Proposed Rule2024-22865
Unsecured Credit Limits for Federal Home Loan Banks
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 3, 2024
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA or the Agency) proposes to amend its regulation on Federal Home Loan Bank (Bank) capital requirements to modify limits on Bank extensions of unsecured credit in their on- and off-balance sheet and derivative transactions. Currently, overnight federal funds are excluded from the more restrictive "general limit" on unsecured credit to a single counterparty and are limited only by the higher "overall limit." The proposed rule would add interest bearing deposit accounts (IBDAs) and other authorized overnight investments to that exclusion, which may provide greater flexibility and improved cost to yield than overnight federal funds.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 192 (Thursday, October 3, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 192 (Thursday, October 3, 2024)]
[Proposed Rules]
[Pages 80422-80427]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22865]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 89, No. 192 / Thursday, October 3, 2024 /
Proposed Rules
[[Page 80422]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1277
RIN 2590-AB41
Unsecured Credit Limits for Federal Home Loan Banks
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency)
proposes to amend its regulation on Federal Home Loan Bank (Bank)
capital requirements to modify limits on Bank extensions of unsecured
credit in their on- and off-balance sheet and derivative transactions.
Currently, overnight federal funds are excluded from the more
restrictive ``general limit'' on unsecured credit to a single
counterparty and are limited only by the higher ``overall limit.'' The
proposed rule would add interest bearing deposit accounts (IBDAs) and
other authorized overnight investments to that exclusion, which may
provide greater flexibility and improved cost to yield than overnight
federal funds.
DATES: Written comments must be received on or before December 2, 2024.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB41, by any one
of the following methods:
<bullet> Agency website: <a href="https://www.fhfa.gov/regulation/federal-register?comments=open">https://www.fhfa.gov/regulation/federal-register?comments=open</a>.
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at <a href="/cdn-cgi/l/email-protection#abf9cecce8c4c6c6cec5dfd8ebcdc3cdca85ccc4dd"><span class="__cf_email__" data-cfemail="085a6d6f4b6765656d667c7b486e606e69266f677e">[email protected]</span></a> to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB41.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB41,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. Deliver the package at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
<bullet> U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB41, Federal Housing
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please
note that all mail sent to FHFA via U.S. Mail is routed through a
national irradiation facility, a process that may delay delivery by
approximately two weeks. For any time-sensitive correspondence, please
plan accordingly.
FOR FURTHER INFORMATION CONTACT: Jack Phelps, Associate Director,
Division of Bank Regulation, <a href="/cdn-cgi/l/email-protection#eaa08b8981c4ba828f869a99aaaca2acabc48d859c"><span class="__cf_email__" data-cfemail="d993b8bab2f789b1bcb5a9aa999f919f98f7beb6af">[email protected]</span></a>, 202-688-6348; Julie
Paller, Principal Financial Analyst, Division of Bank Regulation,
<a href="/cdn-cgi/l/email-protection#83c9f6efeae6add3e2efefe6f1c3c5cbc5c2ade4ecf5"><span class="__cf_email__" data-cfemail="f6bc839a9f93d8a6979a9a9384b6b0beb0b7d8919980">[email protected]</span></a>, 202-649-3201; or Winston Sale, Assistant General
Counsel, Office of General Counsel, <a href="/cdn-cgi/l/email-protection#e6b18f8895928988c8b5878a83a6808e8087c8818990"><span class="__cf_email__" data-cfemail="65320c0b16110a0b4b3604090025030d03044b020a13">[email protected]</span></a>, 202-649-
3081. These are not toll-free numbers. For TTY/TRS users with hearing
and speech disabilities, dial 711 and ask to be connected to any of the
contact numbers above.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of the notice of proposed
rulemaking and will take all comments into consideration before issuing
a final rule. Comments will be posted to the electronic rulemaking
docket on the FHFA public website at <a href="http://www.fhfa.gov">http://www.fhfa.gov</a>, except as
described below. Commenters should submit only information that the
commenter wishes to make available publicly. FHFA may post only a
single representative example of identical or substantially identical
comments, and in such cases will generally identify the number of
identical or substantially identical comments represented by the posted
example. FHFA may, in its discretion, redact or refrain from posting
all or any portion of any comment that contains content that is
obscene, vulgar, profane, or threatens harm. All comments, including
those that are redacted or not posted, will be retained in their
original form in FHFA's internal rulemaking file and considered as
required by all applicable laws. Commenters that would like FHFA to
consider any portion of their comment exempt from disclosure on the
basis that it contains trade secrets, or financial, confidential or
proprietary data or information, should follow the procedures in
section IV.D. of FHFA's Policy on Communications with Outside Parties
in Connection with FHFA Rulemakings, see <a href="https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf">https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf</a>. FHFA cannot guarantee that such data or information, or the
identity of the commenter, will remain confidential if disclosure is
sought pursuant to an applicable statute or regulation. See 12 CFR
1202.8, 12 CFR 1214.2. and <a href="https://www.fhfa.gov/about/foia-reference-guide">https://www.fhfa.gov/about/foia-reference-guide</a> for additional information.
