[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Proposed Rules]
[Pages 30784-30791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12333]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1267, 1269, and 1270

RIN 2590-AA40


Removal of References to Credit Ratings in Certain Regulations 
Governing the Federal Home Loan Banks

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking; request for comment.

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SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) requires Federal agencies to review 
regulations that require the use of an assessment of the credit-
worthiness of a security or money market instrument and any references 
to, or requirements in, such regulations regarding credit ratings 
issued by credit rating organizations registered with the Securities 
and Exchange Commission (SEC) as nationally recognized statistical 
rating organizations (NRSROs), and to remove such references or 
requirements. To implement this provision, the Federal Housing Finance 
Agency (FHFA) is proposing to remove a number of references and 
requirements in certain safety and soundness regulations affecting the 
Federal Home Loan Banks (Banks) and to adopt new provisions that would 
require the Banks to apply internal analytic standards and criteria to 
determine the credit quality of a security or obligation, subject to 
FHFA oversight and review through the examination and supervisory 
process. FHFA will undertake separate rulemakings to remove NRSRO 
references and requirements contained in the capital regulations 
applicable to the Banks and in the regulations governing the Banks' 
acquired member asset (AMA) programs.

DATES: Comments on the proposed rule must be received on or before July 
22, 2013.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AA40 by any of 
the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comments to the Federal eRulemaking Portal, please also send it by 
email to FHFA at RegComments@FHFA.gov to ensure timely receipt by the 
agency. Please include ``RIN 2590-AA40'' in the subject line of the 
message.

[[Page 30785]]

     Email: Comments to Alfred M. Pollard, General Counsel may 
be sent by email to RegComments@FHFA.gov. Please include ``RIN 2590-
AA40'' in the subject line of the message.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA40, 
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth 
Floor, 400 Seventh Street SW., Washington, DC 20024. The package should 
be logged at the Seventh Street entrance Guard Desk, First Floor, on 
business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA40, Federal 
Housing Finance Agency, Constitution Center, (OGC) Eighth Floor, 400 
Seventh Street SW., Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Amy Bogdon, Associate Director for 
Regulatory Policy and Programs, Amy.Bogdon@FHFA.gov, 202-649-3320, 
Division of Federal Home Loan Bank Regulation, Federal Housing Finance 
Agency; or Thomas E. Joseph, Associate General Counsel, 
Thomas.Joseph@FHFA.gov, 202-649-3076 (these are not toll-free numbers), 
Office of General Counsel (OGC), Federal Housing Finance Agency, 
Constitution Center, Eighth Floor, 400 Seventh Street SW., Washington, 
DC 20024. The telephone number for the Telecommunications Device for 
the Hearing Impaired is 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comments on all aspects of the Notice of Proposed 
Rulemaking (NPR), and will develop final regulations after taking all 
comments into consideration. Copies of all comments will be posted 
without change, including any personal information you may provide such 
as your name and address (mailing or email) and telephone numbers, on 
the internet Web site at https://www.fhfa.gov. In addition, copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m., at the 
Federal Housing Finance Agency, Constitution Center, (OGC) Eighth 
Floor, 400 Seventh Street SW., Washington, DC 20024. To make an 
appointment to inspect comments, please call the Office of General 
Counsel at 202-649-3804.

II. Background

A. Dodd-Frank Act Provisions

    Section 939A of the Dodd-Frank Act requires federal agencies to: 
(i) Review regulations that require the use of an assessment of the 
creditworthiness of a security or money market instrument; and (ii) to 
the extent those regulations contain any references to, or requirements 
regarding credit ratings, remove such references or requirements. See 
section 939A, Public Law 111-203, 124 Stat. 1887 (July 21, 2010). In 
place of such credit-rating based requirements, agencies are instructed 
to substitute appropriate standards for determining creditworthiness. 
The new law further provides that, to the extent feasible, an agency 
should adopt a uniform standard of creditworthiness for use in its 
regulations, taking into account the entities regulated by it and the 
purposes for which such regulated entities would rely on the 
creditworthiness standard.

B. The Bank System

    The twelve Banks are wholesale financial institutions organized 
under the Federal Home Loan Bank Act (Bank Act).\1\ The Banks are 
cooperatives; only members of a Bank may purchase the capital stock of 
a Bank, and only members or certain eligible housing associates (such 
as state housing finance agencies) may obtain access to secured loans, 
known as advances, or other products provided by a Bank.\2\ Each Bank 
is managed by its own board of directors and serves the public interest 
by enhancing the availability of residential credit through its member 
institutions.\3\ Any eligible institution (generally a federally 
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock.\4\
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    \1\ See 12 U.S.C. 1423, 1432(a).
    \2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
    \3\ See 12 U.S.C. 1427.
    \4\ See 12 U.S.C. 1424; 12 CFR part 1263.
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    As government-sponsored enterprises, the Banks are granted certain 
privileges under federal law. In light of those privileges, the Banks 
typically can borrow funds at spreads over the rates on U.S. Treasury 
securities of comparable maturity lower than most other entities. The 
Banks pass along a portion of their funding advantage to their 
members--and ultimately to consumers--by providing advances and other 
financial services at rates that would not otherwise be available to 
their members. Consolidated obligations (COs), consisting of bonds and 
discount notes, are the principal funding source for the Banks. The 
Bank System's Office of Finance (OF) issues all COs on behalf of the 
twelve Banks. Although each Bank is primarily liable for the portion of 
COs corresponding to the proceeds received by that Bank, each Bank is 
also jointly and severally liable with the other eleven Banks for the 
payment of principal and interest on all COs.\5\
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    \5\ See 12 U.S.C. 1431(c); 12 CFR 1270.10.
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C. Advance Notice of Proposed Rulemaking

