CITY OF FULLERTON
PROFESSIONAL SERVICES AGREEMENT
WITH
CHANDLER ASSET MANAGEMENT, INC.
THIS AGREEMENT is made and entered into this 21st day of JANUARY, 2026 (“Effective Date”), by and between the CITY OF FULLERTON, a California municipal corporation (“City”), and CHANDLER ASSET MANAGEMENT, INC., a California corporation (“Consultant”).
W I T N E S S E T H :
A. City proposes to utilize the services of Consultant as an independent contractor to provide certain Investment and Portfolio Management Services, as more fully described herein Professional Services Agreement (“Agreement”) and respective exhibits.
B. By entering into said Agreement, the City appoints Consultant as the City’s Investment Manager, and is authorized to perform all investment activities and duties with respect to City’s instruction and in compliance to the City’s Investment Policy.
B. Consultant represents that it has that degree of specialized expertise contemplated within California Government Code section 37103, and holds all necessary licenses to practice and perform the services herein contemplated.
C. City and Consultant desire to contract for the specific services described herein, and desire to set forth their rights, duties and liabilities in connection with the services to be performed.
D. No official or employee of City has a financial interest, within the provisions of Sections 1090-1092 of the California Government Code, in the subject matter of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants and conditions contained herein, the parties hereby agree as follows:
1.0. SERVICES PROVIDED BY CONSULTANT
1.1. Scope of Services.
Consultant shall provide the professional services described in Scope of Services and Fees attached hereto as Exhibit “A” and incorporated herein by this reference and subject to the Additional Terms Specific to Investment Management Services set forth in Exhibit “B” and the City’s .”
1.2. Professional Practices. All professional services to be provided by Consultant pursuant to this Agreement shall be provided by personnel experienced in their respective fields and in a manner consistent with the standards of care, diligence and skill ordinarily exercised by professional consultants in similar fields and circumstances in accordance with sound professional practices. Consultant also warrants that it is familiar with all laws and regulations that may affect its performance of this Agreement and shall advise City of any changes in any laws that may affect Consultant’s performance of this Agreement.
1.3. Performance to Satisfaction of City. Consultant agrees to perform all the work to the reasonable satisfaction of the City, in accordance with the applicable professional standard of care and City specifications and within the hereinafter specified. Evaluations of the work will be done by the City Manager or his designee. If the quality of work is not satisfactory, City in its discretion has the right to:
PSA with Chandler Asset Management Inc.
(a) Meet with Consultant to review the quality of the work and resolve the matters of concern;
(b) Require Consultant to repeat the work at no additional fee until it is satisfactory; and/or
(c) Terminate the Agreement as hereinafter set forth.
1.4. Warranty. Consultant warrants that it shall perform the services required by this Agreement in compliance with all applicable and non conflicting Federal and California employment laws, including, but not limited to, those laws related to minimum hours and wages; occupational health and safety; fair employ ment and employment practices; workers’ compensation insurance and safety in employm ent; and all other Federal, State and local laws and ordinances applicable to the services required under this Agreement. Consultant shall indemnify and hold harmless City from and against all claims, demands, payments, suits, actions, proceedings, and judgments of every nature and description including attorneys’ fees and costs, presented, brought, or recovered against City for, or on account of any liability under any of the above-mentioned laws, which may be incurred by reason of Consultant’s performance under this Agreement.
1.5. Non-discrimination. In performing this Agreement, Consultant shall not engage in, nor permit its agents to engage in, discrimination in employment of persons because of their race, religion, color, national origin, ancestry, age, physical handicap, medical condition, marital status, sexual gender or sexual orientation, except as permitted pursuant to Section 12940 of the Government Code.
1.6. Non-Exclusive Agreement. Consultant acknowledges that City may enter into agreements with other consultants for services sim ilar to the services that are subject to this Agreement or may have its own employees per form services similar to those services contemplated by this Agreement.
1.7. Delegation and Assignment. This is a personal service contract, and the duties set forth herein shall not be delegated or assigned to any person or entity without the prior written consent of City. Consultant may engage a subcontractor(s) as permitted by law and may employ other personnel to perform services contemplated by this Agreement at Consultant’s sole cost and expense.
1.8. Confidentiality. Employees of Consultant in the course of their duties may have access to financial, accounting, statistical, and personnel data of private individuals and employees of City. Consultant covenants that all data, documents, discussion, or other information developed or received by Consultant or provided for performance of this Agreement are deemed confidential and shall not be disclosed by Consultant without written authorization by City. City shall grant such authorization if disclos ure is required by law. All City data shall be returned to City upon the termination of this Agreement. Consultant's covenant under this Section shall survive the termination of this Agreement.
2.0. COMPENSATION AND BILLING
2.1. Compensation. Consultant shall be paid in accordance with the fee schedule set forth in Exhibit “A”.
PSA with Chandler Asset Management Inc.
2.2. Additional Services. Consultant may perform the additional terms as described in Additional Terms to Investment Management Relationship (Exhibit “B”) attached hereto and incorporated herein by this reference if specifically engaged to do so by City. Consultant shall not receive compensation for any services provided outside the scope of services specified in Exhibit “A” unless the City or the Project Manager for this Project, prior to Consultant performing the additional services, approves such additional services in writing. It is specifically understood that oral requests and/or approvals of such additional services or additional compensation shall be barred and are unenforceable.
