Life After LIBOR CMTA · Financial institutions found to be manipulating LIBOR for their own gain....

For financial professional use only. Not for distribution. This presentation does not constitute an offer or solicitation of securities.

Life After LIBOR

2 For financial professional use only. Not for distribution. This presentation does not constitute an offer or solicitation of any securities.

History


The beginning of the end of LIBOR

2012 Financial institutions found to be manipulating LIBOR for their own gain. Investigations, fines, jail terms and reputational damage ensue.

2013The International Organization of Securities Commissions (IOSCO) establishes principles for benchmark rates. LIBOR doesn’t meet the criteria.

June 2017The U.S. Alternative Reference Rates Committee (ARRC) selects SOFR as its recommended alternative to USD LIBOR.

July 2017 The U.K. Financial Conduct Authority says it will phase out LIBOR by 2021. At the time of the announcement, LIBOR underpinned more than $350 trillion in securities worldwide, according to Bloomberg.

April 2018New York Fed begins publishing SOFR.


The beginning of SOFR

2014The Federal Reserve Bank of NY convenes its Alternative Reference Rate Committee (ARRC) to identify best practices for U.S. alternative reference rates.

June 2017ARRC identifies broad UST repo financing rate SOFR as the preferred alternative to USD LIBOR.

April 3, 2018NY Fed begins publishing daily SOFR rates.

May 7, 2018CME launches SOFR futures.

July 26, 2018 Fannie Mae issues $6 billion of SOFR‐linked Floating Rate Notes (6m, 12m, 18m).

October 25, 2018 FASB adopts SOFR as a benchmark rate for hedging purposes.

2019Derivatives that reference SOFR are a key component in the transition due to the widespread use of contracts for hedging.

‐ Building liquidity in derivatives requires loans and mortgages to reference SOFR.

ARRC seeks to produce an indicative SOFR‐based term reference rate based on futures data.


What is the Secured Overnight Financing Rate (SOFR)?

What is SOFR?

● The Secured Overnight Financing Rate was selected by the Alternative ReferenceRates Committee to replace LIBOR

● It broadly measures the cost of borrowing cash overnight with U.S. Treasuries ascollateral

● The rate is a volume‐weighted median of transaction‐level data

How is it published?● The New York Fed publishes SOFR online at approximately 8 a.m. for the prior day'stransactions

● The rate includes nearly $750 billion+ in daily transactions

Characteristics

● Overnight: Unlike LIBOR, which is a term rate, SOFR is an overnight rate● Volatile: SOFR is more volatile than LIBOR or the effective Fed Funds rate●Minimal credit risk: SOFR should spike less in a credit event● Backward‐looking: ARRC is tackling how to build a forward‐looking SOFR term rate


LIBOR v. SOFR

Unsecured rate

Various maturities

Built‐in credit component

Partially transaction‐based

$500 million in underlying transactions1(3‐month LIBOR)

“The key challenge with LIBOR arises from the fact that unsecured borrowing transactions between banks have declined since 2008, reducing the size of the underlying market feeding into LIBOR submissions. SOFR, with its large range of observable transactions, will be a more robust, measurable and reliable benchmark. Thomas Pluta

Co‐Head of Global Rates TradingJ.P. Morgan

Leaving LIBOR: A Landmark Transition, jpmorgan.com

LIBOR

Secured rateOvernightMinimal credit riskWholly transaction‐based$750 billion in underlying transactions1

1Source: SIFMA.org

SOFR

V.


SOFR on the Move


SOFR moves higher when . . .

• The Federal Funds target rate climbsThe lowest U.S. rate is the rate paid by the Fed in reverse repurchase agreement (RRP) to investors that do not have access to interest on excess reserves (IOER). RRP is the lower bound of the Fed Funds target range. Repo trades relative to RRP, Fed Funds and IOER. As the Fed raises the target range, Repo should trade higher.

• More Treasury bills are issuedMoney market funds (MMFs) fund nearly $1 trillion of the $2 trillion market. MMFs can typically buy Repo (up to 7d), T bills and discount notes. If there is more bill issuance, 1‐month, 3‐month and 6‐month rates should all increase, as MMFs could substitute bills for Repo assets.

• Treasury issuance/dealer inventory are higherAs Treasury issues more debt, more collateral will most likely need to be funded, whether ownership sits with dealer desks or with levered investors.