    On January 31, 2011, FHFA published an advance notice of proposed 
rulemaking (ANPR) in which it solicited comments from the public on 
potential alternatives to the use of NRSRO credit ratings in its 
regulations applicable to the Banks, as well as in its regulations 
applicable to the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation (collectively, the Enterprises).\6\ 
Prior to issuing the ANPR, FHFA also had issued a proposed rule on Bank 
liabilities and COs, which, among other things, would have combined and 
re-designated a number of existing regulations as new part 1270 of the 
FHFA rules.\7\ In the preamble for the proposed rule on Bank 
Liabilities, FHFA asked for comments on implementing section 939A of 
the Dodd-Frank Act with regard to certain provisions addressed in that 
rulemaking but did not propose specific amendments related to section 
939A at that time. FHFA ultimately decided to adopt the Bank Liability 
Rule without amending those provisions that referenced credit ratings 
but noted that it would propose changes to those provisions as part of 
a future rulemaking.\8\ It also stated that it would consider relevant 
comments made on the part 1270 rules, along with the comments received 
on the ANPR, as part of such rulemaking.
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    \6\ See Advance Notice of Proposed Rulemaking, Alternatives to 
Use of Credit Ratings in Regulations Governing the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation, 
and the Federal Home Loan Banks, 76 FR 5292 (Jan. 31, 2011).
    \7\ See Proposed Rule: Federal Home Loan Bank Liabilities, 75 FR 
68534, 68536-38 (Nov. 8, 2010) (Bank Liability Rule).
    \8\ See Final Rule: Federal Home Loan Bank Liabilities, 76 FR 
18366, 18368 (Apr. 4, 2011) (adopting 12 CFR part 1270).
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    FHFA received nine comment letters on the ANPR. It also received 
five comment letters on the proposed Bank Liability Rule, all but one 
of which addressed issues related to the implementation of section 939A 
of the

[[Page 30786]]

Dodd-Frank Act.\9\ These comments generally supported an approach to 
implementing section 939A of the Dodd-Frank Act that would allow the 
Banks and the Enterprises flexibility to develop internal processes and 
procedures for measuring, monitoring, and controlling the credit risk 
of specific assets and obligations. Many of the comments also stated 
that the Dodd-Frank Act did not prohibit use of NRSRO or other third 
party credit analytics as part of any internal process as long as such 
use was not mandated by FHFA and the entity undertook its own analysis 
of the appropriateness of any rating or third party analytics. A number 
of commenters believed that any proposed new credit standards should 
not be unduly burdensome or costly to implement and should recognize 
difference in risk profiles among different counterparties, assets or 
obligations. The comments received are discussed in more detail below 
to the extent that they are relevant to the specific provisions being 
addressed in this notice of proposed rulemaking.
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    \9\ In addition, FHFA staff met with an outside party who 
provided comments concerning certain minimum credit rating 
requirements for insurance companies in the AMA regulation.
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    While the ANPR addressed all FHFA regulations that referenced or 
otherwise applied requirements based on credit ratings, this proposed 
rulemaking only addresses Bank safety and soundness regulations that 
reference or contain requirements based on credit ratings found in 
parts 1267 (Federal Home Loan Bank Investments), 1269 (Standby Letters 
of Credit), and 1270 (Liabilities) of the FHFA regulations. FHFA 
intends to undertake separate rulemakings to remove references to and 
requirements based on NRSRO credit ratings in the Bank AMA regulations 
as well as to revise and remove NRSRO rating related references and 
requirements in the Bank capital and related rules found at part 932 of 
the former Federal Housing Finance Board regulations.\10\
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    \10\ See 12 CFR part 955 (AMA rules); 12 CFR part 932 (Bank 
capital and related rules). Effective July 30, 2008, the Housing and 
Economic Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 
2654, created FHFA as a new independent agency of the Federal 
Government, and transferred to FHFA the supervisory and oversight 
responsibilities of the Office of Federal Housing Enterprise 
Oversight (OFHEO) over the Enterprises, and the supervisory and 
oversight responsibilities of the Federal Housing Finance Board over 
the Banks and the OF. See id. at section 1101, 122 Stat. 2661-62. 
The Enterprises, the Banks, and the OF continue to operate under 
regulations promulgated by OFHEO and the Finance Board until FHFA 
issues regulations that supersede those regulations. See id. at 
sections 1302, 1312, 122 Stat. 2795, 2798.
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    Finally, FHFA has determined not to amend part 1273 of its 
regulations to remove references to NRSROs found in Sec.  1273.6(d) of 
its rules.\11\ As FHFA noted in the ANPR, this provision assigns to OF 
the responsibility to manage the Bank System's relationship with 
NRSROs, if NRSRO ratings are considered necessary or desirable in 
connection with the issuance and sale of COs.\12\ The provision does 
not prohibit any action or mandate any particular action be taken by 
the Banks or OF based on NRSRO ratings. Therefore, FHFA believes this 
provision is outside the scope of the requirements in section 939A of 
the Dodd-Frank Act and need not be changed.\13\
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    \11\ 12 CFR 1273.6(d).
    \12\ See 76 FR at 5295.
    \13\ No commenters disagreed with FHFA's statement in the ANPR 
that Sec.  1273.6(d) appeared outside the scope of section 939A of 
the Dodd-Frank Act.
     FHFA is not undertaking as part of these Bank-related 
rulemakings the removal of specific references to NRSRO ratings in 
safety and soundness or capital regulations applicable to the 
Enterprises. As FHFA noted in the ANPR, the references to NRSRO 
ratings in the Enterprise safety and soundness regulations do not 
require the Enterprises to take or refrain from specific actions 
based on those ratings and therefore appear outside the scope of 
section 939A of the Dodd-Frank Act. See 76 FR at 5294. FHFA also 
noted that the Enterprise statutory and regulatory capital 
requirements, including those regulatory requirements that 
referenced NRSRO ratings, were not binding on the Enterprises for 
the duration of the current conservatorships, although FHFA 
recognized that it might have to develop and adopt new risk-based 
capital requirements for the Enterprises or their successors in a 
post-conservatorship environment. Id.
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D. Actions of Other Regulators

