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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules
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To evaluate this further, we are seeking comment to determine if we should incorporate unfunded commitments into the existing FCA
liquidity framework and what type of factor would be appropriate to capture the drawdown risks.
1. How should FCA incorporate the liquidity risk of unfunded commitments on affiliated associations direct notes into the System banks liquidity reserve requirement?
a. Should drawdown factors be applied to unfunded commitments?
b. If so, what would be an appropriate factor to apply to the direct note unfunded commitments?
2. How should FCA incorporate the liquidity risk of unfunded commitments to OFIs into the System banks liquidity reserve requirement?
a. Should drawdown factors be applied to unfunded commitments?
b. If so, what would be an appropriate factor to apply to OFI unfunded commitments?
c. Does the liquidity risk of unfunded commitments to OFIs pose a different risk than unfunded commitments to affiliated associations direct notes? If so, how should FCA incorporate this risk into the liquidity reserve requirement?
3. How should FCA incorporate the liquidity risk of unfunded commitments to bank retail borrowers into the System banks liquidity reserve requirement?
a. What would be an appropriate factor to apply to retail borrower unfunded commitments?
b. Should unfunded commitments to retail borrowers that are not unconditionally cancellable be treated differently from those that are unconditionally cancellable? Please explain why.
c. Should we consider applying different factors to differentiate the risk between retail credit and liquidity facilities for such retail borrowers?
Association Lines of Credit to Retail Borrowers FCS associations often have outstanding lines of credit to retail borrowers who may draw funds to meet their seasonal or other business needs.
Associations can be legally obligated to fund these commitments and would generally rely on their System bank for funding under the GFA. A sudden surge in borrower demand for funds under these lines may increase demands on the banks liquidity at a time when market access is becoming impeded.
More specifically, during periods of economic or market uncertainty, retail borrowers may desire to increase their cash holdings to cover operating and
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business expenses and accordingly, draw from their operating lines. As System banks are ultimately responsible to fund associations, we are seeking comment to determine if a revised liquidity requirement should lookthrough System banks to consider each associations unfunded commitment to retail borrowers as a potential outflow item.
4. How should FCA incorporate the risk of unfunded commitments from association retail borrowers for the funding banks liquidity reserve requirement?
a. What would be an appropriate factor for System banks to apply to association unfunded commitments?
b. Should unfunded commitments at associations that are not unconditionally cancellable be treated differently from those that are unconditionally cancellable? Please explain why.
c. If so, should we consider applying a different factor to differentiate the risk between credit and liquidity facilities for association retail borrowers?
d. Should FCA incorporate the liquidity risk of unfunded commitments to association retail borrowers through a look through approach or using the direct note unfunded commitment amount?
Voluntary Advance Conditional Payment Accounts Section 614.4175 allows memberborrowers to make voluntary advance conditional payments VACP on their loans and allows institutions to set up involuntary payment accounts for funds held to be used for insurance premiums, taxes, and other reasons.32 VACP where the advanced payment is not compulsory accounts have the potential to expose the System to additional liquidity risk in a crisis. More specifically, some VACP accounts may be structured so that System memberborrowers may withdraw funds at their request although prior notice for withdrawals may be required. A
sudden surge in member-borrower draws from VACP accounts held at associations would increase the funding required from the bank to the association. This sudden increase in funding may increase demands on the banks liquidity at a time when market access is becoming impeded. To evaluate this further, we are seeking comment on how we should mitigate the risk VACP accounts pose to the liquidity of System banks.
32 Sections 1.56 and 2.213 of the Act authorize institutions to accept advance payments.

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5. How should FCA incorporate the liquidity risk of VACP accounts at associations into the funding banks liquidity reserve requirement?
a. What would be an appropriate factor to apply to these VACP accounts?
b. If different factors should apply to different types of VACP accounts, please specify.
Continuously Redeemable Perpetual Preferred Stock Some System associations have issued continuously redeemable perpetual preferred stock typically called Harvest Stock or H Stock to their members who wish to invest and participate in their cooperative beyond the minimum member-borrower stock purchase. H
Stock is an at-risk investment; it is issued without a stated maturity and is retireable only at the discretion of the institutions board. A common feature of H stock is that the issuing association will redeem it upon the request of the holder only if the association is in compliance with its regulatory capital requirements. Because of this feature, FCA considers the stock to be continuously redeemable. Some associations reduce the operational hurdles to redeeming H stock by delegating the boards authority to retire such stock to management provided certain board-approved minimum regulatory capital ratios are maintained.
FCA has determined that holders reasonably expect the institution to redeem the stock shortly after they make a request. A sudden surge in memberborrower redemptions of H Stock held at associations would increase the funding from System bank to its associations. This sudden increase in funding may increase demands on the banks liquidity at a time when market access is becoming impeded. To evaluate this further, we are seeking comment on how we should mitigate the risk H Stock poses to the liquidity of System banks.
6. How should FCA incorporate the liquidity risk of H Stock redemptions at associations into the funding banks liquidity reserve requirement? What would be an appropriate factor to apply to H Stock?
Cash Inflows As discussed above, modifying FCAs liquidity reserve requirement to capture potential cash outflows, including unfunded commitments, may promote a stronger liquidity profile at System banks. To improve how liquidity is measured and reported, we are also considering incorporating cash inflows into the liquidity reserve requirement.
FCAs existing liquidity regulation,
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