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Rule2021-20433

Regulatory Capital Rules: Tier 1/Tier 2 Framework

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Published

October 1, 2021

Effective

January 1, 2022

Issuing agencies

Farm Credit Administration

Abstract

The Farm Credit Administration (FCA or we) is adopting a final rule that amends the regulatory capital requirements for Farm Credit System (System or FCS) institutions. These amendments clarify certain provisions in the Tier 1/Tier 2 Capital Framework final rule that became effective in 2017 (2017 Capital Rule) and codify the guidance provided in FCA Bookletter--BL-068--Tier 1/Tier 2 Capital Framework Guidance. This final rule also includes revisions to the regulatory capital rules to reduce administrative burden for System institutions and the FCA. Lastly, to maintain comparability in our regulatory capital requirements, we are amending certain definitions pertaining to qualified financial contracts in conformity with changes adopted by the Federal banking regulatory agencies.

Full Text

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<title>Federal Register, Volume 86 Issue 188 (Friday, October 1, 2021)</title>
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[Federal Register Volume 86, Number 188 (Friday, October 1, 2021)]
[Rules and Regulations]
[Pages 54347-54361]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20433]

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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, 620, and 628

RIN 3052-AD27

Regulatory Capital Rules: Tier 1/Tier 2 Framework

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or we) is adopting a final
rule that amends the regulatory capital requirements for Farm Credit
System (System or FCS) institutions. These amendments clarify certain
provisions in the Tier 1/Tier 2 Capital Framework final rule that
became effective in 2017 (2017 Capital Rule) and codify the guidance
provided in FCA Bookletter--BL-068--Tier 1/Tier 2 Capital Framework
Guidance. This final rule also includes revisions to the regulatory
capital rules to reduce administrative burden for System institutions
and the FCA. Lastly, to maintain comparability in our regulatory
capital requirements, we are amending certain definitions pertaining to
qualified financial contracts in conformity with changes adopted by the
Federal banking regulatory agencies.

DATES: The regulation shall become effective January 1, 2022, or 30
days after publication in the Federal Register during which either or
both houses of Congress are in session, whichever is later. Pursuant to
12 U.S.C. 2252(c)(1), FCA will publish notification of the effective
date in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Technical information: Jeremy R. Edelstein, <a href="/cdn-cgi/l/email-protection#c580a1a0a9b6b1a0acab8f85a3a6a4eba2aab3">[email&#160;protected]</a>,
Associate Director or Clayton D. Milburn, <a href="/cdn-cgi/l/email-protection#692400050b1c1b072a290f0a08470e061f">[email&#160;protected]</a>, Senior
Financial Analyst, Finance and Capital Markets Team, Office of
Regulatory Policy, Farm Credit Administration, McLean, VA 22102-5090,
(703) 883-4414, TTY (703) 883-4056 or <a href="/cdn-cgi/l/email-protection#86c9d4d6cbe7efeae4e9fec6e0e5e7a8e1e9f0">[email&#160;protected]</a>;
or
Legal information: Rebecca S. Orlich, <a href="/cdn-cgi/l/email-protection#501f223c39333822103633317e373f26">[email&#160;protected]</a>, Senior
Counsel, or Jennifer A. Cohn, <a href="/cdn-cgi/l/email-protection#04476b6c6a6e446267652a636b72">[email&#160;protected]</a>, Senior Counsel, Office of
General Counsel, Farm Credit Administration, McLean, VA 22102-5090,
(703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Objectives of the Final Rule
B. Background
C. Summary of the Proposed Rule
D. General Summary of Comments Received
II. Substantive Revisions to the Capital Rule
A. Safe Harbor Deemed Prior Approval
B. Capital Bylaw or Board Resolution To Include Equities in Tier
1 and Tier 2 Capital
C. Common Cooperative Equity Issuance Date
D. Farm Credit Leasing Services Corporation
E. Lending and Leasing Limit Base Calculation
F. Qualified Financial Contract (QFC) Related Definitions
G. Common Equity Tier 1 Capital Eligibility Requirements
III. Clarifying and Other Revisions to the Capital Rule
A. Capitalization Bylaw Adjustment
B. Annual Report to Shareholders Corrections
C. Appropriate Risk-Weighting of Cash and Gold Bullion
D. Securitization Formulas
E. Unallocated Retained Earnings and Equivalents Deductions and
Adjustments
F. Service Corporation Deductions and Adjustments
G. Adjustments for Accruing Patronage and Dividends
H. Bank Disclosures
I. Retirement of Statutory Borrower Stock
IV. Abbreviations
V. Regulatory Analysis
A. Regulatory Flexibility Act
B. Congressional Review Act

I. Introduction

A. Objectives of the Final Rule

FCA's objectives in adopting this rule are to:
<bullet> Provide technical corrections, amendments and
clarification to certain provisions in the Tier 1/Tier 2 Capital
Framework; and
<bullet> Ensure the System's capital requirements maintain
comparability with the standardized approach that the Federal banking
regulatory agencies \1\ have adopted (U.S. Rule) while accommodating
the cooperative structure and the organization of the System.
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\1\ The Federal banking regulatory agencies are the Office of
the Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), and the Board of Governors of the Federal
Reserve (FRB). See 12 CFR 3.20(b)(1)(i) (OCC), 12 CFR
324.20(b)(1)(i) (FDIC); 12 CFR 217.20(b)(1)(i) (FRB).
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B. Background

In 1916, Congress created the System to provide permanent, stable,
affordable, and reliable sources of credit and related services to
American agricultural and aquatic producers.\2\ As of June 30, 2021,
the System consists of 3 Farm Credit Banks, 1 agricultural credit bank,
66 agricultural credit associations, 1 Federal land credit association,
service corporations, and the Federal Farm Credit Banks Funding
Corporation (Funding Corporation). Farm Credit banks (including both
the Farm Credit Banks and the agricultural credit bank) issue System-
wide consolidated debt obligations in the capital markets through the
Funding Corporation,\3\ which enable the System to extend short-,
intermediate-, and long-term credit and related services to farmers,
ranchers, aquatic producers and harvesters, their cooperatives, rural
utilities, exporters of agricultural commodities products, farm-related
businesses, and certain rural homeowners.\4\ The System's enabling
statute is the Farm Credit Act of 1971, as amended (Act).\5\
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\2\ The Federal Agricultural Mortgage Corporation (Farmer Mac),
which is also a System institution, has authority to operate
secondary markets for agricultural real estate mortgage loans, rural
housing mortgage loans, and rural utility cooperative loans. The FCA
has a separate set of capital regulations that apply to Farmer Mac.
This rulemaking does not affect Farmer Mac, and the use of the term
``System institution'' in this preamble and rule does not include
Farmer Mac.
\3\ The Funding Corporation was established pursuant to section
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all
Farm Credit banks.
\4\ The agricultural credit bank lends to and provides other
financial services to farmer-owned cooperatives, rural utilities
(electric and telecommunications), and rural water and wastewater
disposal systems. It also finances U.S. agricultural exports and
imports and provides international banking services to cooperatives
and other eligible borrowers. The agricultural credit bank operates
a Farm Credit Bank subsidiary.
\5\ 12 U.S.C. 2001-2279cc. The Act is available at <a href="http://www.fca.gov">www.fca.gov</a>
under ``Laws and regulations'' and ``Statutes.''
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FCA's Tier 1/Tier 2 Capital Framework, the 2017 Capital Rule, was
published in the Federal Register in

[[Page 54348]]

July 2016.\6\ The objectives of the 2017 Capital Rule were:
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\6\ 81 FR 49720 (July 28, 2016). The rule was effective January
1, 2017.
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<bullet> To modernize capital requirements while ensuring that
institutions continue to hold enough regulatory capital to fulfill
their mission as a Government-sponsored enterprise (GSE);
<bullet> To ensure that the System's capital requirements are
comparable to the Basel III framework and the standardized approach in
the U.S. Rule, but also to ensure that the rules take into account the
cooperative structure and the organization of the System;
<bullet> To make System regulatory capital requirements more
transparent; and
<bullet> To meet the requirements of section 939A of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act).\7\
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\7\ Public Law 111-203, 124 Stat. 1376 (2010).
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To date, FCA believes the 2017 Capital Rule has met, and continues
to meet, these stated objectives.\8\
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\8\ For a comprehensive discussion of the 2017 Capital Rule, see
81 FR 49720 (July 28, 2016). FCA's capital requirements can be found
at Parts 615 and 628 of FCA Regulations.
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On December 22, 2016, the FCA Board adopted FCA Bookletter--BL-
068--Tier 1/Tier 2 Capital Framework Guidance (Capital Bookletter).\9\
The Capital Bookletter provided guidance to ensure System institutions
had the necessary information to correctly implement the requirements
of the 2017 Capital Rule. The Capital Bookletter included clarification
and technical fixes on 18 separate items. The Capital Bookletter also
stated our intention to incorporate some of these items into the
regulation in a future rulemaking project.
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\9\ A copy of the Capital Bookletter can be found at
<a href="http://www.fca.gov">www.fca.gov</a>, under ``Laws & Regulations'' and ``Bookletters.''
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C. Summary of the Proposed Rule