II. Background
A. The Federal Home Loan Banks and Limits on Unsecured Extensions of
Credit
The eleven Banks are wholesale financial institutions organized
under the Federal Home Loan Bank Act (Bank Act).\1\ Each Bank is a
cooperative managed by its own board of directors.\2\ Only members of a
Bank may purchase the capital stock of a Bank and only members or
certain eligible non-member housing associates (such as state housing
finance agencies) may obtain access to secured loans, known as
advances, or other products provided by a Bank.\3\
---------------------------------------------------------------------------
\1\ See 12 U.S.C. 1423 and 1432(a). The eleven Banks are located
in: Boston, New York, Pittsburgh, Atlanta, Cincinnati, Indianapolis,
Chicago, Des Moines, Dallas, Topeka, and San Francisco.
\2\ See 12 U.S.C. 1427.
\3\ See 12 U.S.C. 1426(a)(4) and (c)(5), 1430(a), and 1430b.
---------------------------------------------------------------------------
The Banks are subject to FHFA's Bank capital regulation, located at
12 CFR part 1277, which sets requirements regarding Bank minimum
capital, Bank capital stock, and Bank capital plans. Subpart B of the
regulation, which governs Bank capital requirements, includes at 12 CFR
1277.7 provisions establishing limits on extensions of unsecured credit
in which the Banks engage when managing their liquidity
[[Page 80423]]
portfolios. Existing Sec. 1277.7(a) establishes for the Banks two
limits on unsecured extensions of credit to a single counterparty,
referred to in the regulation as the ``general limit'' \4\ and the
``overall limit.'' \5\ The functional difference between the two limits
is that the more restrictive general limit excludes sales of federal
funds with a maturity of one day or less and the sales of federal funds
subject to a continuing contract \6\ (collectively, overnight Fed
Funds) from its measurement of extensions of unsecured credit, while
the higher overall limit includes overnight Fed Funds.
---------------------------------------------------------------------------
\4\ See 12 CFR 1277.7(a)(1).
\5\ See 12 CFR 1277.7(a)(2).
\6\ ``The fed funds market is an unsecured, mostly overnight,
over-the counter funding market among banks and government-sponsored
enterprises.'' See Board of Governors of the Federal Reserve System
FEDS Notes (July 11, 2024). By regulation FHFA has defined ``sales
of federal funds subject to a continuing contract'' as ``an
overnight federal funds loan that is automatically renewed each day
unless terminated by either the lender or the borrower.'' 12 CFR
1277.1.
---------------------------------------------------------------------------
The general limit is calculated by multiplying a maximum capital
exposure limit (expressed as a percentage) associated with the
applicable FHFA Credit Rating category of the counterparty by the
lesser of either the Bank's total capital, or the counterparty's Tier 1
capital or total capital (in either case as defined by the
counterparty's principal regulator).\7\ In cases where the counterparty
does not have a regulatory Tier 1 capital or total capital measure, the
Bank would determine a similar capital measure to use.\8\ The overall
limit is set at not more than twice the general limit, which
effectively establishes overnight Fed Funds as a special category of
unsecured extensions of credit subject to a substantially higher limit
than all other unsecured extensions of credit.
---------------------------------------------------------------------------
\7\ See 12 CFR 1277.7(a)(1).
\8\ See 12 CFR 1277.7(a)(1)(ii).
---------------------------------------------------------------------------
The Federal Housing Finance Board (Finance Board), FHFA's
predecessor as regulator of the Banks, established the general and
overall limits in a 2001 final rule addressing the Banks' extensions of
unsecured credit.\9\ The intent of the limits was to prevent undue
concentration of credit in a single counterparty or group of affiliated
counterparties. In the final rule, the Finance Board stated that it had
considered excluding overnight Fed Funds transactions from the
unsecured credit limits because other banking regulators excluded these
transactions from their lending limits. However, it ultimately
concluded that, given the Banks' financial incentives to lend into the
federal funds markets (i.e., the government-sponsored enterprise (GSE)
funding advantage and fewer permissible investments than are available
to commercial banks), permitting such lending without limits would be
imprudent.\10\ FHFA retained that approach when adopting the Finance
Board's capital regulations along with certain amendments in 2019.\11\
The special limit for overnight Fed Funds has not been substantively
revised since 2001, while the Banks and the financial products in which
they may invest have evolved considerably.