    In formulating this proposed rule, FHFA also considered actions 
taken by other regulators to implement section 939A of Dodd-Frank with 
respect to similar regulations, including actions by SEC, the Commodity 
Futures Trading Commission (CFTC), the Federal Deposit Insurance 
Corporation (FDIC), the National Credit Union Administration (NCUA), 
the Office of the Comptroller of the Currency (OCC) and the Federal 
Reserve Board (FRB).
    The FHFA recognizes, as have the other federal regulatory agencies, 
that existing references to credit ratings generally serve several 
regulatory purposes including those related to capital adequacy, 
investment acceptability, risk assessment, and disclosure. Agencies 
that have proposed or finalized regulations in line with the 
requirements of section 939A of the Dodd-Frank Act have taken one or 
more of the following actions: (i) Removed and not replaced references 
to credit ratings; (ii) prohibited certain high risk activities 
altogether; (iii) established new definitions for minimum credit 
standards with an emphasis on repayment capacity and risk of default; 
(iv) replaced creditworthiness standards that previously referenced 
credit ratings with standards that evaluate other common credit 
criteria; (v) eliminated any undue reliance on third-party credit 
ratings; and/or (vi) re-emphasized and promoted sound and effective 
governance, (credit) risk management, due diligence, and documentation 
practices.
    The final rules that the NCUA, FDIC, and OCC adopted regarding 
investments are most relevant to this rulemaking.\14\ In their 
rulemakings, the FDIC and OCC redefined an ``investment grade'' 
security as one where the issuer has an adequate capacity to meet all 
financial commitments under the security for the projected life of the 
security. To meet this new standard, national banks and federal and 
state savings associations must determine that the risk of default by 
the obligor is low and that the full and timely repayment of principal 
and interest is expected. Both agencies also published guidance to 
assist their regulated institutions in complying with the new 
regulations.\15\ Similarly, the NCUA replaced minimum rating 
requirements with a requirement that the federal credit union or 
corporate credit union conduct and document a credit analysis 
demonstrating that the issuer of the security has a certain, specified 
capacity to meet its financial commitments. For regulations pertaining 
to counterparty transactions, the NCUA's final rule replaced minimum 
rating requirements with a requirement that the credit union conduct a 
credit analysis of the counterparty based on a standard approved by the 
credit union's board of directors.
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    \14\ See Final Rule: Alternatives to the Use of Credit Ratings, 
77 FR 74103 (Dec. 13, 2012) (NCUA); Final Rule: Permissible 
Investments for Federal and State Savings Associations: Corporate 
Debt Securities, 77 FR 43151 (Jul. 24, 2012) (FDIC); and Final Rule: 
Alternatives to the Use of External Credit Ratings in the 
Regulations of the OCC, 77 FR 35253 (Jun. 13, 2012) (OCC).
    \15\ See Guidance on Due Diligence Requirements for Savings 
Associations in Determining Whether a Corporate Debt Security Is 
Eligible for Investment, 77 FR 43155 (Jul. 24, 2012) (FDIC); and 
Guidance on Due Diligence Requirements in Determining Whether 
Securities Are Eligible for Investment, 77 FR 35259 (Jun. 13, 2012) 
(OCC).
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E. Considerations of Differences Between the Banks and the Enterprises

    When promulgating regulations relating to the Banks, section 
1313(f) of the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (Safety and Soundness Act), as amended by section 
1201 of HERA, requires the Director of FHFA (Director) to consider the 
differences between the Banks and the Enterprises with respect

[[Page 30787]]

to the Banks' cooperative ownership structure; mission of providing 
liquidity to members; affordable housing and community development 
mission; capital structure; and joint and several liability.\16\ The 
Director also may consider any other differences that are deemed 
appropriate. The changes proposed in this rulemaking apply exclusively 
to the Banks. FHFA, in preparing this proposed rule, considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors. FHFA, however, requests comments from the public about 
whether these differences should result in any revisions to the 
proposed rules.
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    \16\ See 12 U.S.C. 4513 (as amended by section 1201 Pub. L. 110-
289, 122 Stat. 2782-83).
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III. Proposed Amendments to Parts 1267, 1269, and 1270 of the FHFA 
Regulations

