HomeMy WebLinkAbout2016-06-09 - Resolution No. 16-06 RESOLUTION NO. 16-06
RESOLUTION OF THE BOARD OF DIRECTORS
OF THE YORBA LINDA WATER DISTRICT
SETTING FORTH A PUBLIC FUNDS INVESTMENT POLICY
AND RESCINDING RESOLUTION NO. 15-13
WHEREAS, California Government Code Section 53600 sets forth guidelines for the
investment of public funds; and
WHEREAS, the current Yorba Linda Water District Investment Policy was adopted by
Resolution No. 15-13 on June 11, 2015; and
WHEREAS, the District is in possession of public funds that are not required for
immediate expenditure, and are available for investment; and
WHEREAS, a policy setting forth guidelines for the investment of said funds is necessary
for compliance with the principles of sound financial management; and
WHEREAS, the Board of Directors of the Yorba Linda Water District desire to adopt the
Investment Policy set forth herein.
NOW, THEREFORE, BE IT RESOLVED by Board of Directors of the Yorba Linda Water
District as follows:
Section 1. Exhibit 1 (Investment Policy—Yorba Linda Water District) is hereby adopted
and deemed implemented concurrent with passage and adoption of this
Resolution.
Section 2. That Resolution No. 15-13 is hereby rescinded immediately upon adoption
of this Resolution.
PASSED AND ADOPTED this 9th day of June 2016 by the following called vote:
AYES: Directors Beverage, Collett, Hawkins, Kiley and Melton
NOES: None
ABSTAIN: None
ABSENT: None
Ric Collett, President
Yorba Linda Water District
ATTEST:
Marc Marcantonio, Secretary
Yorba Linda Water District
Resolution No. 16-06 Setting Forth a Public Funds Investment Policy and Rescinding Resolution No. 15-'l 3 1
Reviewed as to form by General Counsel:
Ahr man,q
Kidman Law, LLP
Resolution No. 16-06 Setting Forth a Public Funds Investment Policy and Rescinding Resolution No. 15-13 2
FMYorba Linda
Water District
INVESTMENT POLICY
BOARD OF DIRECTORS
Ric Collett, President
Michael J. Beverage, Vice President Robert Kiley, Board Member
Gary T. Melton, Board Member Phil Hawkins, Board Member
Marc Marcantonio, General Manager
June 2016
TABLE OF CONTENTS
Section 1 Policy
Section 2 Scope
Section 3 Delegation of Authority
Section 4 Investment Objectives
Section 5 Prudence
Section 6 Ethics and Conflicts of Interest
Section 7 Authorized Broker/Dealers
Section 8 Authorized Investments
Section 9 Review of Investment Portfolio
Section 10 Investment Pools
Section 11 Collateralization
Section 12 Safekeeping and Custody
Section 13 Diversification and Maximum Maturities
Section 14 Internal Controls
Section 15 Performance Standards
Section 16 Reporting
Section 17 Investment Policy Adoption
Appendix "A" Description of Authorized Investments and Restrictions
Appendix "B" Glossary
Investment Policy June 2016
SECTION 1: POLICY
1.1 It is the policy of the Yorba Linda Water District ("District") to invest public
funds in a manner which ensures the safety and preservation of capital while
meeting reasonably anticipated operating expenditure needs, achieving a
reasonable rate of return and conforming to all state and local statutes
governing the investment of public funds.
1.2 The purpose of this policy is to provide guidelines for the prudent investment
of funds of the District and to outline the policies for maximizing the
efficiency of the District's cash management. The District's goal is to
enhance the economic status of the District consistent with the prudent
protection of the District's investments. This investment policy has been
prepared in conformance with all pertinent existing laws of the State of
California.
SECTION 2: SCOPE
2.1 This Investment Policy applies to all funds and investment activities of the
District, except for the proceeds from capital project financing instruments,
which are invested in accordance with provisions of their specific documents.
These funds are accounted for as Enterprise Funds and are identified in the
District's Comprehensive Annual Financial Report.
SECTION 3: DELEGATION OF AUTHORITY
3.1 The authority of the Board of Directors to invest funds is derived from Section
53601 of the California Government Code ("CGC"). Section 53607 of the
CGC grants the Board of Directors the authority to delegate that authority, for
a one-year period, to the District's Treasurer. Therefore, management
responsibility for the investment program is hereby delegated to the District's
Treasurer, who shall be responsible for all transactions undertaken and shall
establish a system of controls to regulate the activities of subordinate officials
and their procedures in the absence of the Treasurer. The Treasurer shall
establish procedures for the management of investment activities, including
the activities of staff consistent with this Policy.