---------------------------------------------------------------------------
\9\ See 66 FR 66718 (Dec. 27, 2001).
\10\ 66 FR at 66720-21.
\11\ See 84 FR 5308 (Feb. 20, 2019).
---------------------------------------------------------------------------
B. Developments in Overnight Lending
One of the primary functions of the Banks is to provide advances to
their members. Thus, each Bank must have a large store of liquidity to
meet its own needs and demands for advances from its members, even
during periods of financial market disruption. Each Bank holds asset-
side liquidity, or liquidity assets, on its balance sheet to supplement
its liability-side liquidity, sourced from debt issued in the capital
markets. These liquidity holdings include money market instruments,
certain U.S. Treasury securities, and unencumbered cash. FHFA has
provided guidance to the Banks on maintaining sufficient amounts of
asset-side liquidity to continue regular business during capital market
disruptions in FHFA Advisory Bulletin (AB) 2018-07.\12\ This guidance
states an expectation that asset-side liquidity holdings be readily
convertible to cash with little or no loss in their par value.
---------------------------------------------------------------------------
\12\ Available at: <a href="https://www.fhfa.gov/sites/default/files/2023-06/AB-2018-07-FHLB-Liquidity-Guidance.pdf">https://www.fhfa.gov/sites/default/files/2023-06/AB-2018-07-FHLB-Liquidity-Guidance.pdf</a>.
---------------------------------------------------------------------------
Money market instruments, including overnight Fed Funds, reverse
repurchase agreements (reverse repos),\13\ and IBDA deposits, typically
comprise the largest segment of Bank liquidity holdings to optimize
adherence to the guidance set forth in AB 2018-07. These overnight
money market instruments have no price risk (they are par instruments
that do not fluctuate in value due to interest rate changes), but they
do have small, varying amounts of credit and operational risk.
---------------------------------------------------------------------------
\13\ Reverse repos are overnight or term lending to other
financial institutions secured by securities collateral.
---------------------------------------------------------------------------
Historically, Bank money market holdings consisted of overnight Fed
Funds and reverse repos. Starting in 2014, new liquidity risk
management requirements imposed by members' prudential regulators made
it advantageous for certain insured depositories to offer IBDAs to the
Banks. IBDA deposits are non-maturity deposits (that is, deposits that
the depositor is free to withdraw at any time since there is no defined
contractual maturity date) that a Bank may access whenever Fedwire fund
transfer capabilities are open.\14\ In contrast, overnight Fed Funds
and reverse repos are returned to a Bank from the counterparty the next
trading or banking day and often require a trade commitment early in
the day. Among eligible money market instrument alternatives, IBDAs
provide the most intraday liquidity flexibility for a Bank, as
protocols can be established for the counterparty to return IBDA
deposits to the Bank early each business day and a Bank can wait until
the close of business to commit to redepositing the funds. This
provides the Bank flexibility to meet unexpected, late-day member
advance demand. For these reasons, IBDAs have become a preferred money
market instrument to manage Bank liquidity.
---------------------------------------------------------------------------
\14\ The Federal Reserve System facilitates financial
institutions' exchange of funds between various accounts, including
from a Bank's IBDA account to its account at its local Federal
Reserve Bank. These services are generally available each business
day.
---------------------------------------------------------------------------
Under the existing Bank capital regulation, IBDA deposits are
subject to the general limit on unsecured extensions of credit to a
single counterparty, in addition to the larger overall limit that
includes overnight Fed Funds. This restricts the amount of liquidity
the Banks can manage using IBDAs. From a risk-management perspective,
IBDAs are a well-established money market instrument among the Banks
and have a similar risk profile to overnight Fed Funds. IBDAs and
overnight Fed Funds are both overnight unsecured investments returned
daily and the amount of exposure a Bank can have to any one
counterparty in either investment type depends on the same Bank-
developed internal credit rating methodology for unsecured
counterparties. For these reasons and considering the importance of
IBDAs to Bank liquidity management, subjecting IBDA deposits to the
general limit rather than restricting them only through the higher
overall limit does not provide offsetting safety and soundness
benefits. Revising the regulation to exclude IBDA deposits from the
more restrictive general limit would provide the Banks with greater
flexibility in managing liquidity.
