HomeMy WebLinkAboutRES 2023-20RESOLUTION NO. 2023-20
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DIAMOND
BAR, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA,
ADOPTING THE STATEMENT OF INVESTMENT
WHEREAS, it is the City's policy to annually adopt the City Investment Policy; and
WHEREAS, the Investment Policy is intended to provide guidelines for the prudent
investment of the City's temporarily idle cash and to outline the policies for maximizing
the efficiency of the City's cash management system.
NOW, THEREFORE, the City Council of the City of Diamond Bar does hereby
resolve as follows:
Section 1. That the City Council of the City of Diamond Bar adopts the attached
Statement of Investment Policy (Exhibit A).
PASSED, APPROVED AND ADOPTED this 6t" day of June, 2023.
CITY OFQIAIV�OND BAR
Ar4�rew �1iol�, Mayor
ATTEST:
I, Kristina Santana, City Clerk of the City of Diamond Bar, do hereby certify that
the foregoing Resolution was passed, approved and adopted at a regular meeting of the
City Council of the City of Diamond Bar held on the 6t" day of June, 2023, by the following
vote:
AYES: COUNCIL MEMBERS: Low, Teng, M/Chou
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: Tye, MPT/Liu
ABSTAINED: COUNCIL MEMBERS: None
Kristina Santana, City Clerk
Attachment: Exhibit "A" —Investment Policy Effective July 1, 2023.
City Council Policy and Procedure
Number: 2023-01 Reviewed: Annually/As-Needed
Effective Date: Revised Date(s): N/A
07/01/2023
nveWmem Policy
� . Policy
1.1 This Statement is intended to provide guidelines for the prudent
investment of the City of Diamond Bar's ("City") temporarily idle cash
and to outline the policies for maximizing the efficiency of the City's cash
management system. The ultimate goal is to enhance the economic
status of the City while protecting its pooled funds in accordance with
the applicable local, state and federal laws.
It is the policy of the City Council to review, update and adopt the City's
Investment Policy on an annual basis.
2. Scope
2.1 This investment policy applies to all financial assets of the City of
Diamond Bar.
The Policy applies to the following funds and is accounted for in the
City's annual audited financial statements.
a. General Fund
b. Special Revenue Funds
c. Debt Service Funds
d. Capital Improvement Fund
e. Internal Service Funds
3. Standards of Prudence
3.1 The City Treasurer (or Finance Director) authorized to make investment
decisions on behalf of the City of Diamond Bar investing public funds
Effective Date: 07/01 /2023 Page 1 of 37
pursuant to this policy are trustees and therefore fiduciaries subject to
the prudent investor standard. When investing, reinvesting, purchasing,
acquiring, exchanging, selling and managing public funds, a trustee
shall act with care, skill, prudence and diligence under the
circumstances then prevailing, including but not limited to, the general
economic conditions and the anticipated needs of the City, that a
prudent person acting in a like capacity and familiarity with those
matters would use in the conduct of funds of a like character and with
like aims, to safeguard the principal and maintain the liquidity needs of
the City. Within the limitations of this section and considering individual
investments as part of an overall strategy, the City Treasurer or Finance
Director is authorized to acquire investments as authorized by law.
4. Investment Objectives
4.1 The investment of funds of the City of Diamond Bar is directed to the
goals of safety, liquidity and yield. The authority governing investments
for municipal governments is set forth in the Government Code, Sections
53600, et. seq.
4.1.1. Safety. Safety of principal is the foremost objective of the
investment program. Investments of the City of Diamond Bar shall
be undertaken in a manner that seeks to ensure the preservation
of capital in the overall portfolio. To attain this objective, the City
of Diamond Bar will diversify its investments by investing funds
among a variety of securities with independent returns. The City
will operate only in those investments that are considered very
safe.
4.1.2. Liquidity The investment portfolio will remain sufficiently liquid to
meet all operating requirements which might be reasonably
anticipated. This is accomplished by structuring the portfolio so
that securities mature at the same time as cash is needed to meet
anticipated demands. Additionally, since all possible cash
demands cannot be anticipated, the portfolio will consist largely
of securities with active secondary or resale markets or local
government investment pools which offer same -day liquidity for
short-term funds.
4.1.3. Yield. The investment portfolio shall be designed with the
objective of achieving a competitive market rate of return or
yield, while taking into account the investment risk constraints and
liquidity needs. Return on investment is of secondary importance
Effective Date: 07/01 /2023 Page 2 of 37
compared to safety and liquidity. The core investments shall be
limited to low risk securities to be held to maturity with the following
exceptions:
a. A security with declining credit may be sold early to minimize
loss of principal.
b. A security swap would improve the quality, yield or target
duration of the portfolio.
c. The liquidity needs of the portfolio require security to be sold.
5. Delegation of Authority
5.1 Authority to manage the City of Diamond Bar's investment program is
derived from Section 2.16.210 of the City of Diamond Bar's Municipal
Code which designates the City Manager to perform all duties
associated with the legal function of the treasurer position.
Management responsibility is hereby delegated to the City Treasurer
who shall be responsible for all transactions undertaken and for
establishing a system of controls to regulate the activities of subordinate
officials, and their procedures in the absence of the Treasurer.
6. Ethics and Conflicts of Interest
6.1 Officers and employees involved in the investment process shall refrain
from personal business activity that could conflict with proper execution
of the investment program or which could impair their ability to make
impartial investment decisions. Employees and investment officials are
required to file annual disclosure statements as required for "public
officials who manage public investments" (as defined and required by
the Political Reform Act and related regulations, being Government
Code Sections 81000 and the Fair Political Practices Commission [FPPC]).
7. Authorized Financial Dealers and Institutions
7.1 The Treasurer (or Finance Director) will maintain a list of approved
financial institutions authorized to provide investment services to the
public agency in the State of California. A determination should be
made to insure that all approved broker/dealer firms and individuals
covering the City of Diamond Bar are reputable and trustworthy. In
addition, the broker/dealer firms should have the ability to meet all of
their financial obligations in dealing with the City of Diamond Bar. The
Effective Date: 07/01/2023 Page 3 of 37
firms and individuals covering the City of Diamond Bar should be
knowledgeable and experienced in Public Agency investing and the
investment products involved. No public deposit shall be made except
in a qualified public depository as established by State law. All financial
institutions and broker/dealers who desire to conduct investment
transactions with the City of Diamond Bar must supply the City Treasurer
or the Finance Director with the following$ audited financial statements,
proof of NASD certification, trading resolution, proof of State of
California registration, completed broker/dealer questionnaire,
certification of having read the City of Diamond Bar's investment policy
and depository contracts.
An annual review of the financial condition and registrations of qualified
bidders will be conducted by the Treasurer or the Finance Director. A
current audited financial statement is required to be on file for each
financial institution and broker/dealer with which the City of Diamond
or invests.
8. Authorized and Suitable Investments
8.1. The City's investments are governed by the California Government
Code (CGC). Specific types of investments are defined in CGC 53635.
Also, CGC 53635.2 permits the use of CGC 53601 investment instruments,
therefore, both CGC 53601 et seq. and CGC 53635 et seq. are the
governing sections pertaining to legal investments. Investments will only
be made in authorized securities with a maturity date of five (5) years or
less from the transaction settlement date.
For the purpose of these investments, the compliance with the
investment percentage(s), in regards to the total investment portfolio,
shall be calculated on the date the investment is acquired. If the
percentage is legally compliant on the date of purchase, then
compliance with the law shall have been met.