3.2 The Treasurer may retain the services of an outside investment advisor or
manager as approved by the Board to assist with the District's investment
program. Any investment advisor selected shall make all investment
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decisions and transactions in strict accordance with State law, and this Policy.
SECTION 4: INVESTMENT OBJECTIVES
4.1 The primary objectives, in priority order, of the District's investment activities
shall be:
4.1.1 Safety: Safety and preservation of principal is the foremost objective
of the investment program. Investments shall be selected in a manner
that seeks to ensure the preservation of capital in the District's overall
portfolio. This will be accomplished through a program of
diversification and maturity limitations, more fully described in Section
13, in order that potential losses on individual securities do not exceed
the income generated from the remainder of the portfolio.
4.1.2 Liquidity: The District's investment portfolio will remain sufficiently
liquid to enable the District to meet all operating requirements which
might be reasonably anticipated. Securities should mature concurrent
with cash needs to meet anticipated demands.
4.1.3 Return on Investments: The District's investment portfolio shall be
designed with the objective of attaining the best yield or returns on
investments, taking into account the investment risk constraints and
liquidity needs. Return on investment is of secondary importance
compared to the safety and liquidity objectives.
SECTION 5: PRUDENCE
5.1 The standard of prudence to be used by the designated representative shall be
the "prudent investor" standard and shall be applied in the context of
managing the overall portfolio. The meaning of the standard of prudent
investor is explained in CGC Section 53600.3, which states 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."
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Investment Policy June 2016
5.2 The Treasurer and delegated investment officers, acting in accordance with
District procedures and the Policy and exercising due diligence, shall be
relieved of personal responsibility for an individual security's credit risk or
market price changes, provided deviations from expectations are reported in
a timely fashion and appropriate action is taken to control adverse
developments.
5.3 Investments shall be made with judgment and care - under circumstances then
prevailing - which persons of prudence, discretion and intelligence exercise
in the management of their own affairs, not for speculation, but for
investment, considering the probable safety of their capital as well as the
probable income to be derived.
SECTION 6.0: ETHICS AND CONFLICTS OF INTEREST
6.1 Officers and employees involved in the investment process shall refrain from
personal business activity that could conflict with proper execution of the
investment program, or which could impair their ability to make impartial
investment decisions. Employees and investment officials shall disclose to the
District's General Manager any material financial interests in financial
institutions that conduct business with the District's boundaries, and they shall
further disclose any large personal financial/investment positions that could
be related to the performance of the District.
SECTION 7: AUTHORIZED BROKER/DEALERS
7.1 The Treasurer will maintain a list of authorized broker/dealers and financial
institutions that are approved for investment purposes. Broker/dealers will be
selected for credit worthiness and must be authorized to provide investment
services in the State of California. These may include "primary" dealers or
regional dealers that qualify under Securities & Exchange Commission Rule
15(C)3-1 (uniform net capital rule). No public deposit will be made by the
broker/dealer except in a qualified public depository as established by the
established state laws. Before a financial institution or broker/dealer is used,
they are subject to investigation and approval by the Treasurer or his/her
designated representative, and must submit the following:
7.1.1 Certification of having read and understood this investment policy
resolution and agreeing to comply with the District's investment policy;
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7.1.2 Proof of Federal Investment Regulatory Authority certification;
7.1.3 Proof of State of California registration;
7.1.4 Audited financial statements for the institution's three (3) most recent
fiscal years;
7.1.5 References of other public-sector clients that similar services are
provided to.
7.2 If a third party investment advisor is authorized to conduct investment
transactions on the District's behalf, the investment advisor may use their own
list of approved independent broker/dealers and financial institutions. The
investment advisor's approved list must be made available to the District upon
request.
SECTION 8: AUTHORIZED INVESTMENTS
8.1 The District is provided a broad spectrum of eligible investments under the
CGC Sections 53601 et seq. Authorized investments shall also include, in
accordance with CGC section 16429.1 et seq., investments into the Local
Agency Investment Fund (LAIF) and the Orange County Treasurer's
Commingled Investment Pool in accordance with CGC section 53684. Within
the investments permitted by the CGC, the District seeks to further restrict
eligible investment to the investments listed in Section 8.3 below. Percentage
holding limits listed in this section apply at the time the security is purchased.