The Federal Home Loan Bank System (Bank System) IBDA deposits have
slowly increased over time relative to total liquidity holdings,
averaging 7.6 percent since January 2019 and peaking
[[Page 80424]]
at 13.6 percent in October 2023. Overnight Fed Funds holdings averaged
43.7 percent over that same time. Despite growth in the Banks' use of
IBDAs, the overnight Fed Funds daily average across the Bank System for
the first six months of 2024 ($91 billion) remains over three times the
volume of IBDA deposits ($27 billion). Under the current general limit,
the maximum permissible IBDA deposit to any one counterparty is only
half of the limit applicable to overnight Fed Funds exposure.
In November 2023, FHFA released its FHLBank System at 100: Focusing
on the Future report (System at 100 Report), culminating FHFA's
comprehensive review of the Bank System.\15\ In the report, FHFA
identified the Banks' ability to meet short-term liquidity needs as an
area that would benefit from modernization.\16\ This proposed rule is
part of FHFA's efforts toward this end.
---------------------------------------------------------------------------
\15\ The System at 100 Report is available at: <a href="https://www.fhfa.gov/sites/default/files/2024-01/FHLBank-System-at-100-Report.pdf">https://www.fhfa.gov/sites/default/files/2024-01/FHLBank-System-at-100-Report.pdf</a>.
\16\ System at 100 Report at 32-33.
---------------------------------------------------------------------------
III. The Proposed Rule
A. Expanding Investments Restricted Only by the Higher Overall Limit--
Sec. Sec. 1277.1 and 1277.7(a)(1)
FHFA is proposing to revise part 1277 of its regulations to exclude
from the general limit on extensions of unsecured credit to a single
counterparty set forth in Sec. 1277.7(a)(1) investments with a
maturity of one day or less where the principal is returned to the Bank
each day. These would include overnight Fed Funds and deposits in banks
or trust companies (such as IBDAs) as defined in Sec. 1267.1, but
would exclude demand accounts in Federal Reserve Banks, as well as
other similar investments that may be approved by FHFA in accordance
with Sec. 1211.3 of its procedures regulation. As discussed further
below, the proposed rule would add to Sec. 1277.1 a new defined term,
``authorized overnight investments,'' to describe these investment
options.
These changes would have the effect of expanding the types of
permissible investments that are subject only to the overall limit on
unsecured credit extensions set forth in Sec. 1277.7(a)(2), a status
that currently applies only to overnight Fed Funds. Overnight Fed Funds
are overnight unsecured investments in approved counterparties, while
IBDA deposits are non-maturity deposits in approved counterparties,
using the same credit standards as, and generally paying a premium
compared to, overnight Fed Funds. For a Bank's IBDA deposit to be
considered an authorized overnight investment under the proposed rule,
the Bank would be required to establish a process by which the
counterparty would return its IBDA deposit daily, which is analogous to
movement of overnight Fed Funds trades.
While IBDA deposits have a similar risk profile to overnight Fed
Funds, FHFA expects that expanding IBDA deposit capacity would benefit
the Banks by increasing the flexibility of their liquidity asset
management. For example, while most reverse repo and overnight Fed
Funds transactions require an early morning trade commitment, IBDA
deposits can move between a Bank and counterparty whenever funds
transfer systems are open, including the end of the business day. By
employing IBDA deposits to manage liquidity, a Bank need not attempt to
accurately anticipate member advance demand before gaining a full
understanding of member liquidity needs and debt issuance conditions
throughout the business day. In a stressed market environment,
developments during the business day can create sudden, unanticipated
late-day advance demand. The proposed exclusion of ``authorized
overnight investments'' from the general limit would allow the Banks to
increase IBDA deposit exposure and therefore retain more cash on hand
to satisfy unexpected late-day member advance needs before committing
excess funds to their IBDA counterparties at the end of the business
day, thereby improving their overall liquidity flexibility.
FHFA expects that expanding the Banks' ability to use IBDA deposits
for liquidity management would further benefit the Banks by reducing
the overall cost of holding liquidity assets due to higher yields
available through IBDAs. Since 2018, the Bank System has achieved a
spread on IBDA deposits above reverse repo and overnight Fed Funds sold
transactions of approximately 7.5 and 6.7 basis points, respectively,
indicating a lower cost to yield against instruments of comparable
risk.