    As noted in the ANPR and above, a number of requirements in FHFA 
regulations impose limits on Bank activity or investments or otherwise 
require the Banks to take certain actions based on NRSRO credit 
ratings. To remove these requirements, FHFA is proposing to require the 
Banks to base determinations about the appropriateness of specific 
investments or activities on their own documented analyses of credit 
and other risks. FHFA has a long standing expectation that Banks apply, 
demonstrate and document appropriate risk management in the assumption 
and extension of credit risk. The analyses required will be subject to 
FHFA oversight and review through the examination and supervisory 
process. FHFA's expectations with respect to appropriate standards for 
assessing creditworthiness under this proposal are described in more 
detail below.

A. Part 1267 Rules--Investments

    A number of provisions in the investment regulation limit Bank 
investments by reference to the rating issued by an NRSRO for a 
particular instrument. First, the Banks are prohibited from investing 
in any debt instrument that is rated below investment grade by an NRSRO 
at the time the investment is made.\17\ Another provision, which sets 
forth exceptions to a general prohibition on a Bank's investment in 
mortgages or other whole loans, specifically allows for investment in 
marketable direct obligations of state, local, or tribal government 
units or agencies, having at least the second highest credit rating 
from an NRSRO where the purchase would generate customized terms, 
necessary liquidity, or favorable pricing for the issuer's funding of 
housing or community lending.\18\
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    \17\ See 12 CFR 1267.3(a)(3).
    \18\ See 12 CFR 1267.3(a)(4)(iii).
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    To remove references to NRSRO credit ratings from these provisions, 
FHFA is proposing to add a new defined term ``investment quality'' to 
Sec.  1267.1 of its rules while removing the current definitions for 
``investment grade'' and ``NRSRO'' from that provision. FHFA would then 
substitute the term ``investment quality'' for the two references to 
``investment grade'' in Sec.  1267.3(a) and for the reference to 
``second highest credit rating from an NRSRO'' in Sec.  
1267.3(a)(4)(iii).
    Under the proposed rule, ``investment quality'' would be defined as 
a determination made by a Bank that there is adequate financial backing 
for any security or obligation so that full and timely payment of 
principal and interest is expected, and there is only minimal risk that 
such timely payment would not occur because of adverse changes in 
financial or economic conditions over the life of the instrument. This 
Bank determination must be based on well documented internal analysis 
that would include consideration of the sources for repayment on a 
particular security or obligation.
    FHFA believes that the proposed definition would allow Banks to 
build upon their current internal credit risk assessment and management 
practices and provide flexibility to consider differences in credit 
quality of different investments--considerations which were supported 
by many commenters to the ANPR. By requiring the Banks to consider 
sources of repayment for a particular instrument, the proposed 
definition also would allow the Banks to consider guarantees or other 
credit enhancements when determining the credit quality of a particular 
investment. FHFA emphasizes that under the proposed definition a Bank 
must document its analysis as to the credit quality of a particular 
instrument so FHFA would be able to review these decisions as part of 
its supervisory and examination process and thereby help ensure 
consistency and rigor in the analysis across all Banks.
    Factors the Banks may consider in evaluating the creditworthiness 
of a security or other obligation include, but are not limited to, 
internal or external credit risk assessments, including scenario 
analysis; security or asset-class related research; credit analysis of 
cash flow and debt service projections; credit spreads for like 
financial instruments; loss distributions, default rates, and other 
statistics; relevant market data, for example, bid-ask spreads, most 
recent sales price, and historical price volatility, trading volume, 
implied market rating, and size, depth and concentration level of the 
market for the investment; local and regional economic conditions; 
legal or other contractual implications to credit and repayment risk; 
underwriting, performance measures and triggers; and other financial 
instrument covenants and considerations. FHFA notes that some 
commenters to the ANPR believed that FHFA should not eliminate 
references to credit ratings in its rules but should instead adopt 
specific standards that would help ensure an NRSRO would be independent 
from an issuer of a security or would meet other specific 
qualifications. Other commenters believed that any proposal should not 
prevent the Banks from using NRSRO ratings as part of any credit 
analysis. While FHFA believes that mandating any use or reliance on 
NRSRO credit ratings in the investment regulation would be inconsistent 
with the Dodd-Frank Act provisions, the proposed definition of 
``investment quality'' would not prevent a Bank from using NRSRO 
ratings or other third party analytics in its credit determination so 
long as the Bank does not rely principally on such rating or third 
party analysis. Instead, FHFA expects that such determination will be 
driven primarily by the Bank's own internal analysis of market and 
other external data and relevant financial information, including the 
size and complexity of the financial instrument and the Bank's own risk 
appetite and risk assessment framework. This approach is consistent 
with the existing FHFA supervisory expectation that the Banks have in 
place appropriate credit risk management and due diligence review 
processes.
    Under the new language proposed for Sec.  1267.3(a), a Bank would 
need to make its determination concerning the credit quality of a debt 
instrument prior to purchasing such instrument. If the Bank determined 
that the instrument did not meet its criteria to be considered 
``investment quality'' consistent with the proposed definition of that 
term discussed above the Bank would be prohibited from purchasing the 
debt instrument. If the Bank determined that the instrument is 
``investment quality,'' the Bank would be permitted to purchase it.
    As part of its risk management and monitoring process, FHFA expects 
a Bank to periodically update its analysis with regard to any debt 
instruments

