schedule, or based upon the movement of one or more

financial indices.

2. A Bank may also participate in non-standard debt issues, some

examples of which are:

a. Debt whose coupon may vary based upon the movement of an

eligible financial index (other than those identified in subsection

C.1.b. above).\5\

b. Debt whose principal is subject to redemption in whole or in

part, based upon the movement of one or more eligible financial indices

(other than those identified in subsection C.1.c. above).

c. Debt whose principal balance may increase based upon the

movement of one or more eligible financial indices.

d. Debt whose coupon may vary based upon the movement of two or

more eligible financial indices, including transactions which multiply

the effect of rate changes.

e. Debt denominated in a currency other than U.S. Dollars,

including the European Currency Unit (ECU), whose

[[Page 13151]]

exchange rate risk relative to the U.S. Dollar can be effectively

hedged.

3. If a Bank participates in a debt issue other than the standard

transactions described in subsection C.1 above, the Bank will be

required to enter into a contemporaneous hedging arrangement that

allows the interest rate and/or basis risk to be passed through to the

hedge counterparty, unless the Bank is able to document that the debt

will: (a) Be used to fund mirror-image assets in an amount equal to the

debt; or (b) offset or reduce interest rate or basis risk in the Bank's

portfolio, or otherwise assist the Bank in achieving its interest rate

and/or basis risk management objectives. If a Bank participates in debt

denominated in a currency other than U.S. Dollars, the currency

exchange risk must be hedged.

4. An FHLBank shall not directly place consolidated obligations

with another FHLBank.

V. Hedge Transaction Guidelines

A. Purpose

To allow the implementation of hedging programs that control the

interest rate and basis risk which arises in the ordinary course of

business.

B. Permitted Instruments and Strategies

Long and short positions in the cash, forward, futures, and option

markets (including caps and floors), and the purchase and sale of

interest rate exchange agreements (swaps) are permitted if they assist

a Bank in achieving its interest rate and/or basis risk management

objectives. Hedging strategies must be explicitly stated at the time of

execution and adequate documentation must be maintained during the life

of the hedge. A Bank may also enter into interest rate swaps and

options with a member to facilitate the member's asset/liability

management strategies. Speculative use of hedging instruments is

prohibited.\6\

C. Hedging With Interest Rate Swaps and Options (Including Caps and

Floors)

1. All swaps entered into by a Bank shall be governed by the FMP.

2. Unsecured credit exposure resulting from interest rate swaps and

options (as defined in subsection VI.B.) is governed by the FMP's

Unsecured Credit Guidelines.

3. Collateral Requirements: A Bank shall require collateral for

interest rate swaps and options from those counterparties (or

guarantors) that, on the trade date of the transaction, do not qualify

for unsecured extensions of credit, and for risk exposure that, on the

trade date of the transaction, exceeds the limits for unsecured

extensions of credit established in the FMP. (Each Bank's board of

directors may identify a level of exposure it deems material before a

collateral call will be required, either at the initiation, or

throughout the life, of a hedge agreement. If a Bank chooses to

identify a minimum collateral call level, that level or the method for

calculating it must be included in the Bank's policy, as required in

subsection VIII.A.1.f. of the FMP.)

a. The dollar amount of collateral shall be determined by the Bank

commensurate with the risk undertaken and shall be maintained in

accordance with the requirements of the Bank's agreement with the

counterparty.

b. Collateral required during the life of the transaction shall be

no less than the market value of the swap, as determined by the Bank,

plus net accrued interest due to the Bank, unless the transaction is

subject to a net collateral exchange agreement as described in

subsection VI. B.

c. For option transactions in which the Bank is a potential

receiver of payments, a minimum initial collateral maintenance level

must be established that is no less than the market value of the

contract, plus amounts due to the Bank under the contract.

d. Collateral agreements entered into by a Bank that are not

required by the FMP will not be subject to FMP collateral requirements.

4. A Bank may enter into an unsecured interest rate swap or option

agreement with a counterparty that does not meet the minimum credit

standards as long as the transaction results in a net reduction of

credit risk arising from previously existing swap or option agreements

with that counterparty, and a master agreement executed by the Bank and

the counterparty provides for such netting.