Investment
California Legal Requirements
City of Diamond Bar Requirements
Government Obligations:
Authorized by CGC 53601(b), (f)
U.S. Treasury and Agency Obligations
(U.S. Treasury obligations are bills,
l . No limit on amount in the portfolio
notes and bonds issued by and direct
obligations of the U.S. Government.
Agency obligations are notes and
Effective Date: 07/01/2023 Page 4 of 37
bonds of Federal agencies and
government sponsored enterprises,
although not direct obligations of the
Treasury, they involve federal
sponsorship or guarantees)
Bankers Acceptances
(A draft or bill of exchange accepted
by a bank or trust company and
brokered to investors in a secondary
market. Its purpose is to facilitate
trade and provide liquidity to the
import-export markets).
Commercial Paper
(Short term, unsecured, promissory
notes issued by firms in the open
market. These notes are generally
backed by a bank credit facility,
guarantee/bond of indemnity or
some other support agreement.
Medium Term Notes
(Corporate notes, deposit notes and
bank notes sold by an agent in the
open market on a continually offered
basis. These notes are debt
obligations generally unsecured,
although some issues come to market
on a collateralized or securitized basis.
Negotiable Certificates of Deposit
(Issued by commercial banks and
thrift institutions against funds
deposited for specified periods of
time and earn specified or variable
rates of interest. NCD's differ from
other CD's because of their increased
liquidity as they are actively traded
on the secondary market. These
deposits are uninsured and
uncollateralized promissorynotes.
Authorized by CGC 53601(g)
l . Not to exceed 180 days
2. Not to exceed 40% of portfolio
3. Not to exceed 30% of portfolio if
done with one bank.
Authorized by CGC 53601 (h), CGC
53601.2 & CGC 53635 (a)
l . Not to exceed 270 days
2. Not to exceed 25% of portfolio
3. No more than 10% of portfolio may
be invested in a single issuer
4. Must be rated P-1 by Moody's
Investors Service or A-1 by Standard
and Poor's
Authorized by CGC 53601 (k), CGC
53601.2
l . Must have a minimum "A" rating
2. Not to exceed 307o of portfolio
3. Not to exceed 5% of portfolio with
single issuer
Authorized by CGC 53601 (i), GCC
53638
1. Not to exceed 30% portfolio
2. All purchases must be from
institutions rated by a nationally
recognized rating organization as
designated by the Security and
Exchange Commission.
Effective Date: 07/Ol /2023 Page 5 of 37
Certificates of Deposit
Authorized by CGC 53635, 53635.2,
(Unsecured, direct obligations of a
53635.81 53636, 53637, 53638, 53641
U.S. bank or savings & loan
association. Federal Deposit
1. Must not exceed 30% of portfolio
Insurance Corporation (FDIC)
2. Deposits in excess of the $250,000
coverage is provided for government
FDIC insured limit shall be collateralized
deposits, but limited to the first
at a level of 110% of market value of
$250,000 on deposit on behalf of a
principal and accrued interest,
given entity at a single financial
institution. California law requires that
deposits of public funds shall be
collateralized if not insured).
Repurchase Agreement
Authorized by CGC 53601 (j)
(These are agreements between an
investor (the pool) who agrees to
1. Market value of the security must
purchase securities and a seller
be 102% or greater, and adjusted
(broker/dealer) who commits to
quarterly.
repurchase these securities at a later
2. The minimal market value of 102%
date at the same price, plus interest).
can't be established by more than
the next business day.
3. Requires a signed Master
Repurchase Agreement from the
participating bank or broker/dealer.
Local Agency Obligations
Authorized by CGC 53601 (a) (c) (d)
(Bonds, notes warrants or other
evidences of indebtedness of any
1. Must comply with the financial
local agency or by a department,
requirements pertaining to temporary
board or authority of any local
borrowing (TRANS, RANS, GANS) as
agency within the 50 United States),
shown in CGC 53820 - 53858.
2. Minimum credit requirement -
Issuers must be at or above the
following investment grade from one
of these rating firms:
Standard & Poors - Sp-1 or A; Fitch - F-
1 or A; Mood 's - MIG 1 or A
Money Market Funds
Authorized by CGC 53601 (1)
Shares of beneficial interest issued by
management companies. Shares
1. The pooled investments that
represent ownership of diversified
comprise these funds must comply
portfolio securities, which are
with 53601 and 53630 inclusive.
redeemable at their net asset value).
Local Agency Investment Fund (LAIF)
Authorized by CGC 16429.1 b
Effective Date: 07/01/2023 Page 6 of 37
Provides high liquidity allowing
deposits to be credited to the City's 1. No more than $75 million (LAIF
checking account within twenty-four account limit) permitted to be
(24) hours. State Pool funds are invested.
operated directly by the Office of the
State Treasurer, who commingles
state and local funds.
Supranati'onal Authorized by CGC 53601 (q)
United States dollar denominated
senior unsecured unsubordinated 1. Maximum maturity of five years or
obligations issued or unconditionally
less
9. Prohibited and Restricted Categories of Investments
9.1 The following investments are either prohibited by law or authorized by
law and prohibited by the City Treasurer.
Inverse Floaters
Prohibited
b
CGC
53601.E
Range Notes
Prohibited
by
CGC
53601.6
Mortgage Derived, Interest -only Strips
Prohibited
by
CGC
53601.6
Zero "Strip" Coupons
Prohibited
by
CGC
53601.6
Futures Market
Allowable
by
CGC
53601.6
Prohibited
by
City Treasurer
Options Market
Allowable
by
CGC
53601.6
Prohibited
by
City Treasurer
Priority Obligations
Allowable
by
CGC
53601
(n)
Prohibited
by
City Treasurer
10. Review of Investment Portfolio
10.1 The securities held by the City of Diamond Bar must be in compliance
with Section 8.0 Authorized and Suitable Investments at the time of
purchase. Because some securities may not comply with Section 8.0
subsequent to the date of purchase the City Treasurer shall at least
quarterly review the portfolio to identify those securities that do not
comply. The City Treasurer shall establish procedures to report to the
Effective Date: 07/01/2023 Page 7 of 37
City Council major and critical incidences of noncompliance identified
through the review of the portfolio.
Should any investment listed in Section 8 exceed a percentage -of -
portfolio limitation due to an incident such as fluctuation in portfolio size,
the affected securities may be held to maturity to avoid losses. When
no loss is indicated, the Treasurer shall consider rebalancing the portfolio
after evaluating the expected length of time that it will be imbalanced.
Portfolio percentage limits are in place in order to ensure diversification
of the City investment portfolio, a small temporary imbalance will not
significantly impair that strategy.
11. Collateralization
11.1 Collateralization will be required on two types of investments:
certificates of deposit and repurchase agreements. In order to
anticipate market changes and provide a level of security for all funds,
the collateralization level will be 1 10% of market value of principal and
accrued interest. The City Treasurer, at his/her discretion may waive the
collateral requirement for deposits up to the maximum dollar amount
which are covered by the Federal Deposit Insurance Corporation,
currently $250,000,
12. Safekeeping and Custody
12.1 All security transactions, including collateral for repurchase agreements,
entered into by the City of Diamond Bar shall be conducted on a
delivery versus payment (DVP) basis. Securities will be held by a third
party custodian designated by the Treasurer and evidenced by
safekeeping receipts.
13. Maximum Maturities
13.1 To the extent possible the City of Diamond Bar will attempt to match its
investments with anticipated cash flow requirements. The prescribed
method of the City of Diamond Bar shall be referred to as "layering" the
investments. Monies not needed to cover immediate operating costs
may be invested up to a five year maturity.