• The Federal Reserve balance sheet decreasesThe Fed’s balance sheet unwind should put more collateral into the market, which will likely need to be funded via Repo. Conversely, the Fed halting its balance sheet unwind would remove an upward bias in Repo rates, all else being equal.


SOFR moves lower when . . .

• Government MMF balances riseMMFs are major Repo investors. Higher balances in government MMFs lead to more cash available for Repo and lower SOFR. Government MMFs gained significant balances relative to Prime Funds approaching money market reform in October 2016 and have largely held their lead.

• There are more shorts/specialsIf more securities go special in Repo, dealers’ cost of funding goes lower, and short sellers will lend cash at a lower rate to source specific collateral. General collateral (GC) will go lower as the same cash investors will compete for a smaller pool of GC collateral.

• Banks have more balance sheet availabilityBank balance sheets typically experience greater pressure at quarter‐end, year‐end, and sometimes month‐end, so GC tends to increase in these scenarios, and vice versa during periods of expanded bank balance sheet availability.

• Regulatory relief is providedRelief on certain regulatory capital calculations, such as LCR, CCAR, and GSIB, among others, may create more balance sheet availability across the street, which would push SOFR lower, all else being equal.

• New players come into the Repo spaceIn the current environment, balance sheet has been allocated from trading desks that traditionally run larger balance sheet/higher risk to Repo desks. This has created more balance sheet capacity. In addition, new players such as European and Asian banks have come into the space, where they are able to access Repo market.


SOFR in Action


What does a SOFR floater look like?

A lot like a Fed funds floater:

SOFR Floater Fed Funds Floater Treasury Floater

Index SOFR Fed Funds effective rate high rate from 13wk T bill auction

Coupon Frequency quarterly quarterly quarterlyReset Frequency daily daily daily

Reset Determination 1 business day prior 1 business day prior 1 business day prior

Coupon Lockout 2 ‐ 4 business days prior to interest date

4 business days prior to interest date

2 business days pror to FRN issue date or FRN interest date

Coupon Calculation simple average simple average

index rate computed on the most recent auction of 13‐week Treasury

bills that took place on a day before the accrual day, plus the

spread, divided by 360, subject to a minimum of zero

Day Count Basis actual/360 actual/360 actual/360

Minimum Rate minimum interest rate of 0.000% minimum interest rate of 0.000% 0.000% minimum daily interest accrual


GSEs Dominate Issuance

2018 SOFR Issuance = $36.4B2019 SOFR Issuance = $51.7BFrom July 2018 until today, GSEs have accounted for 80% of issuance

Issuer Name Ticker Number of IssuesTotal GSE SOFR Market Share

Amount Issued($ millions)

Federal Home Loan Banks FHLB 18 60.84% $43,200 Federal National Mortgage Association FNMA 7 18.31% $13,000 Federal Home Loan Mortgage Corporation FHLMC 16 17.21% $12,221 Federal Farm Credit Banks FFCB 3 2.11% $1,500 The World Bank IBRD 1 1.41% $1,000 Federal Agricultural Mortgage Corporation FAMCA 1 0.11% $80 Total GSE SOFR Issuance 46 $71,001

Source: Bloomberg as of 4/12/2019


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v011514

FHLB System Overview

HAWAII

ALASKA

Atlanta

Cincinnati

Dallas

Des MoinesIndianapolis

PittsburghSan Francisco

U.S. TerritoriesPuerto RicoVirgin Islands

GuamAmerican Samoa

Topeka

Chicago

Boston

New York

The 11 FHLBanks are government‐sponsored enterprises (GSEs)

organized as cooperatives under an act of Congress (Federal Home Loan

Bank Act of 1932)

FHLBanks serve the general public by providing readily available, low‐cost

funding to approximately 7,000 members, thereby increasing the availability of credit for

residential mortgage lending and investment in housing and community

development

FHLBanks fund their operations principally through the sale of debt securities

through the Office of Finance

Office of Finance

Debt Profile Reflects Member and Investor Demand

Source: FHLBanks Office of Finance – by settlement date – as of 3/31/19

($ in billions)

Total Debt Outstanding Bond Issuance*

14 17 40 12 16.5

166 123

82

41 36 19

54 89332

393 387 92

11575

70 36 37 17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019

Globals Bullets/TAPs FRNs Callables/Structured

LIBORandSOFRFRNs

349 304 524 482 477 129Gross Issuance:

