[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57916-57919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28584]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AB66
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Global Debt
AGENCY: Farm Credit Administration.
ACTION: Interim rule; request for comment.
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SUMMARY: The Farm Credit Administration (FCA) is issuing an interim
regulation to clarify the Federal Farm Credit Banks Funding
Corporation's (Funding Corporation) statutory authority to use more
than one fiscal agent to facilitate the sale of Systemwide debt
securities. The regulation permits the Funding Corporation to employ
fiscal agents other than Federal Reserve Banks (FRBs) for issuance of
dollar denominated Systemwide debt securities in foreign capital
markets. Thus, the rule recognizes the authority of the Funding
Corporation to issue, sell, and distribute Systemwide debt securities
on behalf of the Farm Credit banks (banks) on a global basis. Updating
existing FCA regulations allows the banks to engage in debt marketing
practices used by other Government-Sponsored Enterprises (GSEs). In
addition,
[[Page 57917]]
expanding debt marketing internationally may broaden the investor base
for Systemwide debt securities and lead to lower funding costs.
DATES: The regulations shall become effective upon the expiration of 30
days after publication during which either or both Houses of Congress
are in session. Written comments must be received on or before December
26, 1995. Notice of effective date will be published in the Federal
Register.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination, 1501
Farm Credit Drive, McLean, VA 22102-5090. Copies of all communications
received will be available for examination by interested parties in the
Office of Examination, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Policy Analyst, Office of Examination, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4498;
or
William L. Larsen, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)
883-4444.
SUPPLEMENTARY INFORMATION:
I. Background
The Farm Credit System (System) funds its lending operations
through the sale of debt securities in the domestic capital markets.
The banks currently offer Systemwide debt securities, primarily
consisting of Consolidated Systemwide bonds, medium-term notes and
discount notes.1 The Funding Corporation, acting on behalf of the
banks, issues, markets, and handles the debt obligations of the System.
The Funding Corporation also has the responsibility for establishing,
subject to FCA approval, the amount, maturities, rates of interest, and
terms and conditions of participation by the several banks in each
issue of Systemwide debt securities.2
\1\ Systemwide debt securities are the joint and several
obligations of the banks. See 12 U.S.C. 2155(a)(2) and 12 U.S.C
2153(d).
\2\ See 12 U.S.C. 2160.
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The Funding Corporation uses a selling group of investment dealers
and dealer banks to market Systemwide debt securities. Systemwide debt
securities are generally issued in book-entry form.3 The FRBs
maintain the book-entry securities as agents of the banks.4
Pursuant to FCA regulations, Systemwide debt securities clear and
settle through the Federal Reserve Banks' Book-entry System (Fed book-
entry system).5 Foreign investors can purchase Systemwide debt
securities through institutions and depositories that have appropriate
accounts with an FRB. Currently, the banks do not issue securities
through agents other than the FRBs either domestically or in foreign
capital markets.
\3\ Securities issued in book-entry form are assigned to an
investor's account upon purchase. The investor receives a custody
receipt from his or her bank or non-bank dealer instead of receiving
a certificate. Payment of principal and interest on book-entry
securities is credited to the investor's account and does not
require presentation of a coupon or certificate. Investors may
choose, as a custodian, any bank or other financial institution that
maintains book-entry accounts with a member of the Federal Reserve
System.
\4\ See 12 CFR part 615, subpart O.
\5\ The FRBs operate a book-entry system, which provides book-
entry holding and settlement for all U.S. dollar denominated
securities issued by the U.S. Government, certain agencies,
instrumentalities (including GSEs), and international organizations
of which the United States is a member. The Fed book-entry system
enables specified depositories and other institutions, with an
appropriate account with an FRB or Branch, to hold, make payments,
and transfer securities and funds through the FRBs' Fedwire
electronic funds transfer system.
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In contrast, other GSEs 6 have launched global debt issuance
programs to expand the sale of their debt securities into foreign
capital markets. While most GSEs have issued or sold debt securities
denominated in United States dollars (U.S. dollars) outside the United
States, three 7 also have issued debt securities denominated in
foreign currencies. The global debt programs aim at increasing the
depth and breadth of the market for the issuer's debt securities. The
GSEs are seeking to diversify and control the cost of borrowing at a
time when their overall funding needs are rising sharply. The foreign
capital markets could provide the GSEs funding opportunities at rates
that are attractive compared to domestic sources. Additionally,
international debt sales may enhance the efficiency of GSE debt sales
by expanding their sources of funding and reducing the burgeoning
supply of GSE debt in the domestic market.