2.3. Method of Billing. Consultant may s ubmit invoices to the City for approval on a progress basis, but no more often than two times a month. Said invoice shall be based on the total of all Consultant’s services which have been completed to City’s sole satisfaction. City shall pay Consultant’s invoice within forty-five (45) days from the date City receives said invoice. Each invoice shall describe in detail, the services performed, the date of performance, and the associated time for completion. Any additional services approved and performed pursuant to this Agreement shall be designated as “Additional Services” and shall identify the number of the authorized change order, where applicable, on all invoices.
2.4. Records and Audits. Records of Consultant’s services relating to this Agreement shall be maintained in accordance with generally recognized accounting principles and shall be made available to City or its Project Manager for inspection and/or audit at mutually convenient times from the Effective Date of this Agreement until three (3) years after the termination date.
2.5. W-9. Consultant must provide City with a current W-9 form prior to the commencement of work under this Agreement. It is the Consultant’s responsibility to provide to the City any revised or updated W-9 form during the term of this Agreement.
3.0. TIME OF PERFORMANCE
3.1. Commencement and Completion of Work. The professional services to be performed pursuant to this Agreement shall commence within five (5) days from the Effective Date of this Agreement. Failure to commence work in a timely manner and/or diligently pursue work to completion may be grounds for termination of this Agreement.
3.2. Excusable Delays. Neither party shall be responsible for delays or lack of performance resulting from acts beyond the reasonable control of the party or parties. Such acts shall include, but not be limited to, acts of God, fire, strikes, material shortages, compliance with laws or regulations, riots, acts of war, or any other conditions beyond the reasonable control of a party.
4.0. TERM AND TERMINATION
4.1. Term. This Agreement shall commence on the Effective Date for a three-year term through January 20, 2029, and 2 two-year extension option(s) through January 20, 2033 unless terminated as provided herein. The option to extend the term of this Agreement may be exercised by the City Manager and/or designee.
4.2. Notice of Termination. The City reserves and has the right and privilege of canceling, suspending or abandoning the execution of all or any part of the work contemplated by this Agreement, with or without cause, at any time, by providing written notice to Consultant.
The termination of this Agreement shall be deemed effective upon receipt of the notice of termination. In the event of such termination, Consultant shall immediately stop rendering PSA with Chandler Asset Management Inc.
services under this Agreement unless directed otherwise by the City.
4.3. Compensation. In the event of termination, City shall pay Consultant for reasonable costs incurred and professional services satisfactorily performed up to and including the date of City’s written notice of termination. Compensation for work in progress shall be prorated based on the percentage of work completed as of the effective date of termination in accordance with the fees set forth herein. In ascertaining the professional services actually rendered hereunder up to the effective date of termination of this Agreement, consideration shall be given to both completed work and work in progress, to complete and incomplete drawings, and to other documents pertaining to the services contemplated herein whether delivered to the City or in the possession of the Consultant.
4.4. Documents. In the event of termination of this Agreement, all documents prepared by Consultant in its performance of this Agreement including, but not limited to, finished or unfinished design, development and construction documents, data studies, drawings, maps and reports, shall be delivered to the City within ten (10) days of delivery of termination notice to Consultant, at no cost to City. Any use of uncompleted documents without specific written authorization from Consultant shall be at City's sole risk and without liability or legal expense to Consultant.
5.0. INSURANCE
5.1. Insurance Required. Consultant shall procure and maintain throughout the duration of this Agreement, insurance against claims for injuries to persons or damages to property which may arise from or in connection with the performance of the work hereunder by Consultant, its agents, representatives, employees or subcontractors. Consultant shall provide current evidence of the required insurance in a form acceptable to City and shall provide replacement evidence for any required insurance which expires prior to the completion, expiration, or termination of this Agreement.
Nothing in this section shall be construed as limiting in any way, the Indemnification and Hold Harmless clause contained herein in Section 6.8 or the extent to which Consultant may be held responsible for payments of damages to persons or property.
5.2. Minimum Scope and Limits of Insurance.
A. Commercial General Liability Insurance. Consultant shall maintain commercial general liability insurance coverage in a form at least as broad as ISO Form #CG 00 01, with a limit of not less than $1,000,000 each occurrence. If such insurance contains a general aggregate limit, it shall apply separately to the Agreement or shall be twice the required occurrence limit.
B. Business Automobile Liability Insurance. Consultant shall maintain business automobile liability insurance coverage in a form at least as broad as ISO Form # CA 00 01, with a limit of not less than $1,000,000 each accident. Such insurance shall include coverage for owned, hired and non-owned automobiles.
C. Workers’ Compensation and Employers’ Liability Insurance. Consultant shall maintain workers’ compensation insurance as required by the State of California and employers’ liability insurance with limits of not less than $1,000,000 each accident.
D. Professional Liability Insurance. Consultant shall maintain professional liability insurance appropriate to Consultant’s profession with a limit of not less than $2,000,000.
PSA with Chandler Asset Management Inc.
Architects’ and engineers’ coverage shall be endorsed to include contractual liability. If policy is written as a “claims made” policy, the retro date of the policy shall be prior to the start of the contract work.
E. Employee/Officer Fidelity Bond. Consultant shall maintain a fidelity bond with a minimum limit of $1,000,000, providing coverage for the acts of all employees, officers and directors of Consultant.
F. Cyber Liability Insurance. Consultant shall maintain cyber liability insurance coverage with a limit of not less than $2,000,000 per claim and $2,000,000 aggregate. Coverage shall be sufficiently broad to respond to the duties and obligations as is undertaken by Consultant in this Agreement and shall include but not be limited to claims involving infringement of intellectual property, including but not limited to infringement of copyright, trademark, trade dress, invasion of privacy violations, information theft, damage to or destruction of electronic information, release of private information, alteration of electronic information, extortion and network security.