Effective Date: 07/O1 /2023 Page 8 of 37
14. Internal Controls
14.1 The City Treasurer and the Finance Director shall establish procedures
that separate the internal responsibility for management and
accounting of the investment portfolio. An analysis by an independent,
external auditor shall be conducted periodically to review internal
controls, account activity and compliance with policies and
procedures.
15. Reporting
15.1 As required by California Government Code Section 53607, a monthly
report of investments will be provided to the City Council. The required
elements of this report are as follows:
a. Type of investment
b. Issuer
c. Date of Maturity
d. Amount of deposit or cost of security
e. Current market value of securities with maturity in excess of
twelve months
f. Statement relating the report to the Statement of Investment
Policy
g. Rate of interest
h. Statement that there are sufficient funds to meet the next six
months' obligations
The basic premise underlying the City of Diamond Bar's investment
philosophy is to insure that money is always available when needed.
16. Investment Policy Adoption
16.1 The City of Diamond Bar's investment policy shall be adopted by
resolution of the City Council. The policy shall be reviewed annually by
the City Council and any modifications made thereto must be
approved by the City Council.
Effective Date: 07/Ol /2023 Page 9 of 37
Attachments:
Appendix A - Broker Dealer Questionnaire
Appendix B - Glossary of Cash and Investment Management Terms
Appendix C - Local Agency Investment Fund Description
Effective Date: 07/O1 /2023 Page 10 of 37
APPENDIX A
CITY OF DIAMOND BAR
BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION
l . Name of Firm:
2. Address:
3. Telephone:
4. Broker's Representative to the City (attach resume):
Name:
Title:
Telephone:
5. Manager/Partner-in-Charge (attach resume):
Name:
Title:
Telephone:
6. List all personnel who will be trading with or quoting securities to City
empIoyees (attach resume)
Name:
Title:
Telephone:
Effective Date: 07/Ol /2023 Page 1 1 of 37
7. Which of the above personnel have read the City's investment policy?
8. Is your firm a primary dealer in United States Government Secures?
Yes
9. List the total volume of United States Government and Agency Securities for
the last calendar year.
Firm -wide $
Your local office $
No. of Transactions
No. of Transactions
10. Which instruments are offered regularly by your local office?
Treasury Bills
Treasury Notes/Bonds
BA's (domestic)
BA's (foreign)
Commercial Paper
Agencies (specify):
CMO's
Bank CD's
S&LCD's
Repos
Reverse Repos
Other (specify):
1 1. References -- Please identify your most directly comparable public
sector clients in our geographical area.
Entity
Contact
Telephone
Client Since
12. Have any of your clients ever sustained a loss on a securities transaction
arising from a misunderstanding or misrepresentation of the risk
characteristics of the instrument? If so, explain.
Effective Date: 07/Ol /2023 Page 12 of 37
13. Has your local office ever subject to a regulatory or state/federal agency
investigation for alleged improper, fraudulent, disreputable or unfair
activities related to the sale of securities? Have any of your employees
been so investigated? If so explain:
14. Has a client ever claimed in writing that your firm was responsible for
investment losses? If so, explain.
15. Explain your normal custody and delivery process. Who audits these
fiduciary systems? Can you meet safekeeping requirements?
16. How many and what percentage of your transactions failed
Last month? Last year?
17. Describe the capital line and trading limits of the office that would conduct
business with the City of Diamond Bar.
18. Does your firm participate in the S.I.P.C. insurance program if not, explain.
Effective Date: 07/Ol /2023 Page 13 of 37
1 9. What portfolio information, if any, do you require from your clients?
20. What reports, transactions, confirmations and paper trail will the City
receive?
21 . Does your firm offer investment training to your clients?
22. Please enclose the following:
Latest audited financial statements.
Samples of reports, transactions, and confirmations the City will receive.
Samples of research reports and/or publications that your firm regularly
provides to clients.
Complete schedule of fees and charges for various transactions.
Effective Date: 07/Ol /2023 Page 14 of 37
***CERTIFICATION***
I hereby certify that 1 have personally read the Statement of Investment Policy of
the City of Diamond Bar, and have implemented reasonable procedures and a
system of controls designed to preclude imprudent investment activities arising
out of transactions conducted between our firm and the City of Diamond Bar.
All sales personnel will be routinely informed of the City's investment objectives,
horizons, outlooks, strategies and risk constraints whenever we are so advised by
the City. We pledge to exercise due diligence in informing the City of Diamond
Bar of all foreseeable risks associated with financial transactions conducted with
our firm. Under penalties of perjury, the responses to this questionnaire are true
and accurate to the best of my knowledge.
Signed
Title
Countersignature*
Title
Date
Date
* Company president or person in charge of government securities operations.
Effective Date: 07/Ol /2023 Page 15 of 37
Appendix B
Glossary of Cash and Investment Management Terms
Accrued Interest. Interest earned but which has not yet been paid a received.
Agency. See "Federal Agency Securities."
Ask Price. Price at which abroker/dealer offers to sell a security to an investor.
Also known as "offered price."
Asset Backed Securities (ABS). Afixed-income security backed by notes or
receivables against assets other than real estate. Generally issued by special
purpose companies that "own" the assets and issue the ABS. Examples include
securities backed by auto loans, credit card receivables, home equity loans,
manufactured housing loans, farm equipment loans and aircraft leases.
Average Life. The average length of time that an issue of serial bonds and/or
term bonds with a mandatory sinking fund feature is expected to be
outstanding.
Bankers' Acceptance (BA's). A draft or bill of exchange drawn upon and
accepted by a bank. Frequently used to finance shipping of international
goods. Used as a short-term credit instrument, bankers' acceptances are traded
at a discount from face value as a money market instrument in the secondary
market on the basis of the credit quality of the guaranteeing bank.
Basis Point. One hundredth of one percent, or 0.01 �. Thus 1%equals 100 basis
points.
Bearer Security. A security whose ownership is determined by the holder of the
physical security. Typically, there is no registration on the issuer's books. Title to
bearer securities is transferred by delivery of the physical security or certificate.
Also known as "physical securities."
Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills
program, ashort-term debt securities issuance program to supplement its
existing discount note program. The program includes a schedule of larger,
weekly issues in three- and six-month maturities and biweekly issues in one-year
for Benchmark Bills. Each issue is brought to market via a Dutch (single price)
auction. FNMA conducts a weekly auction for each Benchmark Bill maturity and
accepts both competitive and non-competitive bids through a web based
Effective Date: 07/01 /2023 Page 16 of 37
auction system. This program is in addition to the variety of other discount note
maturities, with rates posted on a daily basis, which FNMA offers. FNMA's
Benchmark Bills are unsecured general obligations that are issued in book- entry
form through the Federal Reserve Banks. There are no periodic payments of
interest on Benchmark Bills, which are sold at a discount from the principal
amount and payable at par at maturity. Issues under the Benchmark program
constitute the same credit standing as other FNMA discount notes; they simply
add organization and liquidity to the short-term Agency discount note market.
Benchmark Notes/Bonds: Benchmark Notes and Bonds are a series of FNMA
'bullet" maturities (non -callable) issued according to a pre -announced
calendar. Under its Benchmark Notes/Bonds program, 2, 31 5, 10 and 30- year
maturities are issued each quarter. Each Benchmark Notes new issue has a
minimum size of $4 billion, 30- year new issues having a minimum size of $1 billion,
with re -openings based on investor demand to further enhance liquidity. The
amount of non -callable issuance has allowed FNMA to build a yield curve in
Benchmark Notes and Bonds in maturities ranging from 2 to 30 years. The
liquidity emanating from these large size issues has facilitated favorable
financing opportunities through the development of a liquid overnight and term
repo market. Issues under the Benchmark program constitute the some credit
standing as other FNMA issues; they simply add organization and liquidity to the
intermediate- and long-term Agency market.