FHFA proposes including in the new definition of ``authorized
overnight investments'' set forth in Sec. 1277.1 the ability to expand
without a rulemaking the types of overnight investments excluded from
the general limit, and therefore subject only to the higher overall
limit, to respond to changes in financial products and market
conditions. The Banks would seek approval for such investments through
the approval process set forth in FHFA's procedures regulation at 12
CFR part 1211. This would allow FHFA to update the instruments
qualifying as authorized overnight investments without amending the
regulation through rulemaking, significantly increasing the speed with
which the Agency could respond to the evolving financial marketplace.
FHFA requests comment on whether, as proposed, unsecured extensions of
credit excluded from the general limit and subject only to the overall
limit should be authorized by FHFA through the regulatory approval
process, or whether any such changes should be subject to notice and
comment rulemaking.
FHFA has considered whether unsecured deposits in non-interest-
bearing deposit accounts such as settlement, payroll, or other
transactional accounts should be considered unsecured extensions of
credit and included in a Bank's calculation of its unsecured credit
limits. Such deposits are considered on-balance sheet transactions
under existing Sec. 1277.7(f)(1)(i) \17\ and therefore must be
considered unsecured extensions of credit and subject to the unsecured
credit limits. Further, nothing in the existing regulation excludes
such deposits from the unsecured credit limits.
---------------------------------------------------------------------------
\17\ This regulatory provision characterizes these accounts as
``amortized cost'' or ``fair value'' items as described in that
calculation, which is generally irrelevant in regard to whether they
should be considered unsecured extensions of credit.
---------------------------------------------------------------------------
For purposes of this proposed rule, whether unsecured deposits in
non-interest-bearing accounts such as settlement or payroll accounts
would count toward the general limit or the overall limit would be
determined by whether they meet the daily repayment requirement of the
proposed definition of ``authorized overnight investments,'' as they
would potentially qualify as ``deposits in banks or trust companies''
under that definition. FHFA is proposing that deposits that are not
returned to the Bank or custodian each day would be subject to the
lesser general limit, while funds that are returned to the Bank or
custodian each day, as set forth in the proposed definition of
``authorized overnight investments,'' would be subject to the greater
overall limit. FHFA requests comment on whether this interpretation of
which accounts would be included in the definition of ``authorized
overnight investments'' would create operational or other safety and
soundness concerns for the Banks or their counterparties.
B. Other Revisions to Sec. 1277.7(a)(1)
The proposed rule would also make several other revisions to Sec.
1277.7(a)(1).
[[Page 80425]]
FHFA proposes adding language to the introductory paragraph clarifying
that measurement of unsecured credit exposure to a single counterparty
also includes intra-day exposure and is not limited to overnight
exposure. This language is intended to clarify FHFA's expectations and
ensure consistency among the Banks in how they manage intra-day
unsecured credit extension exposure.
As discussed above, existing Sec. 1277.7(a)(1) provides that the
general limit is to be calculated by multiplying the maximum capital
exposure limit percentage associated with the applicable FHFA Credit
Rating category of the counterparty by the lesser of either (i) the
Bank's total capital, or (ii) the counterparty's Tier 1 capital, or (if
Tier 1 capital is unavailable) total capital. To provide clarity on
what measure of total capital a Bank should use for purposes of
determining compliance with the general and overall limits and avoid
discrepancies between FHFA's unsecured limit calculations and the
Bank's calculations, the proposed rule would revise Sec.
1277.7(a)(1)(i) to specify that, for purposes of this calculation, a
Bank's total capital is to be calculated as the lesser of the daily
total or the most recent month-end total capital. FHFA does not expect
that the proposed clarification would require the Banks to make any
changes to their current methods of calculating month-end capital or
daily capital. Similarly, Sec. 1277.7(a)(1)(ii) would be revised to
provide that the counterparty's total capital would be measured based
on its most recent regulatory financial report filed with its
appropriate regulator, as defined in 12 CFR 1263.1. FHFA expects that
this proposed revision would provide greater certainty to the Banks
about the measure of capital to use when calculating the regulatory
limits, facilitating compliance review during examinations.
C. Limits on Extensions of Credit to Affiliated Counterparties and
GSEs--Sec. Sec. 1277.7(b) & 1277.7(c)
Existing Sec. 1277.7(b) provides that the total amount of
unsecured extensions of credit by a Bank to a group of affiliated
counterparties, including sales of Fed Funds, shall not exceed 30
percent of the Bank's capital--a limit that applies in addition to the
limits on extensions of unsecured credit to a single counterparty under
Sec. 1277.7(a). As a conforming change, FHFA proposes to revise Sec.