5. A Bank may, for hedging purposes, enter into interest rate swap

agreements in which the notional principal balance amortizes based upon

the prepayment experience of a specified group of MBS or the behavior

of an interest rate index (Indexed Principal Swaps), or swap agreements

which may be terminated or extended at the option of the Bank or its

counterparty (swaptions).

a. Interest rate swaps that amortize according to the behavior of

Interest Only or Principal Only stripped MBS/CMOs/REMICs are

prohibited.

b. Interest rate swaps that amortize according to the behavior of

residual interest or interest accrual classes of CMOs or REMICs are

prohibited.

c. Indexed principal swaps that have average lives that vary by

more than six years under an assumed instantaneous change in interest

rates of 300 basis points are prohibited, unless they are entered into

in conjunction with the issuance of COs or the purchase of permissible

investments in which the interest rate risk is passed through to the

investor or counterparty.

6. In addition to interest rate caps and floors, a Bank may take

long and short hedge positions in any options contract provided that:

a. The underlying instrument is an investment or a futures contract

permissible under this policy.

b. The hedge is constructed such that the price volatility of the

option position is consistent with the price volatility of the cash

instrument being hedged or with the option component of that

instrument.

c. The option contract is traded on an organized exchange regulated

by the Commodity Futures Trading Commission or the Securities and

Exchange Commission; or through a recognized securities dealer which

reports its position regularly to the Federal Reserve Bank of New York.

7. Documentation:

a. Market value determinations and subsequent collateral

adjustments should be made, at a minimum, on a monthly basis.

b. Failure of a counterparty to meet a collateral call will result

in an early termination event.

c. Early termination pricing and methodology shall be detailed in

all interest rate swap and option contracts in which a Bank is involved

as principal. This methodology must reflect a reasonable estimate of

the market value of the swap or option at termination. Standard

International Swap and Derivatives Association, Inc. language relative

to early termination pricing/methodology may be used to satisfy this

requirement.

d. The transfer of an agreement or contract by a counterparty shall

be made only with the consent of the Bank.

e. Transactions with a single counterparty shall be governed by a

single master agreement when practicable.

8. Non-U.S. Dollar denominated swaps are authorized only to convert

matching non-U.S. Dollar denominated debt to U.S. Dollar denominated

debt, or to offset another non-U.S. Dollar denominated swap.

[[Page 13152]]

D. Hedging in the Financial Futures Markets:

1. Long and short positions in financial futures may be used for

hedging purposes provided that:

a. The underlying instrument is an investment or other transaction

permissible under this policy.

b. The price of the futures contract has a high correlation with

the price of the cash instrument being hedged.

c. The futures contract is traded on an organized exchange

regulated by the Commodity Futures Trading Commission.

2. If delivery of the underlying security will cause a Bank to

exceed any investment limitation of the FMP, the Bank must close out

its position prior to taking delivery.

3. Any Bank with a position which exceeds 5 percent of the open

interest in any specific futures contract month shall report that

position to the investment desks of the other Banks and to the Managing

Director of the Finance Board within one business day of the initiation

of the position. Notification shall also be provided when such a

position declines below 5 percent.

E. Hedging in the Cash or Forward Markets

1. The purchase or sale of cash market securities for either

regular (cash) or forward delivery is permitted, provided that:

a. Only securities that are permissible investments under this

policy are used.

b. The price of the cash or forward instrument has a high

correlation with the price of the instrument being hedged.

c. Any security purchased in the cash market for hedging purposes

is subject to the investment limits of the FMP.

2. Short positions in instruments authorized in the FMP, the

purchase of securities under resale agreements, and the borrowing of

securities in connection with short sales is authorized for hedging

purposes.

VI. Unsecured Credit Guidelines

A. Purpose

To set prudent limits on unsecured credit risk arising from

authorized investment and hedging strategies.