Ratings, where shown, specify the minimum credit rating category required
at purchased without regard to +/- or 1,2,3 modifiers, if any.
8.2 The purchase of any investment permitted by the CGC, but not listed as an
authorized investment in this Policy is prohibited without the prior approval
of the Board of Directors.
8.3 Within the context of these limitations, the following investments are
authorized:
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TABLE 1
CA Government Code YLWD
Permitted Investments*/ % of Portfolio Limits / % of Portfolio Limits /
Deposits Maturity Limits Maturity Limits
Bank Deposits# No%limit, 5 years No % limit, 5 years
CD Placement Service# 30%limit, 5 years 30%limit, 5 years
Local Agency Investment Fund No % or maturity limit No % or maturity limit
(LAIF)^
County Pooled Investment Funds/' No% or maturity limit No%or maturity limit
Joint Powers Authority Funds No % or maturity limit No % or maturity limit
(Ca1TRUST&CAMP)'
U.S. Treasury Obligations No%limit, 5 years No% limit, 5 years
U.S. Agency Obligations No%limit, 5 years No%limit, 5 years
Negotiable Certificates of Deposit# 30%portfolio, 5 years 30%portfolio, 5 years
Money Market Funds* 20%, 10%per issuer,no limit 20%, 10%per issuer,no limit
Medium-Term(or Corporate)Notes* 30%portfolio, 5 years 30%portfolio, 5 years
Bankers Acceptances* 40%,30%per issuer, 180 days 10% max, 5% per issuer, 180
days
Commercial Paper* 25%, 10%per issuer,270 days 25% max, 5% per issuer, 270
days
* Please see Appendix A for more detailed descriptions and additional restrictions
^ Please see Section 10 for additional restrictions
# Please see Section 11 for additional restrictions
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SECTION 9: REVIEW OF INVESTMENT PORTFOLIO
9.1 The securities held by the District must be in compliance with Section 8
Authorized Investments at the time of purchase. The Treasurer shall at least
quarterly review the portfolio to verify that all securities are in compliance
with Section 8 Authorized Investments. In the event a security held by the
District is subject to a credit rating change that brings it below the minimum
credit ratings specified in Appendix A Authorized Investments, the Treasurer
should notify the Finance-Accounting Committee - and through the
Committee's minutes, the Board - of the change. The course of action to be
followed will then be decided on a case-by-case basis, considering such
factors as the reason for the change, prognosis for recovery or further rate
drops, and the market price of the security.
SECTION 10: INVESTMENT POOLS
10.1 A thorough investigation of any investment pool or mutual fund is required
prior to investing, and on a continual basis. The investigation will, at a
minimum, obtain the following information:
10.1.1 A description of eligible investment securities, and a written statement
of investment policy and objectives;
10.1.2 A description of interest calculations and how it is distributed, and how
gains and losses are treated;
10.1.3 A description of how the securities are safeguarded (included the
settlement processes), and how often the securities are priced and the
program audited;
10.1.4 A description of who may invest in the program, how often and what
size deposit and withdrawal are allowed;
10.1.5 A schedule for receiving statements and portfolio listings;
10.1.6 Are reserves, retained earnings, etc. utilized by the pool/fund;
10.1.7 A fee schedule and when and how it is assessed;
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10.1.8 Is the pool/fund eligible for bond proceeds and/or will it accept such
proceeds.
SECTION 11: COLLATERALIZATION
11.1 Bank Deposits: Under provisions of the CGC, California banks and savings
and loan associations are required to secure the District's deposits by pledging
eligible securities with a value of 110% of principal and accrued interest.
State law also allows financial institutions to secure District deposits by
pledging first trust deed mortgage notes having a value of 150% of the
District's total deposits.
11.2 Waiver of Security: The Treasurer, at his/her discretion and in accordance
with CGC section 53653, may waive security for the portion of any deposits
as is insured pursuant to federal law.
SECTION 12: SAFEKEEPING AND CUSTODY
12.1 All security transactions entered into by the District shall be conducted on a
delivery-versus-payment basis. Securities will be held by a third party
custodian designated by the Treasurer and evidenced by safekeeping receipts.