The policy shall provide coverage for breach response costs as well as regulatory fines, penalties and credit monitoring expenses with limits sufficient to respond to these obligations.
5.3. Deductibles and Self-Insured Retentions. Any deductible or self-insured retention must be declared to and approved by City.
5.4. Other Insurance Provisions. The required insurance policies shall contain or be endorsed to contain the following provisions:
A. Commercial General Liability. City, its elected or appointed officials, officers, employees and volunteers are to be covered as additional insureds with respect to liability arising out of work or operations performed by or on behalf of Consultant, including materials, parts or equipment furnished in connection with such work or operations. Such coverage as an additional insured shall not be limited to the period of time during which Consultant is conducting ongoing operations for City but rather, shall continue after the completion of such operations. The coverage shall contain no special limitations on the scope of its protection afforded to City, its officers, employees and volunteers.
B. Commercial General Liability. This insurance shall be primary insurance as respects City, its officers, employees and volunteers and shall apply separately to each insured against whom a suit is brought or a claim is made. Any insurance or self-insurance maintained by City, its officers, employees and volunteers shall be excess of this insurance and shall not contribute with it.
C. Professional Liability. If the Professional Liability policy is written on a “claims made” form, the Retroactive Date must be shown and must be before the date of the contract or beginning of contract work. The insurance must be maintained and evidence of insurance must be provided for at least (5) years after completion of the contract work. If the coverage is canceled or non-renewed and not replaced with another claims-made policy form with a Retroactive Date prior to the contract effective date, the Consultant must purchase “extended reporting coverage” for a minimum of five (5) years after completion of work.
D. Workers’ Compensation and Employers’ Liability Insurance. Insurer shall waive their right of subrogation against City, its officers, employees and volunteers for work done on behalf of City.
E. Employee/Officer Fidelity Bond, City shall be named as third party PSA with Chandler Asset Management Inc.
beneficiary for losses arising from work done on behalf of City.
F. All Coverages. Each insurance policy required by this clause shall be endorsed to state that coverage shall not be canceled, except after thirty (30) days’ prior written notice by certified mail, return receipt requested, has been given to City.
If Consultant maintains higher limits or has broader coverage than the minimums shown above, City requires and shall be entitled to all coverage, and to the higher limits maintained by Consultant. Any available insurance proceeds in excess of the specified minimum limits of insurance and coverage shall be available to City.
G. Subcontractors. Consultant shall require and verify that all subcontractors maintain insurance meeting all the requirements stated herein and Consultant shall ensure that City is an additional insured on insurance required from subconsultants.
H. Special Risks or Circumstances. City reserves the right to modify these requirements, including limits, based on the nature of the risk, prior experience, insurer, coverage or other special circumstances.
5.5 Acceptability of Insurers. All required insurance shall be placed with insurers acceptable to City with current BEST’S ratings of no less than A, Class VII. Workers’ compensation insurance may be placed with the California State Compensation Insurance Fund.
All insurers shall be licensed by or hold admitted status in the State of California. At the sole discretion of City, insurance provided by non-admitted or surplus carriers with a minimum BEST’S rating of no less than A- Class X may be accepted if Consultant evidences the requisite need to the sole satisfaction of City.
5.6 Verification of Coverage. Consultant shall furnish City with certificates of insurance which bear original signatures of authorized agents and which reflect insurers names and addresses, policy numbers, coverage, limits, deductibles and self-insured retentions.
Additionally, Consultant shall furnish copies of all policy endorsements required herein. All certificates and endorsements must be received and approved by City before work commences.
City reserves the right to require at any time complete, certified copies of any or all required insurance policies and endorsements.
6.0. GENERAL PROVISIONS
6.1. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to any matter referenced herein and supersedes any and all other prior writings and oral negotiations. This Agreement may be modified only in writing, and signed by the parties in interest at the time of such modification. The terms of this Agreement shall prevail over any inconsistent provision in any other contract document appurtenant hereto, including exhibits to this Agreement.
6.2. Representatives. The City Manager or his designee shall be the representative of City for purposes of this Agreement and may issue all consents, approvals, directives and agreements on behalf of the City, called for by this Agreement, except as otherwise expressly provided in this Agreement.
Consultant shall designate a representative for purposes of this Agreement who shall be authorized to issue all consents, approvals, directives and agreements on behalf of Consultant called for by this Agreement, except as otherwise expressly provided in this PSA with Chandler Asset Management Inc.
Agreement.
6.3. Project Managers. City shall designate a Project Manager to work directly with Consultant in the performance of this Agreement.
Consultant shall designate a Project Manager who shall represent it and be its agent in all consultations with City during the term of this Agreement. Consultant or its Project Manager shall attend and assist in all coordination meetings called by City.
6.4. Notices. Any notices, documents, correspondence or other communications concerning this Agreement or the work hereunder may be provided by personal delivery, facsimile or mail and shall be addressed as set forth below. Such communication shall be deemed served or delivered: a) at the time of delivery if such communication is sent by personal delivery; b) at the time of transmission if such communication is sent by facsimile; and c) 48 hours after deposit in the U.S. Mail as reflected by the official U.S. postmark if such communication is sent through regular United States mail.
IF TO CONSULTANT: IF TO CITY:
Chandler Asset Management, Inc.
9255 Towne Centre Drive, Suite 600
San Diego, CA 92121
Attn: Mia Corral, Regional Director
City of Fullerton
303 W. Commonwealth Ave.
Fullerton, CA 92832
Attn: Steven Avalos, Interim Director of
Administrative Services
6.5. Attorneys’ Fees. In the event that litigation is brought by any party in connection with this Agreement, the prevailing party shall be entitled to recover from the opposing party all costs and expenses, including reasonable attorneys’ fees, incurred by the prevailing party in the exercise of any of its rights or remedies hereu nder or the enforcement of any of the terms, conditions, or provisions hereof.
