Resolution - 2016-44RESOLUTION NO. 2016-44
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WEST COVINA,
CALIFORNIA, APPROVING AND ADOPTING THE UPDATED STATEMENT OF
INVESTMENT POLICY FOR FISCAL YEAR 2016-17
WHEREAS, the Government Code Section 53646 of the State of California requires the
City Treasurer or the Chief Fiscal Officer to render an annual statement of investment policy which
must be considered at a public meeting; and
WHEREAS, Government Code Section 53600 et seq., provides guidelines and regulations
pertaining to investment of temporary idle funds.
NOW, THEREFORE, the City Council of the City of West Covina does resolve
as follows:
SECTION 1. The City Council does hereby adopt the attached Statement of Investment
Policy for Fiscal Year 2016-17 (Exhibit A).
SECTION 2. Any and all prior resolutions adopting a Statement of Investment Policy for
the City of West Covina shall be hereby rescinded.
PASSED, APPROVED AND ADOPTED on this 7' day of June, 2016.
APPROVED A�SIT-O FORM:
1�( J
Kimberly II 1 Barlow
City Attorney
Ja es Toma
ayor
ATTEST:
Nickolas S. Lewis
City Clerk
I, HEREBY CERTIFY that the foregoing resolution was duly adopted by the City Council of the
City of West Covina, California, at a regular meeting thereof on the 7" day of June, 2016, by the
following vote of City Council:
AYES: Johnson, Spence, Warshaw, Wu, Toma
NOES: None
ABSENT: None
ABSTAIN: None
ickolas.S. Lewis
City Clerk
CITY OF WEST COVINA
STATEMENT OF INVESTMENT POLICY
FOR FISCAL YEAR 2016-17
I. POLICY
EXHIBIT A
The purpose of this Policy is to establish prudent investment cash management
guidelines for the City of West Covina, the Successor Agency to the Redevelopment
Agency of the City of West Covina, and the West Covina Community Facilities District,
collectively (City). The investment goals of the City are safety, liquidity and yield. The
State of California authority governing investments for local agencies is set forth in the
California Government Code, Section 53600 et seq. The City's portfolio is designed and
managed in a manner responsive to the public trust and consistent with State and local
law.
II. SCOPE
This investment policy governs the pooled investment of funds in the treasury which are
not required for the immediate needs of the City. These funds are accounted for in the
City's general ledger and reported in the City's Comprehensive Annual Financial Report
(CAFR). This policy is applicable, but not limited to all funds listed below: �.
• General Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Projects Funds
• Proprietary Funds
This policy does not apply where superseded by specific bond documents.
III. PRUDENCE
The standard to'be used by the investment officials shall be that of a "prudent investor"
and shall be applied in the context of managing all aspects of the overall portfolio.
Government Code Section 53600.3 provides that those persons to whom investment
decisions have been delegated are trustees with a fiduciary duty to -act as a prudent
investor. This standard of care directs that a trustee shall act with care, skill, prudence,
and diligence under the circumstances then prevailing, that a prudent person acting in
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.
IV. OBJECTIVE
The objectives, in order of priority, for the City's investment activities are:
(A) Safeguard principal: Preservation of principal is the primary objective of the
( investment program. Each investment transaction shall seek to ensure that
capital losses are avoided, whether from securities default, broker/dealer default
or erosion of market value. The City shall seek to preserve principal by
mitigating the two types of risk, credit risk and interest rate risk.
Credit risk, defined as the risk of loss due to issuer's failure to fulfill
obligations, shall be mitigated by investing in high grade securities that
conform to California Code and by diversifying the investment portfolio.
Interest rate risk, defined as the risk that market interest rates will
adversely affect the fair value of an investment, shall be mitigated by
purchasing a combination of shorter term and longer term investments
and by timing cash flows from maturities so that a portion of the portfolio
is maturing or coming close to maturity evenly over time as necessary to
provide cash flow and liquidity needed for operations.