On September 10, 2020,\10\ FCA published in the Federal Register a
notice of proposed rulemaking seeking public comment on revisions to
our regulatory capital requirements to incorporate some of the guidance
in the Capital Bookletter, with various adjustments,\11\ as well as
other revisions, as follows:
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\10\ See 85 FR 55786 (September 10, 2020).
\11\ FCA adjusted some of the guidance provided in the Capital
Bookletter to address concerns identified through ongoing monitoring
and examination of the requirements of the 2017 Capital Rule.
Specific elements of the Capital Bookletter as incorporated into the
rule are detailed in the ``Substantive Revisions'' and the
``Clarifying and Other Revisions'' sections of this preamble.
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<bullet> Eliminate the stand-alone capital requirements for Farm
Credit Leasing Services Corporation (Farm Credit Leasing or FCL);
<bullet> Change the computation of the lending and leasing limit
base in Sec. 614.4351, by using total capital instead of permanent
capital in the calculation \12\ and eliminating the exceptional
treatment of certain purchased stock in Sec. 614.4351(a)(1);
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\12\ Total capital is defined at Sec. 628.2. Permanent capital
is defined at Sec. 615.5201.
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<bullet> Simplify ''Safe Harbor'' provisions that determine when
System institutions have ``deemed prior approval'' from FCA to
distribute cash payments;
<bullet> Revise and clarify certain criteria that capital
instruments must meet to be included in common equity tier 1 (CET1) and
tier 2 capital;
<bullet> Further clarify when the holding period starts for certain
Common Cooperative Equities included in CET1 or tier 2 capital; and
<bullet> Amend the requirement to adopt an annual board resolution
with respect to prior approval requirements and the minimum holding
periods for certain equities included in CET1 or tier 2 capital.
We additionally proposed technical revisions to:
<bullet> Amend the definitions of ``Collateral agreement,''
``Eligible margin loan,'' ``Qualifying master netting agreement
(QMNA),'' and ``Repo-style transaction'' to incorporate amendments made
to these definitions in the U.S. Rule;
<bullet> Amend Sec. 615.5220(a)(6) to replace references to parts
615 and 628 with a general reference to FCA regulations;
<bullet> Make certain amendments to Sec. 620.5 to ensure
institutions report financial information as we intended;
<bullet> Clarify the appropriate risk-weighting of cash and gold
bullion held in a System institution's own vaults;
<bullet> Correct securitization formulas as provided in the Capital
Bookletter;
<bullet> Specify the deductions and adjustments required for
calculating the requirement in Sec. 628.10 that at least 1.5 percent
of the 4 percent tier 1 leverage ratio minimum must consist of
unallocated retained earnings (URE) and URE equivalents;
<bullet> Revise the deductions required under existing Sec.
628.22(a)(6) to include allocated equity investments in System service
corporations;
<bullet> Add to the regulation certain guidance in the call report
instructions on the treatment of accruals of patronage or dividend
payables or receivables recorded prior to the governing board
declaration or resolution;
<bullet> Clarify certain requirements for regulatory capital
disclosures of System banks in Sec. Sec. 620.3, 628.62(c), and
628.63(b)(4); and
<bullet> Clarify that institutions may retire minimum amounts of
statutory borrower stock without prior approval from FCA so long as,
after the retirement, the institution continues to comply with all
minimum regulatory capital requirements. The proposal also provided
clarification and guidance on continuously redeemable preferred stock
(or ``H Stock''), responded to a letter received from the Farm Credit
Council addressing various capital related topics, and sought comment
on potential changes to FCA's existing permanent capital regulations.

D. General Summary of Comments Received

FCA received seven comment letters on the proposed rule.\13\ The
Farm Credit Council, a trade association representing System
institutions, submitted a letter on behalf of its membership after
soliciting comments from all institutions (System Comment Letter).\14\
Two System banks \15\ and three System associations \16\ also submitted
individual comment letters in support of the System Comment Letter. One
System association, Compeer Financial, ACA (Compeer), raised additional
concerns. The American Bankers Association (ABA), a trade association
representing the U.S. banking industry, submitted the remaining comment
letter.\17\ We address the comments in the preamble sections that
follow.
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\13\ The comment letters for the proposed rule are available at
<a href="http://www.fca.gov">www.fca.gov</a>. Once you are on the website, click the ``I want to . .
.'' field near the top of the page; select ``find comments on a
pending regulation'' from the drop down menu; and click ``Go;'' then
select Capital--Tier 1/Tier 2 Capital Framework--Clean Up--NPRM.
\14\ See Letter from Charles Dana, General Counsel, Farm Credit
Council (November 6, 2020).
\15\ See Letter from Thomas E. Halverson, President and Chief
Executive Officer, CoBank, ACB (November 9, 2020); Letter from
Barbara Kay Stille, Chief Administrative Officer and General
Counsel, AgriBank, FCB (November 9, 2020).
\16\ See Letter from Northwest Farm Credit Services, FLCA and
PCA (November 6, 2020); Letter from Steve Zagar, Senior Vice
President Chief Financial Officer, Farm Credit Mid-America, ACA
(November 9, 2020); Letter from Jase Wagner, Chief Financial Officer
(CFO), Compeer Financial, ACA (November 5, 2020).
\17\ See Letter from Hu A. Benton, Vice President, Banking
Policy, American Bankers Association (November 9, 2020).
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The System Comment Letter stated that the Farm Credit Council and
its members ``generally support'' the proposed rule, including
provisions that incorporate the Capital Bookletter and call report
instructions, but that certain aspects of the proposal were

[[Page 54349]]

``problematic.'' Many of the comments from System institutions
reiterated recommendations they had previously communicated to FCA (in
comments on the September 4, 2014, proposed rulemaking) \18\ and
requested changes that were beyond the scope of the proposal. The
balance of the comments from System institutions were supportive of the
proposed amendments or requested specific technical changes.
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\18\ See 79 FR 52814 (September 4, 2014).
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The ABA asserted that the proposed rule would increase risks to the
safety and soundness of the System and increase competitive inequities
between the System and commercial banks. The ABA also requested that we
clarify certain matters we did not expressly address in the proposal.
In some cases, the ABA's comments did not directly relate to the
amendments we proposed.
In the preamble to the proposed rule, we discussed certain matters
that were not the subject of the proposed rule,\19\ and we also sought
comments on potential changes to our permanent capital regulations to
reduce regulatory burden. We may consider proposing specific changes to
the permanent capital requirements and calculations in a future
rulemaking.
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\19\ In the proposed rule preamble, we discussed the exclusion
of continuously redeemable preferred stock (H Stock) from tier 1 and
tier 2 capital and also commented on issues raised in a 2016 letter
we received from the Farm Credit Council. See 85 FR 57786, 55795
(September 10, 2020).
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As discussed in Section 2--Substantive Revisions to the Capital
Rule and Section 3--Clarifying and Other Revisions to the Capital Rule,
the final rule adopts the revisions we proposed with minor adjustments
in response to comments received.

II. Substantive Revisions to the Capital Rule

A. Safe Harbor Deemed Prior Approval

Under existing Sec. 628.20(f), System institutions are required to
obtain prior approval from FCA before retiring equities included in
tier 1 or tier 2 capital and making cash payments for dividends and
patronage (collectively, cash distributions). Institutions have
``deemed prior approval'' from FCA for such distributions provided the
conditions in Sec. 628.20(f)(5) and (6) are satisfied (Safe Harbor).
One of the conditions stipulates that, after any such cash payment, the
dollar amount of CET1 capital must equal or exceed the dollar amount of
CET1 on the same date in the previous calendar year.\20\ Using the same
date in the previous calendar year has made monitoring and enforcing
this requirement difficult because regulatory capital numbers for
System institutions are reported to FCA quarterly, rather than daily.
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\20\ See existing regulation Sec. 628.20(f)(5)(ii). FCA
considers the date of the cash distribution to be the date on which
the institution's board passes a binding resolution declaring an
amount it will make as a cash dividend or patronage refund. This
either must be a specified dollar amount or must include language
whereby a specific amount can be calculated.
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We proposed to simplify the Safe Harbor provisions of Sec.
628.20(f) by replacing the requirement to use the exact calendar date
of the cash distribution with a requirement to use the quarter-end date
of the quarter in which the cash payment is made. A System institution
would have ``deemed prior approval'' from FCA if, after making the cash
distribution, the dollar amount of CET1 capital at the quarter-end
equals or exceeds the dollar amount of CET1 capital on the same
quarter-end in the previous calendar year. We provided two examples in
the preamble to the proposed rule.\21\ We stated that we do not believe
the amendment as proposed would increase or decrease the amount of cash
patronage System institutions would be able to pay when compared to the
provision in the 2017 Capital Rule.
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\21\ See 85 FR 55786, 55788 (September 10, 2020).
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The ABA expressed concern that the proposal was ``liberalizing''
the provisions of the ``Safe Harbor Deemed Prior Approval'' in Sec.
628.20(f)(5) and suggested that the Safe Harbor framework gives
inadequate consideration to an institution's risk profile. The comments
appear to be based in part on concerns regarding the proposal's
omission of specific reference to capital distribution limitations
already in the 2017 Capital Rule and unchanged by the proposal.
We disagree with the assertion that the proposal would
``liberalize'' the Safe Harbor. The proposed rule would change the date
for determining compliance with the Safe Harbor provision in order to
simplify the administration, enforcement, and monitoring of compliance
with the Safe Harbor requirements. As we state above, we do not believe
the proposal would increase or decrease the amount of cash patronage
System institutions could pay when compared to the existing provision.
The proposed changes would in no way ``liberalize'' the Safe Harbor or
create any greater opportunity for capital distributions under the Safe
Harbor.
In response to the ABA's concerns regarding the Safe Harbor giving
inadequate consideration to an institution's risk profile, the
commenter's assertion that the Safe Harbor permits ``cash payouts based
only on maintaining the dollar amount of CET1 capital in a prior year''
is incorrect. As we stated in the preamble to the proposed rule, in
order to make a cash distribution under the Safe Harbor, a System
institution must remain in compliance with all regulatory capital
requirements and any supervisory or enforcement actions after such
distribution.\22\ FCA's regulatory capital requirements are comparable
to the U.S. Rule and include regulatory capital measures using both
risk-adjusted and non-risk-adjusted computational methods.\23\
Furthermore, FCA has comparable authorities to the Federal banking
regulatory agencies to establish minimum capital ratios for an
individual institution \24\ as well as to place further restrictions on
institutions' capital distributions as part of supervisory agreements
and enforcement actions.\25\ Lastly, cash distributions under the Safe
Harbor are subject to the capital buffers in Sec. 628.11, which reduce
the amount of capital distributions an institution can make when its
capital levels fall within the leverage buffer or capital conservation
buffer ranges. These requirements are unaltered by the proposed or
final rule.
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\22\ See Sec. 628.20(f)(5)(iii).
\23\ Compare, for example, Sec. Sec. 628.10 and 628.11 with the
OCC's rules at 12 CFR 3.10 and 3.11.
\24\ Section 4.3(a) of the Act (12 U.S.C. 2154) and 12 CFR
615.5350.
\25\ Section 5.25 of the Act (12 U.S.C. 2261).
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Compeer requested that we expand the Safe Harbor to allow
institutions to retire the allocated equities of a borrower,
irrespective of compliance with minimum holding periods,\26\ to offset
losses when a borrower defaults on a loan. The commenter asserted that
present hurdles to retiring equities in these scenarios (i.e.,
requesting prior approval from FCA under Sec. 628.20(f)) present an
unnecessary administrative burden.
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\26\ To be included in regulatory capital, common cooperative
equities (defined at Sec. 628.2) must meet minimum holding periods
as stipulated in Sec. 628.20(b)(1)(xiv) and (d)(1)(xi). Minimum
holding period requirements are further discussed below under
Section II, C--Common Cooperative Equity Issuance Date.
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Compeer's requested revision is beyond the scope of the present
rulemaking. We note, however, that as we stated in the preamble to the
2017 Capital Rule, equities are issued to capitalize the institution,
not the loan. Accordingly, these equities should not be viewed or
treated as compensating loan balances.\27\ Furthermore, the preamble to
the 2017 Capital Rule also explains in detail our position on the

[[Page 54350]]

necessity for minimum holding periods to address the ``expectation
criterion'' in the Basel III Framework and the U.S. Rule, maximizing
comparability of our rule with the rules applicable to commercial
banks.\28\ We note that, under Sec. 628.20(f)(6), System institutions
may offset allocated equities against a loan in default if mandated by
a court of competent jurisdiction or under Sec. 615.5290 in connection
with a restructuring plan.
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\27\ See 81 FR 49720, 49731 (July 28, 2016).
\28\ See 81 FR 49720, 49732 (July 28, 2016).
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The balance of comments received supported this proposed amendment,
and we are adopting it as proposed.