6.6. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California without giving effect to that body of laws pertaining to conflict of laws. In the event of any legal action to enforce or interpret this Agreement, the parties hereto agree that the sole and exclusive venue shall be a court of competent jurisdiction located in Orange County, California.
6.7. Assignment. Consultant shall not vo luntarily or by operation of law assign, transfer, sublet or encumber all or any part of Consultant's interest in this Agreement without City's prior written consent. Any attempted assignment, transfer, subletting or encumbrance shall be void and shall constitute a breach of this Agreement and cause for termination of this Agreement.
Regardless of City's consent, no subletting or assignment shall release Consultant of Consultant's obligation to perform all other obligations to be performed by Consultant hereunder for the term of this Agreement.
6.8. Indemnification and Hold Harmless. To the fullest extent of the law, Consultant agrees to defend, indemnify, hold free and harmless the City, its elected officials, officers, agents, and employees, at Consultant’s sole expense, from and against claims, actions, suits or other legal proceedings brought against the City, its elected officials, officers, agents, and employees arising out of the performance of the Consultant, its employees, and/or authorized subcontractors, PSA with Chandler Asset Management Inc.
of the professional services undertaken pursuant to this Agreement. The defense obligation provided for hereunder shall apply without any advance showing of negligence or wrongdoing by the Consultant, its employees, and/or authorized subcontractors, but shall be required whenever any claim, action, complaint, or suit asserts as its basis the negligence, errors, omissions or misconduct of Consultant, its employees, and/or authorized subcontractors, and/or whenever any claim, action, complaint or suit asserts liability against the City, its elected officials, officers, agents, and employees based upon the work performed by Consultant, its employees, and/or authorized subcontractors under this Agreement, whether or not Consultant, its employees, and/or authorized subcontractors are specifically named or otherwise asserted to be liable.
Notwithstanding the foregoing, the Consultant shall not be liable for the defense or indemnification of the City for claims, actions, complaints, or suits arising out of the sole negligence or willful misconduct of the City. This provision shall supersede and replace all other indemnity provisions contained either in the City’s specifications or Consultant’s Proposal, which shall be of no force and effect.
6.9. Independent Contractor. Consultant is and shall be acting at all times as an independent contractor and not as an employee of City. Consultant shall have no power to incur any debt, obligation, or liability on behalf of City or otherwise act on behalf of City as an agent.
Neither City nor any of its agents shall have control over the conduct of Consultant or any of Consultant’s employees, except as set forth in this Agreement. Consultant shall not, at any time, or in any manner, represent that it or any of its or employees are in any manner agents or employees of City. Consultant shall secure, at its sole expense, and be responsible for any and all payment of Income Tax, Social Security, State Disability Insurance Compensation, Unemployment Compensation, and other payroll deductions for Consultant and its officers, agents, and employees, and all business licenses, if any are required, in connection with the services to be performed hereunder. Consultant shall indemnify and hold City harmless from any and all taxes, assessments, penalties, and interest asserted against City by reason of the independent contractor relationship created by this Agreement. Consultant further agrees to indemnify and hold City harmless from any failure of Consultant to comply with the applicable worker’s compensation laws. City shall have the right to offset against the amount of any fees due to Consultant under this Agreement any amount due to City from Consultant as a result of Consultant’s failure to promptly pay to City any reimbursement or indemnification arising under this paragraph.
6.10. PERS Eligibility Indemnification. In the event that Consultant or any employee, agent, or subcontractor of Consultant providing services under this Agreement claims or is determined by a court of competent jurisdiction or the California Public Employees Retirement System (PERS) to be eligible for enrollment in PERS as an employee of the City, Consultant shall indemnify, defend, and hold harmless City for the payment of any employee and/or employer contributions for PERS benefits on behalf of Consultant or its employees, agents, or subcontractors, as well as for the payment of any penalties and interest on such contributions, which would otherwise be the responsibility of City.
Notwithstanding any other agency, state or federal policy, rule, regulation, law or ordinance to the contrary, Consultant and any of its employees, agents, and subcontractors providing service under this Agreement shall not qualify for or become entitled to, and hereby agree to waive any claims to, any compensation, benefit, or any incident of employment by City, including but not limited to eligibility to enroll in PERS as an employee of City and entitlement to any contribution to be paid by City for employer contribution and/or employee contributions for PERS benefits.
6.11. Cooperation. In the event any claim or action is brought against City relating to PSA with Chandler Asset Management Inc.
Consultant’s performance or services rendered under this Agreement, Consultant shall render any reasonable assistance and cooperation which City might require.
6.12. Ownership of Documents. All findings, reports, CAD drawings, documents, information and data, including, but not limited to, computer tapes or discs, files and tapes furnished or prepared by Consultant or any of its subcontractors in the course of performance of this Agreement, shall be and remain the sole property of City. Consultant agrees that any such documents or information shall not be made available to any individual or organization without the prior consent of City. Any use of such documents for other projects not contemplated by this Agreement, and any use of incomplete documents, shall be at the sole risk of City and without liability or legal exposure to Consultant. City shall indemnify and hold harmless Consultant from all claims, damages, losses, and expenses, including attorneys’ fees, arising out of or resulting from City’s use of such documents for other projects not contemplated by this Agreement or use of incomplete documents furnished by Consultant. Consultant shall deliver to City any findings, reports, documents, information, data, in any fo rm, including but not limited to, computer tapes, discs, files, audio tapes or any other Project related items as requested by City or its authorized representative, at no additional cost to the City.