(B) Meet liquidity needs: Historical cash flow trends are compared to current
cash flow requirements on an ongoing basis in an effort to ensure that the City's
investment portfolio will remain sufficiently flexible to enable the City to meet
reasonably anticipated operating requirements.
(C) Achieve a return on funds: The City's investment portfolio is designed with
the objective of maximizing yield, while safeguarding principal and meeting the
City's liquidity needs.
V. DELEGATION OF AUTHORITY
The City Council or its delegate is a fiduciary for investments of City funds.
Authority to manage the City's investment program is specified in West Covina
Municipal Code Section 2-182(i); "The chief financial officer also shall be responsible
for the investment of surplus funds subject to the restrictions and requirements of
applicable law." Daily management responsibility of the investment program may be
delegated to responsible members of the Finance Department staff who, under
direction of the Finance Director, shall establish Investment Policy Guidelines for the
operation of the investment program consistent with this Investment Policy. Under the
direction of the Finance Director, the Finance Department staff is responsible for
investment cash management functions, is authorized to conduct transactions involving
pooled cash accounts as necessary, and is required to adhere to the requirements set
forth in this Investment Policy.
The City may engage the services of one or more external investment advisers, who
are registered under the Investment Advisers Act of 1940, to assist in the management
of the City's investment portfolio in a manner consistent with the City's objectives.
External investment advisers may be granted discretion to purchase and sell
investment securities in accordance with this investment policy.
K
VI. ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal
business activity that could conflict with proper execution of the Investment Policy, or
which could impair their ability to make impartial investment decisions. Investment
officials shall disclose to the City Manager, and as otherwise required by law, any
material financial interests (as defined by the Political Reform Act and the regulations
thereunder) in financial institutions that conduct business within this jurisdiction, and
they shall further disclose any large personal financial or investment positions that could
be related to the performance of the City's portfolio. Employees and officers shall
subordinate their personal investment transactions to those of the City, particularly with
regard to the time of purchases and sales.
VII. DIVERSIFICATION
The City shall diversify its investments by security type and institution. With the
exception of U.S. Treasury and U.S. Agency securities, as well as authorized
investment pools, no more than 40% of the City's total portfolio shall be invested in a
single security type or with a single financial institution. If a lower percentage is
legislatively established, then the legislatively established limit will apply.
Purchase and sale of securities shall be made using a competitive process. Securities
shall have a maturity of five years or less and where applicable be rated by at least one
Nationally Recognized Statistical Rating Organization (NRSRO). The structuring of the
portfolio shall be based on historic and current cash flow analysis and securities should
not be purchased for the sole purpose of short term speculation.
No more than 5% of the total portfolio may be invested in securities of any single issuer,
except where the issuer is the US Government, its Agencies and GSEs, an authorized
Supranational issuer, or where the security is a Money Market Mutual Fund, Local
Agency Investment Fund (LAIF) or other Local Government Investment Pool.
If securities owned by the City are downgraded to a level below the credit quality
required by this Investment Policy, it shall be the City's policy to review the credit
situation and make a determination as to whether to sell or retain such securities in the
portfolio. If a security is downgraded, the City will use discretion in determining whether
to sell or hold the security based on its current maturity, the economic outlook for the
issuer, and other relevant factors. If a decision is made to retain a downgraded security
in the portfolio, its presence in the portfolio will be monitored and reported monthly to
the City Council.
The following percentage limits,. maturity matrix, and quality requirements, by individual
investment type, are established for the City's total pooled funds portfolio:
3
it
�a InvestmentTypen a,G
Max'jmumat
Maximum'
'
t,
s `' ' j
,'
f� Metuntyz�'�
of
,U-vMmmum�
_
Quah�ty tx
z
�Speaifietl'%
5, N
r...,h..*.>,:�....,,_`..`.