571634

705 732 706 729

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017 2018 2019Globals Bullets/TAPs Floating Rate NotesCallable/Structured Discount Notes

1,034

847905

Advances989

1,031 1,011

*Coupon debt only – excludes discount notes

($ in billions)

*

*As of 12/31/18

FHLBank SOFR Debt Transition

The FHLBanks recognize our leading role in supporting development of liquidity in the SOFR‐linked debt market

• Part of the FHLBanks’ transition will be supporting our members transition plans which will lead to our need to source SOFR‐based funding

The System began its SOFR issuance program in November 2018 with these objectives• Support development of SOFR floating rate note (FRN) market through regular and consistent issuance• Encourage broad investor participation to promote market development and liquidity• Standardize payment and reset features that are consistent with market participants’ expectations

The FHLBanks anticipate a multi‐phased approach to developing our SOFR issuance platform

Initial focus is on multi‐dealer syndicated issues to foster transparency and liquidity• We expect to access the SOFR market in a regular and consistent fashion developing and maintaining a

curve across 3‐month to 24‐month maturities in the current phase• Diverse investor participation includes MMFs, State & Local Governments, Fund Managers, Financial

Institutions, Insurance & Pension Managers and Corporations

FHLBanks have issued $39.15 billion in SOFR FRNs(November thru March)

2/11/2019, $1.00

11/13/2018, $1.50

12/18/2018, $4.00

1/15/2019, $1.75

2/25/2019, $5.25

3/18/2019, $2.50

12/6/2018, $2.05

2/11/2019, $1.50

3/6/2019, $3.25

11/13/2018, $2.50

1/15/2019, $1.00

2/19/2019, $2.55

3/25/2019, $4.25 1/22/2019, $1.50

12/6/2018, $1.55

3/13/2019, $3.00

‐2

0

2

4

6

8

10

12

14

27‐Oct 16‐Nov 6‐Dec 26‐Dec 15‐Jan 4‐Feb 24‐Feb 16‐Mar 5‐Apr

SOFR

+ ba

sis points

3 Months 6 Months 9 Months 12 Months 18 Months 24 Months

4/1/19

The Farm Credit SystemREGINA GILLSVP INVESTOR RELATIONSFEDERAL FARM CREDIT BANKS FUNDING CORPORATION

CMTA – APRIL 2019

Part of the Farm Credit System

OVERVIEW OF THE SYSTEM

Created by an Act of Congress (1916)

Government Sponsored Enterprise (GSE) created to support rural communities and agriculture with reliable, consistent credit and financial services

Direct lender to U.S. agriculture (farmers, ranchers, ag cooperatives, etc.)

Network of cooperatives owned by its borrowers (farmers, ranchers, agricultural cooperatives and rural customers)

Regulated and examined by the Farm Credit Administration (FCA), an independent agency in the Executive Branch of the US Government

Federal Farm Credit Banks Consolidated Systemwide Debt Securities are issued to fund the System’s loan portfolio, investments and operations

The Farm Credit System funds approximately 40% of all US farm business debt. (March 2019, USDA ERS)

19

Farm Credit supports rural communities and agriculturewith reliable, consistent credit and financial services today and tomorrow.


12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018

100.8 107.8 114.5 119.5 124.9

46.349.2

50.3 51.7 53.432.9

36.639.6

42.246.1

21.625.8

27.428.0

29.2

10.7

11.411.5

11.811.7

4.8

5.15.5

5.66.6 Agricultural Export

Finance

Rural residential realestate and other loans

Rural Infrastructure

Agribusiness loans

Production &intermediate‐termloansGenerally ag loans ‐collateralized by land

GROSS LOANS The System continues to experience moderate loan growth A variety of loan types are available to qualified borrowers Loan eligibility is based on credit, collateral AND repayment capacity/cash

flow.