Benchmark. A market index used as a comparative basis for measuring the
performance of an investment portfolio. A performance benchmark should
represent a close correlation to investment guidelines, risk tolerance and
duration of the actual portfolio's investments.
Bid Price. Price at which abroker/dealer offers to purchase a security from an
investor.
Bond Market Association (BMA). The bond market trade association
representing the largest secures markets in the world. In addition to publishing
a Master Repurchase Agreement, widely accepted as the industry standard
document for Repurchase Agreements, the BMA also recommends bond
market closures and early closes due to holidays.
Bond. Financial obligation for which the issuer promises to pay the bondholder
(the purchaser or owner of the bond) a specified stream of future cash flows,
including periodic interest payments and a principal repayment.
Effective Date: 07/Ol /2023 Page 17 of 37
Book Entry Securities. Securities that are recorded in a customer's account
electronically through one of the financial markets electronic delivery and
custody systems, such as the Fed Securities wire, DTC and PTC (as opposed to
bearer or physical securities). The trend is toward a certificate -free society in
order to cut down on paperwork and to diminish investors' concerns about the
certificates themselves. The vast majority of securities are now book entry
securities.
Book Value. The value at which a debt security is reflected on the holder's
records at any point in time. Book value is also called "amortized cost" as it
represents the original cost of an investment adjusted for amortization of
premium or accretion of discount. Also called "carrying value." Book value can
vary over time as an investment approaches maturity and differs from "market
value" in that it is not affected by changes in market interest rates.
Broker/Dealer. A person or firm transacting securities business with customers. A
"broker" acts as an agent between buyers and sellers, and receives a
commission for these services. A "dealer" buys and sells financial assets from its
own portfolio. A dealer takes risk by owning inventory of securities, whereas a
broker merely matches up buyers and sellers. See also "Primary Dealer."
Bullet Notes/Bonds. Notes or bonds that have a single maturity date and are
non -callable.
California Local Agency Bonds: Bonds that are issued by a California county,
city, city and county, including a chartered city or county, school district,
community college district, public district, county board of education, county
superintendent of schools, or any public or municipal corporation.
Call Date. Date at which a call option may be or is exercised.
Call Option. The right, but not the obligation, of an issuer of a security to redeem
a security at a specified value and at a speced date or dates prior to its stated
maturity date. Most fixed -income calls are a par, but can be at any previously
established price. Securities issued with a call provision typically carry a higher
yield than similar securities issued without a call feature. There are three primary
types of call options (1) European - one-time calls, (2) Bermudan - periodically
on a predetermined schedule (quarterly, semi-annual, annual), and (3)
American - continuously callable at any time on or after the call date. There is
usually a notice period of at least 5 business days prior to a call date.
Effective Date: 07/Ol /2023 Page 18 of 37
Callable Bonds/Notes. Securities, which contain an imbedded call option giving
the issuer, the right to redeem the securities prior to maturity at a predetermined
price and time.
Certificate of Deposit (CD). Bank obligation issued by a financial institution
generally offering a fixed rate of return (coupon) for a specified period of time
(maturity). Can be as long as 10 years to maturity, but most CDs purchased by
public agencies are one year and under.
Collateral. Investment securities or other property that a borrower pledges to
secure repayment of a loan, secure deposits of public monies, or provide
security for a repurchase agreement.
Collateralization. Process by which a borrower pledges securities, property, or
other deposits for securing the repayment of a loan and/or security.
Collateralized Mortgage Obligation (CMO). A security that pools together
mortgages and separates them into short, medium, and long-term positions
(called tranches). Tranches are set up to pay different rates of interest
depending upon their maturity. Interest payments are usually paid monthly. In
"plain vanilla" CMOs, principal is not paid on a tranche until all shorter tranches
have been paid off. This system provides interest and principal in a more
predictable manner. A single pool of mortgages can be carved up into
numerous tranches each with its own payment and risk characteristics.
Commercial Paper. Short term unsecured promissory note issued by a company
or financial institution. Issued at a discount and matures for par or face value.
Usually a maximum maturity of 270 days, and given a short-term debt rating by
one or more NRSROs.
Convexity. A measure of a bond's price sensitivity to changing interest rates. A
high convexity indicates greater sensvity of a bond's price to interest rate
changes.
Corporate Note. A debt instrument issued by a corporation with a maturity of
greater than one year and less than ten years.
Counterparty. The other party in a two party financial transaction. "Counterparty
risk" refers to the risk that the other party, to a transaction, will fail in its related
obligations. For example, the bank or broker/dealer in a repurchase
agreement.
Effective Date: 07/Ol /2023 Page 19 of 37
Coupon Rate. Annual rate of interest on a debt security, expressed as a
percentage of the bond's face value.
Current Yield. Annual rate of return on a bond based on its price. Calculated
as (coupon rate / price), but does not accurately reflect a bond's true yield
level.
Custody. Safekeeping services offered by a bank, financial institution or trust
company, referred to as the "custodian." Service normally includes the holding
and reporting of the customer's securities, the collection and disbursement of
income, securities settlement and market values.
Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions,
buying and selling for his own account.
Delivery Versus Payment (DVP). Settlement procedure in which securities are
delivered versus payment of cash, but only after cash has been received. Most
security transactions, including those through the Fed Securities Wire system and
DTC, are done DVP as a protection for both the buyer and seller of securities.
Depository Trust Company (DTC). A firm through which members can use a
computer to arrange for securities to be delivered to other members without
physical delivery of certificates. A member of the Federal Reserve System and
owned mostly by the New York Stock Exchange, the Depository Trust Company
uses computerized debit and credit entries. Most corporate securities,
commercial paper, CDs and BAs clear through DTC.
Derivatives. For hedging purposes, common derivatives are options, futures,
swaps and swaptions. All Collateralized Mortgage Obligations ("CMOs") are
derivatives. (1) Financial instruments whose return profile is linked to, or derived
from, the movement of one or more underlying index or security, and may
include a leveraging factor, or (2) financial contracts based upon notional
amounts whose value is derived from an underlying index or security (interest
rates, foreign exchange rates, equities or commodities).
Derivative Security. Financial instrument created from, or whose value depends
upon, one or more underlying assets or indexes of asset values.
Designated Bond. FFCB's regularly issued, liquid, non -callable securities that
generally have a 2 or 3 year original maturity. New issues of Designated Bonds
are $1 billion or larger. Re -openings of existing Designated Bond issues are
generally a minimum of $100 million. Designated Bonds are offered through a
Effective Date: 07/01 /2023 Page 20 of 37
syndicate of two to six dealers. Twice each month the Funding Corporation
announces its intention to issue a new Designated Bond, reopen an existing
issue, or to not issue or reopen a Designated Bond. Issues under the Designated
Bond program constitute the same credit standing as other FFCB issues; they
simply add organization and liquidity to the intermediate- and long-term
Agency market.
Discount Notes. Unsecured general obligations issued by Federal Agencies at a
discount. Discount notes mature at par and can range in maturity from
overnight to one year. Very large primary (new issue) and secondary markets.
Discount Rate. Rate charged by the system of Federal Reserve Banks on
overnight loans to member banks. Changes to this rate are administered by the
Federal Reserve and closely mirror changes to the "fed funds rate."
Discount Securities. Non -interest bearing money market instruments that are
issued at discount and redeemed at maturity for full face value. Examples
include: U.S. Treasury Bills, Federal Agency Discount Notes, Bankers'
Acceptances and Commercial Paper.
