HomeMy WebLinkAboutAGENDA REPORT 2003 0917 CC REG ITEM 10JMOORPARK CITY COUNCIL
AGENDA REPORT
ITEM 10 . T.
. " T n C, z
of
9-��-
TO: Honorable City Council
FROM: Cynthia L. Borchard, Administrative Services Director,
City Treasurer
DATE: September 8, 2003 (CC Meeting of September 17, 2003)
SUBJECT: CONSIDER RESOLUTION ADOPTING THE ANNUAL INVESTMENT
POLICY FOR THE CITY OF MOORPARK
SUMMARY
Effective January 1, 1996, State law requires the City Council
to annually review and adopt the City's Investment Policy at a
public meeting (Gov. Code § 53646). The requirement for an
annual Investment Policy update ensures consistency with respect
to current laws and allows the City Council to review portfolio
objectives.
DISCUSSION
Although the attached investment policy has been restructured
and updated in a few areas, it contains no substantial changes
from the previous policy. Some of the changes contain clearer
language; the addition of an index; update of all government
code references; improvements to the descriptions of authorized
investments; and enhancement to the glossary of terms.
The current policy meets the City's needs and is in compliance
with California Government Codes. The Budget and Finance
Committee (Mayor Hunter and Councilmember Harper) reviewed the
policy changes at their meeting on September 3, 2003. Staff
recommends the approval of this policy for fiscal year 2003 -04.
The City's and Redevelopment Agency's investment portfolio as of
6/30/03 (unaudited) consisted of the following:
000104
Investment
City
MRA
Total
LAIF
$39.8 Million
$12.1 Million
$51.9 Million
US Treasuries/
Agencies
$15.5 Million
$ 0.0 Million
$15.5 Million
Total
$55.3 Million
$12.1 Million
$67.4 Million
The City is limited to $40 million per the Local Agency
Investment Pool guidelines and so we will be exploring various
other investment options in addition to LAIF as authorized in
the attached policy.
STAFF RECOMMENDATION
Adopt Resolution No. 2003- establishing the City of
Moorpark's Investment Policy for fiscal year 2003 -04.
Attached: Resolution 2003-
000105
RESOLUTION NO. 2003-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF MOORPARK, CALIFORNIA, ADOPTING THE ANNUAL
STATEMENT OF INVESTMENT POLICY
WHEREAS, on September 17, 2003, the City Council reviewed
and adopted the City of Moorpark's annual investment policy; and
WHEREAS, a staff report has been presented to the Council
requesting adoption of the annual statement of investment
policy; and
WHEREAS, the investment policy describes the investment of
City funds in compliance with the Municipal Code and state law,
and, therefore, the investment policy is to be hereby submitted
to an oversight committee in compliance with state law.
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF MOORPARK
DOES HEREBY RESOLVE AS FOLLOWS:
SECTION 1. The annual statement of investment policy
attached hereto as "Exhibit A" has been reviewed in a public
meeting and is hereby adopted.
SECTION 2. The City Clerk shall certify to the adoption of
the resolution and shall cause a certified resolution to be
filed in the book of original Resolutions.
PASSED AND ADOPTED this 17th day of September 2003.
Patrick Hunter, Mayor
ATTEST:
Deborah S. Traffenstedt, City Clerk
Attachment: City of Moorpark Investment Policy
STATEMENT OF INVESTMENT POLICY
CITY OF MOORPARK
Submitted by: Cindy Borchard,
Administrative Services Director /City Treasurer
Approved September 17, 2003
000107
TABLE OF CONTENTS
Introduction.................. ..............................1
Policy........................ ..............................1
Scope......................... ..............................1
Pooled Investments ....... ..............................1
Investments Held Separately ............................1
Objectives.................... ..............................2
Safety................... ..............................2
Liquidity............. ............................... .2
Return on Investment ..... ..............................2
Duties and Responsibilities ... ..............................2
Prudence...................... ....... ••-- ...................3
Ethics and Conflicts of Interest ............................3
Authorized Investments ........ ..............................4
Collateralization ............. ..............................6
Unauthorized Investments /Investment Activity ................6
Investment Strategy ........... ..............................6
Diversification ............... ..............................7
Maximum Maturities ............ ..............................7
Selection of Financial Institutions and Brokers .............8
Purchase, Payment and Delivery ..............................8
Safekeeping and Custody ....... ..............................9
Performance Standard for Pooled Investments .................9
Reporting..................... ..............................9
Short Term Borrowing ........... .............................10
Short Term Loan ........... .............................10
Line of Credit ............ .............................10
Exceptions..................... .............................10
Internal Control ............... .............................11
Investment Policy Adoption ..... .............................11
Glossary....................... .............................12
rrr r;
CITY OF MOORPARK
STATEMENT OF INVESTMENT POLICY
Approved by City Council September 17, 2003
1.0 Introduction. The purpose of this document is to identify
various policies and procedures that enhance opportunities for
a prudent and systematic investment policy and to organize and
formalize investment - related activities of the City of
Moorpark, Moorpark Redevelopment Agency and Moorpark Public
Financing Authority. Related activities which comprise good
cash management include accurate cash projections, the
expeditious collection of revenue, the control of
disbursements, cost - effective banking relations, and arranging
for a short -term borrowing program which coordinates working
capital requirements and investment opportunities.