1277.7(b) to replace the references to Fed Funds with references to the
newly-defined ``authorized overnight investments.'' The proposed rule
would also clarify that, for purposes of the affiliated counterparty
limits, a Bank's total capital must be calculated in the same manner as
provided for the single counterparty limits under proposed Sec.
1277.7(a)(1)(i). Similar revisions would also be made to Sec.
1277.7(c), which provides that unsecured extensions of credit to a GSE
that is operating with capital support or another form of direct
financial assistance from the United States government that enables the
GSE to repay those obligations shall not exceed a Bank's total capital.
D. Removing References to Sales of Federal Funds Subject to a
Continuing Contract--Sec. Sec. 1277.1 and 1277.7(d)
Existing Sec. 1277.7(d) provides that if a Bank revises its
internal credit rating for any counterparty or obligation, it must
assign the counterparty or obligation to the appropriate FHFA Credit
Rating category based on the revised rating. If the revised internal
rating results in a lower FHFA Credit Rating category, a Bank need not
unwind or liquidate any existing transaction or position, but any
subsequent extensions of unsecured credit must comply with the maximum
capital exposure limit applicable to that lower rating category. The
provision stipulates that the renewal of an existing unsecured
extension of credit, ``including any decision not to terminate any
sales of federal funds subject to a continuing contract,'' shall be
considered a subsequent extension of unsecured credit that can be
undertaken only in accordance with the lower limit.
The proposed rule would remove from this provision the reference to
``sales of federal funds subject to a continuing contract'' and replace
it with a reference to ``any automatic renewal of an authorized
overnight investment.'' FHFA is not aware of any Bank that participates
in overnight Fed Funds sales that are subject to a continuing contract
and considers the term obsolete. The purpose of the change would be to
ensure that the regulation would address a similar concept to the
extent it would be applicable now or in the future. As described above,
funds in any automatically renewing overnight investment would need to
be transferred to and from the Bank daily to be eligible for treatment
under the overall limit or would otherwise be subject to the lesser
general limit.
Existing Sec. 1277.1 includes a definition of sales of federal
funds subject to a continuing contract, which the proposed rule would
delete, given that the term is obsolete and would no longer be
referenced in the regulation.
E. Clarifying Reporting Requirements
Existing Sec. 1277.7(e)(1) requires each Bank to report to FHFA
monthly on secured and unsecured extensions of credit arising from on-
and off-balance sheet and derivative transactions to any counterparty
and group of affiliated counterparties exceeding five percent of its
total capital or the counterparty's or affiliated counterparties' Tier
1 capital or total capital. Existing Sec. 1277.7(e)(2) also requires
each Bank to report to FHFA monthly on total secured and unsecured
extensions of credit arising from on- and off-balance sheet and
derivative transactions to any single counterparty or group of
affiliated counterparties exceeding five percent of the Bank's total
assets. FHFA is proposing to revise Sec. 1277.7(e)(1) and (2) to
replace the descriptions of the specific reporting requirements with
new language referencing FHFA's Data Reporting Manual (DRM),\18\ which
sets forth detailed data reporting requirements for the Banks and in
accordance with which the Banks are required to report under Sec.
1277.8.
---------------------------------------------------------------------------
\18\ As defined in 12 CFR 1201.1 the ``Data Reporting Manual or
DRM'' means a manual issued by FHFA and amended from time to time
containing reporting requirements for the Regulated Entities. The
DRM is one method through which FHFA implements its statutory
authority under 12 U.S.C. 4514 to require regular and special
reports from its regulated entities and communicates those
requirements.
---------------------------------------------------------------------------
The DRM sets forth specific requirements for the reporting of
unsecured credit data by each Bank, including data required to be
reported under Sec. 1277.7(e)(1) and (2). Since FHFA collects
comprehensive information on secured and unsecured credit exposure
through its DRM requirements, the detailed requirements in Sec.
1277.7(e)(1) and (2) are redundant. FHFA proposes deleting them to
avoid confusion and the possibility that the regulatory text may
conflict with the DRM reporting requirements as FHFA's supervisory
reporting needs evolve. FHFA proposes to retain the violation self-
reporting requirement of Sec. 1277.7(e)(3), which is not currently
covered in the DRM, and redesignate it as Sec. 1277.7(e)(2).
Existing Sec. 1277.7(e)(3) requires that a Bank ``report promptly
to FHFA'' any extension of unsecured credit that exceeds any limit set
forth in Sec. 1277.7(a), (b), or (c). FHFA requests comment on whether
the use of the term ``promptly'' in 1277.7(e)(3) is too ambiguous and
open to different interpretations given the seriousness of the context
and, if so, whether it should be revised to reference a more specific
timeframe such as ``two business days.''