uirements nri
Local Agency Investment Fund (LAIF)
N/A
None
None
(not to exceed legal maximum)
Los Angeles County Investment Pool
N/A
None
None
LACIP
Mutual Funds and Money Market Mutual
N/A
20% - no more
Multiple
Funds
than 10% in any
one mutual fund
U.S. Treasury bonds/notes/bills
5 years
None
None
U.S. Government Agency obligations
5 ears
None
None
Bankers' acceptances
180 days
40%
None
Commercial paper
270 days
25%
A1/P1 rating
Negotiable certificates of deposit
5 years
30%
None
Certificates of Deposit
5 years
25%
None
Medium term corporate notes
5 years
30%
"A" rating
Repurchase agreements
100 days
20%
None
Municipal Securities
5 years
30%
"A" Rating
Asset Backed Securities
5 Years
20%
"AA" Rating
Su ranational
5 years
30%
AA" Rating
VIII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Finance Director or his/her authorized designee will maintain a list of financial
institutions authorized to provide investment services. In addition, a list will also be
maintained of approved security brokers/dealers selected by credit worthiness, who
maintain an office in the State of California. These may include primary or secondary
dealers or brokers that qualify under Securities and Exchange Commission Rule 15C3-
1 (uniform net capital rule). No public deposit shall be made except in a qualified public
depository as established by state law.
All financial institutions and brokers/dealers who desire to become qualified bidders for
investment transactions must supply the following:
A. Audited financial statements of all financial institutions
B. Proof of Financial Industry Regulatory Authority certification
C. Proof of State registration
D. Certification of having read Investment Policy
E. Depository contracts of all financial institutions
F. Broker/Dealer questionnaire, as applicable
( An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Finance Director or his/her authorized designee.
4
IX. AUTHORIZED AND SUITABLE INVESTMENTS
The City is empowered by California Government Code Section 53601 to invest in the
following types of securities, and is subject to the limitations set out in that section as
well as the remainder of this policy.
Any investment structure, which has an effect on the City borrowing money, is
prohibited.
A. TREASURY ISSUES: Treasury Bills, Treasury Notes, and Treasury
Bonds
B. FEDERAL AGENCIES: Federal National Mortgage Association (FNMA)
securities, Federal Home Loan Bank (FHLB) securities, Federal Home
Loan Mortgage Corporation (FHLMC), Federal Farm Credit Bureau
(FFCB) securities, Government National Mortgage Association (GNMA)
securities, Small Business Administration (SBA) securities, Student Loan
Marketing Association (SLMA) securities, etc.
C. BANKERS' ACCEPTANCES: The City may not purchase bankers'
acceptances exceeding one hundred and eighty (180) days maturity or
forty percent (40%) of the City's surplus money, (Government Code
53601(f).) Furthermore, no more than thirty percent (30%) of the City's
surplus funds may be invested in bankers' acceptances of any one
commercial bank.
D. CERTIFICATES OF DEPOSIT: A type of collateralized bank deposit with a
specific maturity evidenced by a certificate. The City restricts the maximum
percentage of investment in Certificates of Deposit to 25% of the City's total
portfolio.
E. REPURCHASE AGREEMENTS: A Public Securities Association (PSA)
Master Repurchase Agreement is required between the City and the
broker/dealer or financial institution for all repurchase agreements
transacted. The maturity of repurchase agreements shall not exceed 100
days. The counterparty must be a primary dealer of the Federal Reserve
Bank of New York. The market value of securities used as collateral for
repurchase agreements shall be monitored daily and will not be allowed to
fall below 102% of the value of the repurchase agreement. In order to
conform with provisions of the Federal Bankruptcy Code which provides
for the liquidation of securities held as collateral for repurchase
agreements, the only securities acceptable as collateral shall be eligible
negotiable certificates of deposit, eligible bankers' acceptances, or
securities that are direct obligations of, or that are fully guaranteed as to
principal and interest by, the United States or any agency of the United
States.
s
r F. COMMERCIAL PAPER: Must be of prime quality of the highest rating by
both Moody's and Standard and Poor's (P-1 by Moody's and A-1 by
Standard and Poor's). Eligible paper is limited to corporations organized
and operating within the U.S. and having total assets of at least
$500,000,000. Purchases of commercial paper shall not exceed two
hundred and seventy (270) days to maturity and no more than 25% of the
City's surplus funds should be invested in commercial paper. No more
than 5% of the amount invested shall be in any one. issuer.