2.0 Policy. It is the policy of the City of Moorpark to
invest public funds not required for immediate day -to -day
operations in accordance with the principals of sound treasury
management and the provisions of California Government Code §
53600 et seq., the Municipal Code and this policy.
3.0 Scope. This policy applies to all investment activities
of the City of Moorpark, except for the proceeds of certain
debt issues that are invested and managed by trustees appointed
under indenture agreements.
3.1 Pooled Investments. Investments for the City and its
component units will be made on a pooled basis, including
the City of Moorpark, the Moorpark Redevelopment Agency,
and the Moorpark Public Financing Authority.
All pooled funds are accounted for in the Comprehensive
Annual Financial Report of the City of Moorpark. Funds
include the General Fund, Special Revenue Funds, Debt
Service Fund, Capital Projects Funds and Trust and Agency
Funds.
3.2 Investments held separately. Investments of bond
proceeds will be held separately when required by the bond
indentures or when necessary to meet arbitrage
regulations. If allowed by the bond indentures, or if the
arbitrage regulations do not apply, investments of bond
proceeds will be held as part of the pooled investments.
1
000109
4.0 Objectives. Section 53600.5 of the California Government
Code outlines the primary objectives of a trustee investing
public money. The primary objectives, in order of priority, of
the City's investment activities shall be:
4.1 Safety. Safety of principal is the foremost
objective of the investment program. Investments shall
be undertaken in a manner that seeks to ensure
preservation of capital in the overall portfolio.
4.2 Liquidity. The City's investment portfolio will
remain sufficiently liquid to enable the City to meet all
operating requirements which might be reasonably
anticipated.
4.3 Return on Investment. Investment return becomes a
consideration only after the basic requirements of safety
and liquidity have been met. The City shall attempt to
obtain an acceptable return provided that the requirements
of safety and liquidity are first met.
The City Treasurer shall strive to maintain the level of
investment of all contingency reserves and inactive funds
as close to 100% as possible. While the objectives of
safety and liquidity must first be met, it is recognized
that portfolio assets represent a potential source of
significant revenues. It is to the benefit of the City
that these assets be managed to produce optimum revenues,
consistent with state statutes and local ordinances.
5.0 Duties and Responsibilities. By Council Ordinance,
investment authority is delegated to the City Treasurer. No
person may engage in investment transactions unless directed by
the City Treasurer.
In the execution of this delegated authority, the City
Treasurer may establish accounts with well qualified,
financially sound financial institutions and /or brokers /dealers
for the purpose of completing investment transactions in
accordance with this policy. The criteria used to select
qualified financial institutions and broker /dealers are
identified in paragraph 14 of this policy.
The City Treasurer may designate in
Treasurer, who in the absence of the
assume the City Treasurer's duties and
K
writing a Deputy City
City Treasurer, will
responsibilities. The
000110
City Treasurer shall retain full responsibility for all
transactions undertaken under the terms of this policy.
The City Treasurer is required to annually render a statement
of investment policy to the City Council to be considered at a
public meeting. A copy of the investment policy shall be filed
with to the California Debt and Investment Advisory Commission.
The City Treasurer is required to submit the investment policy
to the Commission no later than 60 days after the close of the
second quarter of each calendar year and within 60 days of any
subsequent policy amendment.
The City Treasurer is required to submit quarterly investment
reports to the City Council and City Manager. The investment
report shall comply with the requirements of Gov. Code, §53646.
A copy of the City's second and fourth quarter investment
report shall be filed with the California Debt and Investment
Advisory Commission that is due within 60 days following the
close of the second and fourth quarter of each year.
