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HomeMy WebLinkAboutCC RES 98-011RESOLUTION NO. 98-11 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT, CALIFORNIA, AMENDING THE POLICY FOR THE INVESTMENT OF CITY OF PALM DESERT FUNDS. WHEREAS, Section 53646 of the State of California Government Code has been amended to require the annual review and adoption of an investment policy statement; and WHEREAS, said investment policy has been written in compliance with all applicable laws and in accordance with guidelines provided by the Municipal Treasurers' Association of the United States and Canada; and WHEREAS, the City of Palm Desert Finance Investment Committee comprised of the Mayor, Mayor Pro-Tempore, City Manager, City Attorney, Finance Director, Investment Manager, other members of City Staff and citizens at large, have reviewed and approved the proposed policy. NOW THEREFORE BE IT RESOLVED by the City Council of the City of Palm Desert, California, as follows: 1. That the policy statement attached hereto as Exhibit "A" is adopted; and 2. That the policy be examined and considered for readoption each January. PASSED, APPROVED AND ADOPTED at a regular meeting of the City Council of the City of Palm Desert, California, held this 12th day of February, 1998, by the following vote, to wit: AYES: Crites, Ferguson, Kelly, Benson NOES: None ABSENT: Spiegel ABSTAIN: None SHEILA R. GILLIGAN CITY OF PALM DES Y CLERK , CALIFORNIA ENSON, MAYOR [THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK] CITY OF PALM DESERT/PALM DESERT REDEVELOPMENT AGENCY Statement of Investment Policy INTRODUCTION The policy and practices of the City of Palm Desert and the Palm Desert Redevelopment Agency are based upon state law, city ordinances, prudent money management and the "prudent person" 'standards. The primary goals of this policy are to invest public funds to: !. Meet the daily cash flow needs of the City and the Redevelopment Agency. 2. Comply with all laws of the State of California regarding the investment of public funds. 3. Achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. SCOPE The investment policy applies to all funds under the control of the Finance Director/City Treasurer of the City of Palm Desert and the Palm Desert Redevelopment Agency, including but not limited to the general revenues of the City/Agency, enterprise fund revenues, proceeds of bond sales and debt service revenues, trust funds in the custody of the Finance Director/Treasurer and any other funds under his control. These funds are accounted for in the comprehensive annual financial reports of the City of Palm Desert and the Palm Desert Redevelopment Agency. INVESTMENT OBJECTIVES A. Safety of Principal Safety of principal is the City/Agency's foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure that capital losses resulting from institution default, broker -dealer default, or the erosion of market value are avoided. The City/Agency shall seek to preserve principal by mitigating the two types of risk: credit risk and market risk. 1. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in only the highest quality securities (see authorized investments) and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm the City/Agency's cash flow. 2. Market risk, defined as the risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by structuring the portfolio so that Rev: 01/98 1 securities mature at the same time that major cash outflows occur, this eliminating the securities mature at the same time that major cash outflows occur, thus eliminating the need to sell securities prior to maturity; and by prohibiting the taking of short positions, that is, selling securities that the City/Agency does not own. It is explicitly recognized, however, that in a diversified portfolio, occasional measured losses may occur, and must be considered within the context of overall investment return. B. Liquidity Liquidity is the second most important objective of the investment program. The investment portfolio shall remain sufficiently liquid to enable the City/Agency to meet all operating requirements. At all times, at least 50% of the total portfolio shall be invested for periods of three years or less; at least 30% of the total portfolio shall be invested for two years or less; at least 20% of the total portfolio shall be invested for one year or less. At no time will a security in the portfolio mature in more than five years except bond reserve funds, bond escrow funds and any funds approved reviewed by the Finance Committee er and approved by City Council to be appropriate for a longer period. C. Yield The City/Agency portfolio shall be invested to attain a market average rate of return through economic cycles, as long as it does not diminish the objectives of Safety and Liquidity. The market rate of return is defined as the average return on the one-year U.S. Treasury Bill. Whenever possible and in a manner consistent with the objectives of safety of principal and liquidity, a yield higher than the market rate of return shall be sought. AUTHORITY TO INVEST FUNDS The City Council and Redevelopment Agency Board have appointed the City Finance Director as City Treasurer responsible for undertaking investment transactions on behalf of the City/Agency. Unless specifically designated by the City Council and Agency Board, the only officials authorized to undertake investment transactions on behalf of the City/Agency are the Director of Finance/Treasurer and his/her designee. The Finance Director/Treasurer and Investment Manager will observe, review and react to the changing conditions