G. MEDIUM TERM NOTES: issued by corporations organized and operating
within the United States or by depository institutions licensed by the
United States or any state and operating within the United States. Notes
eligible for investment under this subdivision shall be rated in a rating
category of "A" or its equivalent or better by a NRSRO. Purchases of
medium -term notes may not exceed 30% of the City's surplus money
which may be invested pursuant to this section. The maximum maturity
shall not be greater than five years
H. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCD): To be eligible for
purchase by the City, the NCD must be issued by a Nationally or State -
Chartered bank, State or Federal savings and loan association, or State -
licensed branch of a foreign bank, and must meet one of the following
criteria:
• Be a California Bank rated "A" or better by a nationally recognized
statistical rating organization (NRSRO);
• Be a major national or regional bank outside California rated "A" or
better by a NRSRO;
• Be a domestic branch of a foreign bank ("Yankee" C.D.) rated "I" for
country rating, "II" or better for peer -group rating, and "II" or better for
dollar access by a NRSRO;
• Be a savings and loan association operating in California rated "A" or
better by a NRSRO;
• Purchases of negotiable certificates of deposits may not exceed 30%
of the total portfolio.
H. LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds
from political subdivisions that are placed in the custody of the State of
California Treasurer for the benefit of local agencies. State law (California
Government Code Section 16429.1) establishes the maximum deposits for
each local agency.
3
J. LOS ANGELES COUNTY INVESTMENT POOL (LACIP): Similar to LAIF,
this pool is established by the Los Angeles County Treasurer for the benefit
of local agencies under California Government Code Section 53684.
K. MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS: To be
eligible for purchase by the City, the investment instruments must meet
multiple minimum requirements. Instruments must receive the highest
ranking or the highest letter and numerical rating as provided for by a
NRSRO, must comply with all investment restrictions and regulations that
apply to public agencies in California Code 53601 (a-k, m-o), and must
follow regulations specified by the Securities and Exchange Commission
under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1, et
seq.).
L. MUNICIPAL SECURITIES: include obligations of the City, the State of
California, any of the other 49 states, and any local city within the State of
California, provided that the securities are rated "A" or higher by at least
one NRSRO. No more than 5% of the portfolio may be invested in any
single issuer. No more than 30% of the portfolio may be in Municipal
Securities. The maximum maturity does not exceed five years.
M. SUPRANATIONALS: securities that are unsubordinated obligations
issued by the International Bank for Reconstruction and Development
(IBRD), International Finance Corporation (IFC), or Inter -American
Development Bank (IADB). The securities must be rated "AX or higher by
a NRSRO. No more than 30% of the total portfolio may be invested in
these securities. No more than 10% of the total portfolio shall be invested
in any single issuer. The maximum maturity of any security of this type
shall not exceed five years.
N. ASSET BACKED SECURITIES: including mortgage pass through,
collateralized mortgage obligation, mortgage backed or other pay through
bond, equipment lease backed certificate, consumer receivable pass
through certificate, or consumer receivable backed bond with a maximum
maturity of five years. Securities eligible for investment under this
subdivision shall be issued by an issuer having an "A" or higher rating for
the issuer's debt as provided by a NRSRO and rated in a rating category
of "AX or its equivalent or better by a NRSRO. Purchase of securities
authorized by this subdivision may not exceed 20% of the City's surplus
money that may be invested pursuant to this section.
X. PROHIBITED INVESTMENTS
California Government Code Section 53601.6 prohibits the following list of investment
types.
A. INVERSE FLOATERS
( C. INTEREST -ONLY MORTGAGE STRIPS, OR ANY SECURITY THAT
COULD RESULT IN ZERO INTEREST ACCRUAL IF HELD TO
MATURITY.
The City further restricts investment activities by prohibiting investments in
reverse repurchase agreements.
