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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules
issued final rules implementing the Basel III Liquidity Framework in the United States. More specifically, we are evaluating whether it is feasible to adjust the LCR and NSFR to the Systems cooperative and nondepository structures and its mission as a GSE, and we are seeking your input.
In the alternative, we are considering whether to incorporate specific elements of the LCR and NSFR into our liquidity regulation, and we are interested in your ideas about how to do so.
22. What core principles would be most important in FCAs consideration of the Basel III Liquidity Framework?
How relevant is the Basel III Liquidity Framework to the cooperative and nondepository structure of the FCS?
23. To what extent should FCA
propose a similar rule to the FBRAs LCR and NSFR?
a. Should FCA completely replace its existing liquidity regulations with an LCR and NSFR framework or only augment existing regulations with certain elements of the LCR and NSFR
framework? If so, please explain.
b. What specific modifications, if any, should FCA consider making to the LCR
and NSFR ratios for application to System banks, and why?
c. If FCA proposed to incorporate the LCR and NSFR ratios as part of the CFP
requirement in 615.5134f, what types of modifications would be necessary to include elements of the ratios, without being redundant or overly burdensome?
24. If the FCA closely aligned the LCR
and NSFR to the FBRAs regulations, and made only narrow modification to accommodate the Systems unique structure, would the results enable FCS
banks to better withstand liquidity crises, or in the alternative, prove too costly or burdensome? Please explain.
25. How would the implementation of an LCR and NSFR impact the Systems funding structure, lending activities, or use of discount notes?
Outflows to Credit Facilities
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The LCR requires covered institutions to hold liquidity against the undrawn amount of a committed credit facility to a borrower. The outflow factor applied to this undrawn amount depends on the type of credit facility credit or liquidity facility 46 and the type of borrower 46 Credit and liquidity facility are defined at 12
CFR 329.3. A credit facility is a legally binding agreement to extend funds at a future date and generally includes working capital facilities e.g., revolving line of credit used for general corporate or working capital purposes. A liquidity facility is a legally binding agreement to extend funds for purposes of refinancing the debt of a counterparty when it is unable to obtain a primary or anticipated
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financial sector entity or non-financial sector entity. The direct notes from System banks to System associations under the GFAs are credit facilities, not liquidity facilities. Unfunded commitments on a credit facility to a financial sector entity have a 40 percent factor, while the same commitment to a non-financial sector entity only have a 10 percent factor. Financial sector entities typically have shorter-term funding structures and higher correlations of drawing down commitments during times of stress which support a higher factor when compared to non-financial sector entities.47 A higher factor results in a higher liquidity requirement under the LCR.
The FBRAs LCR regulation defines a financial sector entity to include a regulated financial company, but specifically excludes GSEs. The FCS is a cooperative system of financial institutions that the FCA charters and regulates in accordance with the Act.
System associations lend directly to and provide certain financially-related services to eligible borrowers. The Systems lending activities to retail borrowers, and its structure are different than the activities and structure of other GSEs excluded from the FBRAs definition of a financial sector entity.48
Unlike the other GSEs, most FCS
institutions lend directly to retail borrowers in a manner that is substantially similar to lenders that the FBRAs define as financial sector entities. To evaluate this further, we are seeking comment to determine if we propose an LCR, should FCA treat System institutions as financial sector entities and apply the relevant factor under the FBRAs definition.
26. If FCA proposes an LCR, should FCA treat System institutions as financial sector entities and apply a 40
percent factor to the unfunded portion of the associations direct note commitments?
a. If so, what supports FCA treating System institutions as financial sector entities and applying a 40 percent factor on the unfunded commitments System banks have to associations?
source of funding. If a facility has characteristics of both credit and liquidity facilities, the facility must be classified as a liquidity facility.
47 See 79 FR 61440, 61485 October 10, 2014.
48 Other GSEs currently include the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Federal Home Loan Bank System. As noted in footnote 3, supra, Farmer Mac is a GSE that has a charter to operate a secondary market for certain types of loans originated by retail lenders. Farmer Mac is not a cooperative. Instead, it is a stockholder-owned, federally chartered corporation.

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b. If not, what supports FCA treating System institutions as non-financial sector entities and applying a 10 percent factor on the unfunded commitments System banks have to associations?
System Bank Member Investment Bonds Two System banks offer investment bonds to their member-borrowers and other specified individuals, such as bank employees Member Investment Bonds. Both programs are similar in that each bank offers overnight or shortterm, uninsured bonds to the banks members and other specified individuals. Member Investment Bonds are structured so that holders may redeem funds at their request although prior notice for withdrawals may be required. Given their short maturity, a holders investment may be continuously rolled over until they provide notice to redeem the investment, which may be at any time.
Member Investment Bonds present a liquidity demand similar to maturing System bonds. Accordingly, FCA treats Member Investment Bonds and maturing System bonds the same under the existing liquidity rules. Under the LCR, there are several different outflow categories that Member Investment Bonds could fall into. To evaluate this further, we are seeking comment to determine if we propose an LCR, what the most appropriate factor for these investment bonds would be.
27. If FCA proposes an LCR, what would be an appropriate factor to apply to the Member Investment Bonds and why?
Voluntary Advance Conditional Payment Accounts As discussed above, FCA regulation 614.4175 allows member-borrowers to make 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. A sudden surge in member-borrower draws from VACP
accounts held at associations would increase the funding required from the System bank to the affiliated association at a time when market access is becoming impeded. To evaluate this further, we are seeking comment to determine if we propose an LCR, what the most appropriate factor for these VACP accounts would be.
28. If FCA proposes an LCR, given the uniqueness of VACP accounts and the ability of member-borrowers to withdraw certain VACP account funds at their request, what would be an appropriate factor?
29. If different factors should apply to different VACP accounts, please specify.

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