6.0 Prudence. Section 53600.3 of the California Government
Code identifies those persons authorized to make investment
decisions on behalf of a local agency. As a trustee, the
standard of prudence to be used shall be the "prudent investor"
standard and shall be 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
management of their own affairs, not for speculation, but for
investment, considering the probable safety of their capital aw
well as the probable income to be derived.
Investment officers acting in accordance with written
procedures and the investment policy and exercising due
diligence shall be relieved of personal responsibility for an
individual security's credit risk changes or market price
changes, provided deviations from expectations are reported in
a timely manner and appropriate action is taken to control
adverse developments.
7.0 Ethics and Conflicts of Interest. All participants in the
City's investment process shall seek to act responsibly as
custodians of the public trust. 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 recommendations and decisions.
3
00011:1
Employees and investment officials shall make all disclosures
appropriate under the Fair Political Practices Act, and may
seek the advice of the City Attorney and the Fair Political
Practices Commission whenever there is a question concerning
personal financial or investment positions that could represent
potential conflicts of interest.
8.0 Authorized Investments.
8.1 Pooled Investments. The City Treasurer may invest
City funds in the following instruments as specified in
the California Government Code, Section 53601, subject to
the limitations set out in that section and as further
limited in this policy. Investments will be made only in
readily marketable securities actively traded in the
secondary market.
8.1.1 U.S. Treasury Bills, Notes and Bonds:
provided that the stated final maturity of such
security does not exceed five (5) years from the date
of purchase.
8.1.2 U.S. Government Federal Agency Issues:
Mortgage backed securities with a fixed coupon,
provided that the stated final maturity of such
security does not exceed five (5) years from the date
of purchase.
8.1.3 Time Certificates of Deposit, major Banks
or Savings & Loans: Deposits should not exceed five -
year maturity and shall be collateralized as
specified in paragraph 9.0 of this policy.
8.1.4 Negotiable Certificates of Deposit issued
by nationally or state - chartered bank. Purchases may
not exceed 30% of the portfolio and final maturity
may not exceed five (5) years from date of purchase.
8.1.5 Banker's Acceptances, Foreign /Domestic,
with a minimum rating of "Al" by Standard & Poors or
"Pl" by Moody's (prime) rating provided that the
acceptances are eligible for purchase by the Federal
Reserve System and the maturity does not exceed 180
days maturity or 40% of the total portfolio.
8.1.6 Commercial Paper: Short -term instruments
with fixed coupons, fixed maturity and no call
4 000112
provisions issued by corporations organized and
operating within the United States, with an "Al /P1"
(prime) rating or better. Purchases may not exceed
270 days maturity or 25% of the portfolio.
8.1.7 Medium -term Corporate Notes of a maximum of
five years until maturity issued by corporations
organized and operating within the United States and
rated in the "AAA" or "AA" categories of Moody's
Investment Services, Inc. and Standard and Poors
Corporation. Purchases may not exceed 30% of the
portfolio.
8.1.8 Repurchase Agreements with a maximum
maturity of one year. Repurchase Agreements will
only be with primary dealers of the Federal Reserve
Bank of New York, and who have long -term debt rated
in the "AAA" or "AA" categories of Moody's Investment
Services, Inc. or Standard and Poors Corporation.
Investments will be collateralized as specified in
paragraph 9.0 of this Investment Policy.
8.1.9 Money Market Mutual Funds whose portfolio
consists of one or more of the foregoing legal
investments. Purchases may not exceed 20% of the
portfolio and 90 days maturity.
8.1.10 County Pooled
accordance with the laws
those Funds and State law.
Investment Funds in
and regulations governing
8.1.11 State of California pooled "Local Agency
Investment Fund" in accordance with the laws and
regulations governing those Funds and State law.
8.1.12 Investment Trust of California, CalTRUST,
pool in accordance with the laws and regulations
governing those Funds and State law.
8.1.13 Insured deposits: Deposits not exceeding
$100,000, shall be permitted only in those financial
institutions that are active members of the Federal
Deposit Insurance Corporation (FDIC) and provided
that the final maturity does not exceed five (5)
years from date of purchase. The "Sweep" account for
the overnight investment of idle funds shall be
subject to this policy.
5 000113
8.2 Investments held separately. Investments of bond
funds will be made in conformance with the trust indenture
for each issue. Such investments will be held separately
when required.