The only exception to the foregoing shall be depository accounts and
securities purchases made with (i) local government investment pools, and (ii)
money market mutual funds, since those purchased securities are not
deliverable.
SECTION 13: DIVERSIFICATION AND MAXIMUM MATURITIES
13.1 The District will diversify its investments by security type and institution.
With the exception of U.S. Treasuries, U.S. Agency Securities, FDIC Insured
Certificates of Deposit and authorized pools, no more than 30% of the
District's total investment portfolio will be invested in a single security type
or with a single financial institution.
13.2 To the extent possible, the District will attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow
and approved in advance by the Board of Directors, the District will not
directly invest in securities maturing more than 5 years from the date of
purchase.
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SECTION 14: INTERNAL CONTROLS
14.1 The external auditors will annually review the investments and general
activities associated with the investment program. This review will provide
internal control by assuring compliance with the Investment Policy and
District policies and procedures.
SECTION 15: PERFORMANCE STANDARDS
15.1 The investment portfolio will be designed with the objective of obtaining a
rate of return throughout budgetary and economic cycles, commensurate with
the investment risk constraints and the cash flow needs.
15.2 The District's investment strategy is passive. The performance of the
District's investment portfolio will be evaluated and compared to an
appropriate benchmark in order to assess the success of the investment
portfolio relative to the District's Safety, Liquidity and Return on Investments
objectives. This review will be conducted annually with the Finance-
Accounting Committee.
SECTION 16: REPORTING
16.1 Subject to CGC sections 53607 and 53646(b), the Treasurer will provide
monthly investment reports to the District's Finance-Accounting Committee
(and through the Committee's minutes, to the Board of Directors) and
quarterly reports to the Board of Directors which provide a clear picture of the
status of the current investment portfolio. The reports shall comply with the
reporting requirements of CGC sections 53607 and 53646(b), respectively.
SECTION 17: INVESTMENT POLICY ADOPTION
17.1 The District's Investment Policy will be adopted by resolution of the Board
of Directors. The policy will be reviewed on an annual basis and
modification, if any, must be approved by the Board of Directors.
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APPENDIX "A"
DESCRIPTION OF AUTHORIZED INVESTMENTS AND RESTRICTIONS
The following descriptions of authorized investments, maximum maturities and
limits are included here to assist in the administration of this policy.
1) BANK DEPOSITS
The District may make bank deposits in accordance with California
Government Code section 53630 et seq., which requires collateral. Per
California Government Code Section, there are three classes of deposits: (a)
inactive deposits, (b) active deposits and (c) interest-bearing active deposits.
The collateral requirements apply to both active deposits (checking and
savings accounts) and inactive deposits (non-negotiable time certificates of
deposit). The maximum maturity shall be five years. No limit will be placed
on the percentage total invested in this category.
2) CD PLACEMENT SERVICE — Government Code Sections 53601.8 and
53653.8
The District may invest in collateralized certificates of deposits in accordance
with the requirements in California Government Code Sections 53601.8 and
53635.8. Purchases of certificates of deposit pursuant to Government Code
Sections 53601.8, 53653.8, and 53601 shall not, in total, exceed 30 percent of
District's investment portfolio. The maximum maturity is limited to five
years.
3) THE STATE LOCAL AGENCY INVESTMENT FUND (LAIF) —
Government Code Section 16429.1
The LAIF is a special fund in the California State Treasury and an investment
alternative for California's local governments and special districts created and
governed pursuant to CGC Section 16429.1 et seq. and managed by the State
Treasurer's Office. The District, with the consent of the Board of Directors,
is authorized to remit money not required for the District's immediate need,
to the State Treasurer for deposit in this fund for the purpose of investment.
Principal may be withdrawn on one day's notice. The fees charged by LAIF
are limited by statute. Investment of District funds in LAIF shall be subject
to investigation and due diligence prior to investing, and on a continual basis
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to a level of review described in Section 10 Investment Pools. No limit will
be placed on the percentage total in this category.
4) ORANGE COUNTY TREASURER'S COMMINGLED INVESTMENT
POOL (OCCIP) — Government Code Section 53684
The OCCIP is a money market investment pool managed by the Orange
County Treasurer's Office. OCCIP is more fully described in the glossary at
Appendix B. The District has no funds invested in OCCIP at this time.