B. Capital Bylaw or Board Resolution To Include Equities in Tier 1 and
Tier 2 Capital

The 2017 Capital Rule stipulates conditions and criteria that must
be met in order to include an instrument in an institution's regulatory
capital.\29\ Among these are the requirements for the institution's
board of directors to affirm its commitment to adhere to the regulatory
minimum redemption or revolvement periods; to obtain prior approval
from FCA prior to redeeming, revolving, redesignating, cancelling or
removing equities included in regulatory capital; \30\ and to obtain
prior approval from FCA for certain other actions that could impact the
institution's capital quantity or quality.\31\ Such affirmation must be
set forth in the institution's capitalization bylaws or in a board
resolution that the board must re-affirm annually. Where this
requirement is satisfied by a board resolution, we proposed to reduce
the administrative burden by no longer requiring an annual re-
affirmation by the board. We proposed to replace the annual re-
affirmation with a one-time requirement to adopt the board resolution
and, in subsequent annual capital adequacy plans, to expressly
acknowledge the continuing and binding effect of this resolution.
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\29\ See existing regulations Sec. Sec. 628.20 and 615.5200(d).
\30\ By meeting the conditions for ``deemed prior approval''
under regulation Sec. 628.20(f)(5) and (6), an institution
effectively obtains FCA prior approval for a given capital
distribution.
\31\ Existing Sec. 615.5200(d)(3) requires boards to obtain
prior approval before redesignating unallocated retained earnings
(URE) equivalents as redeemable equities; removing equities from
regulatory capital (other than through repurchase, cancellation,
redemption, or revolvement); or redesignating equities from one
regulatory capital component to another. Section 615.5200(d)(4)
requires that URE equivalents shall not be revolved, except under
very limited circumstances (i.e., upon dissolution or liquidation).
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We proposed to move the existing requirements of Sec. 615.5200(d)
to a new section, Sec. 628.21, and to revise them to provide that an
institution's board must adopt either a capitalization bylaw
requirement or a binding board resolution. New Sec. 615.5200(b) would
add to existing capital planning provisions a requirement that the
capital adequacy plan must expressly acknowledge the continuing and
binding effect of all board resolutions adopted pursuant to Sec. Sec.
628.20(b)(1)(xiv), (c)(1)(xiv), and (d)(1)(xi) and 628.21. We proposed
conforming changes as necessary to refer to new Sec. 628.21 rather
than Sec. 615.5200(d).
We received no specific comments on this amendment and are adopting
it as proposed.

C. Common Cooperative Equity Issuance Date

Common cooperative equities \32\ included in CET1 capital have a
minimum holding period of 7 years before redemption or revolvement, and
common cooperative equities included in tier 2 capital have a minimum
holding period of 5 years.\33\ These holding periods also must be met
for equities (other than the statutory borrower stock minimum) to be
retireable under the Safe Harbor. To clarify when the minimum
redemption and revolvement period starts for a common cooperative
equity, we proposed to add a new definition, common cooperative equity
issuance date, in Sec. 628.2 and to make conforming changes to other
sections of the regulations. Similar to our guidance in the Capital
Bookletter, we proposed to define the common cooperative equity
issuance date as the quarter-end in which an institution recognizes
newly issued purchased stock in its financial statements and, for newly
allocated equities, the quarter-end in which the institution's board
has declared a patronage refund and the applicable accounting treatment
has taken place. We provided examples of the proposed treatment in the
proposed rule preamble.\34\
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\32\ Common cooperative equities are defined in Sec. 628.2.
\33\ As established in Sec. 628.20(b)(1)(xiv)(A) and
(d)(1)(xi)(A).
\34\ See 85 FR 55786, 55789 (September 10, 2020).
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The System Comment Letter and Compeer requested that we eliminate
altogether the minimum holding period requirements for allocated
equities. The System made the same request and supporting arguments in
comments on our 2014 Tier 1/Tier 2 proposed capital rule, and FCA
responded to those comments in the final rule preamble to the 2017
Capital Rule.\35\
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\35\ See 81 FR 49720, 49732 (July 28, 2016). The proposed rule
is at 79 FR 52814 (September 4, 2014).
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The System's request not only is beyond the scope of this
rulemaking but also presents no new arguments that would persuade us to
reevaluate the need for minimum holding periods. We discussed at length
the stock-like attributes of allocated equities (as distinct from
unallocated retained earnings) and the reasons for the minimum holding
periods in the preamble to the 2017 Capital Rule.\36\
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\36\ See 81 FR 49720, 49726-49730 (July 28, 2016).
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The System Comment Letter suggested we add the word ``calendar''
before ``quarter-end'' in the proposed definition of ``common
cooperative equity issuance date'' to clarify that the issuance date
would be the calendar quarter-end. We agree and have incorporated the
suggestion into the final rule. FCA also fully acknowledges the legal
stock issuance date may be different from the quarter-end date used for
financial reporting and regulatory capital calculations. Beyond this
minor change, we are adopting the new definition as proposed.

D. Farm Credit Leasing Services Corporation

The proposed rule would recognize the current ownership status of
Farm Credit Leasing as a wholly-owned subsidiary of CoBank, ACB
(CoBank) by removing FCL from the definition of ``System institution''
in Sec. Sec. 615.5201 and 628.2 for the purposes of the regulatory
capital requirements.\37\ In so doing, FCA would no longer require FCL
to meet minimum capital and related regulatory requirements under part
615, subpart H, and part 628 of our regulations on a stand-alone basis.
As a wholly-owned subsidiary of CoBank, FCL is a business unit of the
bank with profits and losses accrued to the bank, and its assets and
liabilities are consolidated with the bank's assets and liabilities for
financial and regulatory reporting purposes. To the extent the bank is
adequately capitalized overall, CoBank's consolidation ensures FCL's
assets are adequately capitalized. This amendment will reduce the
administrative burden of separately applying the regulatory capital
requirements to FCL and will not reduce the capital to be held against
FCL and CoBank's combined assets. If

[[Page 54351]]

FCL's ownership status were to change in the future, we will reassess
whether to separately apply our regulatory capital requirements.\38\
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\37\ Farm Credit Leasing is a service corporation chartered
under section 4.25 of the Act. A service corporation is an
institution of the System that is established by System banks or
associations and chartered by FCA, and it is subject to FCA
regulation and examination. See title IV, subpart E of the Act.
\38\ The definitions of ``System institution'' under Sec. Sec.
615.5201 and 628.2 provide that we may include ``any other
institution chartered by the FCA that we determine should be
included for purposes of this subpart.''
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Commenters supported this change, and we are adopting it as
proposed.

E. Lending and Leasing Limit Base Calculation

Since adopting the 2017 Capital Rule, FCA has relied on tier 1 and
tier 2 capital, not on permanent capital, to evaluate the safety and
soundness of System institutions. In order to better align the lending
and leasing limit base with FCA's supervisory focus on tier 1 and tier
2 capital, we proposed to shift the base of the lending and leasing
limit from permanent capital \39\ to total capital as defined and
adjusted in Sec. Sec. 628.20-628.22 and to continue to include
otherwise eligible third-party capital that must be excluded under
Sec. 628.23. We further proposed to align the treatment of investments
in other System institutions under the lending and leasing limit base
with the treatment under regulatory capital calculations by eliminating
the exceptional treatment of stock purchased in connection with a loan
participation under Sec. 614.4351(a)(1).\40\ We estimated that the
impacts to lending limits at System institutions resulting from these
changes would be small.\41\ The System Comment Letter supported the
change to the use of total capital as the lending limit base and noted
that most institutions have internal lending limit policies that are
lower than the lending limit base in the regulation. We received no
other comments and are adopting the amendment as proposed.
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\39\ The existing lending and leasing limit base (which this
final rule is changing) is a System institution's permanent capital
with adjustments applicable to the institution in accordance with
Sec. 615.5207, and with two additional adjustments in Sec.
614.4351(a) that apply only to the lending and leasing limit base.
\40\ The 2017 Capital Rule requires System institutions to
deduct their investments in other System institutions from
regulatory capital calculations. Existing Sec. 614.4351(a)(1)
directs a System institution to include its investment in another
System institution in its lending limit base where the investment
resulted from stock purchased in connection with a loan
participation. This is, in effect, the exact opposite of the
regulatory capital requirements in the 2017 Capital Rule.
\41\ See 85 FR 55786, 55790 (September 10, 2020), footnotes 29
and 30.
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F. Qualified Financial Contract (QFC) Related Definitions