that affect the investment portfolio. They will meet on a regular basis to discuss current market conditions, future trends and how each of these affects the investment portfolio and the City/Agency. The Finance Director/Treasurer and Investment Manager shall establish a system of controls to ensure compliance with the City/Agency's investment policy. INVESTMENT/FINANCE COMMITTEE The City utilizes a Finance Committee, composed of the Mayor, Mayor Pro-Tempore, City Manager, Redevelopment Agency Executive Director, Finance Director, Investment Manager, City Attorney and Citizen(s) appointed by the City Council, to insure stability and constant information flow as it relates to investment and other finance activities. They will meet monthly to discuss issues relating Rev: 01/98 2 to the City/Agency's investment portfolio. Items may include the suitability of current investment policies and procedures, current and proposed strategies, investment transactions since the last meeting as well as other topics affecting the sources and uses of funds in the portfolio. INTERNAL CONTROL The Finance Director, is responsible for ensuring compliance with the City/Agency investment policies as well as establishing internal controls designed to prevent losses due to fraud, employee error, misrepresenting by third parties, or unanticipated changes in financial markets. A written policy on the specific internal controls will be reviewed by the Finance Committee. • ETHICS AND CONFLICTS OF INTEREST Officer 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 officers shall disclose any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City/Agency's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City/Agency, particularly with regard to the timing of purchases and sales, and shall avoid transactions that might impair public confidence in the City's ability to govern effectively. EVALUATION OF INVESTMENT OFFICER ACTIONS The actions of City/Agency investment officers in the performance of their duties as managers of public funds shall be evaluated using the following "prudent person" standard applied in the context of managing the overall portfolio: Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the professional management of their business affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. City/Agency investment officers acting in accordance with written policies and the "prudent person" standard and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that substantial deviations from expectations are reported by the Treasurer to City Manager and the Finance Committee within three days of discovery. Mutually agreeable remedial action will be taken by the Treasurer and reported to the next Finance Committee meeting. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS Rev: 01/98 3 The City/Agency shall transact business only with banks and savings and loans. and with investment securities dealers which/who comply with Schedule III (Policy Criteria for Selecting Broker/Dealers) attached. The Finance Director/Treasurer will maintain a list of financial institutions authorized to provide investment services. He will also maintain a list of approved security brokers/dealers selected by credit worthiness who are authorized to provide investment services to the City/Agency. The dealers must be primary dealers regularly reporting to the Federal Reserve Bank. Exceptions to the primary dealer rule may be made with the approval of the Investment/Finance Committee, provided they are consistent with California Government Code Section 53601.5. All primary financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply an audited financial statement, and U4 Form for the broker, completed broker/dealer questionnaire (see Schedule III) and certification of having read the City/Agency's investment policy. All secondary financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply an audited financial statement, proof of National Association of Securities Dealers certification, trading resolution, proof of state registration, completed broker/dealer questionnaire (see Schedule III), U4 Form for the broker and certification of having read the City/Agency's investment policy. The Finance Director/Treasurer shall determine if they are adequately capitalized, make markets on securities appropriate to the City/Agency's needs and are recommended by managers of portfolios similar to the City/Agency. The Finance Director/Treasurer shall submit his findings and recommendations to the Investment/Finance Committee. The committee will determine which broker/dealers will be authorized to trade with the City/Agency. An annual review of the financial condition and registration of qualified bidders will be conducted. A current audited financial statement is required to be on file for each financial institution and broker/dealer in which the City/Agency invests. The City/Agency shall at least annually send a copy of the current investment policy to all financial institutions and broker/dealers approved to do business with the City/Agency. Confirrnation of receipt of this policy shall be considered evidence that the dealer has read and understands the City/Agency's investment policy and will recommend and execute only transactions suitable for and in compliance with the City/Agency's investment policy. AUTHORIZED INVESTMENTS The City/Agency is authorized by California Government Code Section 53600, et. seq. to invest in specific types of secu:-nes. The City/Agency has further limited the types of securities in which we may invest. Any security not listed, is not a valid investment