2016-29613
[Federal Register Volume 81, Number 238 (Monday, December 12, 2016)]
[Notices]
[Pages 89447-89449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29613]
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COMMODITY FUTURES TRADING COMMISSION
Order Excluding Farm Credit System Institutions From the
Commodity Exchange Act's Definition of ``Commodity Trading Advisor''
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice and order.
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SUMMARY: Pursuant to the authority under section 1a(12)(B)(vii) of the
Commodity Exchange Act (``CEA'' or ``Act''), the Commodity Futures
Trading Commission (``Commission'') is issuing an order (``Order'')
excluding institutions in the Farm Credit System (``FCS'') from the
definition of ``commodity trading advisor'' (``CTA''). The Commission
finds that FCS institutions are primarily engaged in lending to U.S.
farmers, ranchers, and agricultural cooperatives, and that any
commodity trading advice provided by FCS institutions to their
clientele is solely incidental to that lending conduct, as required by
CEA section 1a(12)(C). Therefore, the Commission concludes that FCS
institutions are not entities within the intent of the statutory CTA
definition, and that the issuance of this Order excluding them from the
definition is appropriate.
DATES: Effective date: December 12, 2016.
FOR FURTHER INFORMATION CONTACT: Amanda Olear, Associate Director,
Division of Swap Dealer and Intermediary Oversight, (202) 418-5283,
[email protected], or Elizabeth Groover, Special Counsel, Division of
Swap Dealer and Intermediary Oversight, (202) 418-5985,
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On October 28, 2016, the Farm Credit Council (``Farm Credit'' or
``Council'') petitioned the Commission for an order excluding FCS
institutions from the CTA definition in the CEA. The Council is the
national trade association for the FCS, a federally-chartered network
of borrower-owned lending institutions comprised of cooperatives and
related service organizations.\1\ Farm Credit's petition states that
the FCS institutions should be excluded from the CTA definition because
(1) the FCS institutions are not within the intent of the CTA
definition because they are in the business of banking and lending, and
(2) certain services provided by them, which could constitute commodity
trading advice, are solely incidental to their primary lending
business.\2\
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\1\ Petition for Order to Exclude Farm Credit System
Institutions from the Commodity Trading Advisor Definition in
Accordance with Section 1a(12)(B)(vii) of the Commodity Exchange
Act, Farm Credit Council (Oct. 28, 2016) (``Petition''), at 1.
\2\ Id. at 3.
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FCS institutions are important lenders to U.S. farmers, ranchers
and agricultural cooperatives. The FCS institutions include the FCS
Banks (CoBank, AgriBank, AgFirst Farm Credit Bank, and Farm Credit Bank
of Texas), as well as Agricultural Credit Associations, Federal Land
Credit Associations, and Production Credit Associations (together, the
``Associations'').\3\ The FCS Banks make
[[Page 89448]]
loans to affiliated Associations in their geographic areas, which, in
turn, make loans to farmers, ranchers, and other eligible borrowers.\4\
Although FCS institutions do not take deposits, they provide loans,
leases, and related services to farmers, ranchers, rural homeowners,
aquatic producers, timber harvesters, agricultural cooperatives, rural
utilities, and other eligible borrowers in all 50 states, the District
of Columbia, and Puerto Rico.\5\
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\3\ An Agricultural Credit Association (ACA) can make short-,
intermediate-, and long-term loans, as each ACA contains two
subsidiaries: A Federal Land Credit Association (FLCA) that can only
make long-term real estate loans, and a Production Credit
Association (PCA) that makes short- and intermediate-term loans.
Although legally separated, the ACA and its FLCA and PCA
subsidiaries operate an integrated lending business with loans made
through the subsidiary possessing the appropriate authority. The
ACA, PCA, and FLCA are jointly and severally liable on the full
amount of the indebtedness to the relevant FCS Bank under the FCS
Bank's General Financing Agreement. Additionally, the ACA, PCA, and
FLCA agree to guarantee each other's debts and obligations, pledge
their respective assets as security for the guarantee, and share
common capital. Petition, at 2.
\4\ Id. Additionally, CoBank also lends directly to agricultural
cooperatives, rural utilities, and other eligible borrowers. Id.
\5\ Petition, at 3.
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The Farm Credit Administration (``FCA'') is responsible for
regulating and supervising the FCS institutions. The FCA is defined as
an ``appropriate federal banking agency'' under the CEA\6\ and is one
of the ``Prudential Regulators'' charged with implementing certain key
regulatory requirements promulgated by the Dodd-Frank Act.\7\ The
Petition states that the FCA regulates FCS institutions like banks, and
that such regulation appropriately mitigates the risks of FCS
institutions.\8\ In particular, the FCA promulgates policies and
regulations intended to: Protect the safety and soundness of the FCS
institutions; implement the FCA's statutory authority in the Farm
Credit Act of 1971; \9\ establish minimum requirements for lending,
related services, investments, capital, liquidity, and mission; and
ensure adequate financial disclosure and appropriate governance of the
FCS institutions.\10\ Consequently, the FCS institutions are subject to
investment guidelines,\11\ capital requirements,\12\ liquidity
requirements,\13\ guidelines for the use of derivatives,\14\ risk
management standards,\15\ periodic reporting obligations,\16\ as well
as the FCA's examination authority.\17\
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\6\ 7 U.S.C. 1a(2).