In 2017, the Federal banking regulatory agencies adopted rules
establishing certain restrictions and requirements for the financial
contracts (QFC Rules) of global systemically important banking
institutions (GSIBs).\42\ We provided details on the background and
impetus for these regulatory changes in the preamble to the proposed
rule.\43\ The QFC Rules prompted related definitional changes in the
U.S. Rule to ensure regulated entities continued to benefit from
recognition of the risk-mitigating effects of netting and financial
collateral on certain financial transactions. This recognition likely
results in reduced capital requirements for those transactions.
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\42\ See 82 FR 56630 (November 29, 2017) (OCC); 82 FR 50228
(October 30, 2017) (FDIC); and 82 FR 42882 (September 12, 2017)
(FRB).
\43\ See 85 FR 55786, 55790-55791 (September 10, 2020).
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To incorporate amendments made to the U.S. Rule \44\ and to ensure
System institutions would also continue to benefit from recognition of
the risk-mitigating effects of netting and financial collateral, we
proposed changes to the definitions of ``Collateral agreement,''
``Eligible margin loan,'' ``Qualifying master netting agreement
(QMNA),'' and ``Repo-style transaction.'' The proposed changes to QMNA
would also harmonize that definition with the definition of ``Eligible
master netting agreement'' as used in FCA's Margin and Capital
requirements for Covered Swap Entities regulation.\45\ The System
Comment Letter supported these revisions, and we are adopting them as
proposed.
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\44\ As we have previously stated, FCA seeks to achieve
comparability between our regulatory capital rules and those of the
Federal banking regulatory agencies. Among other benefits,
comparability of rules increases transparency for investors in the
capital markets.
\45\ See Sec. 624.2.
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G. Common Equity Tier 1 Capital Eligibility Requirements

Consistent with the Basel III regulatory capital framework \46\ and
the U.S. Rule, we proposed to add the term ``paid-in'' to the
eligibility criteria for CET1 capital in Sec. 628.20(b)(1)(i). Basel
III defines ``paid-in'' capital as capital that (1) has been received
with finality by the institution, (2) is reliably valued, (3) is fully
under the institution's control, and (4) does not directly or
indirectly expose the institution to the credit risk of the
investor.\47\
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\46\ See Basel Committee on Banking Supervision (BCBS), Basel
III: A Global Regulatory Framework for More Resilient Banks and
Banking Systems, December 2010 (as revised June 2011).
\47\ See BCBS, Basel III Definition of capital--Frequently Asked
Questions, September 2017 (update of FAQs published in December
2011).
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As discussed in the preamble to the proposed rule, we proposed this
amendment to the eligibility criteria for CET1 capital after re-
evaluating the attributes of System allocated equities, which we have
subsequently determined meet the Basel definition of ``paid-in.'' \48\
We further discussed our reexamination of the attributes of allocated
equities and the financing of statutorily required borrower stock at
System institutions.\49\ The System Comment Letter supported our
recognition of allocated equities as meeting the definition of ``paid-
in'' and expressed no concern with the additional criteria for an
instrument's inclusion in CET1 capital.\50\ We are adopting the
revision as proposed.
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\48\ See 85 FR 55786, 55791-55792 (September 10, 2020).
\49\ Id.
\50\ As discussed under Section III, E--Unallocated Retained
Earnings and Equivalents Deductions and Adjustments, the System
Comment Letter draws a connection between our determination that
allocated equities are ``paid-in,'' as defined by the Basel
Committee, and arguments in the letter requesting the elimination of
the URE and URE equivalents requirements in FCA's capital rules. Our
determination that allocated equities fully meet the Basel III
definition of paid-in capital does not have any connection to our
URE and URE equivalents requirements.
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We also proposed a conforming change in Sec. 628.20(d)(1)(i) to
clarify that all instruments included in tier 2 capital must be issued
and paid-in. We received no comments on this proposed change and are
adopting it as proposed.
Lastly, we proposed clarifying, non-substantive changes to Sec.
628.20(b)(1)(i) and (b)(1)(ii), both to align our language more closely
with the language in the U.S. Rule and to emphasize a difference
between the rules' prioritization of a capital instrument holder's
claim on the residual assets of an institution in a receivership,
insolvency, liquidation, or similar proceeding. We received no comments
on these proposed revisions and are adopting them as proposed.

III. Clarifying and Other Revisions to the Capital Rule

A. Capitalization Bylaw Adjustment

Section 615.5220(a)(6) requires a System institution to include in
its capitalization bylaws a provision stating that equities other than
those protected under Section 4.9A of the Act are retireable at the
sole discretion of the board, provided minimum capital adequacy
standards established in subpart H of part 615 and part 628 are

[[Page 54352]]

met. We proposed to amend this section by replacing the reference to
parts 615 and 628 with a general reference to FCA's capital adequacy
standards. This would satisfy the requirement to refer to parts 615 and
628 and would include all existing capital requirements of the FCA as
well as any future capital requirements that we may adopt in other
parts of our regulations.
As we noted in the proposal,\51\ changes to bylaws to conform to
this regulatory requirement should not change any substantive rights of
the System institution or its member-borrowers.\52\ System institutions
that have already amended their capitalization bylaws to include a
reference to parts 615 and 628 do not need to amend their
capitalization bylaws to comply with this revision.
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\51\ See 85 FR 55786, 55792 (September 10, 2020).
\52\ If the change is non-substantive and does not alter,
reduce, or increase the rights of any member-borrowers, a System
institution's board may choose to make a conforming change to the
capitalization bylaws to include a general reference to regulatory
capital adequacy standards without a vote by its member-borrowers,
provided that such bylaws allow for technical amendments without a
shareholder vote.
---------------------------------------------------------------------------

We received no comments on this amendment and are adopting it as
proposed.

B. Annual Report to Shareholders Corrections

We proposed technical revisions to Sec. 620.5, which lists the
required contents of a System institution's annual report to
shareholders, to ensure institutions report financial data as we
intended. First, we proposed to move the requirement that System
associations report their tier 1 leverage ratio in each annual report
for each of the last 5 fiscal years from Sec. 620.5(f)(4)(iv) to Sec.
620.5(f)(3)(v), as we had originally intended. In addition, we proposed
to amend the requirement in Sec. 620.5(f)(4) that institutions report
core surplus, total surplus, and the net collateral ratio (banks only)
in a comparative columnar form for each fiscal year ending in 2012
through 2016. This requirement resulted in System institutions
reporting capital ratios beyond the 5-year requirement established in
Sec. 620.5(f), which was not our intention. Accordingly, we proposed
to require these disclosures in each annual report through 2021, but
only as long as these ratios are part of the previous 5 fiscal years
for which disclosures are required. We received no comments on these
revisions and are adopting them as proposed.

C. Appropriate Risk-Weighting of Cash and Gold Bullion

We proposed to delete provisions in Sec. 628.32(l)(1) pertaining
to the risk weighting of cash that were redundant and potentially
confusing. Specifically, existing Sec. 628.32(l)(1) states that System
institutions must assign a 0-percent risk weight to cash held in
accounts at a depository institution, which created potential confusion
pertaining to the proper risk weight for deposits that exceed the limit
of FDIC deposit insurance coverage (currently set at $250,000). In
addition, existing Sec. 628.32(l)(1) also states that System
institutions must assign a 0-percent risk weight to cash held in
accounts at a Federal Reserve Bank. As the risk weighting of cash on
deposit with a U.S. depository institution or at the Federal Reserve
Bank is adequately and more accurately addressed in Sec.
628.32(a)(1)(i)(A) and (B) and (d)(1), we proposed eliminating the
duplicative and potentially confusing provisions in Sec. 628.32(l)(1).
We received no comments on these revisions and are adopting them as
proposed.
We additionally proposed to revise Sec. 628.32(l)(1) to add a
provision assigning a 0-percent risk weight to gold bullion held in a
System institution's own vaults, consistent with the risk weight
assigned to gold bullion held in the vaults of a depository
institution. We received no comments on this revision and are adopting
it as proposed.

D. Securitization Formulas

Consistent with corrections previously provided in the Capital
Bookletter, we proposed to correct 3 formulas used in the simplified
supervisory formula approach (SSFA) to risk-weighting securitizations
under Sec. 628.43(d), and one formula used in the simple risk-weight
approach (SRWA) for risk-weighting equity exposures under Sec. 628.52.
These formulas were printed incorrectly in the Federal Register version
of the 2017 Capital Rule. We received no comments on these corrections
and are finalizing them as proposed.

E. Unallocated Retained Earnings and Equivalents Deductions and
Adjustments

Under Sec. 628.10, at least 1.5 percent of the 4 percent tier 1
leverage ratio minimum must consist of URE and URE equivalents (UREE).
As the 2017 Capital Rule did not specify how to calculate this
requirement, we proposed to prescribe the calculation methodology.
Specifically, we proposed to incorporate the guidance in the Capital
Bookletter requiring the deductions in Sec. 628.22(a) from the
numerator and the deductions used in calculating the tier 1 leverage
ratio from the denominator.\53\ We also proposed to require that
institutions deduct from the numerator any purchased equity investments
that must be deducted under the corresponding deduction approach in
Sec. 628.22(c). The use of differing deductions for the computation of
the tier 1 leverage ratio and the URE and UREE measure, which is a
component of the tier 1 leverage ratio, resulted in the URE and UREE
measure, when calculated on a stand-alone basis, exceeding the tier 1
leverage ratio at many System institutions.\54\ This was not our
intent. The System Comment Letter generally supported our proposed
revisions, and we are adopting them as proposed.
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\53\ See Capital Bookletter, Item 4.
\54\ Section 628.10(c)(4) requires the amounts deducted under
Sec. Sec. 628.22(a) and (c) and 628.23 to be deducted from tier 1
capital when calculating the tier 1 leverage ratio. However, the
deductions under Sec. Sec. 628.22(c) and 628.23 were not applied to
the numerator when calculating the URE and UREE requirement as they
do not increase the URE of a System institution. Although we are
amending the rule to incorporate deductions under new Sec.
628.22(b) and existing Sec. 628.22(c), we did not find it necessary
to require the deductions under Sec. 628.23 when calculating the
URE and UREE measure because third-party stock is not a component of
URE, UREE, or CET1 capital.
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In addition, we are adopting technical conforming amendments in
Sec. 628.10(c)(4) to incorporate adjustments required under proposed
Sec. 628.22(b) \55\ into the computation of both the tier 1 leverage
ratio and the URE and UREE measure. More specifically, we are amending
the calculation of average total consolidated assets described in Sec.
628.10(c)(4)(i) to include the deduction or adjustment required by
Sec. 628.22(b). Furthermore, we are amending the calculation of the
URE and UREE measure described in Sec. 628.10(c)(4)(ii) to include the
deduction or adjustment required by Sec. 628.22(b). These conforming
changes are consistent with existing call report instructions,\56\ are
technical in nature, and are necessary to maintain consistency in the
deductions for the computation of the tier 1 leverage ratio and the URE
and UREE measure, consistent with the intent of the proposed rule.
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\55\ Proposed Sec. 628.22(b) is discussed below under Section
III, G--Adjustments for Accruing Patronage and Dividends.
\56\ See the call report instructions for Uniform Call Report
schedule RC-R.4, item 3, and schedule RC-R.5, item 1.c. The call
report instructions are available at <a href="https://ww3.fca.gov/fcsinfo/CRS/CallReportFiles/UCR%20Report%20Instructions.pdf">https://ww3.fca.gov/fcsinfo/CRS/CallReportFiles/UCR%20Report%20Instructions.pdf</a>.