for the City/Agency. The concise list of approved securities is as follows: A. United States Treasury Bills, Bonds, and Notes, or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no limitation as to the percentage of the portfolio which can be invested in this category. Rev: 01/98 4 B. Obligations issued by United States Government Agencies such as, but not limited to, the Government National Mortgage Association (GNMA), the Federal Farm Credit Bank System (FFCB), the Federal Home Loan Bank (FHLB), the Federal National Mortgage Association (FNMA), the Federal Home Mortgage Corporation (FHLMC), the Student Loan Marketing Association (SLMA), and the Tennessee Valley Authority (TVA). Although there is no percentage limitation of the dollar amount that can be invested in these issuers, the "prudent person" rule shall apply for any single agency name. C. Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances which are eligible for purchase by the Federal Reserve System, may not exceed 270 days to maturity or 40% of the market value of the portfolio. No more than 30% of the market value of the portfolio may be invested in banker's acceptances issued by any one bank. D. Commercial paper of prime quality and ranked P1 by Moody's Investor Services and Al by Standard and Poor's and issued by a domestic corporation having assets in excess of $500 million and having an "A" or better rating on its long term debt as provided by Moody's or Standard and poor's. Purchases of eligible commercial paper may not exceed 180 days to maturity. Purchases of commercial paper may not exceed 15% of the market value of the portfolio. No more than 5% of the market value of the portfolio, or $5,000,000 or 10% of the issuers' outstanding paper may be invested in commercial paper issued by any one corporation. E. Medium Term Notes (MTNs) issued by corporations organized and operating within the United States. MTNs eligible for purchase shall be rated "A" or better by Standard and Poor's or by Moody's rating services. MTNs with an "A" rating shall be limited to 24 months maximum maturity; "AA" rated MTNs shall be limited to 36 months. The aggregate total of all purchased MTNs may not exceed 30% of the market value of the investment portfolio. No more than 5% of the market value of the portfolio may be invested in notes issued by any one corporation. Commercial paper holdings shall be considered when calculating the maximum percentage of any issuer name. F. The Local Agency Investment Fund (LAIF), established by the State Treasurer for the benefit of local agencies and identified under Government Code Section 16429.1, is authorized up to the maximum amount permitted by State Law. G. The City/Agency may invest in "shares of beneficial interest" issued by diversified management companies which invest only in direct oblitations in United States Treasury bills, notes and bonds, and repurchase agreements with a weighted average of-60 65 days or less. They must be rated in the highest -rating category of at least two nationally -recognized rating services (e.g., Moody's P-1 or Standard and Poor's AAA), and have a minimum of $500 million in assets under management, and comply with Schedule II (Policy Criteria for Entering Into a Diversified Management Company) attached. The purchase price may not include commissions. Rev: 01/98 5 H. The City/Agency may place funds in inactive deposits with Banks and Savings and Loans with a branch within California that have a rating of at least "A-1" from the Financial Directory or an equivalent rating from another generally recognized authority on ratings, and have an Equity to Total Assets ratio of at least 4%. No more than 15% of the City/Agency portfolio, exclusive of investments in government agency issues and the State Treasurer's Local Agency Investment Fund, shall be placed with any one financial institution. All deposits shall be secured in accordance with Sections 53651 and 53652 of the California Government Code and comply with Schedule I (Policy Statement of Collateralized Time Deposits) attached. If deposits are not collateralized, the maximum placed at any one institution will be $100,000. The maximum amount of collateralized inactive deposits placed at any one institution shall not constitute more than 15% of the total assets of the institution or $5,000,000, whichever is less, and shall not exceed the total shareholders' equity of the issuing institution. INVESTMENT POOLS The City/Agency will investigate all local government investment pools (LGP) and money market mutual funds prior to investing and periodically thereafter while the City/Agency is invested in the pool. All money market mutual funds and LGP's, except the Local Agency Investment Fund (LAIF) of the State of California, must meet the criteria in Schedule II of this policy which includes providing a written statement that it meets the requirements in Sections 53601 and 53635 of the California Government Code and have the highest rating from two national rating agencies. The fund must maintain a daily principal per share value of $1.00 per share and distribute interest monthly. The fund's investments shall be limited to direct obligations in United States Treasury bills notes and bonds, and repurchase agreements. LAIF is authorized under provisions in Section 16429.1 of the California Government Code. The City/Agency's participation in the pool was approved by the City Council and the Redevelopment Agency Board on December 12, 1981, by Resolution 81-161. It is a permitted investment of the City/Agency even though it does not comply with all of the items listed in