9.0 Collateralization. Investments in time certificates of
deposit shall be fully insured up to $100,000 by the Federal
Deposit Insurance Corporation or the Federal Savings & Loan
Insurance Corporation, as appropriate. Investments in time
certificates of deposit in excess of $100,000 shall be properly
collateralized. Section 53652 of the California Government
Code requires that the depository pledge securities with a
market value of at least 10% in excess of the City's deposit as
collateral in government securities, and 50% in excess of the
deposit as collateral in mortgage pools. Section 53649 of the
California Government Code specifies that the City Treasurer is
responsible for entering into deposit contracts with each
depository.
Investments in repurchase
agreements
must also
be
collateralized. In order to
anticipate
market changes
and
provide a level of security for
all funds,
the
collateralization level will
be 102% of
market value
of
principal and accrued interest.
10.0 Unauthorized Investments /Investment Activities. Section
53601.6 of the California Government Code disallows the
following investments acquired after January 1, 1996: inverse
floaters, range notes, or interest -only strips that are derived
from a pool of mortgages.
10.1 No investment will be made that has either (1) an
embedded option or characteristic which could result in a
loss of principal if the investment is held to maturity,
or (2) an embedded option or characteristic which could
seriously limit accrual rates or which could result in
zero accrual periods.
10.2 No investment will be made that could cause the
portfolio to be leveraged.
11.0 Investment Strategy.
11.1 Pooled Investments. A buy and hold strategy will
generally be followed; that is, pooled investments once
made will usually be held until maturity. A buy and hold
strategy will result in unrealized gains or losses as
6 000114
market interest rates fall or rise from the coupon rate of
the investment. Unrealized gains or losses, however, will
diminish as the maturity dates of the investments are
approached or as market interest rates move closer to the
coupon rate of the investment. A buy and hold strategy
requires that the portfolio be kept sufficiently liquid to
preclude the undesirable sale of investments prior to
maturity. Occasionally, the City Treasurer may find it
advantageous to sell an investment prior to maturity, but
this should be only on an exception basis and only when it
is clearly favorable to do so.
11.2 Investments held separately. Investments held
separately for bond proceeds will follow the trust
indenture for each issue.
12.0 Diversification. To the extent feasible the portfolio
will be diversified to avoid incurring unreasonable and
avoidable risks regarding specific security types or individual
financial institutions. In addition to the limitations on
specific security types indicated in paragraph 8.0 of this
Investment Policy, and with the exception of U.S.
Treasury /Federal agency securities and authorized pools, no
more than five percent (5 %) of the City's portfolio will be
placed with a single issuer.
13.0 Maximum Maturities.
13.1 Pooled Investments. A policy of laddered maturities
will be followed for pooled investments. The following
maturity requirements will apply as of the month end of
each reporting period.
13.1.1 At least fifty percent (50 %) of the
portfolio shall mature within one year from the date
of purchase. No more than twenty -five percent (25%)
of the entire portfolio may have a maturity date
between three (3) and five (5) years from the
purchase date. Investments with a maturity greater
than five (5) years will not be made. The average
portfolio investment maturity shall be three (3)
years or less. A dollar- weighted average will be
used in computing the average maturity of the
portfolio.
13.1.2 Callable investments will be recorded at
their maturity dates.
7 000115
13.2 Investments Held Separately. Maturities for
investments held separately will conform with the trust
indenture for each issue.
14.0 Selection of Financial Institutions and Broker /Dealers.
Investments shall be purchased only through well established,
financially sound institutions. The City Treasurer shall
maintain a list of financial institutions and broker /dealers
approved for investment. All financial institutions and
broker /dealers who desire to become qualified bidders for
investment transactions will be given a copy of the City's
Investment Policy, and a return cover letter which must be
signed indicating that the investment policy has been read and
understood. Qualified financial institutions and
broker /dealers must supply the City Treasurer with the
following:
14.1 Financial Institutions.
• Current audited financial statements.
• Depository contracts, as appropriate.
• A copy of the latest FDIC call report or the latest
FHLBB report, as appropriate.
• Proof that commercial banks, savings banks, or
savings and loan associations are state or federally
chartered.
14.2 Broker /Dealers.
• Current audited financial statements.
• Proof that brokerage firms are members in good
standing of a national securities exchange.
Commercial banks, savings banks, and savings and loan
associations must maintain a minimum net worth to asset ratio
of 3% (total regulatory net worth divided by total assets), and
must have had a positive net earnings for the last reporting
period.
15.0 Purchase, Payment, and Delivery. A competitive bid
process, when practical, will be used to place all investment
transactions. When two or more investment opportunities offer
essentially the same maturity, liquidity, yield, and quality,
priority will be given first to the financial institutions
based in the City of Moorpark, and second to other financial
institutions in the State of California.