\7\ Public Law 111-203, 124 Stat. 1376 (2010).
\8\ Petition, at 3. In fact, Farm Credit believes that FCS
institutions are, in fact, banks that would otherwise be excluded
from the CTA definition by CEA section 1a(12)(B)(i). However, Farm
Credit states that it petitioned for this Order to achieve greater
certainty for the FCS institutions because the term ``bank'' is not
defined in the CEA or the Commission's regulations. Id.
\9\ 12 U.S.C. 2001-2279cc.
\10\ 2015 Annual Report on the Farm Credit System, Farm Credit
Administration, Regulator of the FCS, p. 5 (``FCA Annual Report'').
See also id. at 41-44.
\11\ 12 CFR part 615, subpart E.
\12\ 12 CFR part 615, subparts H and K. The FCA published final
rules in July 2016 that are intended to ensure that FCS capital
requirements are appropriate for the FCS' cooperative structure, and
comparable to the Basel III framework and the standardized approach
adopted by the federal banking regulatory agencies. See Regulatory
Capital Rules: Regulatory Capital, Implementation of Tier 1/Tier 2
Framework, 81 FR 49720 (July 28, 2016).
\13\ 12 CFR part 615, subpart E.
\14\ David C. Baer, Director, Office of Examination, FCA to All
Farm Credit Banks, ``Guidelines for Utilizing Derivative Products,''
Bookletter, BL-023 (Oct. 31, 1995) (``FCA Guidelines for Utilizing
Derivatives''), available at http://ww3.fca.gov/readingrm/Handbook/_layouts/15/WopiFrame.aspx?sourcedoc=/readingrm/Handbook/FCA%20Bookletters/BL-023.docx&action=default. These Guidelines are
designed to complement existing FCA regulations pertaining to risk
management, investment practices, and asset and liability management
practices. Id. at 3.
\15\ 12 CFR part 615, subpart G.
\16\ 12 CFR part 621, subpart D.
\17\ FCA Annual Report, p. 5.
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FCS institutions use derivatives to manage their own risks, and
also to offer their eligible borrowers or their affiliated
Associations' eligible borrowers the ability to hedge the risks,
including interest rate risk, associated with their loans through the
use of over-the-counter (``OTC'') swaps.\18\ The use of derivatives is
specifically permitted and overseen by the FCA and is subject to
certain conditions, in order to protect the FCS institution eligible
borrowers and to preserve the ``safety and soundness'' of the FCS as a
whole.\19\ The Petition states that swaps offered to FCS institution
eligible borrowers are intended to assist them in hedging their
interest rate and other risks arising from FCS institution loans, and
that FCS institutions do not enter into swaps with persons unless they
are eligible borrowers of an FCS institution.\20\
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\18\ Petition, at 2. The Petition states that FCS institutions
also use derivatives to manage interest rate, liquidity, and balance
sheet risks, but because FCS institutions primarily enter into such
transactions with registered swap dealers, the Council does not view
such activity as raising CTA concerns. Id.
\19\ Petition, at 5. The Petition specifically cites detailed
FCA policies mandating counterparty credit risk management, as well
as the ``comprehensive safety and soundness regulation and oversight
by the FCA.'' Petition, at 5-6. As a result, all of the FCS
institutions' derivatives activity, whether with swap dealers or
eligible borrowers, falls within the definition of ``hedging or
mitigating commercial risk'' in Commission regulations. Id. at 6.
This is consistent with the FCA's historic position related to the
use of derivatives by FCS institutions, as stated in the FCA
Guidelines for Utilizing Derivatives: ``The FCA considers any
speculative use of derivatives an unsafe and unsound banking
practice.'' FCA Guidelines for Utilizing Derivatives, at 1.
\20\ Petition, at 2. Further, the Petition states that FCS
institutions are prohibited from engaging in speculative derivatives
activity, and that approved swap transactions with eligible
borrowers are limited to those that enable eligible borrowers to
hedge risk or that are necessary for the financing of individual
transactions. Id. at 6.
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In connection with the lending-related swap transactions, FCS
institutions sometimes provide eligible borrowers with information
about the financial instrument to be used, i.e., an interest rate swap,
through presentations or in writing.\21\ The Petition further states
that such information generally is generic and not intended as
commodity trading advice.\22\ Additionally, an eligible borrower in
this context acknowledges that the FCS institution is not its advisor,
and that the borrower is not relying on the information as FCS
institution advice.\23\ Nevertheless, because the FCS institution is
providing information about a commodity interest transaction to an
eligible borrower, Farm Credit and FCS institutions are concerned that
the provision of such information could be construed as the provision
of commodity trading advice requiring registration as a CTA with the
Commission.\24\ Therefore, Farm Credit filed the Petition seeking an
Order excluding the FCS institutions from the CEA's CTA definition to
clarify their registration and compliance obligations with respect to
the CEA and the regulations promulgated thereunder.\25\ Farm Credit's
Petition argues that issuing such an Order is appropriate because FCS
institutions are not within the intent of the CTA definition, and
because any provision of information about commodity interests to
eligible borrowers is solely incidental to the FCS institutions'
primary business of lending.\26\
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\21\ Petition, at 2-3.