[[Page 80426]]
FHFA also requests comment on whether the provision should explicitly
address how to notify FHFA in situations where the Bank may not
identify a violation until well after the event occurred.
In coordination with the proposed revisions to the reporting
requirements in 1277.7(e), FHFA proposes to add language clarifying
FHFA's expectations regarding credit exposure reporting to Sec.
1277.8. To avoid any ambiguity, FHFA proposes to add language
highlighting that the Banks' reporting on matters addressed by part
1277 under the DRM includes information related to secured and
unsecured credit exposures and extensions of credit in excess of
limits, in addition to capital information. Banks would be required to
report this information in accordance with the instructions provided in
the DRM.
IV. Considerations of Differences Between the Banks and the Enterprises
Section 1313(f) of the Safety and Soundness Act requires the
Director of FHFA, when promulgating regulations relating to the Banks,
to consider the differences between the Banks and the Enterprises
(Fannie Mae and Freddie Mac) as they relate to: the Banks' cooperative
ownership structure; the mission of providing liquidity to members; the
affordable housing and community development mission; their capital
structure; and their joint and several liability.\19\ The Director also
may consider any other differences that are deemed appropriate. In
preparing this proposed rule, the Director considered the differences
between the Banks and the Enterprises as they relate to the above
factors and determined that the rule is appropriate. FHFA requests
comments regarding whether differences related to those factors should
result in any revisions to the proposed rule.
---------------------------------------------------------------------------
\19\ See 12 U.S.C. 4513.
---------------------------------------------------------------------------
V. Paperwork Reduction Act
The proposed rule would not contain any changes to information
collection requirements that would require the approval of the Office
of Management and Budget (OMB) under the Paperwork Reduction Act.\20\
Therefore, FHFA has not submitted any information to OMB for review.
---------------------------------------------------------------------------
\20\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act \21\ (RFA) requires that a
regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. Such an analysis need not be
undertaken if the agency has certified that the regulation will not
have a significant economic impact on a substantial number of small
entities.\22\ FHFA has considered the impact of the proposed rule under
the RFA. FHFA certifies that the proposed rule, if adopted as a final
rule, would not have a significant economic impact on a substantial
number of small entities because the proposed rule applies only to the
Banks, which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------
\21\ 5 U.S.C. 601 et seq.
\22\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
VII. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 \23\
requires that a notice of proposed rulemaking include the internet
address of a summary of not more than 100 words in length of a proposed
rule, in plain language, that shall be posted on the internet website
under section 206(d) of the E-Government Act of 2002 \24\ (commonly
known as <a href="http://Regulations.gov">Regulations.gov</a>). FHFA's proposal and the required summary can
be found at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
---------------------------------------------------------------------------
\23\ 5 U.S.C. 553(b)(4).
\24\ 44 U.S.C. 3501 note.
---------------------------------------------------------------------------
List of Subjects for 12 CFR Part 1277
Capital, Credit, Federal home loan banks, Investments, Reporting
and recordkeeping requirements.
Accordingly, for reasons stated in the Preamble, and under the
authority of 12 U.S.C. 1426, 1436(a), 1440, 1443, 1446, 4511, 4513,
4514, 4526, 4612, FHFA proposes to amend subchapter D of chapter XII of
title 12 of the Code of Federal Regulations as follows:
PART 1277--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS, CAPITAL
STOCK AND CAPITAL PLANS
0
1. The authority citation for part 1277 continues to read as follows:
Authority: 12 U.S.C. 1426, 1436(a), 1440, 1443, 1446, 4511,
4513, 4514, 4526, and 4612.
0
2. Amend Sec. 1277.1 by removing the definition of ``Sales of federal
funds subject to a continuing contract'' and adding the definition of
``Authorized overnight investments'' in alphabetical order to read as
follows:
Sec. 1277.1 Definitions.
* * * * *
Authorized overnight investments means an investment with a
maturity of one day or less where the principal is returned to the Bank
or custodian each day, including sales of federal funds (known as
Federal funds sold), deposits in banks or trust companies as defined in
Sec. 1267.1 of this chapter, but excluding demand accounts in Federal
Reserve Banks, and other similar investments approved by FHFA in
accordance with Sec. 1211.3 of this chapter.
* * * * *
0
3. Amend Sec. 1277.7 by revising paragraphs (a)(1) and (2), and (b),
(c), (d), and (e) to read as follows:
Sec. 1277.7 Limits on unsecured extensions of credit; reporting
requirements.