8
000116
Purchases on margin will not be made. Payment for securities
will be done on a Delivery Versus Payment (DVP) basis via the
City's custodian. Delivery of securities will be made to the
City in accordance with the third party custodial agreement.
16.0 Safekeeping and Custody. All security transactions,
including collateral for repurchase agreements, entered into by
the City shall be conducted on a delivery -vs. - payment basis.
All securities owned by the City will be held by a third -party
custodian designated by the City Treasurer and evidenced by a
monthly statement from the custodian. Collateral for time
deposits in savings and loans will be held by the Federal Home
Loan Bank of an approved Agent of Depository. Collateral for
time deposits in banks will be held in the City's name in the
bank's Trust Department or in the Federal Reserve Bank.
17.0 Performance Standard for Pooled Investments. Laddered
maturities and a buy and hold strategy for pooled investments
will cause the investment portfolio to attain a market - average
rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and the cash
flow needs. The rate of return of the investment portfolio
will be based on the maturity value of the investments. A
dollar - weighted average of yields to maturity will be used in
calculating the rate of return of the entire portfolio.
18.0 Reporting. Sections 53607 and 53646 of the California
Government Code require reports of investments and transactions
to the City Council, City Manager, and internal auditor.
18.1 Pooled Investments. The investment report shall be
submitted quarterly by the City Treasurer within 30 days
following the end of the quarter covered by the report.
The quarterly report shall include the following elements:
• Itemized listing of portfolio investments by type,
date of maturity, and issuer.
• Par value, dollar amount invested, amortized cost,
and current market value as of the date of the report
will be given for the total of all securities,
investments, and moneys held by the City and its
component units. The source of the market values will
be cited.
• Accrued income.
• Investment transactions for the reporting period.
9
000117
• Statement that the investment portfolio has the
ability to meet the City's cash flow demands for the
next six (6) months.
• Statement of compliance of the portfolio with the
City's Investment Policy. When applicable, any
material exceptions will be noted.
18.2 Investments Held Separately. A report of investments
held separately shall be made quarterly within 30 days
following the end of the quarter submitted as an exhibit
in the City Treasurer's quarterly report. The quarterly
report shall contain the information required by Section
53646 when available.
19.0 Short -term Borrowing. The City is permitted by law to
borrow money to meet current short -term cash flow needs. These
needs may arise either because projected cash disbursements
exceed projected cash receipts, or because the City's cash
accounts may be temporarily overdrawn due to the efforts to
invest 100% of inactive funds at all times. To provide for
these contingencies the City Treasurer is authorized to take
the following actions:
19.1 Short -term Loan. When there is a shortfall between
projected cash revenues and projected cash disbursements,
the City Treasurer will secure a loan in the amount that
would equal the cash deficit plus projected cash
disbursements for one month. Any such loan will be repaid
within one year.
19.2 Line of Credit. The City Treasurer may maintain a
line of credit with the City's bank in an amount to cover
sums temporarily overdrawn because of efforts to invest
all inactive funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the
requirements specified in this Investment Policy may occur for
pooled investments because of events subsequent to the purchase
of investment instruments, e.g. the rating of a corporate note
held in the portfolio is downgraded below an "AA" rating, or
total assets in the portfolio decline causing the percentage
invested in corporate notes to rise above 30 %.
State law is silent as to how exceptions should be corrected.
Exceptions may be temporary or more lasting; they may be self
correcting or require specific action. If specific action is
required, the City Treasurer should determine the course of
10 000118
action that would correct exceptions to move the portfolio into
compliance with State and City requirements. Decisions to
correct exceptions should not expose the assets of the
portfolio to undue risk, and should not impair the meeting of
financial obligations as they fall due. Any subsequent
investments should not extend existing exceptions.
21.0 Internal Control. The City Treasurer shall establish an
annual process of independent review by an external auditor.
This review will provide internal control by assuring
compliance with policies and procedures.
22.0 Investment Policy Adoption. California Government Code §
53646(a) requires the City Treasurer to render to the City
Council a statement of investment policy no less frequently
than once a year for adoption. The City's investment policy and
any modifications thereto shall be considered at a public
meeting. Adoption shall be made by resolution of the City
Council.
11
000119
INVESTMENT POLICY
GLOSSARY
Amortized Cost: The cost of investments adjusted for amortized
premiums and discounts. Amortized cost is used to maintain
comparability with market value.