\6\ The Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Corporation (Freddie Mac), the Student
Loan Marketing Association (Sallie Mae) and the Federal Home Loan
Banks (FHLBs) have introduced global debt programs.
\7\ Fannie Mae, Sallie Mae, and the FHLBs have issued non-dollar
denominated debt securities.
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II. System Global Debt Program Proposal
The Funding Corporation proposes to establish a global debt
marketing program for issuance of Systemwide debt securities similar to
the other GSEs. The Funding Corporation has requested FCA's
confirmation that the Farm Credit Act of 1971, as amended 8 (Act),
allows the banks to issue Systemwide debt securities in foreign capital
markets using fiscal agents other than the FRBs. The proposed System
Global Debt Program (Program) contemplates three approaches to enter
into foreign capital markets that vary in scope and complexity.
\8\ 12 U.S.C. 2001-227966-6.
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The first approach is designed to increase secondary market sales
of Systemwide debt securities outside the United States. To accomplish
this, the Funding Corporation would use international depositories and
clearing systems for maintaining and servicing book-entry Systemwide
debt securities. By expanding secondary market trading and safekeeping
to accountholders in clearing systems beyond the Fed book-entry system,
the Funding Corporation could increase and support demand by foreign
investors. Primary issuances of dollar denominated Systemwide debt
securities would continue to be issued through the FRBs in book-entry
form.
The Program's second method to heighten the System's presence in
foreign capital markets involves both primary issuance and secondary
market sales of Systemwide debt securities outside the United States.
Dollar denominated Systemwide debt securities would be issued through
fiscal agents other than the FRBs, either exclusively outside the
United States or simultaneously inside and outside the United States.
Secondary market trading and safekeeping of the debt securities would
be accomplished through international depositories and clearing
systems.
Under the third approach, Systemwide debt securities would be
denominated in foreign currencies and issued exclusively outside the
United States through fiscal agents other than the FRBs. Secondary
market trading and safekeeping would be handled through international
clearing systems. Such non-dollar denominated Systemwide debt
securities issued in foreign capital markets are the subject of an
Advance Notice of Proposed Rulemaking also adopted by the FCA Board on
November 16, 1995, and published elsewhere in today's issue of the
Federal Register.
[[Page 57918]]
III. Statutory and Regulatory Considerations
A. General
The Act grants broad authority to: (1) The banks to issue debt
obligations to fund their operations; and (2) the FCA to approve the
issuance of System debt in the capital markets. Under section 4.2,
Systemwide debt obligations must be issued solely through the Funding
Corporation, while section 4.9(b)(1) of the Act authorizes the Funding
Corporation to ``issue, market, and handle the obligations'' of the
banks. Under section 4.9(b)(2) of the Act, the Funding Corporation,
acting for the banks and subject to FCA approval, ``shall determine the
amount, maturities, rates of interest, terms, and conditions of
participation by the several banks in each issue of joint,
consolidated, or System-wide obligations.'' Sections 4.2 and 5.17(a)(4)
of the Act require FCA approval of the issuance of all System debt
obligations.
B. Secondary Market Sales Outside the United States
In general, secondary market trading and sales of Systemwide debt
securities have been limited to the United States market. However,
secondary market sales of dollar denominated Systemwide debt securities
outside the United States are compatible with current statutory and
regulatory requirements. The initial issuance of such debt securities
would be subject to the standard FCA approval process.9
\9\ See 12 U.S.C. 2153, 2252(a)(4).
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C. Issuance of Systemwide Debt Outside the United States
The Act is silent concerning issuance of Systemwide debt outside
the United States. No provision of the Act explicitly or implicitly
prohibits the banks, acting through the Funding Corporation, from
issuing debt obligations outside the United States. Furthermore, there
appears to be no other Federal statute or judicial ruling that would
prohibit the banks from issuing Systemwide debt securities outside the
United States. Nevertheless, the laws of the various host countries may
restrict some aspects of System debt issuances within their borders.