B. Scope

All on- and off-balance sheet extensions of credit, in which the

value of collateral pledged to the Bank by a counterparty is less than

the credit the Bank has extended to that counterparty. Off-balance

sheet extensions of credit to institutions that are at least Level III

counterparties (as defined in section VI.C.2), which are subject to a

net collateral exchange agreement having prudent limits on the maximum

allowable levels of unsecured credit exposure as approved by the Bank's

board of directors, shall not be considered unsecured extensions of

credit. (Inter-Bank loans, obligations of an FHLBank, and obligations

of, or guaranteed by, the United States are not subject to the

requirements of this section.) \7\

C. Eligibility for Unsecured Extensions of Credit

1. The amount of unsecured credit that may be extended to

individual counterparties shall be commensurate with the counterparty's

credit quality. A counterparty's credit quality shall be determined by

credit ratings of the counterparty's debt, debt securities, or

deposits.

2. Acceptable Credit Ratings: A Bank may extend unsecured credit to

counterparties assigned the following credit ratings at the transaction

trade date:

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

Standard &

Thomson Bankwatch IBCA Moody's Poor's IDC

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

Level I...................... A A P-1 Aaa A-1 AAA Above 190.

A/B A/B

Level II..................... B B Aa AA 165-190.

B/C B/C

Level III.................... C C A A 140-164.

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

a. With respect to investments in instruments other than commercial

paper, bank notes and thrift notes, Thomson Bankwatch shall be the

primary short-term rater; i.e., a short-term rating from Moody's,

Standard & Poor's, IBCA or IDC may only be used if the counterparty is

not rated by Thomson. For investments other than commercial paper, bank

notes, or thrift notes, an A-1 or P-1 rating from Standard & Poor's or

Moody's may only be used to determine allowable levels of unsecured

credit exposure when it is a stand-alone rating and not the result of

credit enhancement of a counterparty's commercial paper issue. For

long-term investments, only ratings from Moody's and Standard & Poor's

may be used. The use of short- or long-term credit ratings shall be

appropriate to the term of the transaction: i.e., short-term ratings

for transactions with a maturity equal to 1 year or less; long-term

ratings for transactions with a maturity greater than 1 year.

b. Single-A and double-A ratings from Moody's and Standard & Poor's

shall be interpreted to include the full range of the generic rating

category (e.g., single-A will include A- and A3).

c. Rating downgrades of counterparties shall not require the

liquidation of existing positions.

d. A Bank will have discretion to choose the rating it will use if

the rating agencies disagree on either a counterparty's long or its

short-term credit rating.

e. In the event of a split rating (i.e., a counterparty falling

into different FMP unsecured credit levels based on its short- and

long-term ratings), the higher of the two ratings will dictate the

total amount of unsecured credit the Bank may extend to the

counterparty; however, the lower of the two ratings will limit the

allowable credit exposure to the counterparty for transactions with

maturities governed by that rating.

f. When a counterparty is placed on creditwatch for potential

downgrade by a rating agency, the Bank shall: (1) For purposes of

determining the remaining available credit line for on-balance sheet

investment purchases assume a rating from that agency at the next lower

notch, e.g., a downgrade from A-1+ to A-1 or from AA2 to AA3; or (2)

for off-balance sheet transactions, take action deemed appropriate by

the Bank, taking into account contractual agreements in force with the

counterparty.

3. Limitations on Unsecured Credit Extensions

a. Unsecured extensions of credit to a single U.S. Government

Sponsored Agency or Instrumentality shall not exceed 100 percent of a

Bank's capital.

b. Unsecured extensions of credit to a single Level I counterparty

shall not exceed 30 percent of a Bank's capital.