Schedule II, "Criteria for Entering Into a Money Market Fund." SAFEKEEPING OF SECURITIES To protect against potential losses by the collapse of individual securities dealers, all securities owned by the City/Agency shall be held in safekeeping by a third party bank trust department acting as agent for the City/Agency under the terms of a custody agreement executed by the bank and the City/Agency. All securities will be received and delivered using standard delivery -versus -payment (DVP) procedures. The third party bank trustee agreement must comply with Section 53608 of the California Government Code. No outside broker/dealer or advisor may have access to City/Agency funds, accounts or investments, and any transfer of funds to or through an outside broker/dealer must be approved by the Finance Director/Treasurer. Rev: 01/98 6 DIVERSIFICATION The City/Agency will diversify its investments by security type and investment. With the exception of bond reserve funds, bond escrow funds, and any other funds approved by the Finance Committee or the City Council, at all times at least 50% of the total portfolio shall mature in three years or less; at least 30% of the total portfolio shall mature in two years or less; at least 20% of the portfolio shall ' mature in one year or less. MAXIMUM MATURITIES The City/Agency will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, as approved reviewed by the Finance Committee and approved by City Council, the City/Agency will not directly invest in securities maturing more than five years from the date of purchase. Bond reserve funds, bond escrow funds, and any other funds approved reviewed by the Finance Committee er and approved by the City Council may be invested in securities exceeding five years if the maturities of such investments are made to coincide as nearly as possible with the expected use of the funds. BOND PROCEEDS The City/Agency will direct the investment of proceeds on bonds issued as instructed in the bond indenture. Securities authorized by the bond indenture that are not authorized by the City/Agency's investment policy will only be used if they are specifically approved by the Finance Committee. All securities will be held in third -party safekeeping with the bond trustee, and all delivery -versus - payment rules will apply. . REPORTING REQUIREMENTS The Finance Director/Treasurer shall render a report of investment activity to the City Council, Agency Board and the Finance Committee quarterly monthly within 30 days following the end of the -ester month or the next regular scheduled Council meeting following the Finance and Investment Committee meeting. The report will include the type of investment, issuer, date of maturity, and par and dollar amount invested, on all securities, investments and monies held by the City/Agency. The report shall state market value and the source of the valuation, and state that the portfolio is in compliance with the policy or the manner in which it is not in compliance. The report will also include a statement denoting the ability to meet the City/Agency's expected expenditure requirements for the next six months or provide an explanation as to why sufficient money is not available. The report date will be the actual month -end date unless the last day of the month falls on a weekend or legal holiday. If the last day of the month is a weekend or legal holiday, the date of month -end report will be the last business day prior to the end of the month. Rev: 01/98 7 INVESTMENT POLICY ADOPTION The Finance Director/Treasurer shall submit an annual Statement of Investment Policy to the Finance Committee and then the City Council and Redevelopment Agency Board for their approval. This statement shall be filed with the Finance Committee by January 31 of each year. 'INVESTMENT POLICY REVIEW The City/Agency's independent Certified Public • Accountant shall annually review and make recommendations regarding the City/Agency investment policies to the extent considered necessary as required by generally accepted auditing standards as they relate to the annual financial audit which includes cash and investments. Rev: 01/98 CITY OF PALM DESERT PALM DESERT REDEVELOPMENT AGENCY POLICY STATEMENT ON COLLATERALIZED TIME DEPOSITS SCHEDULE I Before the Treasury can place a time deposit with a local bank or savings and loan, the following criteria must be met: 1. The bank must provide us with an executed copy of the "Contract for Deposit for Moneys" as specified in Section 53649 of the California Government Code. 2. The interest rate on the Time Certificate of Deposit must be competitive with rates offered by other banks and savings and loans residing in Riverside County and must exceed the interest rate for treasury bills for a similar maturity period. 3. For investments less than $100,000, FDIC insurance will be sufficient without requiring any collateral to be pledged with the Federal Reserve to secure the public fund deposit. 4. For investments exceeding $100,000, there may be a waiver of collateral for the first $100,000 deposited, and all of the funds placed on deposit must be collateralized by 105% 110% of U.S. Treasury or Federal Agency securities, or by 150% of mortgages having maturities less than five years in accordance with Section 53652 of the California Government Code. The City/Agency must receive confirmation that these securities have been pledged in repayment of the time deposit. The securities pledged must be maintained at a current market value 10% greater than the dollar amount of the deposit. 