[Code of Federal Regulations]

[Title 12, Volume 6]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 12CFR652.40]



[Page 318]

 

                       TITLE 12--BANKS AND BANKING

 

                 CHAPTER VI--FARM CREDIT ADMINISTRATION

 

PART 652_FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND FISCAL 

AFFAIRS--Table of Contents

 

                     Subpart A_Investment Management

 

Sec. 652.40  Stress tests for mortgage securities.



    (a) You must perform stress tests to determine how interest rate 

changes will affect the cashflow and price of each mortgage security 

that you purchase and hold, except for adjustable rate mortgage 

securities that reprice at intervals of 12 months or less and are tied 

to an index. You must also use stress tests to gauge how interest rate 

fluctuations on mortgage securities affect your capital and earnings. 

The stress tests must be able to measure the price sensitivity of 

mortgage instruments over different interest rate/yield curve scenarios 

and be consistent with any asset liability management and interest rate 

risk policies. The methodology that you use to analyze mortgage 

securities must be appropriate for the complexity of the instrument's 

structure and cashflows. Prior to purchase and each quarter thereafter, 

you must use the stress tests to determine that the risk in the mortgage 

securities is within the risk limits of your board's investment 

policies. The stress tests must enable you to determine at the time of 

purchase and each subsequent quarter that the mortgage security does not 

expose your capital or earnings to excessive risks.

    (b) You must rely on verifiable information to support all your 

assumptions, including prepayment and interest rate volatility 

assumptions. You must document the basis for all assumptions that you 

use to evaluate the security and its underlying mortgages. You must also 

document all subsequent changes in your assumptions. If at any time 

after purchase, a mortgage security no longer complies with requirements 

in this section, Farmer Mac's management must report to the 

Corporation's board of directors in accordance with Sec. 652.10(g).