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[[Page 54353]]

The System Comment Letter advocated that FCA reconsider the
necessity of requirements to hold a minimum level of URE. Consistent
with its comments on our 2014 proposed Capital Rule, the System Comment
Letter asserted that the minimum URE requirement establishes URE as
higher quality capital relative to other System capital components,
results in nearly 3 percent of URE held against each dollar of new
loans made by associations, violates the cooperative principle of user-
ownership, and undermines the cooperative principle of user-
control.\57\ In addition, the System Comment Letter asserted that a
minimum URE requirement is not consistent with the Basel III Framework
and thus decreases the comparability of FCA's capital requirements to
those of the U.S. Rule.
---------------------------------------------------------------------------

\57\ The Farm Credit Council made similar comments in response
to the 2017 Capital Rule, as we summarized in the rule's preamble.
See 81 FR 49720, 49733-49735 (July 28, 2016).
---------------------------------------------------------------------------

The System Comment Letter and AgriBank, FCB (AgriBank), also
requested that we consider changes to the definition of UREE in Sec.
628.2 if we retain the URE requirement.
Under the existing definition, nonqualified allocated equities not
subject to redemption or revolvement are included in the definition of
UREE and count towards an institution's minimum URE and UREE
requirement, provided that certain additional stipulations are met.\58\
Such equities allocated to other System institutions are expressly
excluded. The commenters assert that, because of the deductions and
eliminations for computing regulatory capital under FCA's 2017 Capital
Rule, equities allocated by a System bank to an association satisfy the
objectives for URE and UREE as previously outlined by FCA.\59\
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\58\ To include nonqualified allocated equities in UREE, an
institution's board must designate the equities as UREE at issuance
and undertake in its capitalization bylaws or a board resolution
(1.) not to change the designation without FCA prior approval, (2.)
not to exercise discretion to revolve the equities except under
dissolution or liquidation, and (3.) not offset the equities against
a loan in default except as required by a court of competent
jurisdiction, or if required under Sec. 615.5290 in connection with
a restructuring.
\59\ URE and UREE provide a cushion from losses for both third-
party and common cooperative equities and protect against
interconnected risk between System banks and associations. See 79 FR
52814 (September 4, 2014).
---------------------------------------------------------------------------

The request to reconsider application of the minimum URE and UREE
requirements or to change the definition of UREE is beyond the scope of
the proposal. We explained at length our position on the significance
of URE and UREE to System capitalization in the preamble to the 2017
Capital Rule.\60\
---------------------------------------------------------------------------

\60\ See 81 FR 49720, 49732-49735 (July 28, 2016).
---------------------------------------------------------------------------

We note that the System Comment Letter and AgriBank drew a
connection between our interpretation that allocated equities are
``paid-in'', as defined by Basel, and their argument for the
elimination of the URE and UREE requirements. The interpretation that
allocated equities meet the Basel definition of paid-in capital, as
discussed in the proposal,\61\ does not diminish the importance of the
URE and UREE requirements.\62\
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\61\ See 81 FR 55786, 55791 (September 10, 2020).
\62\ As noted in the System Comment Letter, Basel III recognizes
two broad categories of CET1 capital: Retained earnings and paid-in
capital instruments. Consistent with that view, our capital rules
acknowledge and draw distinction between these two types of CET1
capital (Sec. 628.20(b)(1) and (2)). Our interpretation that common
cooperative equities are ``paid-in'' as defined by Basel does not
eliminate the distinction between these two types of high-quality
capital. Equities allocated by one System institution to another are
at risk at both institutions and present a risk of financial
contagion as a result of the interconnection that gives rise to
their existence. Unallocated retained earnings and equivalents (as
presently defined) do not present the same contagion risk.
---------------------------------------------------------------------------

The minimum URE and UREE requirement as presently calculated
protects association members against association losses, associations
against bank losses, and the System against financial contagion.
Financial contagion in this context would include impacts to earnings
measures that are relevant to System investors and FCA's evaluations of
the safety and soundness of System institutions. In addition to our
previously stated position, we note that URE at a System bank ensures
the bank can act as a source of strength and provide assistance to
district associations or other banks if needed, and it also insulates a
bank's affiliated associations from losses in other districts in the
event of a joint and several liability call.

F. Service Corporation Deductions and Adjustments

Existing Sec. 628.22(a)(6) requires a System institution to deduct
any allocated equity investment in another System institution. We
proposed to expand the deduction requirement to include allocated
equity investments in a System service corporation.\63\ The System
Comment Letter indicated that System institutions are unaware of any
service corporations that allocate equities and provided no further
comment on the amendment proposed. Accordingly, we are adopting the
revision as proposed.
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\63\ System institution is defined in existing Sec. 628.2 as
``a System bank, an association of the Farm Credit System, . . . and
any other institution chartered by the FCA that the FCA determines
should be considered a System institution for the purposes of this
part.'' The FCA has not made any determinations to include other
institutions in this definition.
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As we noted in the preamble to the proposed rule, in November 2016
the Farm Credit Council sent a letter \64\ to FCA requesting that
institutions be permitted to risk-weight their investments in System
service corporations at 100 percent instead of having to deduct the
investments from CET1 capital in their regulatory capital calculations.
The Farm Credit Council further requested FCA to establish regulatory
capital treatments for unincorporated business entities (UBEs) based on
the specific nature of the entity in question. We responded to this
request in the preamble to the proposed rule, declining to revise the
requirement to deduct equity investments in service corporations from
regulatory capital and noting that we retain the authority to consider
the appropriate capital treatment of UBEs on a case-by-case basis.
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\64\ Letter dated November 22, 2016, from Charles Dana, General
Counsel, Farm Credit Council to Gary K. Van Meter, Director, Office
of Regulatory Policy. This letter was received after the 2017
Capital Rule had been adopted by the FCA Board and communicated a
request to change certain provisions of the 2017 Capital Rule, as
discussed in this section.
---------------------------------------------------------------------------

The System Comment Letter requested that we reconsider our position
on service corporation investments. The System believes the requirement
to deduct investments in System service corporations is inconsistent
with the level of risk in the investments and state that the deduction
requirement discourages the formation of organizations that provide an
efficient means for cooperation among System institutions in providing
services to their stockholders. The System further noted that all
service corporations are subject to chartering requirements and that
FCA can establish the individual capital requirements of a service
corporation on a case-by-case basis.
We are not convinced of the need to change our previously
communicated position. As we stated in the preamble to the proposed
rule, we believe that investments in service corporations are committed
to support the risks at the service corporation and must be available
to meet the service corporation's capital needs.\65\ This position and
our resulting regulatory capital treatment of investments in service
corporations are consistent with our treatment of all intra-System
investments. The System accurately points out that FCA can establish

[[Page 54354]]

individual capital requirements for service corporations as part of the
chartering process. We believe the more prudent default treatment is
deduction rather than risk weighting. We would consider risk weighting
on a case-by-case basis as the exception.
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\65\ See 85 FR 55786, 55795 (September 10, 2020).
---------------------------------------------------------------------------

G. Adjustments for Accruing Patronage and Dividends

We proposed to amend the regulatory capital adjustment and
deduction requirements under Sec. 628.22 by incorporating in proposed
Sec. 628.22(b) the existing call report instructions directing System
institutions to reverse the accrual of patronage or dividend payables
or receivables that occur prior to a board declaration resolution.\66\
As discussed in the proposed rule preamble, FCA believes it is
important to reflect regulatory capital on the basis of related
contractual obligations. Some options for the treatment of patronage
and dividend accruals under GAAP may not be consistent with this
regulatory capital requirement.\67\ FCA looks to the date an
institution's board of directors passes a binding resolution declaring
an amount it will pay in patronage or dividends \68\ to establish when
the legal obligation exists and should be reflected in regulatory
capital computations. We received no comments on this amendment and are
adopting it as proposed.
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\66\ See existing Call Report instructions for Schedule RC-R.4,
Line item 3 at <a href="https://www.fca.gov/bank-oversight/fcs-call-reports">https://www.fca.gov/bank-oversight/fcs-call-reports</a>.
\67\ See 85 FR 55786, 55787-55788 (September 10, 2020).
\68\ The declaration must include an amount to be paid or
include language by which an amount could be calculated.
---------------------------------------------------------------------------

H. Bank Disclosures

We proposed clarifying amendments to the requirement under Sec.
628.63(b)(4) that banks disclose a reconciliation of their regulatory
capital elements to their balance sheets in any audited consolidated
financial statements. Specifically, we proposed to add the word
``applicable'' before ``audited'' to clarify that reconciliation
requirements apply only to current period financial statements that
have been audited.\69\ We further proposed that System banks be
required to complete this reconciliation of regulatory capital elements
using both point-in-time and three-month average daily balance
regulatory capital values as our regulatory capital requirements are
based on a three-month average daily balance.\70\ Financial statements
are generally prepared using point-in-time information.
---------------------------------------------------------------------------

\69\ Under FCA regulations, only the annual report to
shareholders prepared at yearend must be audited. See Sec.
620.5(j)(1).
\70\ See Sec. 628.10(a).
---------------------------------------------------------------------------

The System Comment Letter questioned the value added by completing
the required reconciliation on both a point-in-time and a three-month
average daily balance basis. The commenters noted that Basel III Pillar
3 disclosure requirements are based on a tieback to audited financial
statements, which are prepared on a point-in-time basis. They further
noted that the addition of the three-month average reconciliation was
unnecessary and potentially confusing.
We are persuaded that completing the reconciliation on a point-in-
time basis satisfies the Basel III Pillar 3 disclosure requirement for
a reconciliation of regulatory capital to GAAP capital. We acknowledge
that requiring a reconciliation on two separate bases would have added
another administrative requirement. We have decided instead to revise
Sec. 628.63(b)(4) to require only a reconciliation on a point-in-time
basis, together with a statement that compliance with the minimum
capital requirements in subpart B of part 628 is determined using
average daily balances for the most recent 3 months.
To address potential conflicts between the requirements of
Sec. Sec. 620.3 and 628.62(c), we proposed to revise Sec. 620.3 to
state that, unless otherwise determined by FCA, the use of the
authorized limited disclosure in Sec. 628.62(c) does not create an
incomplete disclosure. We also proposed to revise Sec. 620.3 to permit
institutions to modify the required statement that the information
provided is true, accurate, and complete to explain that the
completeness of the disclosure was determined in consideration of Sec.
628.62(c). We received no comments on this amendment and are adopting
it as proposed.
Lastly, we proposed to remove and reserve Sec. 628.63(b)(3), which
required disclosure of the computation of regulatory capital ratios
during the transition period, because the provision is no longer
applicable. We received no comments on this amendment and are adopting
it as proposed.