Discount. The amount by which a bond or other financial instrument sells below
its face value. See also "Premium."
Diversification. Dividing investment funds among a variety of security types,
maturities, industries and issuers offering potentially independent returns.
Dollar Price. A bond's cost expressed as a percentage of its face value. For
example, a bond quoted at a dollar price of 95/21 would have a principal cost
of $955 per $1,000 of face value.
Duff &Phelps. One of several NRSROs that provide credit ratings on corporate
and bank debt issues.
Duration. The weighted average maturity of a security's or portfolio's cash flows,
where the present values of the cash flows serve as the weights. The greater the
duration of a security/portfolio, the greater its percentage price volatility with
respect to changes in interest rates. Used as a measure of risk and a key tool for
managing a portfolio versus a benchmark and for hedging risk. There are also
different kinds of duration used for different purposes (e.g. MacAuley Duration,
Modified Duration).
Fannie Mae. See "Federal National Mortgage Association."
Effective Date: 07/01/2023 Page 21 of 37
Fed Money Wire. A computerized communications system that connects the
Federal Reserve System with its member banks, certain U. S. Treasury offices, and
the Washington D.C. office of the Commodity Credit Corporation. The Fed
Money Wire is the book entry system used to transfer cash balances between
banks for themselves and for customer accounts.
Fed Securities Wire. A computerized communications system that facilitates
book entry transfer of securities between banks, brokers and customer
accounts, used primarily for settlement of U.S. Treasury and Federal Agency
securities.
Fed. See "Federal Reserve System."
Federal Agency Security. A debt instrument issued by one of the Federal
Agencies. Federal Agencies are considered second in credit quality and
liquidity only to U.S. Treasuries,
Federal Agency. Government sponsored/owned entity created by the U.S.
Congress, generally for the purpose of acting as a financial intermediary by
borrowing in the marketplace and directing proceeds to specific areas of the
economy considered to otherwise have restricted access to credit markets. The
largest Federal Agencies are GNMA, FNMA, FHLMC, FHLB, FFCB, SLMA, and TVA.
Federal Deposit Insurance Corporation (FDIC). Federal agency that insures
deposits at commercial banks, currently to a limit of $250,000 per depositor per
bank.
Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A
government sponsored enterprise (GSE) system that is a network of
cooperatively -owned lending institutions that provides credit services to farmers,
agricultural cooperatives and rural utilities. The FFCBs act as financial
intermediaries that borrow money in the capital markets and use the proceeds
to make loans and provide other assistance to farmers and farm -affiliated
businesses. Consists of the consolidated operations of the Banks for
Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks.
Frequent issuer of discount notes, agency notes and callable agency securities.
FFCB debt is not an obligation of, nor is it guaranteed by the U.S. government,
although it is considered to have minimal credit risk due to its importance to the
U.S. financial system and agricultural industry. Also issues notes under its
'designated note" program.
Effective Date: 07/O1 /2023 Page 22 of 37
Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by
depository institutions in excess of current reserve requirements, and frequently
loaned or borrowed on an overnight basis between depository institutions.
Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository
institution lending Federal Funds to another depository institution. The Federal
Reserve influences this rate by establishing a "target" Fed Funds rate associated
with the Fed's management of monetary policy.
Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A
government sponsored enterprise (GSE) system, consisting of wholesale banks
(currently twelve district banks) owned by their member banks, which provides
correspondent banking services and credit to various financial institutions,
financed by the issuance of securities. The principal purpose of the FHLB is to
add liquidity to the mortgage markets. Although FHLB does not directly fund
mortgages, it provides a stable supply of credit to thrift institutions that make
new mortgage loans. FHLB debt is not an obligation of, nor is it guaranteed by
the U.S. government, although it is considered to have minimal credit risk due to
its importance to the U.S. financial system and housing market. Frequent issuer of
discount notes, agency notes and callable agency securities. Also issues notes
under its "global note" and "TAP" programs.
Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"). One
of the large Federal Agencies. A government sponsored public corporation
(GSE) that provides stability and assistance to the secondary market for home
mortgages by purchasing first mortgages and participation interests financed by
the sale of debt and guaranteed mortgage backed securities. FHLMC debt is
not an obligation of, nor is it guaranteed by the U.S. government, although it is
considered to have minimal credit risk due to its importance to the U.S. financial
system and housing market. Frequent issuer of discount notes, agency notes,
callable agency securities and MBS. Also issues notes under its "reference note"
program.
Federal National Mortgage Association (FNMA or "Fannie Mae"). One of the
large Federal Agencies. A government sponsored public corporation (GSE) that
provides liquidity to the residential mortgage market by purchasing mortgage
loans from lenders, financed by the issuance of debt securities and MBS (pools
of mortgages packaged together as a security). FNMA debt is not an obligation
A nor is it guaranteed by the U.S. government, although it is considered to have
minimal credit risk due to its importance to the U.S. financial system and housing
market. Frequent issuer of discount notes, agency notes, callable agency
securities and MBS. Also issues notes under its "benchmark note" program.
Effective Date: 07/01/2023 Page 23 of 37
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve
System,
Federal Reserve System (the Fed). The independent central bank system of the
United States that establishes and conducts the nation's monetary policy. This is
accomplished in three major ways: (1) raising or lowering bank reserve
requirements, (2) raising or lowering the target Fed Funds Rate and Discount
Rate, and (3) in open market operations by buying and selling government
securities. The Federal Reserve System is made up of twelve Federal Reserve
District Banks, their branches, and many national and state banks throughout
the nation. It is headed by the seven member Board of Governors known as the
"Federal Reserve Board" and headed by its Chairman.
Financial Industry Regulatory Authority, Inc (FINRA). A private corporation that
acts as a self -regulatory organization (SRO). FIN RA is the successor to the
National Association of Securities Dealers, Inc. (NASD). Though sometimes
mistaken for a government agency, it is a non -governmental organization that
performs financial regulation of member brokerage firms and exchange
markets. The government also has a regulatory arm for investments, the
Securities and Exchange Commission,
Fiscal Agent/Paying Agent. A bank or trust company that acts, under a trust
agreement with a corporation or municipality, in the capacity of general
treasurer. The agent performs such duties as making coupon payments, paying
rents, redeeming bonds, and handling taxes relating to the issuance of bonds.
Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on
corporate and municipal debt issues.
Floating Rate Security (FRN or "floater"). A bond with an interest rate that is
adjusted according to changes in an interest rate or index. Differs from
variable -rate debt in that the changes to the rate take place immediately when
the index changes, rather than on a predetermined schedule. See also
"Variable Rate Security."
Freddie Mac. See "Federal Home Loan Mortgage Corporation".
Ginnie Mae. See "Government National Mortgage Association".
Global Notes: Notes designed to qualify for immediate trading in both the
domestic U.S. capital market and in foreign markets around the globe. Usually
Effective Date: 07/01 /2023 Page 24 of 37
large issues that are sold to investors worldwide and therefore have excellent
liquidity. Despite their global sales, global notes sold in the U.S. are typically
denominated in U.S. dollars.
Government National Mortgage Association (GNMA or "Ginnie Mae"). One of
the large Federal Agencies. Government -owned Federal Agency that acquires,
packages, and resells mortgages and mortgage purchase commitments in the
form of mortgage -backed securities. Largest issuer of mortgage pass -through
securities. GNMA debt is guaranteed by the full faith and credit of the U.S.
government (one of the few agencies that is actually full faith and credit of the
U.S.).