20

($ billions)

217.1

235.9248.8

258.8271.9

Part of the Farm Credit System 21

SYSTEMWIDE DEBT SECURITIES OUTSTANDING

($ billions)

Please note columns may not total due to rounding *Includes Linked Deposits and Retail Bonds

12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 3/31/19

27.0 31.3 29.6 25.6 22.8 20.7

8.2 5.0 4.5 1.0 0.0 0.0

56.5 58.8 59.7 72.2 79.0 78.4

57.5 60.4 68.0 67.1 71.1 70.8

75.286.3

95.8 99.2 108.6 111.10.4

0.4

0.30.2 0.3 0.3

$224.8$242.2

$257.9$265.3 $281.8 $281.3

Other*

Floating‐Rate Bonds

Fixed‐Rate Non Callable Bonds

Fixed‐Rate Callable Bonds

Designated Bonds

Discount Notes


RELEVANCE TO FARM CREDIT

Floating Rate Bonds:LIBOR$83B

Floating Rate Bonds:Other$28B

Discount Notes$21B

Fixed Rate Callable$78B

Fixed RateNon‐Callable

$71B

Farm Credit Debt Outstandingat 3/31/2019


LIBOR Transition Efforts

Goals

– Support the market’s transition from LIBOR– Support the transition of the Banks of the Farm Credit System

– Minimize basis risk– Encourage consistency throughout GSE SOFR market

Farm Credit Transition Efforts

ISDA Workgroup membership ARRC’s FRN Sub‐workgroup memberships Farm Credit LIBOR Workgroup FCA Informational Memorandum SOFR floater issuance

23


FFCB US$500 million SOFR‐Indexed Floating Rate Notes due 06 February 2020Transaction Details

Issuer: Federal Farm Credit Banks

Issuer Rating: Aaa/AA+/AAA (Moody’s/S&P/Fitch)

Pricing Date: January 29, 2019

Settle Date: February 06, 2019

Size: $500,000,000

Price: SOFR+3bps

Maturity Date: February 06, 2020

CUSIP: 3133EJ6X2

Interest Payment Dates: Quarterly

Reset Dates: Daily

Reset Determination: 1 business day prior

Calculation Date: 2 business days prior toeach Interest Payment Date

Coupon Calculation: Simple Average

Day Count Basis: ACT/360

Leads: Bank of America, TD Securities

FARM CREDIT INAUGURAL SOFR‐INDEXED FLOATING RATE NOTE

11


FFCB US$500 million SOFR‐Indexed Floating Rate Notes due 18 March 2021Transaction Details



Pricing Date: March 12, 2019

Settle Date: March 18, 2019

Size: $500,000,000

Price: SOFR+12bps

Maturity Date: March 18, 2021

CUSIP: 3133EKDM5


Reset Dates: Daily





Leads: Daiwa, Jefferies

FARM CREDIT SECOND SOFR‐INDEXED FLOATING RATE NOTE

12


FFCB US$500 million SOFR‐Indexed Floating Rate Notes due 15 January 2021Transaction Details



Pricing Date: April 9, 2019

Settle Date: April 15, 2019

Size: $500,000,000

Price: SOFR+10.5bps

Maturity Date: January 15, 2021

CUSIP: 3133EKHC3


Reset Dates: Daily





Leads: Citigroup, Wells Fargo

FARM CREDIT THIRD SOFR‐INDEXED FLOATING RATE NOTE

12


DISCLAIMER

This overview is provided for general information purposes only. It is not an offer to sell or a solicitation of an offer to buy any Systemwide Debt Securities. Debt Securities are offered only in jurisdictions where permissible by offering documents available through our Selling Group. Systemwide Debt Securities may not be eligible for sale in certain jurisdictions or to certain persons and may not be suitable for all types of investors. All statements made in this overview are qualified in their entirety by the information in the most recent Federal Farm Credit Banks Consolidated Systemwide Bonds and Discount Notes Offering Circular, including the financial and other Systemwide information incorporated therein, and other offering documents. Copies of offering documents can be obtained, if permitted by applicable law through Selling Group members or through the Funding Corporation’s website at www.farmcreditfunding.com.

Any forward‐looking statements in this presentation are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in the System’s most recent Annual and Quarterly Information Statements. The System undertakes no duty to update or revise any forward‐looking statements, whether as a result of new information, future events or otherwise.


NEW NATIONAL MESSAGING CAMPAIGN

The “One Mission. Many Voices.” national messaging campaign brings FarmCredit’s mission to life through the many voices of its customers, directors,employees, and others. Please visit www.farmcreditvoices.com to learn more.

Life After LIBOR CMTA · Financial institutions found to be manipulating LIBOR for their own gain....

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