D. Use of Issuing and Servicing Agents Other Than the FRBs
Section 4.8(a) of the Act, which governs the issuance and sale of
System obligations through fiscal agents, clearly contemplates that the
banks can issue their debt obligations through one or more fiscal
agents. Section 4.8(a) states:
Each bank of the System * * * may provide for the sale of
obligations issued by it, consolidated obligations, or System-wide
obligations, through a fiscal agent or agents, by negotiation,
offer, bid, syndicate sale, and to deliver such obligations by book
entry, wire transfer, or such other means as may be appropriate.
(Emphasis added.)
Section 4.8(a) does not, however, identify a fiscal agent or agents
that the banks are authorized to use for debt issuances.
The FCA regulations governing the issuance, maintenance, and
servicing of Farm Credit securities refer only to the authority of FRBs
to act as agents for the banks.10 The absence of any reference in
the regulations to fiscal agents other than the FRBs may appear to
restrict the authority of the Funding Corporation to select a fiscal
agent other than an FRB. In light of the apparent latitude permitted
under section 4.8(a), the FCA believes the authority of the Funding
Corporation to employ fiscal agents other than FRBs should be
clarified.
\10\ See 12 CFR part 615, subpart O which authorizes each FRB to
issue and maintain book-entry Farm Credit securities, service book-
entry Farm Credit securities by making payment of interest and
payment at maturity or upon call, transfer or pledge Farm Credit
securities to any transferee or pledgee eligible to maintain an
appropriate book-entry account in its name with an FRB and provide
other services as fiscal agent.
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IV. Need for Amended Regulations
The FCA regulations governing issuance of Systemwide debt
securities were promulgated nearly 20 years ago. The existing
regulations reflect a period when the FRBs served as the exclusive
fiscal agents for GSE debt issuances in a predominantly domestic
market. Since then, global debt markets and international clearing
systems have evolved and become more closely integrated with the United
States domestic securities market. Due to substantial increases in GSE
debt issuances, the domestic GSE debt market has become highly
competitive. As a result, the GSEs are seeking to expand their market
horizon and lower their cost of funds by using international delivery
systems to reach foreign investors.
The FRBs may not act as fiscal agents for GSE debt obligations that
are issued outside of the United States. Therefore, GSEs that embark
upon global debt programs must employ fiscal agents that have the
capability of issuing, maintaining, and servicing international debt
offerings. As noted, the Act does not restrict the issuance of
Systemwide debt securities to domestic markets or the use of fiscal
agents to the FRBs. To clarify this authority, the FCA is adopting a
new subpart P in 12 CFR part 615 dealing with issuance of Global
Systemwide debt securities. The FCA regulations governing the authority
of the FRBs to issue book-entry Farm Credit securities are not affected
by the new rules and remain in effect.11
\11\ See 12 CFR part 615, subpart O.
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The FCA believes the new regulations will preserve the flexibility
provided to the banks under the Act by allowing them to pursue the most
cost-effective and efficient method of raising funds in the capital
markets. The FCA also recognizes the increasingly global nature of
capital markets and supports the objectives of the proposed Program. By
developing the capability to issue debt internationally, the System may
increase its name recognition, broaden its investor base, diversify its
sources of funding, and obtain more cost-effective financing.
The new subpart differentiates Systemwide debt securities
distributed outside the United States from those issued through the
FRBs under existing Funding Corporation programs. The regulation
defines a Global agent as any fiscal agent, other than the FRBs, used
by the Funding Corporation to facilitate the sale of global debt
securities. Global debt securities are defined as obligations issued by
the Funding Corporation on behalf of the Farm Credit banks under
section 4.2(d) of the Act through a fiscal agent or agent and
distributed either exclusively outside the United States or
simultaneously inside and outside the United States. Issuances of
global debt securities will be subject to the standard FCA approval
process.
The FCA believes that it is unlikely that any substantial
operational or business risks to the System will be posed by clearance
and settlement of transactions in the systems outside the Fed book-
entry system. Systemwide debt securities issued internationally would
likely be handled through established and interconnected international
clearinghouses, all of which have book-entry systems available to
distribute and settle primary sales and to transfer beneficial
interests in secondary market sales among their respective holding
institutions, participants, and accountholders. In general, book-entry
systems are considered superior to other means for evidencing ownership
and are universally accepted by investors in the global marketplace.