Government Securities. An obligation of the U.S. government, backed by the
full faith and credit of the government. These securities are regarded as the
highest quality of investment securities available in the U.S. securities market. See
'Treasury Bills, Notes, Bonds, and SLGS."
Government Sponsored Enterprise (GSE). Privately owned entity subject to
federal regulation and supervision, created by the U.S. Congress to reduce the
cost of capital for certain borrowing sectors of the economy such as students,
farmers, and homeowners. GSEs carry the implicit backing of the U.S.
Government, but they are not direct obligations of the U.S. Government. For this
reason, these securities will offer a yield premium over U.S. Treasuries. Some
consider GSEs to be stealth recipients of corporate welfare. Examples of GSEs
include: FHLB, FHLMC, FNMA and SLMA.
Government Sponsored Enterprise Security. A security issued by a Government
Sponsored Enterprise, Considered Federal Agency Securities.
Index. A compilation of statistical data that tracks changes in the economy or in
financial markets.
Interest -Only (10) STRIP. A security based solely on the _I_ payments from
the bond. After the principal has been repaid, interest payments stop and the
value of the security falls to nothing. Therefore, IOs are considered risky
investments. Usually associated with mortgage -backed securities.
Internal Controls. An internal control structure ensures that the assets of the entity
are protected from loss, theft, or misuse. The internal control structure is designed
to provide reasonable assurance that these objectives are met. The concept of
reasonable assurance recognizes that 1) the cost of a control should not
exceed the benefits likely to be derived and 2) the valuation of costs and
Effective Date: 07/01/2023 Page 25 of 37
benefits requires estimates and judgments by management. Internal controls
should address the following points:
1. Control of collusion - Collusion is a situation where two or more
employees are working in conjunction to defraud their employer.
2. Separation of transaction authority from accounting and record
keeping - By separating the person who authorizes or performs the
transaction from the people who record or otherwise account for the
transaction, a separation of duties is achieved.
3. Custodial safekeeping -Securities purchased from any bank or dealer
including appropriate collateral (as defined by state law) shall be placed
with an independent third party for custodial safekeeping.
4. Avoidance of physical delivery securities - Book -entry securities are
much easier to transfer and account for since actual delivery of a
document never takes place. Delivered securities must be properly
safeguarded against loss or destruction. The potential for fraud and
loss increases with physically delivered securities.
5. Clear delegation of authority to subordinate staff members -
Subordinate staff members must have a clear understanding of their
authority and responsibilities to avoid improper actions. Clear delegation
of authority also preserves the internal control structure that is contingent
on the various staff positions and their respective responsibilities.
6. Written confirmation of transactions for investments and wire transfers -
Due to the potential for error and improprieties arising from telephone and
electronic transactions, all transactions should be supported by written
communications and approved by the appropriate person. Written
communications may be via fax if on letterhead and if the safekeeping
institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and
third -party custodian -The designated official should ensure that an
agreement will be entered into and will address the following points:
controls, security provisions, and responsibilities of each party making
and receiving wire transfers.
Inverse Floater. A floating rate security structured in such a way that it reacts
inversely to the direction of interest rates. Considered risky as their value moves
Effective Date: 07/01 /2023 Page 26 of 37
in the opposite direction of normal fixed -income investments and whose interest
rate can fall to zero.
Investment Advisor. A company that provides professional advice managing
portfolios, investment recommendations and/or research in exchange for a
management fee.
Investment Adviser Act of 1940. Federal legislation that sets the standards by
which investment companies, such as mutual funds, are regulated in the areas
of advertising, promotion, performance reporting requirements, and securities
valuations.
Investment Grade. Bonds considered suitable for preservation of invested
capital; bonds rated a minimum of Baa3 by Moody's, BBB- by Standard & Poor's,
or BBB- by Fitch. Although "BBB" rated bonds are considered investment grade,
most public agencies cannot invest in securities rated below "A."
Liquidity. Relative ease of converting an asset into cash without significant loss
of value. Also, a relative measure of cash and near -cash items in a portfolio of
assets. Also, a term describing the marketability of a money market security
correlating to the narrowness of the spread between the bid and ask prices.
Local Agency Investment Fund (LAIF): A voluntary investment fund open to state
and local government entities and certain non-profit organizations in California
in which organization pools their funds for investment. LAIF is managed by the
State Treasurer's Office.
Long -Term Core Investment Program. Funds that are not needed within a one
year period.
Market Value. The fair market value of a security or commodity. The price at
which a wng buyer and seller would pay for a security.
Mark -to -market. Adjusting the value of an asset to its market value, reflecting in
the process unrealized gains or losses.
Master Repurchase Agreement. A widely accepted standard agreement form
published by the Bond Market Association (BMA) that is used to govern and
document Repurchase Agreements and protect the interest of parties in a repo
transaction.
Effective Date: 07/O1 /2023 Page 27 of 37
Maturity Date. Date on which principal payment of a financial obligation is to be
paid.
Medium Term Notes (MTN's). Used frequently to refer to corporate notes of
medium maturity (5-years and under). Technically, any debt security issued by a
corporate or depository institution with a maturity from 1 to 10 years and issued
under an MTN shelf registration. Usually issued in smaller issues with varying
coupons and maturities, and underwritten by a variety of broker/dealers (as
opposed to large corporate deals issued and underwritten all at once in large
size and with a fixed coupon and maturity).
Money Market. The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptance, etc.) are issued and traded.
Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in
money market instruments, such as: U.S. Treasury bills, commercial paper,
bankers' acceptances, and repurchase agreements. Money market mutual
funds are registered with the SEC under the Investment Company Act of 1940
and are subject "rule 2a-7" which significantly limits average maturity and credit
quality of holdings. MMF's are managed to maintain a stable net asset value
(NAV) of $1.00. Many MMFs carry ratings by a NRSRO.
Moody's Investors Service. One of several NRSROs that provide credit ratings on
corporate and municipal debt issues.
Mortgage Backed Securities (MBS). Mortgage -backed securities represent an
ownership interest in a pool of mortgage loans made by financial institutions,
such as savings and loans, commercial banks, or mortgage companies, to
finance the borrower's purchase of a home or other real estate. The majority of
MBS are issued and/or guaranteed by GNMA, FNMA and FHLMC. There are a
variety of MBS structures, some of which can be very risky and complicated. All
ABS have reinvestment risk as actual principal and interest payments are
dependent on the payment of the underlying mortgages which can be prepaid
by mortgage holders to refinance and lower rates or simply because the
underlying property was sold.
Mortgage Pass -Through Securities. A pool of residential mortgage loans with
the monthly interest and principal distributed to investors on a pro-rata basis.
Largest issuer is GNMA.
Effective Date: 07/Ol /2023 Page 28 of 37
Municipal Note/Bond. A debt instrument issued by a state or local government
unit or public agency. The vast majority of municipals are exempt from state
and federal income tax, although some non -qualified issues are taxable.
Mutual Fund. Portfolio of securities professionally managed by a registered
investment company that issues shares to investors. Many different types of
mutual funds exist (bond, equity, money fund); all except money market funds
operate on a variable net asset value (NAV).
Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs
($100,000 and larger) that are issued in bearer form and can be traded in the
secondary market.
Net Asset Value. The market value of one share of an investment company,
such as a mutual fund. This figure is calculated by totaling a fund's assets which
includes securities, cash, and any accrued earnings, subtracting this from the
fund's liabilities and dividing this total by the number of shares outstanding. This is
calculated once a day based on the closing price for each security in the fund's
portfolio. (See below.)