6.13. Public Records Act Disclosure. Consultant has been advised and is aware that this Agreement and all reports, documents, information and data, including, but not limited to, computer tapes, discs or files furnished or prepared by Consultant, or any of its subcontractors, pursuant to this Agreement and provided to City may be subject to public disclosure as required by the California Public Records Act (California Government Code Section 6250 et seq .).
Exceptions to public disclosure may be those doc uments or information that qualify as trade secrets, as that term is defined in the California Government Code Section 6254.7, and of which Consultant informs City of such trade secret. The City will endeavor to maintain as confidential all information obtained by it that is designated as a trade secret. The City shall not, in any way, be liable or responsible for the disclosure of any tr ade secret including, without limitation, those records so marked if disclosure is deemed to be required by law or by order of the Court.
6.14. Conflict of Interest. Consultant and its officers, employees, associates and subconsultants, if any, will comply with all conflict of interest statutes of the State of California applicable to Consultant's services under this agreement, including, but not limited to, the Political Reform Act (Government Code Sections 81000, et seq.) and Government Code Section 1090.
During the term of this Agreement, Consultant and its officers, employees, associates and subconsultants shall not, without the prior written approval of the City Representative, perform work for another person or entity for whom Consultant is not currently performing work that would require Consultant or one of its officers, employees, associates or subconsultants to abstain from a decision under this Agreement pursuant to a conflict of interest statute.
6.15. Responsibility for Errors. Consultant shall be responsible for its work under this Agreement. Consultant, when requested, shall furnish clarification and/or explanation as may be required by the City’s representative, regarding any services rendered under this Agreement at no additional cost to City. In the event that an error or omission attributable to Consultant occurs, without prejudice to any other remedy to which City may be entitled to at law or equity, Consultant shall, at no cost to City, provide all necessary design drawings, estimates and other Consultant professional services necessary to rectify and correct the matter to the sole satisfaction of City and to participate in any meeting required with regard to the correction. In addition, Consultant shall reimburse City for any and all costs, expenses and/or damages, if any, that the City has incurred due to the aforementioned error or omission.
6.16. Prohibited Employment. Consultant w ill not employ any regular employee of City PSA with Chandler Asset Management Inc.
while this Agreement is in effect.
6.17. Order of Precedence. In the event of an inconsistency in this Agreement and any of the attached Exhibits, the terms set forth in this Agreement shall prevail. If, and to the extent this Agreement incorporates by reference any provision of any document, such provision shall be deemed a part of this Agreement. Nevertheless, if there is any conflict among the terms and conditions of this Agreement and those of any such provision or provisions so incorporated by reference, this Agreement shall govern over the document referenced.
6.18. Costs. Each party shall bear its own costs and fees incurred in the preparation and negotiation of this Agreement and in the perfo rmance of its obligations hereunder except as expressly provided herein.
6.19. No Third Party Beneficiary Rights. This Agreement is entered into for the sole benefit of City and Consultant and no other parties are intended to be direct or incidental beneficiaries of this Agreement and no third party shall have any right in, under or to this Agreement.
6.20. Headings. Paragraphs and subparagraph headings contained in this Agreement are included solely for convenience and are not intended to modify, explain or to be a full or accurate description of the content thereof and shall not in any way affect the meaning or interpretation of this Agreement.
6.21. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises with respect to this Agreement, this Agreement shall be construed as if drafted jointly by the parties and in accordance with its fair meaning. There shall be no presumption or burden of proof favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.
6.22. Amendments. Only a writing executed by the parties hereto or their respective successors and assigns may amend this Agreement.
6.23. Waiver. The delay or failure of either party at any time to require performance or compliance by the other of any of its obligations or agreements shall in no way be deemed a waiver of those rights to require such performance or compliance. No waiver of any provision of this Agreement shall be effective unless in writing and signed by a duly authorized representative of the party against whom enforcement of a waiver is sought. The waiver of any right or remedy in respect to any occurrence or event shall not be deemed a waiver of any right or remedy in respect to any other occurrence or event, nor shall any waiver constitute a continuing waiver.
6.24. Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be unenforceable in any circumstance, such determination shall not affect the validity or enforceability of the remaining terms and provisions hereof or of the offending provision in any other circumstance. Notwithstanding the foregoing, if the value of this Agreement, based upon the substantial benefit of the bargain for any party, is materially impaired, which determination made by the presiding court or arbitrator of competent jurisdiction shall be binding, then both parties agree to substitute such provision(s) through good faith negotiations.
6.25. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. All counterparts shall be construed together and shall constitute one agreement.
PSA with Chandler Asset Management Inc.
6.26. Corporate Authority. The persons executing this Agreement on behalf of the parties hereto warrant that they are duly authorized to execute this Agreement on behalf of said parties and that by doing so the parties hereto are formally bound to the provisions of this Agreement.
6.27 Executive Order N-6-22. On March 4, 2022, Governor Gavin Newsom issued Executive Order N-6-22 (the EO) regarding Ec onomic Sanctions against Russia and Russian entities and individuals. “Economic Sanctions” refers to sanctions imposed by the U.S. government in response to Russia’s actions in Ukraine, as well as any sanctions imposed under state law. The EO directs state agencies to terminate contracts with, and to refrain from entering any new contracts with, individuals or entities that are determined to be a target of Economic Sanctions. Accordingly, should the City determine Contractor is a target of Economic Sanctions or is conducting prohibited transactions with s anctioned individuals or entities, that shall be grounds for termination of this agreement. The City shall provide Contractor advance written notice of such termination, allowing Contractor at least 30 calendar days to provide a written response. Termination shall be at the sole discretion of the City.