All issuers of debt or equity securities must employ an entity to
issue, hold, trade, and clear book-entry securities in the name of
accountholders, unless the securities are issued in definitive (i.e.,
tangible) form to facilitate sales. To date, the
[[Page 57919]]
experience of the other GSEs engaged in global debt marketing programs
also suggests that using international clearing systems is an
acceptable business practice.
Nevertheless, the FCA believes that the operational risk inherent
in the development of a global debt program is significant enough to
warrant the requirement that the Funding Corporation Board of Directors
approve each prospective global agent and clearing system.
Additionally, the Funding Corporation must establish appropriate
selection criteria for global agents. The FCA expects that selection
criteria will be based on factors such as credit ratings, capital,
reputation, experience, and management capabilities to ensure that the
entity is suitable to assume and carry out the functions of a fiscal
agent, including the appointment of subordinate agents if
necessary.12
\12\ Depending upon the agreement between the Funding
Corporation and the entity acting as global agent, a global agent
may only retain primary responsibility over certain fiscal functions
and thus may need to appoint other agents, such as paying agent,
transfer agent, calculation agent, exchange agent, or register agent
to perform other functions necessary for clearance and settlement of
transactions.
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Promulgation of new subpart P of 12 CFR part 615 effectively
approves the first two aspects of the proposed Program as previously
outlined. Thus, the Funding Corporation may engage global agent(s) to
issue and service dollar denominated global debt securities and
facilitate their secondary market trading in foreign capital markets by
using international clearing systems.
The FCA has decided that the third aspect of the proposed Program--
issuance of non-dollar denominated Systemwide debt securities--presents
issues that need to be addressed through conventional notice-and-
comment rulemaking rather than in the present expedited rulemaking. The
Act does not restrict the issuance of Systemwide debt securities to
dollar denominated securities. However, issuance of non-dollar debt
obligations could raise safety and soundness concerns for the banks,
including currency and counterparty risks. The FCA, therefore, intends
to explore these potential safety and soundness issues through an
Advance Notice of Proposed Rulemaking prior to developing regulations.
V. Expedited Rulemaking Procedure
The Act permits the Funding Corporation to market debt securities
on a global basis and use global agents to issue and service such
securities. Moreover, marketing and issuance of dollar denominated debt
by GSEs is an established practice that appears to present minimal
safety and soundness risk. Accordingly, the FCA finds that pre-
promulgation notice and comment on a new subpart P that merely
clarifies existing authority is unnecessary and is not in the public
interest.13 Thus, this regulation shall take effect as a final
regulation in accordance with section 5.17(c)(1) of the Act, upon the
expiration of 30 days after publication in the Federal Register, during
which either or both Houses of Congress are in session. The FCA
solicits and will consider comments on whether the requirements of new
subpart P need further clarification.
\13\ See 5 U.S.C. 553(b)(B).
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List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, Banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, part 615 of chapter VI,
title 12 of the Code of Federal Regulations is amended as follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076,
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-
8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat.
1568, 1608.
2. Subpart P is added to read as follows:
Subpart P--Global Debt Securities
Sec. 615.5500 Definitions.
In this subpart, unless the context otherwise requires or
indicates:
(a) Global debt securities means consolidated Systemwide debt
securities issued by the Funding Corporation on behalf of the Farm
Credit banks under section 4.2(d) of the Act through a fiscal agent or
agents and distributed either exclusively outside the United States or
simultaneously inside and outside the United States.
(b) Global agent means any fiscal agent, other than the Federal
Reserve Banks, used by the Funding Corporation to facilitate the sale
of global debt securities.
Sec. 615.5502 Issuance of global debt securities.
(a) The Funding Corporation may provide for the sale of global debt
securities on behalf of the Farm Credit banks through a global agent or
agents by negotiation, offer, bid, or syndicate sale, and deliver such
obligations by book-entry, wire transfer, or such other means as may be
appropriate.
(b) The Funding Corporation Board of Directors shall establish
appropriate criteria for the selection of global agents and shall
approve each global agent.
Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28584 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P