[[Page 30788]]

purchased to determine whether they continue to meet criteria to be 
considered ``investment quality'' as well as to meet other safety, 
soundness, and business objectives. The Bank would also be expected to 
develop appropriate strategies to respond to a decline in the credit 
quality of its investments, consistent with then-current market and 
financial conditions and considerations. Under proposed Sec.  
1267.(3)(a)(ii), however, the Bank would not be required to sell a debt 
instrument if subsequent analysis indicated the instrument became less 
than ``investment quality'' after the initial purchase. This approach 
is consistent with current Sec.  1267.3(a), which provides that a Bank 
cannot buy debt instruments that are rated less than investment grade 
by an NRSRO at the time of purchase, but that the Bank does not have to 
sell any such instrument if it is downgraded to below investment grade 
after acquisition. FHFA is proposing no other changes to current Sec.  
1267.3(a) beyond replacing the current references to ``investment 
grade'' with references to ``investment quality.''
    Similarly, under proposed Sec.  1267.3(a)(4)(iii), a Bank would be 
permitted to purchase a marketable direct obligation of a state, local 
or tribal government agency or unit, as an exception to the general 
prohibition on the purchases of mortgages or interest in mortgages, 
only after determining that the obligation would meet the ``investment 
quality'' criteria (as well as meeting all the other conditions set 
forth in the provision).\19\ As with the debt investments, a Bank would 
be expected to periodically update its credit analysis to determine 
whether the obligation in question continues to meet the ``investment 
quality'' criteria. The ``investment quality'' standard would replace 
the current requirement that the instrument have ``the second highest 
rating from an NRSRO.'' No other change to the provision is being 
proposed.
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    \19\ Specifically, the Bank's purchase of the marketable direct 
obligation of a state, local or tribal government unit or agency 
would have to provide the issuer the customized terms, necessary 
liquidity, or favorable pricing required to generate needed funding 
for housing or community lending. These conditions are being carried 
over from the current rule without change as part of the proposed 
amendments.
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    The proposed change may appear to extend somewhat the ability of 
the Banks to invest in certain marketable direct obligations of a 
state, local or tribal government agencies or units as such investments 
would not be limited to instruments rated by an NRSRO in the second 
highest rating category or better. Before making a purchase, however, a 
Bank would first need to determine, based on rigorous analysis, that 
there will be sufficient financial backing so that full and timely 
repayment of principal and interest on such obligations is expected, 
and only minimal risk that adverse changes would alter this likelihood. 
FHFA believes that requiring the Banks to undertake this affirmative 
analysis should help ensure that the proposed change would not alter 
substantially the risk a Bank may face from this class of investments 
and could help improve the quality of a Bank's investment decisions in 
this area. FHFA also believes that it would be complex and unduly 
burdensome to develop and apply a standard that would more closely 
approximate the current requirement than that proposed.
    Finally, FHFA proposes to remove current Sec.  1267.5 because it no 
longer applies to any Bank. This provision establishes interim capital 
requirements for investments, but by its terms applies only to those 
Banks that have not yet converted to the capital stock structure 
mandated by the Gramm-Leach-Bliley Act \20\ (GLB Act) and are not 
subject to the more rigorous risk-based and leverage capital 
requirements mandated by the GLB Act and implemented by the capital 
regulations found at 12 CFR part 932. Because all Banks have now 
converted to the GLB Act capital stock structure, none remain subject 
to the requirements of Sec.  1267.5,\21\ and FHFA proposes to delete it 
from its regulations.
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    \20\ Public Law 106-102, 133 Stat. 1338 (1999).
    \21\ See 76 FR at 5295, n.5.
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B. Part 1269 Rules--Standby Letters of Credit