[(Total assets) - (Liabilities)]/(Number of shares outstanding)
NRSRO. A "Nationally Recognized Statistical Rating Organization." A
designated rating organization that the SEC has deemed a strong national
presence in the U.S. NRSROs provide credit ratings on corporate and bank debt
issues. Only ratings of a NRSRO may be used for the regulatory purposes of
rating. Includes Moody's, S&P, Fitch and Duff & Phelps.
Offered Price. See also "Ask Price."
Open Market Operations. Federal Reserve monetary policy tactic entailing the
purchase or sale of government secures in the open market by the Federal
Reserve System from and to primary dealers in order to influence the money
supply, credit conditions, and interest rates.
Par Value. Face value, stated value or maturity value of a security.
Physical Delivery. Delivery of readily available underlying assets at contract
maturity.
Portfolio. Collection of securities and investments held by an investor.
Effective Date: 07/Ol /2023 Page 29 of 37
Premium. The amount by which a bond or other financial instrument sells
above its face value. See also "Discount."
Primary Dealer. Any of a group of designated government securities dealers
designated by to the Federal Reserve Bank of New York. Primary dealers can
buy and sell government securities directly with the Fed. Primary dealers also
submit daily reports of market activity and security positions held to the Fed and
are subject to its informal oversight. Primary dealers are considered the largest
players in the U.S. Treasury securities market.
Prime Paper. Commercial paper of high quality. Highest rated paper is A-1+/A-1
by S&P and P-I by Moody's.
Principal. Face value of a financial instrument on which interest accrues. May
be less than par value if some principal has been repaid or retired. For a
transaction, principal is par value times price and includes any premium or
discount.
Prudent Investor Standard. Standard that requires that when investing,
reinvesting, purchasing, acquiring, exchanging, selling, or managing public
funds, a trustee shall act with care, skill, prudence, and diligence under the
circumstances then prevailing, including, but not limited to, the general
economic conditions and the anticipated needs of the agency, that a prudent
person acting in a like capacity and familiarity with those matters would use in
the conduct of funds of a like character and with like aims, to safeguard the
principal and maintain the liquidity needs of the agency. More stringent than
the "prudent person" standard as it implies a level of knowledge commensurate
with the responsibility at hand.
Range Note. A type of structured note that accrues interest daily at a set
coupon rate that is tied to an index. Most range notes have two coupon levels,
a higher accrual rate for the period the index is within a designated range, the
lower accrual rate for the period that the index falls outside the designated
range. This lower rate may be zero and may result in zero earnings.
Rate of Return. Amount of income received from an investment, expressed as a
percentage of the amount invested.
Realized Gains (Losses). The difference between the sale price of an
investment and its book value. Gains/losses are "realized" when the security is
actually sold, as compared to "unrealized" gains/losses which are based on
current market value. See "Unrealized Gains (Losses)."
Effective Date: 07/01/2023 Page 30 of 37
Reference Bills: FHLMC's short-term debt program created to supplement its
existing discount note program by offering issues from one month through one
year, auctioned on a weekly or on an alternating four -week basis (depending
upon maturity) offered in sizeable volumes ($1 billion and up) on a cycle of
regular, standardized issuance. Globally sponsored and distributed, Reference
Bill issues are intended to encourage active trading and market -making and
facilitate the development of a term repo market. The program was designed
to offer predictable supply, pricing transparency and liquidity, thereby providing
alternatives to U.S. Treasury bills. FHLMC's Reference Bills are unsecured general
corporate obligations. This program supplements the corporation's existing
discount note program. Issues under the Reference program constitute the
same credit standing as other FHLMC discount notes; they simply add
organization and liquidity to the short-term Agency discount note market.
Reference Notes: FHLMC's intermediate -term debt program with issuances of 2,
3, 5, 10 and 30-year maturities. Initial issuances range from $2 - $6 billion with re -
openings ranging $1 - $4 billion.
The notes are high -quality bullet structures securities that pay interest
semiannually. Issues under the Reference program constitute the same credit
standing as other FHLMC notes; they simply add organization and liquidity to the
intermediate- and long-term Agency market.
Repurchase Agreement (Repo). A short-term investment vehicle where an
investor agrees to buy securities from a counterparty and simultaneously agrees
to resell the securities back to the counterparty at an agreed upon time and for
an agreed upon price. The difference between the purchase price and the
sale price represents interest earned on the agreement. In effect, it represents a
collateralized loan to the investor, where the securities are the collateral. Can
be DVP, where securities are delivered to the investor's custodial bank, or "tri-
party" where the securities are delivered to a third party intermediary. Any type
of security can be used as "collateral," but only some types provide the investor
with special bankruptcy protection under the law. Repos should be undertaken
only when an appropriate BMA approved master repurchase agreement is in
place.
Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view
of the original seller of securities. Used by dealers to finance their inventory of
securities by essentially borrowing at short-term rates. Can also be used to
leverage a portfolio and in this sense, can be considered risky if used improperly.
Effective Date: 07/Ol /2023 Page 31 of 37
Safekeeping. Service offered for a fee, usually by financial institutions, for the
holding of securities and other valuables. Safekeeping is a component of
custody services.
Secondary Market. Markets for the purchase and sale of any previously issued
financial instrument.
Securities Lending. An arrangement between and investor and a custody bank
that allows the custody bank to "loan" the investors investment holdings, reinvest
the proceeds in permitted investments, and shares any profits with the investor.
Should be governed by a securities lending agreement. Can increase the risk of
a portfolio in that the investor takes on the default risk on the reinvestment at the
discretion of the custodian.
Sinking Fund. A separate accumulation of cash or investments (including
earnings on investments) in a fund in accordance with the terms of a trust
agreement or indenture, funded by periodic deposits by the issuer (or other
entity responsible for debt service), for the purpose of assuring timely availability
of moneys for payment of debt service. Usually used in connection with term
bonds.
Spread. The difference between the price of a security and similar maturity U.S.
Treasury investments, expressed in percentage terms or basis points. A spread
can also be the absolute difference in yield between two securities. The
securities can be in different markets or within the same securities market
between different credits, sectors, or other relevant factors.
Standard & Poor's. One of several NRSROs that provide credit ratings on
corporate and municipal debt issues.
STRIPS (Separate Trading of Registered Interest and Principal of Securities).
Acronym applied to U.S. Treasury securities that have had their coupons and
principal repayments separated into individual zero -coupon Treasury securities.
The same technique and "strips" description can be applied to non -Treasury
securities (e.g. FNMA strips).
Structured Notes. Notes that have imbedded into their structure options such as
step-up coupons or derivative- based returns.
Supranational Debt. The debt of an international ormulti-lateral financial
agency used to finance economic and infrastructure development,
Effective Date: 07/01/2023 Page 32 of 37
environmental protection, poverty reduction and renewable energy around the
world. Supranational debt is typically rated AAA by most NRSRO's as these
entities are well -capitalized, have significant capital commitments from a
diverse capital base, conservative lending and risk management practices and
strong supervision.
Swap. Trading one asset for another.
TAP Notes: Federal Agency notes issued under the FHLB TAP program.
Launched in 6/99 as a refinement to the FHLB bullet bond auction process. In a
break from the FHLB's traditional practice of bringing numerous small issues to
market with similar maturities, the TAP Issue Program uses the four most common
maturities and reopens them up regularly through a competitive auction. These
maturities (2, 3, 5 and 10 year) will remain open for the calendar quarter, after
which they will be closed and a new series of TAP issues will be opened to
replace them. This reduces the number of separate bullet bonds issued, but
generates enhanced awareness and liquidity in the marketplace through
increased issue size and secondary market volume.