Contractor shall immediately notify City in writing upon being subjected to Economic Sanctions or upon being charged by an government agency of conducting prohibited transactions within the meaning of Executive Order N-6-22.
IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by and through their respective authorized officers, as of the date first above written.
CITY OF FULLERTON
__________________________________ Date: __________________________ Eddie Manfro, Interim City Manager
CONSULTANT
__________________________________ Date: __________________________ Nicole Dragoo, Chief Executive Officer
_On File___________________________
Social Security or Taxpayer ID Number
APPROVED AS TO FORM:
__________________________________
Richard D. Jones, City Attorney
PSA with Chandler Asset Management Inc.
EXHIBIT A
SCOPE OF SERVICES & FEES
PSA with Chandler Asset Management Inc.
EXHIBIT A
SCOPE OF SERVICES & FEES
I. Chandler Asset Management is pleased to provide the City of Fullerton the following services:
1. Portfolio Management - Manage the City’s investment portfolio pursuant to the specific, stated investment objectives. Place all orders for the purchase and sale of securities, communicate settlement information to the City’s staff and coordinate security settlement.
Execute all approved trades through competitive bidding processes when possible. The investment advisor will not provide custodial services or security safekeeping.
2. Compliance Reporting - Ensure the portfolio is in compliance with applicable laws and the City’s Investment Policy including ordinances and resolutions relating to the investment of public funds.
3. Portfolio Accounting and Reporting:
a. Monthly statements with all the information required by the California Government Code and Governmental Accounting Standards Board (GASB). b. Quarterly investment reports including a description of market conditions, investment strategies employed, performance, and suggested changes to investment strategy.
4. Broker/Dealer Due Diligence - Perform broker/dealer due diligence and maintain relations with the broker/dealer community.
5. Investment Policy Review - Annually, or more often if necessary, review the City’s Investment Policy and provide recommended changes as needed per California Government Code or to incorporate best practices as provided by relevant statewide and national organizations. The City’s Investment Policy will be submitted to the Investment Advisory Committee and the City Council for approval on an annual basis.
6. Communication - Serve as a general resource to the City’s staff for information, advice, and training regarding fixed-income investments. Communicate as necessary with City staff to understand the City’s investment operations.
7. Online Access – Provide and make available to the City timely online access to portfolio transactions and holdings.
II. Fee Schedule
For the Investment Management Services to the Client under this Agreement, the Client agrees to pay Chandler in accordance with the following fee schedule for the entire initial contract term:
Fee Schedule For the City of Fullerton
Assets Under Management Annual Asset Management Fee
First $50 million 0.09 of 1% (9 basis points)
Next $50 million 0.06 of 1% (6 basis points)
Over $100 million 0.04 of 1% (4 basis points)
A 20% discount will be applied to our fees for the first 12 months of the contract.
PSA with Chandler Asset Management Inc.
The fee schedule is all-inclusive for the services that Chandler provides, including full-time investment advisory and portfolio management services, technological resources, onboarding and implementation, online access to the Chandl er Client Portal, comprehensive reporting, Investment Advisory Committee Meetings, personal visits, educational offerings for City staff, as well as the additional treasury support services described in Chandler’s proposal. Chandler charges management fees only on assets directly under our management. All fees are firm for the entire initial contract term and the City will not be subject to any increases during this period.
Fees are based on the amount of assets under management and are not based on transaction volume. There are no separate annual, retainer, or fixed fees; management fees will accrue as long as there are assets in the portfolio, even if there is no activity during the period. Since the firm calculates fees based on the average balance of assets under Chandler’s direct management (market value including accrued interest), the fees will fluctuate based on portfolio value. Fees are charged monthly in arrears and can be debited directly from the City’s third-party custody account.
III. RFP 2526-01 Scope of Services
A. Manage the City’s investment portfolio pursuant to the specific, stated investment objectives.
B. Provide assistance in developing and implementing an investment strategy that will maintain or enhance portfolio quality and performance within the parameters of the City’s Investment Policy Statement and cash flow needs.
C. Ensure the portfolio is in compliance with all applicable laws and the City’s Investment Policy Statement including ordinances and resolutions relating to the investment of public funds.
D. Provide the City with investment reports that shall include, but not be limited to the following:
1. Monthly statements with all the information required by the California Government Code and Governmental Accounting Standards Board (GASB). These reports must include, but not limited to: detailed portfolio holdings including purchase price, accrued interest, amortized cost, market and book values, purchase date, maturity date, next upcoming potential call date, assigned security ratings by a nationally recognized statistical rating organization (NRSRA), principal and interest payments, effective earnings rate, yield to maturity, days to maturity, and portfolio summary statistics. These reports are required to be completed no later than the 10th of the month for the immediately preceding month for presentation to the Investment Advisory Committee at their next available meeting.
2. Quarterly investment reports including a description of economic and market conditions, investment strategies employed, performance, and suggested changes to investment strategy for presentation to the Investment Advisory Committee at their next available meeting. The performance numbers shall be presented as required by the CFA Institute’s Global Investment Performance Standards (GIPS).
3. Annual portfolio performance reports, based on the City’s fiscal year, including, but not limited to: local and national economy, the City’s portfolio holdings, performance objectives, and policy compliance.
E. Perform credit analysis and assess risk of recommended/ selected portfolio investments.
F. Recommend, justify and assist the city to establish appropriate investment benchmarks.
PSA with Chandler Asset Management Inc.
