§ 615.5133 - Investment management.

§ 615.5133 Investment management.

Cross Reference

Link to an amendment published at 83 FR 27499, June 12, 2018.

Cross Reference

Link to a correction published at 83 FR 30833, July 2, 2018.

(a) Responsibilities of board of directors. Your The board of directors must adopt written policies for managing your the institution's investment activities. Your The board must also ensure that management complies with these policies and that appropriate internal controls are in place to prevent loss. At least annually, the board, or a designated committee of the board, must review the sufficiency of these investment policies. Any changes to the policies must be adopted by the board and be documented.

(b) Investment policies - general requirements. Your board's written investment Investment policies must address the purposes and objectives of investments; risk tolerance; delegations of authority; internal controls; due diligence; and reporting requirements. Moreover, your The investment policies must fully address the extent of pre-purchase analysis that management must perform for various classes of investments. Furthermore, your The investment policies must also address the means for reporting, and approvals needed for, exceptions to established policies. A Farm Credit bank's investment policy must address portfolio diversification and obligor limits under paragraphs (f) and (g) of this section. Investment policies must be sufficiently detailed, consistent with, and appropriate for the amounts, types, and risk characteristics of your its investments.

(c) Investment policies - risk tolerance. Your investment Investment policies must establish risk limits for the various types, classes, and sectors of eligible investments and for the entire investment portfolio. These The investment policies must include concentration limits to ensure prudent diversification of credit, market, and, as applicable, liquidity risks in the investment portfolio. Risk limits must be based on all relevant factors, including your institutional the institution's objectives, capital position, earnings, and quality and reliability of risk management systems and must take into consideration the interest rate risk management program required by § 615.5180 or § 615.5182, as applicable. Your Investment policies must identify the types and quantity of investments that you the institution will hold to achieve your its objectives and control credit risk, market risk, liquidity, and operational risksand liquidity risk as applicable. Each association or service corporation that holds significant investments and each Farm Credit bank must establish risk limits in its investment policies for these four , as applicable, for the following types of risk. :

(1) Credit risk. Investment policies must establish:

(i) Credit quality standards, limits on counterparty risk, and risk diversification standards that limit concentrations. Limits must be set for single or related counterparty(ies), a geographical area, industries, and . Credit quality standards must be established for single or related obligors, sponsors, secured and unsecured exposures, and asset classes or obligations with similar characteristics.

(ii) Concentration limits. Concentration limits must be established for single or related obligors, sponsors, geographical areas, industries, unsecured exposures, asset classes or obligations with similar characteristics.

(

ii

iii)Criteria for selecting brokers and, dealers

, and investment bankers (collectively, securities firms). You

. Each institution must buy and sell eligible investments with more than one securities firm.

As part of your review of your investment policies required under paragraph (a) of this section, your board of directors, or a designated committee of the board, must review the criteria for selecting securities firms. Any changes to the criteria must be approved by the board.

(iiiThe institution must define its criteria for selecting brokers and dealers used in buying and selling investments.

(iv) Collateral margin requirements on repurchase agreements.

You

To the extent the institution engages in repurchase agreements, it must regularly mark the collateral to fair market value and ensure appropriate controls are maintained over collateral held.

(2) Market risk. Investment policies must set market risk limits for specific types of investments and for the investment portfolio.

(3) Liquidity risk -

(i) Liquidity at Farm Credit banks. Investment policies must describe the liquidity characteristics of eligible investments that

you

the bank will hold to meet

your

its liquidity needs and other institutional objectives.

(ii) Liquidity at associations. Investment policies must describe the liquid characteristics of eligible investments that the association will hold.

(4) Operational risk. Investment policies must address operational risks, including delegations of authority and internal controls in accordance with under paragraphs (d) and (e) of this section.

(d) Delegation of authority. All delegations of authority to specified personnel or committees must state the extent of management's authority and responsibilities for investments.

(e) Internal controls. You Each institution must:

(1) Establish appropriate internal controls to detect and prevent loss, fraud, embezzlement, conflicts of interest, and unauthorized investments.

(2) Establish and maintain a separation of duties between personnel who supervise or execute investment transactions and personnel who supervise or engage in all other investment-related functions.

(3) Maintain records and management information systems that are appropriate for the level and complexity of your the institution's investment activities.

(4) Implement an effective internal audit program to review, at least annually, your the investment management function, practices including internal controls, reporting processes, and compliance with FCA regulations. The scope of the This annual review's scope must be appropriate for the size, risk and complexity of the investment portfolio.

(f) Farm Credit bank portfolio diversification -

(1) Well-diversified portfolio. Subject to the exemptions set forth in paragraph (f)(3) of this section, each Farm Credit bank must maintain a well-diversified investment portfolio as set forth in paragraph (f)(2) of this section.

(2) Investment portfolio diversification requirements. A well-diversified investment portfolio means that, at a minimum, investments are comprised of different asset classes, maturities, industries, geographic areas, and obligors. These diversification requirements apply to each individual security that the Farm Credit bank holds within a DIF. In addition, except as exempted by paragraph (f)(3) of this section, no more than 15 percent of the investment portfolio may be invested in any one asset class. Securities within each DIF count toward the appropriate asset class. Measurement of this diversification requirement must be based on the portfolio valued at amortized cost.

(3) Exemptions from investment portfolio diversification requirements. The following investments are not subject to the 15-percent investment portfolio diversification requirement specified in paragraph (f)(2) of this section:

(i) Investments that are fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency;

(ii) Investments that are fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE, except that no more than 50 percent of the investment portfolio may be comprised of GSE MBS. Investments in Farmer Mac securities are governed by § 615.5174 and are not subject to this limitation; and

(iii) Money market instruments identified in § 615.5131.