Arbitrage Regulation: The law to control the use of profit
making by purchasing securities on one market for immediate
resale on another in order to profit from a price difference.
Asked: The price at which securities are offered.
Bankers' Acceptances (BA) : A time draft of invested funds that
have been drawn on and accepted for repayment by a bank. By
accepting the draft (investment of City funds), the bank is
liable for the payment at maturity. The credit worthiness of
Bankers' Acceptances is enhanced because they are secured by
the issuing bank, the goods themselves, and the importer. This
financial instrument is short -term, not more than 270 days and
is sold on a discounted basis. Not more than 30% of the City's
portfolio may be placed with any one bank.
Bear Market: A period of generally pessimistic attitudes and
declining market prices.
Bid: The price offered for securities.
Bond: An interest - bearing security issued by a corporation,
government, governmental agency or other body, which can be
executed through a bank or trust company. A bond is a form of
debt with an interest rate, maturity, and face value, and is
usually secured by specific assets. Most bonds have a maturity
of greater than one year, and generally pay interest
semiannually.
Bond Indenture: Written agreement specifying the terms and
conditions for issuing bonds, including; the form of the bond,
the maturity date and payment schedule with interest rate, call
provisions and protective covenants, if any, collateral
pledged, and other terms. Obligations of the bond issuer are
identified as well as the trustee's responsibility for ensuring
that interest payments are made to registered bondholders.
Bond Rating: The classification of a bond's investment
quality.
12
000120
Bookvalue: A term synonymous with amortized cost
Broker: A broker brings buyers and sellers together for a
commission paid by the initiator of the transaction or by both
sides; a broker does not position. In the money market, brokers
are active in markets, in which banks buy and sell money, and
in inter - dealer markets.
Bull Market: A period of generally optimistic attitudes and
increasing market prices.
Buy and Hold: Management strategy in which the intent is to
hold each security until maturity.
Certificate of Deposit (CD): A time deposit with a specific
maturity and interest rate evidenced by a certificate.
Maturities range from a few weeks to several years. Interest
rates are set by competitive forces in the marketplace. There
is a penalty for early withdrawal. CD's in large denominations
are typically negotiable.
Collateral ization: Refers to securities pledged by a bank to
secure deposits of public monies. Also refers to evidence of
deposit or other property that a borrower pledges to secure
repayment of a loan.
Commercial Book - Entry: The commercial book -entry system is
operated by the Federal Reserve Banks in their capacity as
fiscal agents of the Treasury. Investors who maintain their
securities in this system generally have purchased their
securities through a financial institution or a government
securities broker or dealer. These securities are recorded in
the commercial book -entry system as book -entry issues held for
the account of a depository institution. The depository
institution (e.g., bank, brokerage firm or securities clearance
organization) maintains records identifying the owners of
securities held in its account in the system.
Commercial Paper: A short -term IOU, or unsecured money market
obligation, issued by prime rated commercial firms and
financial companies, with maturities from two (2) days up to
270 days. A promissory note of the issuer used to finance
current obligations, and is a negotiable instrument. The notes
are in bearer form starting at $100,000. State law limits the
City to investments in United States corporations having assets
in excess of five hundred million dollars with an "A" or higher
rating.
13
000121
Commission: The broker's or agent's fee for purchasing or
selling securities for a client.
Coupon: The annual rate of interest that a bond's issuer
promises to pay the bondholder on the bond's face value or 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 their 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" (also called free). Delivery versus payment is
delivery of securities with an exchange of money for the
securities indicating payment is due when the buyer has
securities in hand or in book entry.
Discount: The difference between the cost price of a security
and its value at maturity when quoted at lower than face value.
A security selling below original offering price shortly after
sale also is considered to be 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.
Embedded Option: A statement within the bond structure that
would alter the interest rate earned by the bond.
Federal Credit Agencies: Agencies of the Federal
government set up to supply credit to various classes of
institutions and individuals, e.g., small business firms,
farmers, farm cooperatives, and exporters. These are securities
such as the Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Corporation (Freddie Mac) , Federal
Farm Credit Bureau (FFCB), Government National Mortgage
Association (GNMA) and the Small Business Administration (SBA).
14
000JL22
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 Open Market Committee: 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
Governors in Washington, D.C., twelve Regional Banks and about
5,700 commercial banks that are members of the system.
Federal Deposit Insurance Corporation (FDIC) : A federal agency
that insures bank deposits, currently up to $100,000 per
deposit.
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.
Fiscal Year: An accounting or tax period comprising any twelve
month period. The City's fiscal year begins on July 1.
