Although it may only be a half-loaf to some ABS players, the Farm Credit Administration (FCA) has adopted several investment criteria changes for Farm Credit System institutions, allowing for greater flexibility and increased investment levels.

The FCA, the regulatory body for the Farm Credit System, is a government-sponsored enterprise providing credit for the agricultural sector.

The major setback for the asset-backed community was a proposal championed by the Bond Market Association that sought to increase portfolio limits on asset-backed securities to 50% from 20%. The FCA rejected the request, stating that "the ABS market primarily developed during a period of prolonged economic growth," pointing out the market has not been tested under significant economic stress.

But Laurie Ray, senior policy analyst for the FCA, said the final allocation does mark a modest increase in the ABS investment portion since the current limit is actually at 15% and the initial version of the proposal already incorporated an increase to 20% which was retained.

Ray added that ABS investments could also benefit from a provision in the revised rules that removes investments in student loans guaranteed by the U.S. Department of Education from the ABS cap.

The FCA also approved an expanded list of allowable ABS securities for system investments. Under current regulations, system banks are only permitted to purchase auto and credit card receivable-backed securities. The newly expanded list includes securitizations of home equity loans, auto dealer floor plan loans, equipment lease and manufactured housing as well as student loans.

Revised rules also provide the system with increased flexibility in selecting investments based upon maturity. Whereas current regulations limit ABS investments to issues with a final maturity of less than five-years, the revisions make weighted average life the determinant. For fixed income investments the limit will be a five-year average life, while floaters will be allowed up to a seven-year average life.

A request to ease slightly on strict credit rating limits was rejected by the FCA, so the banks will continue to be limited to investing exclusively in triple-A rated securities.

But how quickly the system moves to take advantage of its increased ABS investment authority remains to be seen. Ray noted that at present the Farm Credit System has a $70 billion loan portfolio. Under system regulations, up to 30%, or $21 billion, of this amount can be held in investments other than loans. However, at present the system's investments total only about $12 billion, of which $2.4 billion can now be in ABS rather than the $1.8 billion limit under current rules. She could not provide a figure for the actual amount of ABS investments currently being carried.

She said the measure must now go through a 30-day waiting period while Congress is in session before it goes into effect. - David Feldheim

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