\22\ Id. at 3.
\23\ Id.
\24\ Petition, at 2-3.
\25\ Id. at 3.
\26\ Id.
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II. Legal Authority and Analysis
CEA section 1a(12)(A) defines ``commodity trading advisor'' as any
person who for compensation or profit, engages in the business of
advising others, either directly or through publications, writings, or
electronic media, as to the value of or the advisability of trading in
any commodity interest transactions; \27\ any person who for
compensation or profit, and as part of a regular business, issues or
promulgates analyses or reports concerning any of the activities
referred to in clause (i) of CEA section 1(a)(12)(A); \28\ any person
who is
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registered with the Commission as a commodity trading advisor; \29\ or
any person who the Commission, by rule or regulation, may include if
the Commission determines that the rule or regulation will effectuate
the purposes of the CEA.\30\
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\27\ 7 U.S.C. 1a(12)(A)(i). Specifically, such transactions
include any contract for sale of a commodity for future delivery,
security futures product, or swap; any agreement, contract, or
transaction described in 7 U.S.C. 2(c)(2)(i) or 7 U.S.C.
2(c)(2)(D)(i); any commodity option authorized under section 6c of
this title; or any leverage transaction authorized under section 23
of this title. 7 U.S.C. 1a(12)(A)(i)(I)-(IV).
\28\ 7 U.S.C. 1a(12)(A)(ii).
\29\ 7 U.S.C. 1a(12)(A)(iii).
\30\ 7 U.S.C. 1a(12)(A)(iv).
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CEA section 1a(12)(B) excludes certain types of persons and
entities from the CTA definition, and permits the Commission to further
exclude, such other persons not within the intent of the CTA definition
as the Commission may specify by rule, regulation, or order.\31\
Additionally, CEA section 1a(12)(C) states that these exclusions,
including any additional exclusion adopted through rule, regulation or
order by the Commission, shall apply only if the furnishing of such
services by persons referred to in CEA section 1a(12)(B) is solely
incidental to the conduct of their business or profession.\32\
Therefore, the Commission must consider whether the potential CTA
activity is solely incidental to the primary business purposes and
conduct of the FCS institutions, and whether FCS institutions may be
properly excluded from the CTA definition.
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\31\ 7 U.S.C. 1a(12)(B); 7 U.S.C. 1a(12)(B)(vii).
\32\ 7 U.S.C. 1a(12)(C).
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The Commission agrees with the Petition that the provision of
general information about interest rate swaps to eligible borrowers of
FCS institutions is solely incidental to the FCS institutions' main
business and mission, i.e., agricultural lending. This conclusion is
supported by the fact that the information is provided solely to
eligible borrowers of the FCS institutions, and also by the strict
limitations on the swap activities of FCS institutions--FCS
institutions may only enter into swaps with an eligible borrower to
hedge the risk(s) inherent in the underlying financing transaction
between that borrower and an FCS institution.\33\ Additionally, the
Petition states that FCS institutions do not incur significant costs in
providing the information to eligible borrowers, do not charge eligible
borrowers for the information, do not solicit eligible borrowers, do
not require eligible borrowers to hedge their loan risks through an FCS
institution, and do not hold themselves out to the public as an entity
providing CTA services.\34\ Under these circumstances, the Commission
concludes that the provision of information related to a swap
transaction to eligible borrowers of FCS institutions is solely
incidental to the FCS institutions' lending activity with such eligible
borrowers.
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\33\ Petition, at 6.
\34\ Id. at 9.
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Further, the primary business activity of FCS institutions is
engaging in direct lending to farmers, ranchers, and other eligible
borrowers under the regulation and supervision of the FCA. This lending
activity is generally comparable to the lending activities of banking
institutions, which are excluded from the CTA definition under section
1a(12)(B) of the CEA.\35\ The Commission believes that it is reasonable
under the facts and circumstances discussed above to conclude that
granting FCS institutions an exclusion from CTA registration is
consistent with the intent of section 1a(12) of the CEA.
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\35\ See 7 U.S.C. 1a(12)(B)(i).
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III. Conclusion and Order
The Commission finds that under the circumstances set forth above
it is appropriate to exercise the statutory authority afforded to it
under CEA section 1a(12)(B)(vii) to exclude FCS institutions from the
CTA definition. Accordingly, the Commission is issuing this Order
excluding FCS institutions from the CTA definition in CEA section
1a(12)(A). This Order is based upon the representations made by the
petitioner. The Commission reserves authority, in its discretion, to
revisit the Order.
Issued in Washington, DC, on December 6, 2016, by the
Commission.
Robert N. Sidman,
Deputy Secretary of the Commission.
[FR Doc. 2016-29613 Filed 12-9-16; 8:45 am]
BILLING CODE 6351-01-P