I. Retirement of Statutory Borrower Stock

Under existing Sec. 628.20(b)(1)(xiv)(B), System institutions may
redeem the minimum statutory borrower stock described in Sec.
628.20(b)(1)(x) without prior FCA approval and without satisfying the
minimum holding period for common cooperative equities included in CET1
capital. In order to eliminate any possible misinterpretation that an
institution could retire statutory borrower stock if the institution
were not meeting its regulatory capital requirements, we proposed to
add a provision to Sec. 628.20(b)(1)(xiv)(B) to clarify that
institutions may redeem statutory borrower stock only provided that,
after such redemption, the institution continues to comply with all
minimum regulatory capital requirements.
The System Comment Letter and Compeer requested that we reconsider
the regulatory provisions for redemptions of statutory minimum borrower
stock because of the administrative burden they create for small-
balance loans at some institutions (those with balances of $50,000 or
less). As we clarified in the preamble to the proposed rule, under the
existing provisions of Sec. 628.20(b)(1)(xiv)(B), for any statutory
borrower stock exceeding $1,000 or 2 percent of the loan amount,
whichever is less, the minimum holding periods for inclusion in
regulatory capital apply.\71\ We also clarified in the preamble that
the 2 percent of the loan amount is determined relative to the
originated loan amount. Commenters stated that, under this structure,
some System institutions must undertake a ``burdensome process'' to
track the holding period for stock that is $1,000 or less but greater
than 2 percent of the loan balance. The commenters further noted that
the amounts of capital retained as a result of this requirement are de
minimis in terms of any institution's total capital.
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\71\ See 85 FR 55786, 55794 (September 10, 2020). Of note, under
Sec. 628.20(b)(1)(x) and (d)(1)(viii), any statutory borrower stock
in excess of the statutory minimum that is funded through loan
proceeds from the System institution is includable only in tier 2
capital.
---------------------------------------------------------------------------

We are persuaded that the burden of tracking and managing these de
minimis amounts of statutory minimum borrower stock in accordance with
existing requirements is not justified by the safety and soundness
benefits of the nominal amounts of capital retained. Accordingly, we
are amending the provisions of Sec. 628.20(b)(1)(xiv)(B) to reflect
that an amount of the statutory borrower stock as described in section
4.3A of the Act, not to exceed $1,000, may be redeemed without a
minimum period outstanding after issuance and without the prior
approval of the FCA. This amendment eliminates the burden of tracking
de minimis amounts of statutory borrower stock that are less than
$1,000 but exceed 2 percent of the loan balance. More specifically,
System institutions may redeem up to $1,000 of statutory borrower stock
irrespective of

[[Page 54355]]

the proportional relationship of the stock investment and the
originated loan amount. We are making conforming changes to Sec.
628.20(b)(1)(x) and (d)(1)(viii)(C) to incorporate this change.
The ABA commented that it appreciated our clarification but
asserted that the proposal would still leave FCS institutions subject
to very lax requirements concerning stock redemptions compared to those
applicable to commercial banks. We note that the proposed amendment
eliciting this comment does not reduce restrictions on stock
redemptions for System institutions. As discussed in the preamble to
the proposed rule, the proposed amendment is merely a technical
clarification for the avoidance of doubt.\72\
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\72\ 85 FR 55786, 55794 (September 10, 2020).
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As stated in the preamble to the 2017 Capital Rule, one of our
objectives was to ensure the System's capital requirements are
comparable to the Basel III framework and the standardized approach
under the U.S. Rule, taking into consideration the cooperative
structure and the organization of the System.\73\ Accordingly, while
most requirements of our rule are similar or identical to requirements
in the U.S. Rule, the cooperative structure and the organization of
System institutions necessitated modification of other requirements. A
piecemeal comparison of various elements of the two rules will not
yield an accurate appraisal of the regulatory outcome of our
requirements as compared to the U.S. Rule.
---------------------------------------------------------------------------

\73\ See objectives in 81 FR 49720 (July 28, 2016).
---------------------------------------------------------------------------

As the ABA points out, when restrictions on stock redemptions are
considered in isolation of other rule requirements, commercial banks
are subject to more restrictions than System institutions. For example,
to retire stock, national banks must obtain the approval of
shareholders owning two thirds of the shares in each affected class, as
well as prior approval from the OCC.\74\ By contrast, System
institutions may redeem common cooperative equities without obtaining
FCA or shareholder prior approval, provided certain conditions are
met.\75\ We acknowledged and discussed this difference in the preamble
to the 2017 Capital Rule.\76\ However, the requirements for stock
redemptions should not be evaluated in isolation of the remaining
restrictions on distributions in FCA's capital rules.
---------------------------------------------------------------------------

\74\ 12 U.S.C. 59.
\75\ Under Sec. 628.20(f)(5), institutions may retire common
cooperative equities included in CET1 capital a minimum of 7 years
after the issuance date, and they may retire common cooperative
equities included in tier 2 capital a minimum of 5 years after the
issuance date. In the case of common cooperative equities included
in CET1, after such retirements the dollar amount of CET1 capital
outstanding must equal or exceed the dollar amount outstanding one
year earlier. Under Sec. 628.20(b)(1)(xiv)(B), statutory minimum
borrower stock may be retired without a minimum period outstanding
after issuance and without the prior approval of FCA.
\76\ See 81 FR 49720, 49731 (July 28, 2016).
---------------------------------------------------------------------------

First, FCA's Safe Harbor for stock redemptions applies only to
common cooperative equities; all other capital instruments including
preferred stock and subordinated debt cannot be redeemed or retired
prior to their maturity without express prior approval from the FCA
Board.\77\ Second, the most flexible treatment of stock redemptions
under FCA's existing capital rules, which is the focus of the ABA's
comments, is applicable only to minimum statutory borrower stock.\78\
This capital element comprises less than 1 percent of the System's
total capital base.\79\ All other common cooperative equities included
in regulatory capital are subject to further restrictions including
minimum holding periods before they can be redeemed without obtaining
prior approval from FCA.\80\ A third consideration is that a
significant portion of allocated equities in the System has been
designated as unallocated retained earnings equivalents,\81\ a type of
common cooperative equity that cannot be redeemed without obtaining
prior approval from the FCA Board.\82\
---------------------------------------------------------------------------

\77\ See Sec. 628.20(c)(1)(vi) and (d)(1)(X).
\78\ Statutory minimum borrower stock is stock acquired by
System borrowers to satisfy requirements under Section 4.3A of the
Act. It is equal to the lesser of $1,000 or 2 percent of the loan.
\79\ As of June 30, 2021, System entities reported combined
total regulatory capital of $65.8 billion, of which $0.39 billion or
0.6 percent was comprised of statutory minimum borrower stock that
is already eligible to be redeemed without a minimum holding period
under existing regulatory requirements. This rulemaking does not
change the requirements governing redemption of this stock.
\80\ See Sec. 628.20(f)(5).
\81\ As defined in Sec. 628.2, unallocated retained earnings
(URE) equivalents include nonqualified allocated equities designated
as URE equivalents at issuance that a System institution undertakes
not to revolve except upon dissolution or liquidation. Under new
Sec. 628.21, System institutions are required to obtain prior FCA
approval before re-designating URE equivalents as equities that the
institution has discretion to redeem.
\82\ As of March 31, 2021, System entities reported a combined
total regulatory capital of $65.8 billion, of which $19.2 billion
(29 percent) was comprised of allocated common cooperative equities.
Of the $19.1 billion in allocated common cooperative equities, $11.9
billion (62 percent) were designated as unallocated retained
earnings equivalents.
---------------------------------------------------------------------------

Finally and most importantly, as previously discussed in the
preamble to the 2017 Capital Rule, the redemptions we allow must be
considered in the context of our overall limitations on capital
distributions.\83\ Under the provisions of FCA's Safe Harbor Deemed
Prior Approval,\84\ all capital distributions by a System institution,
including redemptions of common cooperative equities, dividends, and
cash patronage, are limited to no more than the year-over-year dollar
increase in CET1 capital for any given 12-month period. All other
factors held constant, this in effect limits System institutions to
distributing no more than the current year's net income. By contrast,
national banks have statutory authority to distribute cash dividends in
amounts up to current year's net income plus the retained net income
for the two previous years.\85\ As we noted in the preamble to the 2017
Capital Rule, we believe that our Safe Harbor for equities is
appropriately comparable to Basel III and the U.S. Rule because the
Safe Harbor's broader application to total cash dividend payments, cash
patronage payments, and equity redemptions or revolvements is tempered
by an overall limit that is more restrictive than commercial banks'
safe harbor to pay cash dividends.\86\
---------------------------------------------------------------------------

\83\ See 81 FR 49720, 49731 (July 28, 2016).
\84\ Sec. 628.20(f)(5).
\85\ 12 U.S.C. 60.
\86\ See 81 FR 49720, 49731 (July 28, 2016).
---------------------------------------------------------------------------

IV. Abbreviations

BCBS Basel Committee on Banking Supervision
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
EMNA Eligible Master Netting Agreement
FCA Farm Credit Administration
FDIC Federal Deposit Insurance Corporation
FDI Act Federal Deposit Insurance Corporation Improvement Act of
1991
FFIEC Federal Financial Institutions Examination Council
FR Federal Register
FRB Board of Governors of the Federal Reserve System
GAAP Generally Accepted Accounting Principles (U.S.)
GSE Government-Sponsored Enterprise
GSIB Global Systemically Important Bank
OCC Office of the Comptroller of the Currency
QFC Qualified Financial Contract
QMNA Qualified Master Netting Agreement
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UBE Unincorporated Business Entity
URE Unallocated Retained Earnings
UREE Unallocated Retained Earnings Equivalents
U.S.C. United States Code

[[Page 54356]]

V. Regulatory Analysis

A. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that this final rule will not
have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.