G. Assist the City with developing an appropriate cash flow model to minimize balances held in highly liquid but low interest accounts (e.g., bank accounts and LAIF).
H. Assist the City with portfolio maturity analysis and reinvestment strategies given operations cashflow requirement considerations.
I. The selected proposer will not act as a custodian of assets in the account or have possession of any such assets.
J. Work with the City’s third-party custodian (currently US Bank) for safekeeping of securities and provide services required to execute and settle investment trades.
K. Perform broker/dealer due diligence and maintain relations with the broker/dealer community.
L. The selected proposer will act as a fiduciary agent to the City, serving as an independent advisor to represent the best interests of the City.
M. Demonstrate independence from any financial institution or securities brokerage firm, and fully disclose any such relationships relevant to qualified investments for public sector entities.
N. Continually monitor market conditions and circumstances and keep City informed of changing economic conditions through flash ema ils, daily, weekly, and/or monthly reports including discussion of key economic indicators as well as any recommended changes to policies, strategies, and specific positions.
O. Annually, or more often if necessary, review the City’s Investment Policy Statement and provide recommended changes as needed per California Government Code or to incorporate best practices as provided by relevant statewide and national organizations.
The City’s Investment Policy Statement will be submitted to the Investment Advisory Committee and the City Council for approval on an annual basis.
P. Attend and make presentations to the City's Investment Advisory Committee or City Council meetings as necessary. The City Investment Advisory Committee meets quarterly. Serve as a general resource to the City’s staff for information, advice, and training regarding city investments portfolio. Communicate as necessary with City staff to understand the City’s investment operations.
PSA with Chandler Asset Management Inc.
EXHIBIT B
ADDITIONAL TERMS
SPECIFIC TO INVESTMENT MANAGEMENT RELATIONSHIP
PSA with Chandler Asset Management Inc.
ADDITIONAL TERMS
SPECIFIC TO INVESTMENT MANAGEMENT RELATIONSHIP
1. Client Representative. In its capacity as investment manager, Chandler shall receive all instructions, directions and other communications on Client's behalf respecting Client's account from Steven Avalos (Representative). Chandler is hereby authorized to rely and act upon all such instructions, directions and communications from such Representative or any agent of such Representative.
2. Investment Policy. In investing and reinve sting Client’s assets, Chandler shall comply with Client’s Investment Policy, which is attached hereto as Exhibit C.
3. Authority of Chandler. Chandler is hereby granted full discretion to invest and reinvest all assets under its management in any type of security it deems appropriate, subject to the instructions given or guidelines set by Representative.
4. Electronic Delivery. From time to time, Chandler may be required to deliver certain documents to Client such as account information, notices and required disclosures. Client hereby consents to Chandler’s use of electronic means, such as email, to make such delivery. This delivery may include notification of the availability of such document(s) on a website, and Client agrees that such notification will constitute “delivery”. Client further agrees to provide Chandler with Client’s em ail address(s) and to keep this information current at all times by promptly notifying Chandler of any change in email address(s).
Client email address(s): [email protected]
5. Proxy Voting. Chandler will vote proxies on behalf of Client unless otherwise instructed.
Chandler has adopted and implemented written policies and procedures and will provide Client with a description of the proxy voting procedures upon request. Chandler will provide information regarding how Clients’ proxies were voted upon request. To request proxy policies or other information, please contact us by mail at the address provided, by calling 800-317-4747 or by emailing your request to [email protected].
6. Custody of Securities and Funds. Chandler shall not have custody or possession of the funds or securities that Client has placed under its management. Client shall appoint a custodian to take and have possession of its assets. Client recognizes the importance of comparing statements received from the appointed custodian to statements received from Chandler. Client recognizes that the fees expressed above do not include fees Client will incur for custodial services.
7. Valuation. Chandler will value securities held in portfolios managed by Chandler no less than monthly. Securities or investments in the portfolio will be valued in a manner determined in good faith by Chandler to reflect fair market value.
8. Investment Advice. Client recognizes that the opinions, recommendations and actions of Chandler will be based on information deemed by it to be reliable, but not guaranteed to or by it. Provided that Chandler acts in good faith, Client agrees that Chandler will not in any way be liable for any error in judgment or for any act or omission, except as may otherwise be provided for under the Federal Securities laws or other applicable laws.
9. Payment of Commissions. Chandler may place buy and sell orders with or through such brokers or dealers as it may select. It is the policy and practice of Chandler to strive for PSA with Chandler Asset Management Inc.
the best price and execution and for commission and discounts which are competitive in relation to the value of the transaction and which comply with Section 28(e) of the Securities and Exchange Act. Nevertheless, it is understood that Chandler may pay a commission on transactions in excess of the amount another broker or dealer may charge, and that Chandler makes no warranty or representation regarding commissions paid on transactions hereunder.
10. Other Clients. It is further understood that Chandler may be acting in a similar capacity for other institutional and individual clients, and that investments and reinvestments for Client's portfolio may differ from those made or recommended with respect to other accounts and clients even though the investment objectives may be the same or similar.
Accordingly, it is agreed that Chandler will have no obligation to purchase or sell for Client's account any securities which it may purchase or sell for other clients.
11. Confidential Relationship. The terms and conditions of this Agreement, and all information and advice furnished by either party to the other shall be treated as confidential and shall not be disclosed to third parties except (i) as required by law, rule, or regulation, (ii) as requested by a regulatory authority, (iii) for disclosures by either party of information that has become public by means other than wrongful conduct by such party or its officers, employees, or other personn el, (iv) for disclosures by either party to its legal counsel, accountants, or other pr ofessional advisers, (v) as necessary for Chandler to carry out its responsibilities hereunder, or (vi) as otherwise expressly agreed by the parties.