Investment of District funds in OCCIP would be subject to investigation and
due diligence prior to investing, and on a continual basis to a level of review
described in Section 10 Investment Pools. There is no maturity limit. No
limit will be placed on the percentage total in this category.
5) THE INVESTMENT TRUST OF CALIFORNIA (CALTRUST) —
Government Code Section 53601(p)
The Investment Trust of California (CalTRUST) is a local government
investment pool organized as a joint powers authority pursuant to California
Government Code Section 6509.7. Wells Capital Management, a wholly-
owned subsidiary of Wells Fargo, is the portfolio manager for each of the
Ca1TRUST funds. Investment of District funds in Ca1TRUST shall be subject
to investigation and due diligence prior to investing, and on a continual basis
to a level of review described in Section 10 Investment Pools. No limit will
be placed on the percentage total in this category.
6) CALIFORNIA ASSSET MANAGEMENT PROGRAM (CAMP) —
Government Code Section 53601(p)
The Trust is currently governed by a Board of five Trustees, all of whom are
officials or employees of Public Agencies. The Trustees are responsible for
setting overall policies and procedures for the Trust. The Program's
Investment Adviser and Administrator is Public Financial Management, Inc.
The amounts deposited in this category shall be limited to bond proceeds and
are to be invested for the purpose of arbitrage management only. The District
has no funds invested in CAMP at this time. Investment of District funds in
OCCIP would be subject to investigation and due diligence prior to investing,
and on a continual basis to a level of review described in Section 10
Investment Pools. Proceeds may be invested in the Treasury Portfolio and/or
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the Money Market Portfolio. There is no maturity limit. No limit will be
placed on the percentage total in this category.
7) U.S. TREASURY OBLIGATIONS — Government Code Section 53601(b)
United States Treasury notes, bonds, bills or certificates of indebtedness, or
those for which the faith and credit of the United States are pledged for the
payment of principal and interest. The maximum maturity shall be limited to
five years. No limit will be placed on the percentage total invested in this
category.
8) U.S. AGENCY OBLIGATIONS — Government Code Section 53601(f)
Federal agency or United States government-sponsored enterprise senior debt
obligations, participations, mortgaged-backed securities or other instruments,
including those issued by or fully guaranteed as to principal and interest by
Federal agencies or United States government-sponsored enterprises.
Examples of these securities include Federal National Mortgage Association,
Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation and
Federal Home Loan Bank. The maximum maturity shall be limited to five
years with no limit placed on the percentage total in this investment category.
9) NEGOTIABLE CERTIFICATES OF DEPOSIT — Government Code
Section 53601(1)
Investments are limited to deposits issued by a nationally or state-chartered
bank, a savings association or a federal association (as defined by Section
5102 of the Financial Code), a state or federal credit union, or by a state-
licensed branch of a foreign bank.
Individual investments shall be limited to Federal Deposit Insurance
Corporation-insured limits of$250,000. Purchases of certificates of deposit
pursuant to Government Code Sections 53601.8, 53653.8, and 53601 shall
not, in total, exceed 30 percent of District's investment portfolio. The
maximum maturity is limited to five years.
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10) MONEY MARKET FUNDS — Government Code Section 53601(1)(2)
Shares of a beneficial interest issued by diversified management companies
that are money market funds registered with the Securities and Exchange
Commission.
The company shall have met either of the following criteria: (A) attained the
highest ranking or the highest letter and numerical rating provided by not
less than two nationally recognized rating services and (B) retained an
investment adviser registered or exempt from registration with the Securities
and Exchange Commission with not less than five years of experience
managing money market mutual funds with assets under management in
excess of five hundred million dollars ($500,000,000). There is no maturity
limit. A maximum of 20 percent of the portfolio may be invested in this
category, and a maximum of 10 percent of the portfolio may be invested in
any single issuer.
If the District has funds invested in a money market fund, a copy of the
fund's information statement shall be maintained on file. In addition, the
Treasurer should review the fund's summary holdings on a quarterly basis.
11) MEDIUM-TERM (OR CORPORATE) NOTES — Government Code
Section 53601(k)
Medium-term notes are defined as all corporate and depository institution
debt securities with a maximum remaining maturity of five years or less.