B. Congressional Review Act

Under the provisions of the Congressional Review Act (5 U.S.C. 801
et seq.), the Office of Management and Budget's Office of Information
and Regulatory Affairs has determined that this final rule is not a
``major rule'' as the term is defined at 5 U.S.C. 804(2).

List of Subjects

12 CFR Part 614

Agriculture, Banks, Banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.

12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,
Investments, Rural areas.

12 CFR Part 620

Accounting, Agriculture, Banks, Banking, Reporting and
recordkeeping requirements, Rural areas.

12 CFR Part 628

Accounting, Agriculture, Banks, Banking, Capital, Government
securities, Investments, Rural areas.

For the reasons stated in the preamble, the Farm Credit
Administration amends parts 614, 615, 620, and 628 of chapter VI, title
12 of the Code of Federal Regulations as follows:

PART 614--LOAN POLICIES AND OPERATIONS

0
1. The authority citation for part 614 is revised to read as follows:

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2,
2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10,
3.20, 3.28, 4.12, 4.12A, 4.13B, 4.14, 4.14A, 4.14D, 4.14E, 4.18,
4.18A, 4.19, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17,
7.0, 7.2, 7.6, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12
U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074,
2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131,
2141, 2149, 2183, 2184, 2201, 2202, 2202a, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5);
12 U.S.C. 2121 note; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

0
2. Amend Sec. 614.4351 by revising paragraph (a) to read as follows:

Sec. 614.4351 Computation of lending and leasing limit base.

(a) Lending and leasing limit base. An institution's lending and
leasing limit base is composed of the total capital (tier 1 and tier 2)
of the institution, as defined in Sec. 628.2 of this chapter, with
adjustments applicable to the institution provided for in Sec. 628.22
of this chapter, and with the following further adjustments:
(1) [Reserved]
(2) Eligible third-party capital that is required to be excluded
from total capital under Sec. 628.23 of this chapter may be included
in the lending limit base.
* * * * *

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

0
3. The authority citation for part 615 is revised to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4,
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 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,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); 12 U.S.C. 2154 note; 15 U.S.C. 78o-7 note.

0
4. Revise Sec. 615.5200 to read as follows:

Sec. 615.5200 Capital planning.

(a) The Board of Directors of each System institution shall
determine the amount of regulatory capital needed to assure the System
institution's continued financial viability and to provide for growth
necessary to meet the needs of its borrowers. The minimum capital
standards specified in this part and part 628 of this chapter are not
meant to be adopted as the optimal capital level in the System
institution's capital adequacy plan. Rather, the standards are intended
to serve as minimum levels of capital that each System institution must
maintain to protect against the credit and other general risks inherent
in its operations.
(b) Each Board of Directors shall establish, adopt, and maintain a
formal written capital adequacy plan as a part of the financial plan
required by Sec. 618.8440 of this chapter. The plan shall include the
capital targets that are necessary to achieve the System institution's
capital adequacy goals as well as the minimum permanent capital, common
equity tier 1 (CET1) capital, tier 1 capital, total capital, and tier 1
leverage ratios (including the unallocated retained earnings (URE) and
URE equivalents minimum) standards. The plan shall expressly
acknowledge the continuing and binding effect of all board resolutions
adopted in accordance with Sec. 628.20(b)(1)(xiv), (c)(1)(xiv), and
(d)(1)(xi) of this chapter, and with Sec. 628.21 of this chapter. The
plan shall address any projected dividend payments, patronage payments,
equity retirements, or other action that may decrease the System
institution's capital or the components thereof for which minimum
amounts are required by this part and part 628 of this chapter. The
plan shall set forth the circumstances and minimum timeframes in which
equities may be redeemed or revolved consistent with the System
institution's applicable bylaws or board of directors' resolutions.
(c) In addition to factors that must be considered in meeting the
minimum standards, the board of directors shall also consider at least
the following factors in developing the capital adequacy plan:
(1) Capability of management and the board of directors (the
assessment of which may be a part of the assessments required in
paragraphs (b)(2)(ii) and (b)(7)(i) of Sec. 618.8440 of this chapter);
(2) Quality of operating policies, procedures, and internal
controls;
(3) Quality and quantity of earnings;
(4) Asset quality and the adequacy of the allowance for losses to
absorb potential loss within the loan and lease portfolios;
(5) Sufficiency of liquid funds;
(6) Needs of a System institution's customer base; and
(7) Any other risk-oriented activities, such as funding and
interest rate risks, potential obligations under joint and several
liability, contingent and off-balance-sheet liabilities or other
conditions warranting additional capital.

0
5. Amend Sec. 615.5201 by revising the definition of ``System
institution'' to read as follows:

Sec. 615.5201 Definitions.

* * * * *
System institution means a System bank, an association of the Farm
Credit System, and their successors, and any other institution
chartered by the Farm Credit Administration (FCA) that the FCA
determines should be considered a

[[Page 54357]]

System institution for the purposes of this subpart.
* * * * *

0
6. Amend Sec. 615.5220 by revising paragraph (a)(6) to read as
follows:

Sec. 615.5220 Capitalization bylaws.

(a) * * *
(6) The manner in which equities will be retired, including a
provision stating that equities other than those protected under
section 4.9A of the Act are retireable at the sole discretion of the
board, provided minimum capital adequacy standards established by the
Farm Credit Administration, and the capital requirements established by
the board of directors of the System institution, are met;
* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

0
7. The authority citation for part 620 continues to read as follows:

Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.

0
8. Amend Sec. 620.3 by adding a sentence at the ends of paragraphs (a)
and (c)(3) to read as follows:

Sec. 620.3 Accuracy of reports and assessment of internal control
over financial reporting.

(a) * * * Unless otherwise determined by the Farm Credit
Administration (FCA), the appropriate use of the limited disclosure
authorized by Sec. 628.62(c) of this chapter does not create an
incomplete disclosure.
* * * * *
(c) * * *
(3) * * * If the report contains the limited disclosure authorized
by Sec. 628.62(c) of this chapter, the statement may be modified to
explain that the completeness of the report was determined in
consideration of Sec. 628.62(c).
* * * * *

0
9. Amend Sec. 620.5 by adding paragraph (f)(3)(v) and revising
paragraph (f)(4) to read as follows:

Sec. 620.5 Contents of the annual report to shareholders.

* * * * *
(f) * * *
(3) * * *
(v) Tier 1 leverage ratio.
(4) For all banks (on a bank only basis) and for all associations.
The following ratios shall be disclosed in comparative columnar form in
each annual report through fiscal year end 2021, only as long as these
ratios are part of the previous 5 fiscal years of financial data
required under paragraphs (f)(2) and (3) of this section:
(i) Core surplus ratio.
(ii) Total surplus ratio.
(iii) For banks only, net collateral ratio.
* * * * *

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

0
10. The authority citation for part 628 is revised to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
8.0, 8.3, 8.4, 8.6, 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,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); 12 U.S.C. 2154 note; 15 U.S.C. 78o-7 note.

0
11. Amend Sec. 628.2 by:
0
a. Revising the definition of ``Collateral agreement'';
0
b. Adding in alphabetical order a definition for ``Common cooperative
equity issuance date''; and
0
c. Revising the definitions of ``Eligible margin loan'', ``Qualifying
master netting agreement'', ``Repo-style transaction'', and ``System
institution''.
The revisions and addition read as follows:

Sec. 628.2 Definitions.

* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a System institution for a single financial
contract or for all financial contracts in a netting set and confers
upon the System institution a perfected, first-priority security
interest (notwithstanding the prior security interest of any custodial
agent), or the legal equivalent thereof, in the collateral posted by
the counterparty under the agreement. This security interest must
provide the System institution with a right to close-out the financial
positions and liquidate the collateral upon an event of default of, or
failure to perform by, the counterparty under the collateral agreement.
A contract would not satisfy this requirement if the System
institution's exercise of rights under the agreement may be stayed or
avoided:
(1) Under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to Government-sponsored
enterprises (GSEs), or laws of foreign jurisdictions that are
substantially similar to the U.S. laws referenced in this paragraph
(1)(i) in order to facilitate the orderly resolution of the defaulting
counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(i) of this
definition; or
(2) Other than to the extent necessary for the counterparty to
comply with the requirements of part 47, subpart I of part 252, or part
382 of this title, as applicable.
* * * * *
Common cooperative equity issuance date means the date in which the
holding period for purchased stock (excluding statutory minimum
borrower stock and third-party stock) and allocated equities start:
(1) For allocated equities, the calendar quarter-ending in which:
(i) The System institution's Board of Directors has passed a
resolution declaring a patronage refund; and
(ii) The System institution has completed the applicable accounting
treatment by segregating the new allocated equities from its
unallocated retained earnings.
(2) For purchased stock (excluding statutory minimum borrower stock
and third-party stock), the calendar quarter-ending in which the stock
is acquired by the holder and recognized on the institution's balance
sheet.
* * * * *
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid
and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked-to-fair value daily, and the
transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that
provides the System institution the right to accelerate and terminate
the extension of credit and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
insolvency, liquidation, conservatorship, or similar proceeding, of the
counterparty, provided that, in any such case:
(A) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit

[[Page 54358]]

Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs,\2\ or laws of foreign jurisdictions
that are substantially similar to the U.S. laws referenced in this
paragraph (1)(iii)(A)(1) in order to facilitate the orderly resolution
of the defaulting counterparty; or
---------------------------------------------------------------------------

\2\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------

(2) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of
this definition; and
(B) The agreement may limit the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, subpart I of part 252, or part 382 of
this title, as applicable.
(2) In order to recognize an exposure as an eligible margin loan
for purposes of this subpart, a System institution must comply with the
requirements of Sec. 628.3(b) with respect to that exposure.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the System institution the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, subpart I of part 252, or part 382 of
this title, as applicable;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a System institution
must comply with the requirements of Sec. 628.3(d) with respect to
that agreement.
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the System institution
acts as agent for a customer and indemnifies the customer against loss,
provided that:
(1) The transaction is based solely on liquid and readily
marketable securities, cash, or gold;
(2) The transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements;
(3)(i) The transaction is a ``securities contract'' or ``repurchase
agreement'' under section 555 or 559, respectively, of the Bankruptcy
Code (11 U.S.C. 555 or 559), a qualified financial contract under
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting
contract between or among financial institutions under sections 401-407
of the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in
paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides
the System institution the right to accelerate, terminate, and close-
out the transaction on a net basis and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case:
(1) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate
the orderly resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i)
of this definition; and
(2) The agreement may limit the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, subpart I of part 252, or part 382 of
this title, as applicable; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by
the System institution; and
(2) Executed under an agreement that provides the System
institution the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set-off collateral
promptly upon an event of counterparty default; and
(4) In order to recognize an exposure as a repo-style transaction
for purposes of this subpart, a System institution must comply with the
requirements of Sec. 628.3(e) with respect to that exposure.
* * * * *
System institution means a System bank, an association of the Farm
Credit System, and their successors, and any other institution
chartered by the Farm Credit Administration (FCA) that the FCA
determines should be considered a System institution for the purposes
of this subpart.
* * * * *

0
12. Amend Sec. 628.10 by revising paragraph (c)(4) to read as follows:

Sec. 628.10 Minimum capital requirements.