    Section 1269.2(c)(2) of FHFA regulations provides that a standby 
letter of credit issued or confirmed by a Bank on behalf of a member to 
assist the member in facilitating residential housing finance or 
community lending may be collateralized by obligations of a state or 
local government unit or agency, if the obligation is rated investment 
grade by an NRSRO.\22\ FHFA proposes to eliminate this reference to an 
NRSRO investment grade rating in Sec.  1269.2(c)(2) and replace it with 
a requirement that the obligation of the state or local government unit 
or agency have a readily ascertainable value, can be reliably 
discounted to account for liquidation and other risks, and can be 
liquidated in due course. FHFA also proposes to remove the current 
definitions for ``investment grade'' and ``NRSRO'' from Sec.  
1269.1.\23\
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    \22\ See 12 CFR 1269.2(c)(2).
    \23\ 12 CFR 1269.1.
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    FHFA considered replacing the investment grade rating requirement 
in Sec.  1269.2(c)(2) with the same ``investment quality'' standard 
that is being proposed in the part 1267 Investment Regulations. 
However, FHFA believes that it would not be realistic and would be 
unnecessarily onerous for a Bank to perform the same type of in- depth 
credit analysis, as discussed above, for a security that will be 
accepted as collateral as for one in which the Bank intends to invest. 
This is especially true given that the amounts of likely collateral 
covered by this requirement are not large. Instead, FHFA is proposing a 
standard that is more appropriate for collateral and is similar to one 
already applied in other FHFA collateral regulations.\24\ FHFA also 
believes the proposed standard is consistent with the original intent 
of the investment grade requirement in this regulation, given that the 
rating was meant to serve as a proxy for securities that had ``an 
established secondary market . . . [that] . . . can be easily valued 
and, if necessary, liquidated by a [Bank].'' \25\
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    \24\ See 12 CFR 1266.7(a)(4).
    \25\ Proposed Rule: Federal Home Loan Bank Standby Letters of 
Credit, 63 FR 25726, 25729 (May 8, 1998).
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    Under the new language proposed for Sec.  1269.2(c)(2), a Bank 
would be expected to incorporate criteria into its collateral policies 
to assure that any state or local government obligation accepted as 
collateral for a standby letter of credit under this provision would 
have a readily ascertainable value, can be reliably discounted to 
account for liquidation and other risks, and can be liquidated by the 
Bank in due course. FHFA also would expect the Bank to meet other 
requirements applicable to collateral more generally, including having 
a policy and procedures in place to ensure that the Bank accurately 
values the collateral and applies realistic haircuts that reflect the 
market for the instrument and existing economic conditions.

C. Part 1270 Rules--Liabilities

    Part 1270 contains a number of provisions that reference NRSRO 
credit ratings or require the Banks to seek a rating from an NRSRO. 
First, Sec.  1270.4(b)(6) \26\ references assets that have been 
assigned a rating or assessment by an NRSRO that is equivalent to, or 
higher than, the rating or assessment assigned by the NRSRO to 
outstanding COs. This provision is

[[Page 30789]]

contained in the ``negative pledge requirement,'' which states that a 
Bank must maintain certain specific assets free of any lien or pledge 
in an amount equal to the Bank's pro rata share of total outstanding 
COs. FHFA proposes to remove Sec.  1270.4(b)(6) because the provision 
does not appear to expand the type of assets that can be used to 
fulfill negative pledge requirement beyond those already identified in 
paragraphs (b)(1) through (b)(5) of the regulation.
---------------------------------------------------------------------------

    \26\ 12 CFR 1270.4(b)(6).
---------------------------------------------------------------------------

    The negative pledge requirement was first adopted in 1946. It has 
been amended only once to any significant degree, in 1992, at which 
time the Finance Board added the provisions currently found at Sec.  
1270.4(b)(5) and at Sec.  1270.4(b)(6) of FHFA regulations.\27\ While 
Sec.  1270.4(b)(6) allows certain securities to be used to fulfill the 
negative pledge requirement based on their NRSRO rating based on their 
NRSRO ratings, Sec.  1270.4(b)(5) allows a Bank to rely on investments 
authorized under section 16(a) of the Bank Act \28\ to fulfill this 
requirement. Among the investment authorized by section 16(a) of the 
Bank Act are ``such securities as fiduciary and trust funds may be 
invested in under the laws of the State in which the . . . Bank is 
located.'' The type of securities that would be included within the 
broad authority provided by this ``fiduciary'' language would appear to 
include the assets that are also authorized for use in meeting the 
negative pledge requirement by Sec.  1270.4(b)(6). Moreover, FHFA is 
not aware of any asset that the Banks currently use to fulfill the 
negative pledge requirement that would be exclusively authorized by 
Sec.  1270.4(b)(6). Nor did the Finance Board, in adding current Sec.  
1270.4(b)(6), indicate any specific instrument or class of instruments 
that would be covered by the provision.\29\ Thus, FHFA is proposing to 
delete this provision as duplicative and unnecessary.
---------------------------------------------------------------------------

    \27\ See Proposed Rule: Leverage Ratio on Consolidated Federal 
Home Loan Bank Debt, 57 FR 20061, 20062 (May 11, 1992); Final Rule: 
Leverage Ratio on Consolidated Federal Home Loan Bank Debt, 57 FR 
62183, 62185 (Dec. 30, 1992).
    \28\ 12 U.S.C. 1436(a).
    \29\ See 57 FR at 20062, and 57 FR at 62185.
---------------------------------------------------------------------------