The corporation must be domestic, the notes must be domestic and the notes
must be issued in the United States. The corporation must be rated A or its
equivalent or better by a nationally recognized rating service. The
maximum maturity is limited to five years and the maximum percentage
allowable for investment is 30 percent of the investment portfolio in the
aggregate.
12) BANKERS' ACCEPTANCES — Government Code Section 53601 (g)
Bankers' acceptances, otherwise known as bills of exchange or time drafts,
are drawn on and accepted by a commercial bank. Purchases are limited to
bankers' acceptances issued by domestic or foreign banks,which are eligible
for purchase by the Federal Reserve System. Eligible bankers' acceptances
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are restricted to issuing financial institutions with a short-term debt rating of
at least "A-1" or its equivalent by a nationally recognized rating service.
The maximum term may not exceed 180 days and the maximum percentage
allowable for investment is 10 percent of the portfolio in the aggregate, and
5% for an individual issuer.
13) COMMERCIAL PAPER— Government Code Section 53601(h)
Commercial paper rated the highest ranking or of the highest letter and
number ratings as provided for by a nationally recognized rating service.
The entity that issues the commercial paper shall meet either of the following
two sets of criteria: (1) The corporation shall be organized and operating
within the United States, shall have total assets in excess of$500,000,000,
and shall have debt, other than commercial paper, if any, that is rated A or
higher by a nationally recognized rating service. (2) The corporation shall
be organized within the United States as a special purpose corporation, trust,
or limited liability company, has program wide credit enhancements
including, but not limited to, over collateralization, letters of credit, or surety
bond; has commercial paper that is rated "A-1" or higher, or equivalent by
a nationally recognized statistical-rating organization. Eligible commercial
paper may not exceed 270 days' maturity and may not represent more than
the 25 percent of the investment portfolio in the aggregate, and 5% for an
individual issuer.
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APPENDIX "B"
GLOSSARY
AGENCIES: Federal agency securities and/or Government-sponsored enterprises.
ASKED: The price at which securities are offered.
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.
BENCHMARK: A comparative base for measuring the performance or risk
tolerance of the investment portfolio. A benchmark should represent a close
correlation to the level of risk and the average duration of the portfolio's
investments.
BID: The price offered by a buyer of securities. (When you are selling securities,
you ask for a bid.) See Offer.
BROKER: A broker brings buyers and sellers together for a commission.
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.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official
annual report of the District. It includes five combined statements for each individual
fund and account group prepared in conformity with GAAP. It also includes
supporting schedules necessary to demonstrate compliance with finance-related
legal and contractual provisions, extensive introductory material, and a detailed
Statistical Section.
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.
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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.
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).
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 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.
DURATION: A measure of the sensitivity of the price (the value of principal) of a
fixed-income investment to a change in interest rates. Duration is expressed as a
number of years. Rising interest rates mean falling bond prices, while declining
interest rates mean rising bond prices.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions and individuals, 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 $250,000 per entity.
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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.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale
banks (currently 12 regional banks), which lend funds and provide correspondent
banking services to member commercial banks, thrift institutions, credit unions and
insurance companies. The mission of the FHLBs is to liquefy the housing related
assets of its members who must purchase stock in their district Bank.
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 RESERVE SYSTEM: The central bank of the United States created
by Congress and consisting of a seven member Board of Governors 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 FHA 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.
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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.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase—reverse repurchase agreements that
establishes each party'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.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and traded.
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
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Investment Policy June 2016
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.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not
claim exemption from the payment of any sales or compensating use or ad valorem
taxes under the laws of this state, which has segregated for the benefit of the
commission eligible collateral having a value of not less than its maximum liability
and which has been approved by the Public Deposit Protection Commission to hold
public deposits.
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 (REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price on 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.
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 15(C)3-1: See Uniform Net Capital Rule.
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STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises
(FHLB, FNMA, SLMA, etc.) and Corporations, which have imbedded options (e.g.,
call features, step-up coupons, floating rate coupons, derivative-based returns) into
their debt structure. Their market performance is impacted by the fluctuation of
interest rates, the volatility of the imbedded options and shifts in the shape of the
yield curve.
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 BONDS: Long-term coupon-bearing U.S. Treasury securities issued
as direct obligations of the U.S. Government and having initial maturities of more
than 10 years.
TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial maturities
from two to 10 years.
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 l; 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.
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