* * * * *

[[Page 54359]]

(c) * * *
(4) Tier 1 leverage ratio. (i) A System institution's leverage
ratio is the ratio of the institution's tier 1 capital to the
institution's average total consolidated assets as reported on the
institution's Call Report net of deductions and adjustments from tier 1
capital under Sec. Sec. 628.22(a), (b), and (c) and 628.23.
(ii) To calculate the measure of URE and URE equivalents described
in paragraph (b)(4) of this section, a System institution must adjust
URE and URE equivalents to reflect all the deductions and adjustments
required under Sec. 628.22(a), (b), and (c), and must use the
denominator of the tier 1 leverage ratio.
* * * * *

0
13. Amend Sec. 628.20 by revising paragraphs (b)(1)(i), (ii), (x), and
(xiv), (c)(1)(xiv), (d)(1)(i), (d)(1)(viii)(C), (d)(1)(xi), and
(f)(5)(ii) to read as follows:

Sec. 628.20 Capital components and eligibility criteria for tier 1
and tier 2 capital instruments.

* * * * *
(b) * * *
(1) * * *
(i) The instrument is paid-in, issued directly by the System
institution, and represents the most subordinated claim in a
receivership, insolvency, liquidation, or similar proceeding of the
System institution;
(ii) The holder of the instrument is entitled to a claim on the
residual assets of the System institution after all senior claims have
been satisfied in a receivership, insolvency, liquidation, or similar
proceeding;
* * * * *
(x) The System institution, or an entity that the System
institution controls, did not purchase or directly or indirectly fund
the purchase of the instrument, except that where there is an
obligation for a member of the institution to hold an instrument in
order to receive a loan or service from the System institution, an
amount of that loan equal to no more than $1,000 of the borrower stock
requirement under section 4.3A of the Act will not be considered as a
direct or indirect funding where:
(A) The purpose of the loan is not the purchase of capital
instruments of the System institution providing the loan; and
(B) The purchase or acquisition of one or more member equities of
the institution is necessary in order for the beneficiary of the loan
to become a member of the System institution;
* * * * *
(xiv) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
provides that the institution:
(A) Establishes a minimum redemption or revolvement period of 7
years for equities included in CET1; and
(B) Shall not redeem, revolve, cancel, or remove any equities
included in CET1 without prior approval of the FCA under paragraph (f)
of this section, except that the statutory borrower stock described in
paragraph (b)(1)(x) of this section, not to exceed $1,000, may be
redeemed without a minimum period outstanding after issuance and
without the prior approval of the FCA, as long as after the redemption,
the System institution continues to comply with all minimum regulatory
capital requirements.
* * * * *
(c) * * *
(1) * * *
(xiv) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
provides that the institution:
(A) Establishes a minimum redemption or no-call period of 5 years
for equities included in additional tier 1; and
(B) Shall not redeem, revolve, cancel, or remove any equities
included in additional tier 1 capital without prior approval of the FCA
under paragraph (f) of this section.
* * * * *
(d) * * *
(1) * * *
(i) The instrument is issued and paid-in;
* * * * *
(viii) * * *
(C) The capital instruments are in excess of $1,000.
* * * * *
(xi) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
provides that the institution:
(A) Establishes a minimum call, redemption or revolvement period of
5 years for equities included in tier 2 capital; and
(B) Shall not call, redeem, revolve, cancel, or remove any equities
included in tier 2 capital without prior approval of the FCA under
paragraph (f) of this section.
* * * * *
(f) * * *
(5) * * *
(ii) After such cash payments have been declared and defined by
resolution of the board, the dollar amount of the System institution's
CET1 capital at quarter-end equals or exceeds the dollar amount of CET1
capital on the same quarter-end in the previous calendar year; and
* * * * *

0
14. Add Sec. 628.21 to read as follows:

Sec. 628.21 Capital bylaw or board resolution to include equities in
tier 1 and tier 2 capital.

In order to include otherwise eligible purchased and allocated
equities in tier 1 capital and tier 2 capital, the System institution
must adopt a capitalization bylaw, or its board of directors must adopt
a binding resolution, which resolution must be acknowledged by the
board on an annual basis in the capital adequacy plan described in
Sec. 615.5200, in which the institution undertakes the following, as
applicable:
(a) The institution shall obtain prior FCA approval under Sec.
628.20(f) before:
(1) Redeeming or revolving the equities included in common equity
tier 1 (CET1) capital;
(2) Redeeming or calling the equities included in additional tier 1
capital; and
(3) Redeeming, revolving, or calling instruments included in tier 2
capital other than limited life preferred stock or subordinated debt on
the maturity date.
(b) The equities shall have a minimum redemption or revolvement
period as follows:
(1) 7 years for equities included in CET1 capital, except that the
statutory borrower stock described in Sec. 628.20(b)(1)(x) may be
redeemed without a minimum holding period and that equities designated
as unallocated retained earnings (URE) equivalents cannot be revolved
without submitting a written request to the FCA for prior approval;
(2) a minimum no-call, repurchase, or redemption period of 5 years
for additional tier 1 capital; and
(3) a minimum no-call, repurchase, redemption, or revolvement
period of 5 years for tier 2 capital.
(c) The institution shall submit to FCA a written request for prior
approval before:
(1) Redesignating URE equivalents as equities that the institution
may exercise its discretion to redeem other than upon dissolution or
liquidation;
(2) Removing equities or other instruments from CET1, additional
tier 1, or tier 2 capital other than through repurchase, cancellation,
redemption or revolvement; and
(3) Redesignating equities included in one component of regulatory
capital (CET1 capital, additional tier 1 capital, or tier 2 capital)
for inclusion in another component of regulatory capital.
(d) The institution shall not exercise its discretion to revolve
URE

[[Page 54360]]

equivalents except upon dissolution or liquidation and shall not offset
URE equivalents against a loan in default except as required under
final order of a court of competent jurisdiction or if required under
Sec. 615.5290 in connection with a restructuring under part 617 of
this chapter.
(e) The minimum redemption and revolvement period (holding period)
for purchased and allocated equities starts on the common cooperative
equity issuance date, as defined in Sec. 628.2.

0
15. Amend Sec. 628.22 by revising paragraph (a)(6) and adding
paragraph (b) to read as follows:

Sec. 628.22 Regulatory capital adjustments and deductions.

* * * * *
(a) * * *
(6) The System institution's allocated equity investment in another
System institution or service corporation; and
* * * * *
(b) Regulatory adjustments to CET1 capital. (1) Any accrual of a
patronage or dividend payable or receivable recognized in the financial
statements prior to a related board declaration or resolution must be
reversed to or from unallocated retained earnings for purposes of
calculating CET1 capital.
(2) [Reserved]
* * * * *

0
16. Amend Sec. 628.32 by revising paragraph (l)(1) to read as follows:

Sec. 628.32 General risk weights.

* * * * *
(l) * * *
(1) A System institution must assign a 0-percent risk weight to
cash owned and held in all offices of the System institution or in
transit; to gold bullion held in the System institution's own vaults or
held in a depository institution's vaults on an allocated basis, to the
extent the gold bullion assets are offset by gold bullion liabilities;
and to exposures that arise from the settlement of cash transactions
(such as equities, fixed income, spot foreign exchange (FX), and spot
commodities) with a central counterparty where there is no assumption
of ongoing counterparty credit risk by the central counterparty after
settlement of the trade.
* * * * *

0
17. Amend Sec. 628.43 by revising paragraphs (d)(1) and (2) to read as
follows:

Sec. 628.43 Simplified supervisory formula approach (SSFA) and the
gross-up approach.

* * * * *
(d) * * *
(1) The System institution must define the following parameters:

K<INF>A</INF> = (1-W) x K<INF>G</INF> + (0.5 x W)

(2) Then the System institution must calculate K<INF>SSFA</INF>
according to the following equation:
[GRAPHIC] [TIFF OMITTED] TR01OC21.002

Where:
[GRAPHIC] [TIFF OMITTED] TR01OC21.003

* * * * *

0
18. Amend Sec. 628.52 by revising paragraph (c)(2)(ii) to read as
follows:

Sec. 628.52 Simple risk-weight approach (SRWA).

* * * * *
(c) * * *
(2) * * *
(ii) Under the variability-reduction method of measuring
effectiveness:
[GRAPHIC] [TIFF OMITTED] TR01OC21.004

Where:

Xt = At-Bt;
At = the value at time t of one exposure in a hedge pair; and
Bt = the value at time t of the other exposure in a hedge pair.
* * * * *

0
19. Amend Sec. 628.63 by:
0
a. Removing and reserving paragraph (b)(3);
0
b. Revising paragraph (b)(4).
The revision reads as follows:

Sec. 628.63 Disclosures.

* * * * *
(b) * * *
(4) A reconciliation of regulatory capital elements using month-end
balances as they relate to its balance sheet in any applicable audited
consolidated financial statements. The reconciliation must include a
statement that compliance with the regulatory capital requirements
outlined in subpart B of this part is determined using average daily
balances for the most recent 3 months.
* * * * *

[[Page 54361]]

Dated: September 16, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-20433 Filed 9-30-21; 8:45 am]
BILLING CODE P

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