[[Page 13153]]

c. Unsecured extensions of credit to a single Level II counterparty

shall not exceed 20 percent of a Bank's capital.

d. Unsecured extensions of credit to a single Level III

counterparty shall not exceed 10 percent of a Bank's capital.

e. The maximum amount of unsecured credit that may be extended to

any counterparty shall not exceed 25 percent of that counterparty's

Tier I capital (or tangible capital if Tier I is not available).

f. Limitations on extensions of unsecured credit apply to the

specific counterparty receiving the credit or the party guaranteeing

repayment on behalf of the counterparty. However, each Bank is expected

to evaluate its aggregate unsecured credit exposure to affiliated

counterparties and impose limits on such extensions of credit if

necessary.

g. Unsecured extensions of credit to (except those that result from

a Bank entering into swaps and other hedging arrangements with) Level

III counterparties may not be made for terms in excess of one (1)

business day.

h. Maximum Effective Maturities for Unsecured Extensions of Credit

(as defined in subsection VI.B.) Arising from Interest Rate Swap

Agreements and Similar Transactions: \8\

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

Maximum effective

Counterparty credit maturity of

rating agreements

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

Long Term..................... Aaa, AAA No maturity

limit.

Aa, AA 7 years.

A, A 5 years.

Short Term *.................. A1, P1, A, B 1 year.

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

A-1 or P-1 ratings must be based on Standard & Poor's or Moody's rating

of the counterparty, and may not not be the result of credit

enhancement of a counterparty's commercial paper issue.

Note: At its discretion, a Bank may use long term credit ratings for

all interest rate swap agreements and similar transactions, regardless

of the term of those agreements.

i. Contingent Collateralization of Agreements: Contracts for

interest rate exchange agreements or similar transactions with

effective maturities longer than 10 years shall require full

collateralization of the agreement value plus accrued interest

(maintenance margin) in the event of a counterparty downgrade below

Level III.

VII. Interest Rate Risk Guidelines

A. Purpose

To set prudent limits on the extent to which each Bank may be

exposed to interest rate risk.

B. Interest Rate Risk Limitation

1. Each Bank is required to maintain the duration of its equity (at

current interest rate levels using an appropriate discounting

methodology) within a range of +5 years to -5 years.

2. Each Bank is required to maintain its duration of equity, under

an assumed 200 basis point change in interest rates, within a range of

+7 years to -7 years.

3. Duration of equity calculations shall be performed by each Bank

at intervals prescribed by the Finance Board. Each Bank shall employ

calculation methods and assumptions that reasonably capture the

interest rate risks inherent in its on- and off-balance sheet

activities.

4. Each Bank is required to report its cash flows and calculate its

duration and market value of equity without projected cash flows which

represent the Bank's share of the System's REFCorp and AHP obligations.

VIII. Implementation Guidelines

A. The Board of Directors of Each Bank Shall

1. Adopt and forward to the Finance Board a Bank financial

management policy consistent with the FMP within 90 calendar days of

the effective date of the FMP. The Bank's policy will address:

a. the role of the investment portfolio in fulfilling the Bank's

public purpose, maintaining liquidity, and generating earnings;

b. explicit limits (in percent) on changes in net market value (in

addition to limits on changes in net market value implicit in the

duration limits set forth in subsection VII.B.) resulting from interest

rate risk and convexity;

c. how the investment strategy addresses the mark to market

accounting requirements of SFAS 115;

d. the cash flow implications of the FIRREA obligations and their

impact on the Bank's measurement and control of interest rate risk;

e. a commitment to attain and maintain a stand-alone triple-A

rating on long-term deposits or other unsecured long-term liabilities;

f. any maximum threshold and minimum collateral call levels

approved by the Bank's board for off-balance sheet transactions and the

methods by which such levels are determined; and

g. the maximum allowable level of term (i.e., one year or greater),

unsecured credit exposure arising from on-balance sheet transactions.

2. Review and approve, prior to implementation, any significant

changes in financial strategies undertaken by Bank management.

3. To the extent that the Bank enters into investment transactions

not explicitly permitted under Sections ll(g), ll(h), or 16(a) of the

Act, ensure that such investments are securities in which fiduciary and

trust funds may invest under the laws of the state in which the Bank is

located.

4. Identify the tolerable risk limits for mortgage-backed and

asset-backed security investments, including the amount of capital

(market value) the Bank is willing to expose under a 200 basis point

movement in interest rates.

5. Evaluate modeling and management expertise available to measure

and control the credit, interest rate, basis, and other risks involved

in financing and investment arrangements entered into by the Bank.