XL COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and
repurchase agreements. In order to anticipate market changes and provide a level of
security for all funds, the market value of securities used as collateral for repurchase
agreements shall be monitored daily and will not be allowed to fall below 102% of the
value of the repurchase agreement. In order to conform with provisions of the Federal
Bankruptcy Code, which provides for the liquidation of securities held as collateral for
repurchase agreements, the only securities acceptable as collateral shall be eligible
negotiable certificates of deposit, eligible banker's acceptances, or securities that are
direct obligations, or that are fully guaranteed as to principal and interest by, the United
States or any agency of the United States.
A third party custodian with whom the City has a current custodial agreement will
always hold collateral. A clearly marked evidence of ownership (safekeeping receipt)
must be supplied to the City and retained.
XII. SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, entered into by
the City shall be conducted on a delivery -versus -payment (DVP) basis. Securities will
be held by a third party custodian designated by the Finance Director or his/her
authorized designee and evidenced by safekeeping records.
XIII. MAXIMUM MATURITIES
To the extent possible, the City will attempt to match its investments with anticipated
cash flow requirements. However, the City may collateralize its repurchase agreements
using longer -dated investments not to exceed five years to maturity.
XIV. INTERNAL CONTROL
The Finance Director will establish internal controls covering investing procedures
designed to protect the City's investments from unauthorized use or disposition and
ensure compliance with the Investment Policy.
The Finance Director or his/her authorized designee shall establish an annual process of
independent review of internal control by an external auditor. This review will ensure
compliance with policies and procedures. Specific areas of review are investment
R
authorizations, proper safekeeping methods, and comparison of broker/dealer with
safekeeping confirmations.
XV. MINIMUM PERFORMANCE STANDARDS
The investment portfolio will be designed to obtain a market average rate of return
during budgetary and economic cycles, taking into account the City's investment risk
constraints and cash flow needs. Given this strategy, the basis used by the Finance
Director or his/her authorized designee to determine whether market yields are being
achieved shall not be lower than the six month U.S. Treasury Bill yield at month end.
XVI. REPORTING
The City Treasurer shall review and submit quarterly reports to the City Council which
shall include the cost or par value of the cash investment, the classification of the
investment, the name of the institution or entity, the rate of interest, the maturity date,
the current market value and accrued interest due for all securities, as well as all bank
account activity. The report shall also include cash held by trustees in various funds for
all bond issues and cash in the various City bank accounts. It must detail compliance
or non-compliance with the Investment Policy and must provide a statement of the
ability to meet budgeted expenditure needs for the following six months.
XVII. LEGISLATIVE CHANGES
Any State of California legislative action, that further restricts allowable maturities,
investment type or percentage allocations, will be incorporated into the City's
Investment Policy and supersede any and all previous applicable language.
XVIII. INTEREST EARNINGS
All monies earned and collected from investments authorized in this policy shall be
allocated monthly based on cash balances in each fund as a percentage of the entire
pooled portfolio.
XIX. INVESTMENT POLICY ADOPTION
The City's Investment Policy shall be reviewed on an annual basis, and any
modifications made thereto must be approved by the City Council.
I
GLOSSARY
AGENCIES: Shorthand market terminology for any obligation issued by a government -
sponsored entity (GSE), or a federally related institution. Most obligations of GSE's are
not guaranteed by the full faith and credit of the US government.
ASKED: The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES: Securities supported by pools of installment loans or
leases or by pools of revolving lines of credit.
BANKERS' ACCEPTANCE (BA): A draft, bill, or exchange accepted by a bank or trust
company accepting institution guarantees payment of the bill, as well as the issuer.
BID: The price offered for securities.
BROKER: A broker brings buyers and sellers together for a commission paid by the
initiator of the transaction or by both sides. Brokers are active in markets, where banks
buy and sell money, as well as in inter -dealer markets.
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.
