Pub. 5 2010-2011 Issue 6

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2011 Bert Ely FCS Goes All Out to Avoid Derivatives Regulation A S THE FARM CREDIT WATCH reported last year, the Farm Credit System (FCS) made an intense effort to escape the derivatives-regulation provisions in the Dodd-Frank Act (DFA). While the FCS failed to get a blanket exemption, DFA authorized the Commodity Futures Trading Commission (CFTC), the prin- cipal regulator of derivatives activities, to consider exempting small banks, credit unions, and FCS institutions from various swaps clearing require- ments; small is defined as having assets less than $10 billion. However, and this is an important however, when the DFA was debated on the House floor, a discussion between two members of the House Ag Committee strongly suggested that the $10 billion number “should not in any way be viewed by the [CFTC] as a limit on the size of the institution that should be considered for an exemption.” Translation: The CFTC should exempt even the largest FCS institutions from its regulation of derivatives activities, leaving that job to the FarmCredit Administration (FCA). It appears the FCS ismoving aggres- sively to obtain such an exemption from the CFTC. According to information posted on the CFTC website, on Dec. 14 eight representatives of the FCS held meetings with two of the five-member CFTC to discuss, among other matters, the “end user exception.” Those FCS representatives were from the Farm Credit Council (the FCS trade associa- tion), the Federal Farm Credit Banks Funding Corp. (the FCS’ funding arm), and the two largest FCS banks—CoBank andAgriBank. Information about these meetings can be found at www.cftc. gov/LawRegulation/DoddFrankAct/ ExternalMeetings/index.htm. Presumably, the FCS is trying to obtain a CFTC exemption for each of the five FCS banks—the Texas bank is the smallest, with $14.2 billion of assets—and therefore for the entire FCS, which had $221 billion of assets on Sept. 30, 2010. Not only do none of the FCS banks meet the definition of “small,” but the entire FCS should be viewed as a single institution given the FCS’ highly interconnected finances— the joint-and-several liability of the five banks for the $179 billion of debt securities issued by the Funding Corp. and the extensive buying and selling of loan participations among FCS institu- tions. At the end of 2009, the FCS had $47 billion in notational value of swaps and other derivatives outstanding, a not insignificant amount. AgDirect Sidesteps FCS Regs As It Becomes Major FCS Lender AgDirect, a financing arm of FCS of America (FCSA), has become a major FCS lender outside of FCSA’s assigned territory, outside of FCA’s cooperative charter, and outside of borrower-rights protections mandated by Congress. FCSA, headquartered in Omaha and the second-largest FCS association with $15.3 billion in assets on Sept. 30, 2010, serves all of Nebraska, Wyoming, South Dakota, and Iowa. However, AgDirect (www.agdirectonline.com ) provides point-of-sale financing to farm-equipment dealers andmanufac- turers throughout the country. Over the last decade, AgDirect has become a significant piece of FCSA: In 2009, it accounted for 20 percent of FCSA’s overall loan growth. While AgDirect provides taxpayer-subsidized funding in direct competition with taxpaying banks, only once does it mention on its website that it is an FCS institution. Under AgDirect, individual point-of- sale transactions are written as a retail installment contract/security agree- ment/offer of participation/certificate of participation. Read the contract at www.aba.com/aba/documents/ag/ AgDirectRetailInstallmentCont.pdf. In both the offer and certification of participation, the dealer’s only option is to select 100 percent participation to AgDirect—the dealer provides none of the funding and retains none of the credit risk for what reportedly is a non- recourse loan. Accordingly, AgDirect does all the credit approval, sets the in- terest rate or lease-rate factor, funds the loan, files the UCC financing statement, and pays a sales incentive to the dealer and to the salesperson who submitted the application. Marketing materials AgDirect pro- vides to participating dealers raise some very interesting issues. For example, in a March 1, 2010, letter, AgDirect advises participating dealers that “you will no longer need to explain the [FCSA] stock ownership and pa- tronage process to customers. . . . New AgDirect financing for equipment pur- chases will not require stock purchases, or be eligible for patronage.” Read the letter at http://www.aba.com/aba/ documents/ag/AgDirectLetter.pdf. As