(a) Farm Credit banks -
(1) Investment eligibility criteria. A Farm Credit bank may purchase an investment only if it satisfies the following investment eligibility criteria:
(i) The investment must be purchased and held for one or more investment purposes authorized in § 615.5132.
(ii) The investment must be one of the following:
(A) A non-convertible senior debt security;
(B) A money market instrument with a maturity of 1 year or less;
(C) A portion of an MBS or ABS that is fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency;
(D) A portion of an MBS or ABS that is fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE;
(E) The senior-most position of an MBS or ABS that a U.S. Government agency does not fully guarantee as to the timely payment of principal and interest or a GSE does not fully and explicitly guarantee as to the timely payment of principal and interest, provided that the MBS satisfies the definition of “mortgage related security” in 15 U.S.C. 78c(a)(41);
(F) An obligation of an international or multilateral development bank in which the U.S. is a voting member; or
(G) Shares of a diversified investment fund registered under the Investment Company Act of 1940, if its portfolio consists solely of securities that satisfy paragraph (a)(1)(ii)(A), (B), (C), (D), (E), or (F) of this section, or are eligible under § 615.5174. The investment company's risk and return objectives and use of derivatives must be consistent with the Farm Credit bank's investment policies.
(iii) At least one obligor of the investment must have very strong capacity to meet its financial commitment for the expected life of the investment. If any obligor whose capacity to meet its financial commitment is being relied upon to satisfy this requirement is located outside the U.S., either:
(A) That obligor's sovereign host country must have the highest or second-highest consensus Country Risk Classification (0 or 1) as published by the Organization for Economic Cooperation and Development (OECD) or be an OECD member that is unrated; or
(B) The investment must be fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency.
(iv) The investment must exhibit low credit risk and other risk characteristics consistent with the purpose or purposes for which it is held.
(v) The investment must be denominated in U.S. dollars.
(2) Resecuritizations. Notwithstanding any other provision of this section, System banks may not purchase resecuritizations (except when both principal and interest are fully and explicitly guaranteed by the U.S. Government or a GSE) without approval under paragraph (e) of this section.
(b) Farm Credit associations -
(1) Risk management investments. Each Farm Credit System association, with the approval of its funding bank, may purchase and hold investments to manage risks. Each association must identify and evaluate how the investments that it purchases contributes to management of its risks. Only securities that are issued by, or are unconditionally guaranteed or insured as to the timely payment of principal and interest by, the United States Government or its agencies are investments that associations may acquire for risk management purposes under this paragraph (b).
(2) Secondary market Government-guaranteed loans. In addition to investing in the securities described in paragraph (b)(1) of this section, each Farm Credit System association may also manage risk by holding those portions of loans that:
(i) Lenders, which are not Farm Credit System institutions, originate and then sell in the secondary market; and
(ii) The United States Department of Agriculture fully and unconditionally guarantees or insures as to both principal and interest.
(3) Risk management requirements. Each association that purchases investments pursuant to paragraphs (b)(1) and (2) of this section must document how its investment activities contribute to managing risks as required by paragraph (b)(1) of this section. Such documentation must address and evidence that the association:
(i) Complies with § 615.5133(a), (b), (c), (d), (e), (h), and (i). These investment management processes must be appropriate for the size, risk and complexity of the association's investment portfolio.
(ii) Complies with § 615.5182 for investments that exhibit interest rate risk that could lead to significant declines in net income or in the market value of capital.
(iii) Assesses how these investments impact the association's overall credit risk profile and how these investment purchases aid in diversifying, hedging, or mitigating overall credit risk.
(iv) Considers and evaluates any other relevant factors unique to the association or to the nature of the investments that could affect the association's overall risk-bearing capacity, including but not limited to management experience and capability to understand and manage unique risks in investments purchased.
(4) Association investment portfolio limit. The total amount of investments purchased and held under this section must not exceed 10 percent of the association's total outstanding loans. In computing this limit:
(i) Include in the numerator the daily (point-in-time) balance of all investments purchased and held under this section. Unless otherwise directed by FCA, associations must use the investment balance on the last business day of the quarter when calculating the numerator of the portfolio limit under this paragraph. For this calculation, value investments at amortized cost and accrued interest.
(ii) Include in the denominator the 90-day average daily balance of total outstanding loans as defined in § 615.5131. For this calculation, value loans at amortized cost and include accrued interest. The denominator does not include any allowance for loan loss adjustments.
(iii) Exclude from the numerator the following:
(A) Equity investments in unincorporated business entities authorized in § 611.1150 of this chapter;
(B) Equity investments in Rural Business Investment Companies organized under 7 U.S.C. 2009cc et seq.;
(C) Equity investments in Class B Farmer Mac stock authorized in § 615.5173; and
(D) Farmer Mac agricultural mortgage-backed securities under § 615.5174.
(5) Funding bank supervision of association investments.
(i) The association must not purchase and hold investments without the funding bank's prior approval. The bank must review the association's prior approval requests and explain in writing its reasons for approving or denying the request. The prior approval is required before the association engages in investment activities and with any significant change(s) in investment strategy.
(ii) In deciding whether to approve an association's request to purchase and hold investments, the bank must evaluate and document that the association:
(A) Has adequate policies, procedures, and controls, in place for its investment accounting and reporting;
(B) Has capable staff with the necessary expertise to manage the risks in investments; and
(C) Complies with paragraph (b)(3) of this section.
(iii) The bank must review annually the investment portfolio of every association that it funds. This annual review must evaluate whether the association's investments manage risks over time, and the continued adequacy of the associations' risk management practices.
(6) Transition for association investments.
(i) An association is not required to divest of any investment held on January 1, 2019 that was authorized under § 615.5140 as contained in 12 CFR part 615 revised as of January 1, 2018 or otherwise by official written FCA action that allowed the association to continue to hold such investment. Once such investment matures, the association must not renew it unless the investment is authorized pursuant to this section.
(ii) No association is required to divest of investments if a decline in total outstanding loans causes it to exceed the portfolio limit in paragraph (b)(4) of this section. However, the institution must not purchase new investments unless, after they are purchased, the total amount of investments held falls within the portfolio limit.
(c) Reservation of authority. FCA may, on a case-by-case basis, determine that a particular investment you are holding poses inappropriate risk, notwithstanding that it satisfies the investment eligibility criteria. If so, we will notify you as to the proper treatment of the investment.
(d) [Reserved]
(e) Other investments approved by FCA. You may purchase and hold investments that we approve. Your request for our approval must explain the risk characteristics of the investment and your purpose and objectives for making the investment.
[83 FR 27502, June 12, 2018; 83 FR 30833, July 2, 2018, as amended at 85 FR 62949, Oct. 6, 2020; 85 FR 70955, Nov. 6, 2020]