6. Establish policies that promote diversity in the Bank's funding

sources and investments.

7. Authorize specific individuals to develop financial strategies

and to execute financial transactions governed by the FMP. (Duties and

responsibilities shall be appropriately divided so that no one

individual has sole responsibility for any two of the following

functions: trading; funds and security transfer; and portfolio

accounting.)

8. Approve the opening of any unsecured checking or settlement

accounts with counterparties that do not meet the credit standards

established in the FMP. Decide whether to maintain any existing

unsecured checking or settlement accounts with counterparties that have

been downgraded below credit standards established in the FMP.

Justification for such approvals shall be available to Finance Board

examiners for review. (Unsecured checking or settlement accounts with

counterparties that do not meet the credit standards of the FMP but

that are covered by deposit insurance or are otherwise guaranteed are

exempt from this requirement).

9. Approve a list of brokers, reporting dealers, and futures

commission merchants with whom the Bank may purchase and sell

securities and contracts.

B. Management of Each Bank Shall

1. Establish internal control systems to ensure compliance with the

FMP.

2. Submit a monthly report to its board of directors and to the

Finance Board regarding the activities governed by the FMP. At a

minimum, the report shall cover the areas of investments, liquidity,

funding, hedging, unsecured credit risk, and interest rate risk. It

will also discuss compliance with the limitations in the FMP and the

Bank's internal policies. Any exceptions to the FMP shall be

highlighted and explained

[[Page 13154]]

in the compliance report submitted to the Finance Board; such report

shall be in a format defined by the Finance Board.

3. Provide periodic data, as requested by the Finance Board, to

facilitate its oversight of FMP compliance.

4. Establish one or more securities safekeeping agents and notify

the Finance Board accordingly. (Authorized agents include Federal

Reserve Banks, Federal Home Loan Banks, and other eligible financial

institutions domiciled in the U.S.)

5. Account for financial transactions executed under the FMP in

accordance with Generally Accepted Accounting Principles.

C. The Internal Auditor of Each Bank Shall Establish Internal Auditing

Programs That Test for Compliance With the FMP

D. The Federal Housing Finance Board Shall

1. Monitor each Bank's compliance with the FMP.

2. Interpret any questions related to the FMP.

3. Consider requests for exceptions to the FMP.

E. This Most Recently Amended Version of the FMP Shall

1. Become effective on ____________________, 1997.

2. Amend and replace the Financial Management Policy dated July 3,

1996. Financial transactions and contracts that were authorized for,

and entered into by, the Banks under these and any relevant preceding

policies, and that remain outstanding on the effective date of the FMP,

are grandfathered for purposes of compliance with the amended policy

guidelines.

Footnotes

1. The term ``eligible financial institutions'' includes:

a. Federal Home Loan Banks;

b. FDIC-insured financial institutions, including U.S.

subsidiaries of foreign commercial banks, whose most recently

published financial statements exhibit at least $100 million of Tier

I (or tangible) capital if the institution is a member of the

investing FHLBank or least $250 million of tangible capital for all

other FDIC-insured institutions, and which have been rated at least

a level III institution as defined in subsection VI.C. of the FMP.

c. U.S. branch or agency offices of foreign commercial banks,

provided that the most recently published financial statements of

the foreign commercial bank exhibit at least $250 million of Tier I

(or tangible) capital and the foreign bank can be designated at

least a Level III counterparty as defined under Section VI.C.2. and

has a country risk rating of not lower than AA from Thomson

Bankwatch.

2. Eligible counterparties for resale agreements include the

Federal Reserve Bank of New York, primary dealers in government

securities recognized by the Federal Reserve whose capital exceeds

$250 million or whose obligations under such agreements are

guaranteed by parent firms whose capital exceeds $250 million, and

U.S. Government Sponsored Enterprises for which the credit of such

institution is pledged for repayment. The Bank for International

Settlements (BIS) and the central banks of foreign countries with a

Thomson Bankwatch country risk rating of at least double-A are

considered eligible counterparties, provided the resales are

collateralized solely by FHLBank System consolidated obligations.