Tennessee Valley Authority (TVA). One of the large Federal Agencies. A wholly
owned corporation of the United States government that was established in
1933 to develop the resources of the Tennessee Valley region in order to
strengthen the regional and national economy and the national defense. Power
operations are separated from non -power operations. TVA securities represent
obligations of TVA, payable solely from TVA's net power proceeds, and are
neither obligations of nor guaranteed by the United States. TVA is currently
authorized to issue debt up to $30 billion. Under this authorization, TVA may also
obtain advances from the U.S. Treasury of up to
$150 million. Frequent issuer of discount notes, agency notes and callable
agency securities.
Total Return. Investment performance measured over a period of time that
includes coupon interest, interest on interest, and both realized and unrealized
gains or losses. Total return includes, therefore, any market value
appreciation/depreciation on investments held at period end.
Treasuries. Collective term used to describe debt instruments backed by the
U.S. Government and issued through the U.S. Department of the Treasury.
Includes Treasury bills, Treasury notes, and Treasury bonds. Also a benchmark
term used as a basis by which the yields of non -Treasury securities are compared
(e.g., "trading at 50 basis points over Treasuries").
Effective Date: 07/O1 /2023 Page 33 of 37
Treasury Bills (T-Bills). Short-term direct obligations of the United States
Government issued with an original term of one year or less. Treasury bills are
sold at a discount from face value and do not pay interest before maturity. The
difference between the purchase price of the bill and the maturity value is the
interest earned on the bill. Currently, the U.S. Treasury issues 4-week, 13-week
and 26-week T-Bills
Treasury Bonds. Long-term interest -bearing debt securities backed by the U.S.
Government and issued with maturities of ten years and longer by the U.S.
Department of the Treasury. The Treasury stopped issuing Treasury Bonds in
August 2001.
Treasury Notes. Intermediate interest -bearing debt securities backed by the U.S.
Government and issued with maturities ranging from one to ten years by the U.S.
Department of the Treasury. The Treasury currently issues
2-year, 5-year and 10-year Treasury Notes,
Trustee. A bank designated by an issuer of securities as the custodian of funds
and official representative of bondholders. Trustees are appointed to insure
compliance with the bond documents and to represent bondholders in
enforcing their contract with the issuer.
Uniform Net Capital Rule. SEC regulation 15C3-1 that outlines the minimum net
capital ratio (ratio of indebtedness to net liquid capital) of member firms and
non-member broker/dealers.
Unrealized Gains (Losses). The difference between the market value of an
investment and its book value. Gains/losses are "realized" when the security is
actually sold, as compared to "unrealized" gains/losses which are based on
current market value. See also "Realized Gains (Losses)."
Variable -Rate Security. A bond that bears interest at a rate that varies over time
based on a specified schedule of adjustment (e.g., daily, weekly, monthly, semi-
annually or annually). See also "Floating Rate Note."
Weighted Average Maturity for lust" verameMaturity"). The average maturity
of all securities and investments of a portfolio, determined by multiplying the par
or principal value of each security or investment by its maturity (days or years),
summing the products, and dividing the sum by the total principal value of the
portfolio. A simple measure of risk of a fixed -income portfolio.
Effective Date: 07/O1 /2023 Page 34 of 37
Weighted Average Maturity to Call. The average maturity of all securities and
investments of a portfolio, adjusted to substitute the first call date per security for
maturity date for those securities with call provisions.
Yield Curve. A graphic depiction of yields on like secures in relation to
remaining maturities spread over a time line. The traditional yield curve depicts
yields on U.S. Treasuries, although yield curves exist for Federal Agencies and
various credit quality corporates as well. Yield curves can be positively sloped
(normal) where longer -term investments have higher yields, or "inverted"
(uncommon) where longer -term investments have lower yields than shorter
ones.
Yield to Call (YTC). Same as "Yield to Maturity," except the return is measured to
the first call date rather than the maturity date. Yield to call can be significantly
higher or lower than a security's yield to maturity.
Yield to Maturity (YTM). Calculated return on an investment, assuming all cash
flows from the security are reinvested at the same original yield. Can be higher
or lower than the coupon rate depending on market rates and whether the
security was purchased at a premium or discount. There are different
conventions for calculating YTM for various types of securities.
Yield. There are numerous methods of yield determination. In this glossary, see
also "Current Yield," "Yield Curve," "Yield to Call" and "Yield to Maturity."
Effective Date: 07/Ol /2023 Page 35 of 37
Appendix C.
Local Agency Investment Fund
Program Description
The Local Agency Investment Fund (LAIF) is a voluntary program created by
statute in 1977 as an investment alternative for California's local governments
and special districts and it continues today under Treasurer John Chiang's
administration. The enabling legislation for the LAIF is Section 16429.1 et seq. of
the California Government Code.
This program offers local agencies the opportunity to participate in a major
portfolio which invests hundreds of millions of dollars, using the investment
expertise of the Treasurer's Office investment staff at no additional cost to the
taxpayer.
The LAIF is part of the Pooled Money Investment Account (PIMA). The PMIA
began in 1955 and oversight is provided by the Pooled Money Investment Board
(PMIB) and an in-house Investment Committee, The PMIB members are the State
Treasurer, Director of Finance and State Controller,
The Local Investment Advisory Board (LIAB) provides oversight for LAIF. The Board
consists of five members as designated by statute. The Chairman is the State
Treasurer or his designated representative. Two members qualified by training
and experience in the field of investment or finance, and the State Treasurer
appoints two members who are treasurers, finance or fiscal officers or business
managers employed by any county, city or local district or municipal
corporation of this state. The term of each appointment is two years or at the
pleasure of the Treasurer.
All securities are purchased under the authority of Government Code Section
16430 and 16480.4. The State Treasurer's Office takes delivery of all securities
purchased on a delivery versus payment basis using a third party custodian. All
investments are purchased at market and a market valuation is conducted
monthly.
Additionally, the PMIA has Policies, Goals, and Objectives for the portfolio to
make certain that our goals of Safety, Liquidity and Yield are not jeopardized,
and that prudent management prevails. These policies are formulated by
investment staff and reviewed by both the PMIB and the LIAB on an annual
basis.
Effective Date: 07/Ol /2023 Page 36 of 37
The State Treasurer's Office is audited by the Bureau of State Audits on an
annual basis and the resulting opinion is posted to the STO website following its
publication. The Bureau of State Audits also has a continuing audit process
throughout the year. All investments and LAIF claims are audited on a daily basis
by the State Controller's Office as well as an in-house audit process involving
three separate divisions.
Under Federal Law, the State of California cannot declare bankruptcy, thereby
allowing the Government Code Section 16429.3 to stand. This Section states that
"moneys placed with the Treasurer for deposit in the LAIF by cities, counties,
special districts, nonprofit corporations, or qualified quasi -governmental
agencies shall not be subject to either of the following: (a) transfer or loan
pursuant to Sections 16310, 16312, or 16313, or (b) impoundment or seizure by
any state official or state agency."
During the 2002 legislative session, California Government Code Section 16429.4
was added to the LAIF's enabling legislation. The Section states that "right of a
city, county, city and county, special district, nonprofit corporation, or qualified
quasi -governmental agency to withdraw its deposited moneys from the LAIF,
upon demand, may not be altered, impaired, or denied in any way, by any
state official or state agency based upon the state's failure to adopt a State
Budget by July 1 of each new fiscal year."
State Treasurer's Office
Local Agency Investment Fund
P.O. Box 942809
Sacramento, CA 94209-0001
(916) 653-3001
http://www.treasurer.ca.gov/pmia-laif
Effective Date: 07/Ol /2023 Page 37 of 37