(g) Farm Credit bank obligor limit. No more than 10 percent of a Farm Credit bank's total capital (Tier 1 and Tier 2) as defined by § 628.2 of this chapter may be invested in any one obligor. This obligor limit does not apply to investments in obligations that are fully guaranteed as to the timely payment of principal and interest by U.S. Government agencies or fully and explicitly guaranteed as to the timely payment of principal and interest by GSEs. For a DIF, both the DIF itself and the entities obligated to pay the underlying debt are obligors.

(h) Due diligence -

(1) Pre-purchase analysis

.

-

(i) Eligibility

, purpose,

and compliance with investment policies. Before

you purchase

purchasing an investment,

you

the institution must conduct sufficient due diligence to determine whether

it

the investment is eligible under § 615.5140

, is for an authorized purpose under § 615.5132 or § 615.5142, as applicable,

and complies with

your

its board's investment policies.

You

The institution must document

your

its assessment and

the

retain any supporting information used in

your

that assessment.

Your board must approve your decision to

The institution may hold an investment that does not comply with

your

its investment policies only with the prior approval of its board.

(ii) Valuation. Prior to purchase,

you

the institution must verify the fair market value of the investment (unless it is a new issue) with a source that is independent of the broker, dealer, counterparty or other intermediary to the transaction.

(iii) Risk assessment.

Your assessment of each investment at the time of purchase

At purchase, the institution must at a minimum include an evaluation of the credit risk (including country risk when applicable), liquidity risk, market risk, interest rate risk, and

the

underlying collateral of the investment, as applicable. This assessment must be commensurate with the complexity and

risk in

type of the investment.

You

The institution must also perform stress testing on any structured investment that

is structured or that

has uncertain cash flows, including all

mortgage-backed securities and asset-backed securities

MBS and ABS, before

you

purchase

it

. The stress test must be commensurate with the

risk

type and complexity of the investment and must enable

you

the institution to determine that the investment does not expose

your

its capital, earnings, or liquidity if applicable, to risks that are greater than those specified in

your

its investment policies. The stress testing must comply with the requirements in paragraph (

f

h)(4)(ii) of this section. The institution must document and retain its risk assessment and stress tests conducted on investments purchased.

(2) Ongoing value determination. At least monthly,

you

the institution must determine the fair market value of each investment in

your

its portfolio and the fair market value of

your

its whole investment portfolio.

(3) Ongoing analysis of credit risk.

You

The institution must establish and maintain processes to monitor and evaluate changes in the credit quality of each investment in

your

its portfolio and in

your

its whole investment portfolio on an ongoing basis.

(4) Quarterly stress testing.

(i)

You

The institution must stress test

your

its entire investment portfolio, including stress tests of

all investments

each investment individually and

stress tests of

the whole portfolio

as a whole

, at the end of each quarter. The stress tests must enable

you

the institution to determine that

your

its investment securities, both individually and on a portfolio-wide basis, do not expose

your

its capital, earnings, or liquidity if applicable, to risks that exceed the risk tolerance specified in

your

its investment policies. If

your

the institution's portfolio risk exceeds

your

its investment policy limits,

you

the institution must develop a plan to comply with those limits.

(ii)

Your

The institution's stress tests must be defined in a board-approved policy and must include defined parameters for the security types

of securities you purchase

purchased. The stress tests must be comprehensive and appropriate for the institution's risk profile

of your institution

. At a minimum, the stress tests must be able to measure the price sensitivity of investments over a range of possible interest

rate/

rates and yield curve scenarios. The

methodology that you use to analyze investment securities

stress test methodology must be appropriate for the complexity, structure, and cash flows of the investments in

your

the institution's portfolio.

You

The institution must rely to the maximum extent practicable on verifiable information to support all

your

its stress test assumptions, including prepayment and interest rate volatility assumptions

, when you apply your stress tests. You

. The institution must document the basis for all assumptions

that you use

used to evaluate the security and its underlying collateral.

You

The institution must also document all subsequent changes in

your

its assumptions.

(5) Presale value verification. Before

you sell

the institution sells an investment,

you

it must verify its fair market value with

a source that is independent of the broker, dealer, counterparty, or other intermediary to the

an independent source not connected with the sale transaction.

(

g

i) Reports to the board of directors. At least quarterly,

your

the institution's management must report on the following to

your

its board of directors or a designated board committee:

(1) Plans and strategies for achieving the board's objectives for the investment portfolio;

(2) Whether the investment portfolio effectively achieves the board's objectives;

(3) The current composition, quality, and the risk and liquidity

profile

profiles of the investment portfolio;

(4) The performance of each class of investments and the entire investment portfolio, including all gains and losses realized during the quarter on individual investments that

you

the institution sold before maturity and why they were liquidated;

(5) Potential risk exposure to changes in market interest rates as identified through quarterly stress testing and any other factors that may affect the value of

your

its investment holdings;

(6) How investments affect

your

its capital, earnings, and overall financial condition;

(7) Any deviations from the board's policies (must be specifically identified);

(8) The status and performance of each investment described in § 615.5143(a) and (b) or that does not comply with

your

the institution's investment policies; including the expected effect of these investments on

your

its capital, earnings, liquidity, as applicable, and collateral position; and

(9) The terms and status of any required divestiture plan or risk reduction plan.

[77 83 FR 66371, Nov. 5, 201227499, June 12, 2018; 83 FR 30833, July 2, 2018]