Resale agreements may be consummated using a designated custodian,

provided the custodian is a domestic eligible financial institution

and documentation is provided which evidences the Bank's security

interest in the collateral held by the custodian.

3. Commercial paper, bank note, and thrift note issuers shall be

in the banking, housing, finance, or securities industries as

determined by an FHLBank. Commercial paper, bank note, and thrift

note issuers (or guarantors if applicable) must exhibit on their

most recently published audited financial statements at least $100

million of tangible capital if the institution is a member of the

investing FHLBank or at least $250 million of tangible capital for

all other institutions. If the commercial paper, bank note, or

thrift note issue receives its A-1/P-1 rating by virtue of a

guarantee or other credit enhancement, both the minimum tangible

capital requirement and the maximum allowable unsecured credit

exposure (as determined in subsection VI.C.) shall apply to the

guarantor rather than to the issuer.

4. For purposes of determining compliance with the 300 percent

of capital limit, investment levels will be measured as of the

transaction trade date and capital levels will be based on the

Bank's most recently available monthly financial statement. A Bank

will not be required to divest securities solely to bring the level

of its holdings into compliance with the limit. A Bank's dollar roll

financing activity will not be included in calculating the Bank's

position relative to the limit.

5. A ``financial index'' is defined as an index that pertains

to: (1) Interest rates, (2) baskets of equities, (3) currencies, or

(4) aggregate measures of inflation, sanctioned by a national

government, including those derived from aggregate measures of

economic performance and prices. In the event of debt tied to a

basket of equities, the basket should include a sufficient number of

equities to ensure that the movement of the index is not dictated by

the performance of just one equity in the basket. To be considered

``eligible,'' an index must be publicly available and verifiable

independent of underwriters or selling group members. For an index

that pertains to a foreign country, that country must be assigned a

Country Risk Rating no lower than AA- by Thomson Bankwatch. In the

event a country is not rated by Thomson Bankwatch, Sovereign Risk

Ratings from Moody's or Standard & Poor's may be used subject to the

following requirements: a country must be assigned a Sovereign Risk

Rating for long-term bonds or deposits from Moody's of not lower

than Aa3 or a Sovereign Risk Rating for Foreign Currency from

Standard & Poor's of not lower than AA-. The European Currency Unit

(ECU) shall be deemed an eligible index.

6. Eligible non-member counterparties for hedging transactions

include:

a. Eligible financial institutions;

b. Foreign financial institutions rated at least a Level III

institution, as defined in subsection VI.C. of the FMP, and

domiciled in countries receiving a country risk rating of at least

AA from Thomson Bankwatch;

c. Domestic corporations or partnerships, foreign corporations,

domestic subsidiaries of foreign corporations, international

organizations, and foreign governments or their agencies, rated at

least single-A by Moody's or Standard & Poor's, or rated Baa by

Moody's or BBB by Standard & Poor's provided transactions with such

counterparties result in no unsecured credit exposure for the Bank;

and

d. U.S. Government Sponsored Agencies.

7. For purposes of the FMP, unsecured extensions of credit will

be measured as follows:

a. For on-balance sheet transactions, an amount equal to the sum

of the book value of the item plus net payments due the Bank.

b. For off-balance sheet transactions, an amount equal to the

sum of the net market value of the agreement, as determined by the

Bank, plus net payments due the Bank.

c. Extensions of credit arising from off-balance sheet

transactions with one counterparty may be netted provided the Bank

and the counterparty have executed a master agreement that provides

for such netting.

8. The effective maturity of interest rate exchange agreements

may be considered the term from settlement to the date on which an

FHLBank has the unilateral and unconditional option to terminate the

agreement at its then current market value. For Indexed Principal

Swaps, the effective maturity shall be the weighted average maturity

using consensus prepayment speed estimates for current interest rate

levels, unless an appropriate alternative methodology is applied.

Dated: March 5, 1997.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairperson.

[FR No. 97-6878 Filed 3-18-97; 8:45 am]

BILLING CODE 6725-01-U