    FHFA considered replacing the current reference to NRSRO credit 
ratings in Sec.  1270.4(b)(6) with a requirement that a Bank determine 
that a security has a level of credit risk that is equivalent to or 
less than that of outstanding COs before the security can be used to 
fulfill the negative pledge requirement. Under this alternative 
approach, the determination would have been based on credit standards 
collectively developed by the Banks in consultation with OF. Use of a 
collectively developed standard would be warranted in this case because 
all Banks are jointly and severally liable on outstanding COs, and FHFA 
believed that each Bank would have a strong interest in seeing that the 
other Banks maintain the conservative risk profile of assets used to 
fulfill the negative pledge requirement. FHFA viewed this alternative 
approach as overly complex, however, especially in light of the fact 
that Sec.  1270.4(b)(6) appears not to expand the pool of assets 
already authorized for use to meet the negative pledge requirement 
elsewhere in the regulation.
    Nevertheless, FHFA specifically requests comments on whether Sec.  
1270.4(b)(6) should be removed as proposed or if there would be 
benefits to amending rather than deleting the provision. If commenters 
believe the provision should be amended, FHFA requests comments on the 
alternative approach described above, which would require the Banks to 
collectively develop a credit standard in consultation with OF to 
replace use of NRSRO ratings and on whether such an approach would be 
overly complex to implement.
    In addition to the references in Sec.  1270.4(b)(6), Sec. Sec.  
1270.5(b) and (c) \30\ require Banks collectively to maintain the 
highest NRSRO rating for COs and each Bank individually to maintain a 
rating of at least the second highest from an NRSRO. These requirements 
were adopted as a means of enhancing protections afforded holders of 
COs by requiring Banks either collectively or individually to take 
actions to maintain the required ratings.\31\ The Finance Board 
believed that these requirements provided more effective on-going 
protections to bond holders than the provision that they replaced, 
which had required a written statement from a rating agency or an 
investment bank that a change in the leverage limit applicable to the 
Banks would not adversely affect the ratings or creditworthiness of 
COs, prior to the change becoming effective.\32\
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    \30\ 12 CFR 1270.5(b) and (c).
    \31\ See Final Rule: Office of Finance; Authority of Federal 
Home Loan Banks to Issue Consolidated Obligations, 65 FR 36290, 
36294 (June 7, 2000).
    \32\ Id.
---------------------------------------------------------------------------

    FHFA proposes to delete current Sec.  1270.5(b) and (c) and replace 
them with new Sec.  1270.5. This new requirement would provide that the 
Banks, individually and collectively, should operate in such manner and 
take any actions necessary, including reducing leverage, to ensure that 
COs maintain the highest level of acceptance by financial markets and 
are generally perceived by investors as presenting a very low level of 
credit risk. FHFA believes that the proposed provision captures the 
intent of the current rules and helps protect holders of COs while 
upholding the spirit of the Dodd-Frank Act requirements by not 
mandating through regulation that NRSROs effectively provide an 
imprimatur of Bank actions through the rating process.\33\ Nothing in 
the language as proposed, however, would prohibit the Banks 
collectively from seeking NRSRO ratings for COs or an individual Bank 
from maintaining an individual NRSRO rating if such ratings were found 
to be desirable or helpful for either business or other reasons.
---------------------------------------------------------------------------

    \33\ In comments to the ANPR, the Banks stated that because the 
individual Bank rating requirement in Sec.  1270.5(c) did not 
involve the rating of a security or a money market instrument, it 
was outside the scope of section 939A of the Dodd-Frank Act. FHFA 
disagrees and believes that requiring the Banks to maintain a 
specific credit rating from an NRSRO would be a violation of the 
spirit of the Dodd-Frank provision by requiring the Banks to rely on 
NRSROs to review and essentially opine on Bank actions.
---------------------------------------------------------------------------

    FHFA also is proposing to delete current Sec.  1270.5(a) of its 
regulations because no Bank remains subject to it.\34\ This provision 
established leverage requirements which were applicable only to Banks 
that had not yet converted to the capital stock structure mandated by 
the GLB Act and had not become subject to the part 932 capital 
requirements. As already discussed, all Banks have now converted to the 
GLB Act capital stock structure and are subject to the part 932 capital 
requirements. Therefore Sec.  1270.5(a) no longer applies to any Bank 
and can be removed from FHFA regulations. The proposed amendments also 
would delete the definition of ``NRSRO'' from Sec.  1270.1, given that 
the term would no longer be used in part 1270 if the other proposed 
changes are adopted.
---------------------------------------------------------------------------

    \34\ 12 CFR 1270.5(a).
---------------------------------------------------------------------------

D. Phase-In Period

    In comments to the ANPR, the Banks requested that FHFA provide a 
phase-in period of no less than one year for any amendments that would 
implement section 939A of the Dodd-Frank Act. FHFA disagrees and 
believes that a phase-in period of one year or more is too long, 
especially as the Banks should be able to leverage their current 
governance, risk selection, and credit risk management policies, 
processes, and practices to meet the proposed requirements. 
Nevertheless, FHFA may consider a delayed implementation date for any 
final requirements, and requests

[[Page 30790]]

comments on what time frame may be necessary for the Banks to implement 
the proposal. FHFA further requests that any comments on this issue 
specifically identify and describe the actions that would need to be 
taken to implement these proposed amendments.

IV. Paperwork Reduction Act

    The proposed rule amendments do not contain any collections of 
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.). Therefore, FHFA has not submitted any information to the 
Office of Management and Budget for review.

V. Regulatory Flexibility Act

    The proposed rule amendments apply only to the Banks, which do not 
come within the meaning of small entities as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore in accordance 
with section 605(b) of the RFA, FHFA certifies that this proposed rule, 
if promulgated as a final rule, will not have significant economic 
impact on a substantial number of small entities.

List of Subjects

12 CFR Parts 1267 and 1269

    Community development, Credit, Federal home loan bank, Housing, 
Reporting and recordkeeping requirements.

12 CFR Part 1270

    Accounting, Federal home loan banks, Government securities.

    Accordingly, for reasons stated in the preamble and under authority 
in 12 U.S.C. 4511, 4513, and 4526, FHFA proposes to amend chapter XII 
of title 12 of the Code of Federal Regulations as follows:

PART 1267--FEDERAL HOME LOAN BANK INVESTMENTS

0
1. The authority citation for part 1267 continues to read as follows:

    Authority:  12 U.S.C. 1429, 1430, 1430b, 1431, 1436, 4511, 4513, 
4526.

