HomeMy WebLinkAboutRES 2015-26Nt • _ NIKi2IL„[OWiTiF1=11'o
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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 2n ay of June, 2015.
eve Tye, ayor
I, Tommye Cribbins, 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 2nd
day of June, 2015, by the following vote:
AYES: COUNCIL MEMBERS: Herrera, Lin, Tanaka, MPT/Lyons,
M/Tye
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: None
ABSTAINED: COUNCIL MEMBERS: None
Tommye Cribbins, City Clerk
2015-26
Exhibit A
S- +' •'.�
INVESTMENT POLICY— FY 2015-2016
1.0 POLICY:
This Statement of Investment Policy ("Policy") 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 Policy on an annual
basis.
2.0 SCOPE:
This investment policy applies to all financial assets of the City.
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
3.0 STANDARDS OF PRUDENCE:
The City Council, City Treasurer and his designee (hereafter, collectively, the "City
Treasurer") and others who are authorized to make investment decisions on behalf of
the City when investing public funds 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 is authorized to acquire investments as authorized by law.
4.0 INVESTMENT OBJECTIVES:
The investment of funds of the City 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 53601, et. seq.
Exhibit A
1. Safety. Safety of principal is the foremost objective of the investment program.
Investments of the City shall be undertaken in a manner that seeks to ensure
the preservation of capital in the overall portfolio. To attain this objective, the City
will diversify its investments by investing funds among a variety of securities with
independent returns.
2. LiquiditV. 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.
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 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.
5.0 DELEGATION OF AUTHORITY
Authority to manage the City's investment program is derived from Section 2.16.210
of the City'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 City
Treasurer.
6.0 ETHICS AND CONFLICTS OF INTEREST
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 Government Code Sections 81000 et seq., related regulations and the Fair Political
Practices Commission).
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Exhibit A
The City Treasurer will maintain a list of approved financial institutions authorized to
provide investment services to the City 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. The firms
and individuals covering the City 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 must
supply the City Treasurer 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's investment policy and
depository contracts.
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Treasurer. A current audited financial statement is required to be on file
for each financial institution and broker/dealer with which the City invests.
List of Authorized Broker/Dealers
Broker/Dealer
Under Contract Since
BOSC, Inc.
September 2014
First Empire Securities
March 2012
Great Pacific Securities
September 2005
Time Value Investments
August 2012
Wells Fargo Institutional Securities
June 2005
8.0 AUTHORIZED AND SUITABLE INVESTMENTS
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.
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Exhibit A
Investment
California Legal Requirements
City of Diamond Bar Re uirements
Government Obligations:
Authorized by CGC 53601(b), (f)
U.S. Treasury and Agency Obligations
(U.S. Treasury obligations are bills, notes
1. No limit on amount in the portfolio
and bonds issued by and direct obligations
of the U.S. Government. Agency
obligations are notes and bonds of Federal
agencies and government sponsored
enterprises, although not direct obligations
of the Treasury, they involve federal
sponsorship or guarantees)
Bankers Acceptances
Authorized by CGC 53601(g)
(A draft or bill of exchange accepted by a
bank or trust company and brokered to
1. Not to exceed 180 days
investors in a secondary market. Its
2. Not to exceed 40% of portfolio
purpose is to facilitate trade and provide
3. Not to exceed 30% of portfolio if done
liquidity to the import-export markets).
with one bank.
Commercial Paper
Authorized by CGC 53601 (h), CGC
(Short term, unsecured, promissory notes
53601.2 & CGC 53635 (a)
issued by firms in the open market. These
notes are generally backed by a bank
1. Not to exceed 270 days
credit facility, guarantee/bond of indemnity
2. Not to exceed 25% of portfolio
or some other support agreement.
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
Medium Term Notes
Authorized by CGC 53601 (k), CGC
(Corporate notes, deposit notes and bank
53601.2
notes sold by an agent in the open market
on a continually offered basis. These
1. Must have an minimum "A" rating
notes are debt obligations generally
2. Not to exceed 30% of portfolio
unsecured, although some issues come to
3. Not to exceed 5% of portfolio with single
market on a collateralized or securitized
issuer
basis.
Negotiable Certificates of Deposit
Authorized by CGC 53601 (i), GCC 53638
(Issued by commercial banks and thrift
institutions against funds deposited for
1. Not to exceed 30% portfolio
specified periods of time and earn
2. All purchases must be from institutions
specified or variable rates of interest.
rated by a nationally recognized rating
NCD's differ from other CD's because of
organization as designated by the Security
their increased liquidity as they are actively
and Exchange Commission.
traded on the secondary market. These
deposits are uninsured and
uncollateralized promissory notes.
Certificates of Deposit
Authorized by CGC 53635, 53635.2,
(Unsecured, direct obligations of a U.S.
53635.8, 53636, 53637, 53638, 53641
bank or savings & loan association.
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Exhibit A
Federal Deposit Insurance Corporation
1. Must not exceed 30% of portfolio
(FDIC) coverage is provided for
2. Deposits in excess of the $250,000
government deposits, but limited to the first
FDIC insured limit shall be collateralized at
$250,000 on deposit on behalf of a given
a level of 110% of market value of principal
entity at a single financial institution.
and accrued interest.
California law requires that deposits of
public funds shall be collateralized if not
insured).
Repurchase Agreement
Authorized by CGC 53601 Q)
(These are agreements between an
investor (the pool) who agrees to purchase
1. Market value of the security must be
securities and a seller (broker/dealer) who
102% or greater, and adjusted quarterly.
commits to repurchase these securities at
2. The minimal market value of 102% can't
a later date at the same price, plus
be established by more than the next
interest).