COMMERCIAL PAPER (CP): Short-term, unsecured, promissory notes issued by
corporations to finance short-term credit needs.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual financial
report of the City. It includes combined statements for each individual fund 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.
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.
10
DELIVERY VERSUS PAYMENT (DVP): 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 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 at a discount and redeemed at maturity for full face value i.e., 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 and individuals, such as savings and loan
associates, 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 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.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale 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 United States 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 rate mortgages and second loans in addition to fixed rate mortgages. FNMA's
securities are highly liquid and are widely accepted. FNMA assumes and guarantees that
all security holders will receive timely payment of principal and interest.
11
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 Governors and 12 regional banks.
About 5,700 commercial banks are members of the system.
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the
agricultural industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing
market. FHLB issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and
liquidity in the housing market. FHLMC, also called "FreddieMac" issues discount notes,
bonds and mortgage pass -through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was
established to provide credit and liquidity in the housing market. FNMA, also known as
"FannieMae," issues discount notes, bonds and mortgage pass -through securities.
GNMA. The Government National Mortgage Association, known as "GinnieMae," issues
mortgage pass -through securities, which are guaranteed by the full faith and credit of
the US Government.
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. The full faith and credit of the U.S. Government protect the security holder.
Ginnie Mae securities are backed by FHA, VA or FMHM mortgages. The term "pass-
throughs" is often used to describe Ginnie Mae Securities.
LIQUID ASSET: 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.
LIQUIDITY: The ability to convert investments to cash.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political
subdivisions that are placed in the custody of the State of California Treasurer for the
benefit of local agencies. State law (California Government Code Section 16429.1)
establishes the maximum deposits for each local agency.
iN
LOS ANGELES COUNTY INVESTMENT POOL (LACIP): Similar to LAIF, this pool is
established by the Los Angeles County Treasurer for the benefit of local agencies under
California Government Code Section 53684.
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 related to repurchase or reverse repurchase
agreements. The contract 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 of the seller -borrower.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MEDIUM TERM NOTES: Notes with a maximum of five years maturity issued by
corporations organized and operating within the United States or by depository institutions
licensed by the United States or any state and operating within the United States.
MUNICIPAL SECURITIES: Securities issued by state and local agencies to finance
capital and operating expenses.
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
similar to a short-term note, which earns the depositor a competitive rate of return.
Negotiable certificates of deposit were developed so that large deposits could be made at
a competitive interest rate. with some liquidity.
OFFER: The price asked by the 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.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of
PEFCO are not guaranteed by the full faith and credit of the US government.
PORTFOLIO: A collection of securities held by an individual organization or institution.
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
13
Bank of New York and are subject to its informal oversight. Primary dealers include
Securities and Exchange Commission (SEC) -registered securities brokers/dealers,
banks, and a few unregulated firms.
PRUDENT INVESTOR RULE: This rule is 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 state. The securities are commonly referred to as the 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 or the current
income return.
REPURCHASE AGREEMENT (REPO): Agreements with banks and dealers under which
the City has entered into a master repurchase agreement that specifies terms and
conditions of individual repurchase agreements. The agreement requires the seller of a
security to repurchase an investment on a specific date for an agreed -upon price.
SAFEKEEPING: A service to customers rendered by banks and other security
custodians for a fee. For the fee, the customer's securities and valuables of all types and
descriptions are held in the service provider's vaults for protection. Securities are
commonly held electronically in lieu of physical custody in a vault.
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.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB,
FNMA, SLMA, etc.) and Corporations, which have imbedded options (i.e., call features,
step-up coupons, floating rate coupons, and 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.
SUPRANATIONAL: A Supranational is a multi -national organization whereby member
states transcend national boundaries or interests to share in the decision making to
promote economic development in the member countries.
14
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.
TVA. The Tennessee Valley Authority provides flood control and power and promotes
development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA
currently issues discount notes and bonds.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember brokers/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 (YTM) is the current income yield
minus any premium above par or plus any discount from purchase price, with the
adjustment spread over the period from the date of purchase to the date of maturity of the
bond.
IN