5. The City/Agency must be given a current audited financial statement for the financial year just ended . The financial reports must both include a "statement of financial condition" as well as an "income statement" depicting current and prior year operations. 6. The City/Agency will not place a fund deposit for more than $5,000,000, or 10% of the assets of the institution, whichever is less. 7. The City/Agency must receive a certificate of deposit which specifically expresses the terms governing the transaction, (i.e., the period of time, name of depositor, interest rate, etc.). 8. All time certificates must have a maturity period not exceeding one year from the date of deposit with quarterly payments of interest based upon the stated interest rate. Rev: 01/98 Schedule I +079. Time deposits will only be made with qualified banks and savings,and loans having branch office locations within Riverside County. However, time deposits with a bank or savings. and loan must be centralized at one designated office location rather than making separate deposits with each branch office. Rev: 01/98 gni Schedule I CITY OF PALM DESERT PALM DESERT REDEVELOPMENT AGENCY POLICY CRITERIA FOR ENTERING INTO A DIVERSIFIED MANAGEMENT COMPANY SCHEDULE II 1. The firm must meet all requirements set forth in the California Government Code Sections 53601 and 53635. • Government-Code7 2. The fund must provide evidence that it has been registered with SEC and has "AAA" ratings from Standard & Poor's and Moody's. 3. The fund's investments shall be limited to direct obligations in U.S. Treasury bills, bonds or notes and repurchase agreements, to the extent allowed by law, and shall maintain weighted average maturities within their portfolio of less than 60 days. -67 4. The fund shall provide -us a current prospectus before our participation in the fund. -7 5. The fund cannot engage in hedging strategies, WI purchases, options, future, reverse - repurchase agreements, or security lending. -& 6. The fund must maintain daily, a principal per share value of $1.00 per share. +9 7. The fund shall provide us at least annual financial statements on the fund's financial condition and performance. -H-: 8. The fund shall provides wire instructions for the purchase and redemption of shares and must be able to distribute interest earnings to us on a monthly basis. 4-27 9. Unless the fund is more than five years old, the City/Agency is to be given its performance history since the inception of the fund. Rev: 01/98 Schedule II Rev: 01/98 Schedule II CITY OF PALM DESERT PALM DESERT REDEVELOPMENT AGENCY POLICY CRITERL4 FOR SELECTING BROKER/DEALERS SCHEDULE III 1. All primary financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply an audited financial statement, and U4 Form for the broker, completed broker/dealer questionnaire (matlea part of this Schedule) and certification of having read the City/Agency's investment policy. All secondary financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply an audited financial statement, proof of National Association of Securities Dealers certification, trading resolution, proof of state registration, completed broker/dealer questionnaire (made -a part of this Schedule), U4 Form for the broker and certification of having read the City/Agency's investment policy. 2. The net capital position of the firm shall be in excess of $100 million. 3. The Finance Director/Treasurer's intent is to enter into a long-term relationship. Therefore, the integrity of the firm and the personnel assigned to our account is of primary importance. -:4. It is important that the firm provide related services that will enhance the account relationship which could include: a) An active secondary market for its securities. b) Internal credit research analysis on commercial paper, banker's acceptances and other securities it offers for sale. c) Be capable of providing market analysis, economic projections, newsletters. e) d) Provide market education on new investment products, security spread relationships, graphs, etc. -9:5. If requested, the firm must be willing to provide us a list of local government clients or other references, particularly those client relationships established within the State of California. Rev: 01/98 Schedule III the-eippiAgeneyls-eusteelial-bank7Without exception, all transactions are to be conducted on a "delivery vs. payment" basis. All securities owned by the City/Agency shall be held in safekeeping by a Third Party Bank Trust Department acting as Agent for the City/Agency under the terms of a Custody Agreement executed by the bank and the City/Agency. ?7. The-breker/desler Firm shall be headquartered or have a branch office in California, Exeept out-of-state: and must be registered with and be operating under the laws of the State of California. 4-3:8. The brelker/eiealer Firm must have been in operation for more than 5 years, and must have net capital in excess of $100 million. 44.9. No business relationship shall be established with firms engaging in the sale of "exotic" products. Exotic meaning "unusually high yields," no ready secondary market, or "high price volatility" on the security. 10. No broker/dealer or security firm shall be selected whe which has, within any consecutive 48- month period, made a political contribution in an amount exceeding the limitations contained in Rule G-37 of the Municipal Securities Rulemaking Board, to the local treasurer or any member of the City Council or the Redevelopment Agency governing board or to any candidate for these offices. 