Title: NOTICE OF APPROVAL OF MARKET ACCESS AGREEMENT--Market Access Agreement
Issue Date: 08/23/1994
Agency: FCA
Federal Register Cite: 59 FR 43344
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FARM CREDIT ADMINISTRATION

Market Access Agreement


ACTION: Notice of approval of market access agreement.

[*43344]

SUMMARY: The Farm Credit Administration (FCA) announces that, after taking into consideration comments from the public on the Market Access Agreement (Agreement) to be entered into by all of the banks of the Farm Credit System (System) and the Federal Farm Credit Banks Funding Corporation (Funding Corporation), the FCA has given final approval to the Agreement, subject to certain conditions.

FOR FURTHER INFORMATION CONTACT:

Jean Noonan, General Counsel, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444, or

James M. Morris, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The Agreement, to be entered into among each of the banks of the System and the Funding Corporation, provides that it will not be implemented until it is approved by the FCA and the Farm Credit System Insurance Corporation (FCSIC) expresses its support for the Agreement.

In February 1993 the boards of directors of the banks and the Funding Corporation approved a draft Agreement and submitted the Agreement to the FCA and the FCSIC for approval. On September 9, 1993 the FCA Board granted preliminary approval to the Agreement subject to certain conditions. Following the FCA's preliminary approval, the System banks and the Funding Corporation modified the Agreement to bring the Agreement into conformance with the FCA's conditions. The board of directors of each of the banks and of the Funding Corporation adopted resolutions whereby each party agreed to enter into the Agreement in the form submitted to the FCA, subject to the FCA's approval. The resolution of each board of directors provides that if the FCA requires modifications to the Agreement in response to public comments, the resolution shall be ineffective and the board of directors shall consider what further action to take.

On May 17, 1994, the FCA published the Agreement in the Federal Register (59 FR 25644) for public comment by any interested member of the public. During the comment period, which ended on June 16, 1994, comments were submitted by the Federal Land Bank Association of Yosemite, FLCA, and by the Farm Credit Bank (FCB) of Columbia on behalf of all of the System banks and the Funding Corporation.

The comment submitted by the Federal Land Bank Association of Yosemite, FLCA, stated that it was unfortunate that associations did not have the opportunity to be involved in the formulation of the Agreement and suggested two modifications to the Agreement. The association proposed that the Agreement be amended to allow "strong" associations to continue to have access to funds whenever the associations' funding bank is subject to restrictions or prohibitions on its participation in debt obligations. Second, the association recommended that the Agreement be amended to provide that when the banks receive notice that a certain bank is in category I, II, or III, all associations should receive a similar notice.

The association's first issue is an important one for associations that obtain funding from a bank subjected to sanctions under the Agreement. The association correctly points out that in the event a bank is restricted in its ability to borrow, the associations funded by that bank may need an alternative source of funds. Although this is a critical concern, it is not one that is best addressed through the Agreement. The Agreement is only designed to impose funding restrictions on banks, and cannot be used to empower other banks to lend. Moreover, the best approach to ensuring continued funding in a particular instance may require an individualized solution. The FCA and the affected institutions will have to identify the best options for continued funding, some of which may require regulatory action by the FCA or the FCSIC. In fact, a major concern of the FCA during the time that a bank is in serious financial decline is to minimize the financial impact on the bank's related associations and implement actions that will enable viable associations to continue to serve the territory in question. This need to make arrangements for viable associations was among the FCA's reasons for requiring that the Agreement provide a limited period during which the FCA could forestall the imposition of category III sanctions. For these reasons, the FCA concludes that the Agreement does not provide the appropriate vehicle for addressing this significant issue.

With regard to the association's second suggestion, the FCA concurs that associations receiving their funding from a bank in financial trouble should receive a notice when that bank is subject to category I, II, or III restrictions or prohibitions. Although these associations will also receive notice of the bank's sanctions in the bank's quarterly report to shareholders, a notice under the Agreement would be more timely. However, the assertion that all associations should receive notices identifying a bank that is subject to any of the three categories is less compelling. The FCA notes that the Funding Corporation would be required to report the imposition of category II or III sanctions as a material condition affecting a bank in its quarterly report to investors. The FCA concludes that this and other information in the public domain will provide adequate information to associations that are not affected directly by a bank's restricted access to funding. Accordingly, the FCA Board conditions its final approval of the Agreement on an amendment that would provide notice to associations receiving funding from a bank that is subject to category I, II, or III restrictions or prohibitions.

The comment submitted by the Farm Credit Bank of Columbia on behalf of all of the System banks and the Funding Corporation expressed the "strong and continuing support of the banks and the Funding Corporation" for the Agreement. However, in light of FCA's publication of proposed regulations governing disclosures to investors on February 4, 1994, subsequent to the development of the Agreement, the FCB of Columbia suggested that the Agreement be amended to expand its scope to include both consolidated as well as Systemwide debt obligations. The banks noted that the FCA stated in its proposed regulations that banks are jointly and severally liable on consolidated obligations as well as Systemwide obligations. See 59 FR 4341, Feb. 4, 1994, proposed 630.3(f). [*43345] The commentor stated that, while the banks and the Funding Corporation do not concede that all banks are, without further action, jointly and severally liable on consolidated obligations, they believe that because the purpose of the Agreement was to cover all debt obligations on which such liability attaches, the Agreement should be amended to specifically encompass both types of obligations.

Through the issuance of the disclosure regulations, the FCA clarified that the statutory provisions governing joint and several liability contained in section 4.4 of the Farm Credit Act of 1971, as amended (Act), apply equally to consolidated and Systemwide obligations. Given the purposes of the Agreement, it is appropriate for the Agreement to be amended to treat both types of obligations in the same manner. Accordingly, the Agreement should be amended to replace the term "Systemwide Debt Securities" with the term "Debt Securities," which should be defined to include both Systemwide and consolidated obligations. In raising this issue, the commentor stated that the banks and the Funding Corporation are not "conceding" that all banks are, without further action, jointly and severally liable on consolidated obligations, and proposed that the Agreement refer to "potential liability" on "Debt Securities." Although the FCA does not share the commentor's doubt about the extent of liability for consolidated debt, the proposed modification of the Agreement is acceptable.

Having given interested parties notice and the opportunity to comment on the Agreement, the FCA Board hereby approves the Agreement pursuant to sections 4.2(d) and 4.9(b)(2) of the Act, with the following conditions:

1. The Agreement is amended by removing the term "Systemwide Debt Securities" throughout the Agreement and adding in its place the term "Debt Securities," and by adding the following definition to Article I: Debt Securities means Systemwide and Consolidated Obligations issued through the Funding Corporation within the meaning of sections 4.2(c) and (d) and 4.9 of the Act.

2. Section 1.09 of the Agreement is amended by adding the words "all associations discounting with or otherwise receiving funding from a bank that is in category I, II, or III," after "all Banks."

The FCA's approval of this Agreement is conditioned on the banks and the Funding Corporation amending the Agreement to make these changes and the board of directors of each institution then approving the amended Agreement. Neither the Agreement nor FCA approval of it shall in any way restrict or qualify the authority of the FCA or the FCSIC to exercise any of the powers, rights, or duties granted by law to the FCA or the FCSIC. Finally, the FCA retains the right to modify or revoke its approval of the Agreement at any time.

Dated: August 17, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-20687 Filed 8-22-94; 8:45 am]
BILLING CODE 6705-01-P