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 local agency or by
1. Must comply with the financial
a department, board or authority of any
requirements pertaining to temporary
local agency within the 50 United States).
borrowing (TRANS, RANS, GANS) as
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; Moody's — MIG 1 or
Money Market Funds
Authorized by CGC 53601 (1)
Shares of beneficial interest issued by
management companies. Shares
1. The pooled investments that comprise
represent ownership of diversified portfolio
these funds must comply with 53601 and
securities, which are redeemable at their
53630 inclusive.
net asset value).
Local Agency Investment Fund (LAIF)
Authorized by CGC 16429.1 (b)
Provides high liquidity allowing deposits to
be credited to the City's checking account
1. No more than 60% or $50 million
within twenty-four (24) hours. State Pool
whichever is less shall be invested in LAIF.
funds are operated directly by the Office of
the State Treasurer, who commingles state
and local funds.
Exhibit A
The following investments are either prohibited by law or authorized by law and prohibited
by the City Treasurer.
Reverse Repurchase Agreements
Allowable by CGC 53601.5
Prohibited by City Treasurer
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
The securities held by the City 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 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.
11.0 LAIF
The City Treasurer shall conduct a thorough investigation of LAIF prior to investing and
on a continual basis. In conducting this investigation the City Treasurer shall consider
eligible investments, the written statement of investment policy, interest calculations,
distributions, how gains and losses are treated, how securities are safeguarded, how often
securities are priced and the program audited, who may invest and in what manner, the
schedule for receiving statements and portfolio listings, the fee schedule, whether
reserves, retained earnings, etc., are utilized, and whether LAIF is eligible for and will
accept bond proceeds. Attached as Attachment C is a LAIF Program Description.
12.0 COLLATERALIZATION
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 110% of market value of principal
and accrued interest. The City Treasurer may waive the collateral requirement for
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Exhibit A
deposits up to the maximum dollar amount which are covered by the Federal Deposit
Insurance Corporation, currently $250,000.
13.0 SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, entered into by
the City 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.
14.0 MAXIMUM MATURITIES
To the extent possible the City 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.
15.0 INTERNAL CONTROLS
The City Treasurer 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 annually to review internal controls, account activity
and compliance with policies and procedures.
16.0 REPORTING
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
After safety, the basic premise underlying the City of Diamond Bar's investment
philosophy is to insure that funds are always available when needed.
17.0 Investment Policy Adoption
The City'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.
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Exhibit A
Attachments: Appendix A - Broker Dealer Questionnaire
Appendix B - Glossary of Cash and Investment Management Terms
Appendix C - Local Agency Investment Fund Description
APPENDIX A
CITY OF DIAMOND BAR
BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION
1. Name of Firm:
2. Address:
3. Telephone: ( ) ( )
4. Broker's Representative to the City (attach resume):
Name:
111100
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
employees (attach resume)
Name:
Title:
Telephone: ( ) ( )
7. Which of the above personnel have read the City's investment policy?
8. Is your firm a primary dealer in United States Government Securities?
Yes_ No
7
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):
11. 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.
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.
IIIf
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.
19. What portfolio information, if any, do you require from your clients?
2 0. What reports, transactions, confirmations and paper trail will the City receive?
21 . Does your firm offer investment training to your clients?
Yes No
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.
***CERTIFICATION***
I hereby certify that I 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.
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Appendix B
Glossary of Cash and Investment
Management Terms
Accrued Interest. Interest earned but which has not yet been paid or received
Agency. See "Federal Agency Securities."
Ask Price. Price at which a broker/dealer offers to sell a security to an investor. Also known as
"offered price."
Asset Backed Securities (ABS). A fixed-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, a short-
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 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.
BenchmarkNotes/Bonds; Benchmark Notes and Bonds area series of FNMA "bullet" maturities
(non -callable) issued according to a pre -announced calendar. Under its Benchmark NotesBonds
program, 2, 3, 5, 10 and 30- year maturities are issued each quarter. Each Benchmark Notes new
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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 same
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 a broker/dealer offers to purchase a security from an investor.
Bond Market Association (BMA). The bond market trade association representing the largest
securities 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 close's 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 fature cash flows, including periodic interest payments
and a principal repayment.
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.
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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 specified 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.
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 sensitivity 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.
Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond's
face value.
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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 bust 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 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
16
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 ''/z, 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."
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.
17
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.
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 of, nor is it guaranteed by the U.S. govermnent, 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.
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System,.
18
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). FINRA 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 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 govermnent. 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."
19
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 interest 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 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 „
20
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 malting 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 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 willing
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.
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
21
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 MBS 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.
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)
22
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 securities 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.
Premium. The amount by which a bond or other financial instrurnent 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-l+/A-1 by S&P and
P-1 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.
23
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)."
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.
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
24
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 or multi -lateral financial agency used to finance
economic and infrastructure development, environmental protection, poverty reduction and
renewable energy around the world. Supranational debt is typically rated AAA by most NRSRO's
as theses 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
25
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").
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 (or just "Average Maturity"). 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
26
the sum by the total principal value of the portfolio. A simple measure of risk of a fixed-income
portfolio.
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 securities 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 retum 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."
27
Appendix C
•� r.r- ti
Program-
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. This in-house
management team is comprised of civil servants who have each worked for the State
Treasurer's Office for an average of 20 years.
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 (PMIS) 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 appointing authority.
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.
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.
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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.
The LAIF has grown from 293 participants and $468 million in 1977 to 2,500 participants
and $21.2 billion at the end of April 2015.
State Treasurer's Office
Local Agency Investment Fund
P.O. Box 942809
Sacramento, CA 94209-0001
(916)653-3001
http:llwww.treasurer.ca.gov/pmia-laif
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