0
2. Amend Sec.  1267.1 by removing the definitions for ``Investment 
grade'' and ``NRSRO'' and adding in correct alphabetical order a 
definition for ``Investment quality'' to read as follows:


Sec.  1267.1  Definitions.

* * * * *
    Investment quality means a determination made by the Bank with 
respect to a security or obligation that based on documented analysis, 
including consideration of the sources for repayment on the security or 
obligation:
    (1) There is adequate financial backing so that full and timely 
payment of principal and interest on such security or obligation is 
expected; and
    (2) There is minimal risk that that timely payment of principal or 
interest would not occur because of adverse changes in economic and 
financial conditions during the projected life of the security or 
obligation.
* * * * *
0
3. Amend Sec.  1267.3 by revising paragraphs (a)(3) and (a)(4) to read 
as follows:


Sec.  1267.3  Prohibited investments and prudential rules.

    (a) * * *
    (3) Debt instruments that are not investment quality, except:
    (i) Investments described in Sec.  1265.3(e) of this chapter; and
    (ii) Debt instruments that a Bank determined became less than 
investment quality because of developments or events that occurred 
after acquisition of the instrument by the Bank;
    (4) Whole mortgages or other whole loans, or interests in mortgages 
or loans, except:
    (i) Acquired member assets;
    (ii) Investments described in Sec.  1265.3(e) of this chapter;
    (iii) Marketable direct obligations of state, local, or Tribal 
government units or agencies, that are investment quality, where the 
purchase of such obligations by the Bank provides to the issuer the 
customized terms, necessary liquidity, or favorable pricing required to 
generate needed funding for housing or community lending;
    (iv) Mortgage-backed securities, or asset-backed securities 
collateralized by manufactured housing loans or home equity loans, that 
meet the definition of the term ``securities'' under 15 U.S.C. 
77b(a)(1) and are not otherwise prohibited under paragraphs (a)(5) 
through (a)(7) of this section, and
    (v) Loans held or acquired pursuant to section 12(b) of the Bank 
Act (12 U.S.C. 1432(b)). * * *
* * * * *


Sec.  1267.5  [Removed]

0
4. Remove Sec.  1267.5.

PART 1269--STANDBY LETTERS OF CREDIT

0
5. The authority citation for part 1269 continues to read as follows:

    Authority:  12 U.S.C. 1429, 1430, 1430b, 1431, 4511, 4513, 4526.


Sec.  1269.1  [Amended]

0
6. Amend Sec.  1269.1 by removing the definitions for ``Investment 
grade'' and ``NRSRO.''
0
7. Amend Sec.  1269.2 by revising paragraph (c)(2) to read as follows:


Sec.  1269.2  Standby letters of credit on behalf of members.

* * * * *
    (c) * * *
    (2) A standby letter of credit issued or confirmed on behalf of a 
member for a purpose described in paragraphs (a)(1) or (a)(2) of this 
section may, in addition to the collateral described in paragraph 
(c)(1) of this section, be secured by obligations of state or local 
government units or agencies, where such obligations have a readily 
ascertainable value, can be reliably discounted to account for 
liquidation and other risks, and can be liquidated in due course.

PART 1270--LIABILITIES

0
8. The authority citation for part 1270 continues to read as follows:

    Authority:  12 U.S.C. 1431, 1432, 1435, 4511, 4512, 4513, 4526.


Sec.  1270.1  Definitions.

0
9. Amend Sec.  1270.1 by removing the definition of ``NRSRO.''
0
10. Amend Sec.  1270.4 by revising paragraph (b) to read as follows:


Sec.  1270.4  Issuance of consolidated obligations.

* * * * *
    (b) Negative pledge requirement. Each Bank shall at all times 
maintain assets described in paragraphs (b)(1) through (b)(5) of this 
section free from any lien or pledge, in an amount at least equal to a 
pro rata share of the total amount of currently outstanding 
consolidated obligations and equal to such Bank's participation in all 
such consolidated obligations outstanding, provided that any assets 
that are subject to a lien or pledge for the benefit of the holders of 
any issue of consolidated obligations shall be treated as if they were 
assets free from any lien or pledge for purposes of compliance with 
this paragraph (b). Eligible assets are:
    (1) Cash;
    (2) Obligations of or fully guaranteed by the United States;
    (3) Secured advances;
    (4) Mortgages as to which one or more Banks have any guaranty or 
insurance, or commitment therefor, by the United States or any agency 
thereof; and
    (5) Investments described in section 16(a) of the Bank Act (12 
U.S.C. 1436(a)).
0
11. Amend Sec.  1270.5 by revising this section in its entirety to read 
as follows:

[[Page 30791]]

Sec.  1270.5  Bank operations.

    The Banks, individually and collectively, shall operate in such 
manner and take any actions necessary, including without limitation 
reducing leverage, to ensure that consolidated obligations maintain a 
high level of acceptance by financial markets and are generally 
perceived by investors as presenting a low level of credit risk.

    Dated: May 17, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-12333 Filed 5-22-13; 8:45 am]
BILLING CODE 8070-01-P