Interest -Only Strips: Mortgage backed instrument where
investor receives only the interest, no principal, from a pool
of mortgages. Issues are highly interest rate sensitive. Cash
flows vary between interest periods. As well, the maturity
date may occur earlier than that stated if all loans within the
pool are pre -paid. High prepayments on underlying mortgages
can return less to the holder than the dollar amount invested.
Inverse Floater: A bond or note that does not earn a fixed
rate of interest. Rather, the interest rate that is earned is
tied to a specific interest -rate index identified in the
bond /note structure. The interest rate earned by the bond /note
will move in the opposite direction of the index, e.g. if
market interest rates as measured by the selected index rises,
the interest rate earned by the bond /note will decline. An
inverse floater increases the market rate risk and modified
duration of the investment.
15
000123
Laddered Portfolio: Bond investment portfolio with securities
in each maturity range (e.g. monthly) over a specified period
of time (e.g. five years) .
Leverage: Investing with borrowed money with the exception that
the interest earned on the investment will exceed the interest
paid on the borrowed money.
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 price is narrow and reasonable
size can be done at those quotes.
Local Agency Investment Fund (LAIF) : The aggregate of all funds
from political subdivisions of the State of California that are
placed in the custody of the State Treasurer for investment and
reinvestment. This is a voluntary investment program offering
agencies the opportunity to participate in a major portfolio
which daily invests hundreds of millions of dollars and using
the investment expertise of the State Treasurer's Office
investment staff, at no additional cost to the taxpayer.
Investment in LAIF, considered a short -term investment, is
readily available for cash withdrawal on a daily basis.
Market Risk: The risk that market interest rates will rise
causing a loss of value in investments held. All investments
made by the City involve a degree of market risk. See also
"Unrealized Gains (Losses) .
Market Value: The price at which a security is trading and
could presumably be purchased or sold.
Maturity: The date upon which the principal or stated value of
an investment becomes due and payable.
Medium Term Corporate Notes: Corporate notes issued with fixed
coupons and maturity. A promissory note of the issuer used to
finance current obligations, which is a negotiable instrument.
Modified Duration: A measure of the sensitivity that the value
of a fixed - income security has to changes in market rates of
interest. Modified duration is the best single measure of a
portfolio's or security's exposure to market risk. Modified
duration identifies the potential gain /loss in value before the
gain /loss actually occurs. It is a prospective measurement,
16
000124
e.g., a modified duration of 1.5 indicates that when and if a
1% change in market interest rates occurs, a 1.5% change in the
value of a security will result. Investments with modified
durations of one to three are considered to be relatively
conservative.
Money Market: The market in which short -term debt instruments
(bills, commercial paper, bankers' acceptances, etc) are issued
and traded.
Negotiable Certificates of Deposit (NCD) : Although technically
a deposit, it is a short -term note, which earns the depositor a
competitive rate of return. Negotiable certificates of deposit
were developed so large deposits ($100,000 or more) could be
made at a competitive interest rate with some liquidity.
Nominee Name: Registered owner of a stock or bond if different
from the beneficial owner, who acts as holder of record for
securities and other assets. Typically, this arrangement is
done to facilitate the transfer of securities when it is
inconvenient to obtain the signature of the real owner, or the
actual owner may not wish to be identified. Nominee ownership
simplifies the registration and transfer of securities.
Offer: The price asked by the seller of securities. When buying
securities you ask for an offer. See Asked and Bid.
Open Market Operations: Purchases and sales of government and
certain other securities by the New York Federal Reserve Bank
as directed by the Federal Open Market Committee 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.
Pooled Investments: Resources grouped for advantage of the
participants.
Portfolio: Collection of securities held by an investor.
Primary Dealer: A group of government security dealers that
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.
17
000JL25
Principal: The face or par value of an instrument.
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 legal list of securities selected by the state.
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 that has
been approved by the Public Deposit Protection Commission to
hold public deposits. These financial institutions do not claim
exemption from the payment of any sales, compensating use or ad
valorem taxes under State laws, and which has segregated, for
the benefit of the Commission, eligible collateral having a
value of not less than its maximum liability.
Range Note: Investment whose coupon payment varies (e.g.
either 7% or 3 %) and is dependent on whether the current
benchmark (e.g. 30 year Treasury) falls within a pre- determined
range (e.g. between 6.75% and 7.25 %).
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 or the current income
return.