11. All Broker/Dealers who have been selected to work with the City/Agency will anually review the revised Investment Policy and sign a statement indicating that he/she will comply with it. They will also provide their audited financial statement to us. Rev: 01/98 Schedule III 1w CITY OF PALM DESERT PALM DESERT REDEVELOPMENT AGENCY FIRMS AUTHORIZED TO CONDUCT INVESTMENT TRANSACTIONS SCHEDULE IV The City/Agency is authorized to conduct investment security transactions with the following investment firms and broker/dealers, many of which are designated by the Federal Reserve Bank as primary government dealers. Security transactions with firms, other than those appearing on this list, are prohibited. A. Firms designated by the Federal Reserve Bank as Primary Government Dealers: Bank of America NT & SA ehttse-Sc_curitie- I_n__c. Chemical Sc_uritic3 Inc e Morgan Stanley Dean Witter Reynolds, Discover, Inc. Paine Wcbbcr fInc - , ,• f Solomon Smith Barney, Inc. B. Other authorized firms: Union Bank of California The Bank of New York Great Western Bank Home Savings of America Downey Savings Glendale Federal Bank Wells Fargo Bank Rev: 01/98 Schedule IV GLOSSARY AGENCIES: Federal agency securities. ASKED: The price at which securities are offered. (The price at which a firm will sell a security to an investor.) BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BASIS POINT: One one -hundredth of a percent (i.e., 0.01%). BID: The price offered by a buyer of securities. (When you are selling securities, you ask fora bid.) BROKER: A broker brings buyers and sellers together for a commission. He does not take a position. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large -denomination CD's are typically negotiable. COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COUPON: a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. b) A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT:The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non -interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value (e.g., U.S. Treasury Bills). DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions (e. g. S&L's, Small business firms, students, farmers, farm cooperatives, and exporters). FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. Rev: 01/98 Glossary FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a Federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder - owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven -member Board of Govemors in Washington, D.C.; 12 regional banks and about 5,700 commercial banks are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA. VA or FMHM mortgages. The term "pass- throughs" is often used to describe Ginnie Maes. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MARKET REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase - reverse repurchase agreements that establish each parry's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the event of default by the seller -borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. Rev: 01/98 Glossary OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See "Asked" and "Bid". OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit: Sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -registered securities broker/dealers, banks and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states, the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state —the so-called "legal list". In other states, the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity; on a bond, the current income return. REPURCHASE AGREEMENT (RP or REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed date. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See "Uniform Net Capital Rule". TREASURY BILLS: A non -interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: Intermediate -term coupon bearing U.S. Treasury securities having initial maturities of from one year to ten years. Rev: 01/98 Glossary UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker/dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, 'one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. Rev: 01/98 Glossary 0 Z W H Z W >- o cE > O W W J H • � re cs, • N i W J 0 coEs • C Q E m a h� 0 > 11) W 'o w.c 0 < J a LL 0 0 CREDIT QUALITY (S&P/MOODY'S) a Q not rated a-1 from Financial Directory or similar Equity/Total Assets=> 4% d A or better MATURITY Max 60 days Max 270 days Max 180 days Max 5 years PURCHASE RESTRICTIONS E J o z E J o z US Treasury & Gov't Agency Funds & Repurchase Agreements Not Authorized Max. 30% pf portfolio w/one bank Bank in top 10 by total assets Max. set by gov't code - currently $20 Million per account Max. 10% of total assets of institution (Collateral = 110% to 150%) Max. per institution = $100,000 Max 5% of portfolio or $5,000,000 whichever is lower per institution Corp/Despoitory must be licensed & operating in US Max 5% per corporation Not Authorized Not Authorized Not Authorized Not Authorized DIVERSIFICATION No Limit No limit - prudent person rule to be used to select individual agency Max. 40% of Portfolio Max. 15% of Portfolio (excluding gov't agency and LAIF) and $5,000,000 per institution Max. 15% of portfolio - Max. 30% if weighted average<31 days Max. 30% of Portfolio INVESTMENTS AUTHORIZED IN GOVERNMENT CODE SECTION 53601 U.S. Treasury Bills & Notes U.S. Govemment Agencies Money Market Mutual Funds* Repurchase Agreements Bankers' Acceptance Local Agency Investment Fund Time Deposits - Collateralized Time Deposit - Uncollateralized Commercial Paper Medium Term Corporate Notes State and Local Indebtness Negotiable CD's Reverse Repurchase Agreements Asset Backed Securities • Money Markey Mutual funds made up of different securities will have different levels of risk.