[Federal Register Volume 81, Number 238 (Monday, December 12, 2016)]
[Pages 89447-89449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29613]



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.


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]


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 

    \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.

    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

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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\

    \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.

    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\

    \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.

    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\

    \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.

    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\

    \21\ Petition, at 2-3.
    \22\ Id. at 3.
    \23\ Id.
    \24\ Petition, at 2-3.
    \25\ Id. at 3.
    \26\ Id.

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\

    \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).

    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.

    \31\ 7 U.S.C. 1a(12)(B); 7 U.S.C. 1a(12)(B)(vii).
    \32\ 7 U.S.C. 1a(12)(C).

    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 

    \33\ Petition, at 6.
    \34\ Id. at 9.

    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.

    \35\ See 7 U.S.C. 1a(12)(B)(i).

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 
Robert N. Sidman,
Deputy Secretary of the Commission.
[FR Doc. 2016-29613 Filed 12-9-16; 8:45 am]