Rating: The designation used by investors' services to rate
the quality of a security's creditworthiness. Moody's ratings
range from the highest Aaa, down through Aa, A, Bbb, Ba, B,
etc. while Standard and Poor's rating range from the highest
AAA, down through AA, A, BBB, BB, B, etc.
Refinancing: Rolling over the principal on securities that
have reached maturity or replacing them with the sale of new
issues. The object may be to save interest costs or to extend
the maturity of the loan.
Repurchase Agreement: A transaction where the seller (bank)
agrees to buy back from the buyer (City) the securities at an
agreed upon price after a stated period of time.
Reverse Repurchase Agreement: A transaction where the seller
(City) agrees to buy back from the buyer (bank) the securities
at an agreed upon price after a stated period of time.
18 000126
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. See Third Party
Custodian.
Secondary Market: A market made for the purchase and sale of
outstanding issues following the initial distribution.
Securities and Exchange Coxunission (SEC) : Agency created by
Congress to protect investor's transactions by administering
securities legislation.
SEC Rule 15C3 -1: See uniform net capital rule.
Spread: The difference between two figures or percentages.
For example, it may be the difference between the bid and asked
prices of a quote, or between the amount paid when bought and
the amount received when sold.
Structured Notes: Notes issued by Government sponsored
enterprises and corporations which have imbedded options in
their debt structure (e.g., call features, step -up coupons,
floating rate coupons and derivative -based returns). Their
market performance is impacted by the fluctuation of interest
rates, the volatility of the imbedded options and shifts in the
yield curve. This includes securities from the Federal National
Mortgage Association (FNMA) , Federal Home Loan Bank (FHLB) and
the Student Loan Marketing Association (SLMA).
Sweep Account: Short -term income account into which all
uninvested cash balances from the non - interest bearing checking
account are automatically transferred on a daily basis. The
sweep is used in conjunction with "zero balance" accounts to
maximize investment of idle cash.
Third -Party Custodian: Corporate agent, usually a commercial
bank, who, acting as trustee, holds securities under a written
agreement for a corporate client and buys and sells securities
when instructed. Custody services include securities
safekeeping, and collection of dividends and interest. The bank
acts only as a transfer agent and makes no buy or sell
recommendations.
Treasury Bills: A short -term non - interest bearing security that
matures in one year or less and are issued by the U.S. Treasury
to finance the national debt. Bills (commonly known as "T"
19 000127
bills) are sold at a discount (a price less than par (face)
value) and are paid at par value at maturity. They do not pay
interest before maturity. Return is the difference between par
and discount price.
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 ten years. The bonds
pay a fixed rate of interest every six months.
Treasury Notes: Medium term coupon bearing U.S. Treasury
securities issued as direct obligations of the U.S. Government.
Treasury notes mature in two, five or ten years. The notes pay
a fixed rate of interest every six months.
Trustee: A bank designated as the custodian of funds and the
official representative for bondholders.
Underwriter: A dealer bank or financial institution which
arranges for the sale and distribution of a large batch of
securities and assumes the responsibility for paying the net
purchase price.
Uniform Net Capital Rule: Securities and Exchange Commission
requirement that member firms, as well as non - member
broker /dealers in securities, maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1: also called net
capital ratio. Indebtedness covers all money owed to a. firm,
including margin loans and commitments to purchase securities,
and is one reason new public issues are spread among members of
underwriting syndicates. Liquid capital includes cash and
assets easily converted into cash.
Unrealized Gains (Losses): Increases (decreases) in the value
of investments representing the difference between the
amortized cost of the investments and their current market
value. Increases (decreases) in value are caused primarily by
changes in market interest rates subsequent to purchasing the
investments. Increases (decreases) in value indicate two (2)
things: 1. The portfolio has a potential gain (loss) in
principal if the securities are sold, and 2. The portfolio is
overperforming (underperforming) the current market for similar
investments. An increase in value indicates the portfolio is
earning relatively more interest than current market
conditions, and a decrease in value indicates that the
portfolio is earning relatively less interest than current
market conditions.
20 U®0J.28
U.S. Government Agencies: Instruments issued by various U.S.
Government Agencies most of which are secured only by the
credit worthiness of the particular agency.
Yield: The rate of annual return on an investment expressed as
a percentage. Income yield is calculated by dividing the
current dollar income by the current market price for the
security. Net yield, or yield to maturity, is the current
income minus any premium or plus any discount from par on
purchase price, with the adjustment amortized over the period
from the date of purchase to the date of maturity of the
instrument.
Zero Accrual Periods: A period of time in which an investment
accumulates no interest.
21 000JL29