(a) * * *
(1) General limits. All unsecured extensions of credit by a Bank to
a single counterparty that arise from the Bank's on- and off-balance
sheet and derivative transactions, including intra-day exposure (but
excluding authorized overnight investments) shall not exceed the
product of the maximum capital exposure limit applicable to such
counterparty, as determined in accordance with the following Table 1 to
this section, multiplied by the lesser of:
(i) The Bank's total capital calculated as the lesser of the daily
total or the most recent month end; or
(ii) The counterparty's Tier 1 capital, or if Tier 1 capital is not
available, total capital (in each case as defined by the counterparty's
appropriate regulator, as defined in Sec. 1263.1 of this chapter) or
some similar comparable measure identified by the Bank based on the
counterparty's most recent regulatory financial report filed with its
appropriate regulator.
(2) Overall limits including authorized overnight investments. All
unsecured extensions of credit by a Bank to a single counterparty that
arise from the Bank's on- and off-balance sheet and derivative
transactions, including authorized overnight investments, shall not
exceed twice the limit calculated pursuant to paragraph (a)(1) of this
section.
* * * * *
(b) Unsecured extensions of credit to affiliated counterparties--
(1) In general. The total amount of unsecured extensions of credit by a
Bank to a group of affiliated counterparties that arise from the Bank's
on- and off-balance sheet and derivative transactions, including
authorized overnight
[[Page 80427]]
investments, shall not exceed 30 percent of the Bank's total capital as
calculated in accordance with paragraph (a)(1)(i) of this section.
(2) Relation to individual limits. The aggregate limits calculated
under paragraph (b)(1) of this section shall apply in addition to the
limits on extensions of unsecured credit to a single counterparty
imposed by paragraph (a) of this section.
(c) Special limits for certain GSEs. Unsecured extensions of credit
by a Bank that arise from the Bank's on- and off-balance sheet and
derivative transactions, including from the purchase of any authorized
overnight investments, with a GSE that is operating with capital
support or another form of direct financial assistance from the United
States government that enables the GSE to repay those obligations,
shall not exceed the Bank's total capital as calculated in accordance
with paragraph (a)(1)(i) of this section.
(d) Extensions of unsecured credit after reduced rating. If a Bank
revises its internal credit rating for any counterparty or obligation,
it shall assign the counterparty or obligation to the appropriate FHFA
Credit Rating category based on the revised rating. If the revised
internal rating results in a lower FHFA Credit Rating category, then
any subsequent extensions of unsecured credit shall comply with the
maximum capital exposure limit applicable to that lower rating
category, but a Bank need not unwind or liquidate any existing
transaction or position that complied with the limits of this section
at the time it was entered. For purposes of this paragraph (d), the
renewal of an existing unsecured extension of credit, including any
decision not to terminate any automatic renewal of an authorized
overnight investment, shall be considered a subsequent extension of
unsecured credit that can be undertaken only in accordance with the
lower limit.
(e) Reporting requirements--(1) Secured and unsecured extensions of
credit. Each Bank shall report to FHFA information concerning the
Bank's secured and unsecured extensions of credit arising from on- and
off-balance sheet and derivative transactions to any counterparty and
group of affiliated counterparties, including information related to
the Bank's total capital, the counterparty's total capital, and
assigned FHFA Credit Rating category per Table 1 to Sec. 1277.7 of
this part, in accordance with instructions provided in the FHFA Data
Reporting Manual as required in Sec. 1277.8.
(2) Extensions of credit in excess of limits. A Bank shall report
promptly to FHFA any extension of unsecured credit that exceeds any
limit set forth in paragraph (a), (b), or (c) of this section. In
making this report, a Bank shall provide the name of the counterparty
or group of affiliated counterparties to which the excess unsecured
credit has been extended, the dollar amount of the applicable limit
which has been exceeded, the dollar amount by which the Bank's
extension of unsecured credit exceeds such limit, the dates for which
the Bank was not in compliance with the limit, and a brief explanation
of the circumstances that caused the limit to be exceeded.
* * * * *
0
4. Revise Sec. 1277.8 to read as follows:
Sec. 1277.8 Reporting requirements.
Each Bank shall report information related to capital, secured and
unsecured credit exposures, extensions of credit in excess of limits,
and other matters addressed by this part in accordance with
instructions provided in the Data Reporting Manual issued by FHFA, as
amended from time to time.
Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2024-22865 Filed 10-2-24; 8:45 am]
BILLING CODE 8070-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on October 3, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.