12. Receipt of Brochure and Privacy Policy. Client hereby acknowledges receipt of the disclosure statement or "brochure" and “brochure supplement” also known as Part 2A and Part 2B of Form ADV, required to be delivered pursuant to Rule 204-3 of the Investment Advisers Act of 1940 (Brochure). Client further acknowledges receipt of Chandler’s Privacy Policy, as required by Regulation S-P.
PSA with Chandler Asset Management Inc.
EXHIBIT C
CITY OF FULLERTON INVESTMENT POLICY
CITY OF FULLERTON
STATEMENT OF INVESTMENT POLICY
November 2024
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STATEMENT OF INVESTMENT POLICY
TABLE OF CONTENTS
Section 1. Purpose ......................................................................................................... 1 Section 2. Policy ............................................................................................................. 1 Section 3. Scope ............................................................................................................. 1 Section 4. Objective ........................................................................................................ 1 A. Safety ................................................................................................. 2 B. Liquidity .............................................................................................. 2 C. Yield ................................................................................................... 2 D. Diversification ..................................................................................... 2 Section 5. Prudence........................................................................................................ 2 Section 6. Investment Procedures................................................................................... 2 Section 7. Ethics and Conflicts of Interest ....................................................................... 2 Section 8. Authorized Investments .................................................................................. 3 A. United States Treasury Securities ....................................................... 3 B. Federal Agencies ................................................................................ 3 C. Bankers Acceptances ......................................................................... 3 D. Commercial Paper .............................................................................. 4 E. Asset-Backed Commercial Paper ....................................................... 4 F. Certificates of Deposit ......................................................................... 4 G. Repurchase Agreement (Repo's) ........................................................ 5 H. State of California Local Agency Investment Fund (LAIF) ................... 5 I. Orange County Investment Pool (OCIP) ............................................. 5 J. Medium-Term Corporate Notes ........................................................... 5 K. Asset Backed Securities ..................................................................... 5 L. Municipal Bonds ................................................................................. 6 M. Supranational Debt ............................................................................. 6 N. Money Market Funds .......................................................................... 6 O. Joint Power Authority Pools ................................................................ 6 Section 9. Prohibited Investments ................................................................................... 7 Section 10. Safekeeping and Custody .............................................................................. 7 Section 11. Diversification ................................................................................................. 7 Section 12. Authorized Financial Brokers and Institutions ................................................. 7 Section 13. Depository Services ....................................................................................... 8 Section 14. Investment Maturity ........................................................................................ 8 Section 15. Portfolio Adjustments ..................................................................................... 8 Section 16. Performance Standards .................................................................................. 9 Section 17. Reporting ....................................................................................................... 9 Section 18. Delegation of Authority ................................................................................. 10 Section 19. Investment Advisory Committee ................................................................... 10 Section 20. Investment Policy Adoption .......................................................................... 10 Section 21 Glossary ....................................................................................................... 11 Attachment A. Glossary of Terms
1 STATEMENT OF INVESTMENT POLICY
SECTION 1. PURPOSE
This Investment Policy is intended to provide guidelines for the prudent investment of the City of Fullerton and the Fullerton Successor Agency’s temporarily idle cash. Throughout this policy the term City or City of Fullerton shall refer to both the City of Fullerton and the Fullerton Successor Agency, unless otherwise indicated. Also outlined are the policies for maximizing the effectiveness of the City’s cash management system. Bond proceeds shall be invested in accordance with the requirements and restrictions outlined in the bond documents. Bond proceeds and other funds or assets that are not part of the general pool shall not be subject to this Investment Policy. This Policy conforms to all existing requirements of State law governing the investment of public funds.
SECTION 2. POLICY
The investment practices and policies of the City of Fullerton are based upon state law and prudent money management. The primary goals of these practices are:
A. To assure compliance with all federal, state, and local laws governing the investment of public funds under the control of the City Treasurer.
B. To protect the principal monies entrusted to this office.
C. To achieve a reasonable rate of return within the parameters of prudent risk management while minimizing the potential for capital losses arising from market changes or issuer default.
SECTION 3. SCOPE
This policy shall apply to all funds that are under the City Treasurer's control including but not limited to the governmental, fiduciary, enterprise, and internal service, and trust and successor agency funds. These funds are accounted for in the City's Annual Comprehensive Financial Report. The City's 115 Pension and OPEB Trust funds and Deferred Compensation Plan shall be excluded from the scope of this policy.
Except for cash in certain restricted and special funds, the City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping, and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles.
SECTION 4. OBJECTIVE
The cash management system of the City is designed to monitor and forecast expenditures and revenues, thus enabling the investment of funds to the fullest extent possible. It shall be the policy of the City to obtain a market rate of interest without assuming undue risk to principal, in accordance with State law (Government Code Section 53600.3 and 53600.5).
1). The primary objectives of the City Treasurer, in priority order, shall be:
2 A. Safety - To avoid potential loss of principal, interest, or combination thereof, safety shall be the highest priority for City investments. It shall be the responsibility of the City Treasurer to see that this Investment Policy is followed to ensure the safety of the City’s portfolio. The City Treasurer shall certify in a quarterly report that all funds in the City’s portfolio are being invested in accordance with this Investment Policy.
B. Li quidity - Shall be the second priority for City investments to assure provision of cash for City operations as needed, with a negligible chance of any loss. Liquidity remains an essential investment consideration in view of the possible need for unexpected or emergency City expenditures.
C. Y
ield - Only after safety and liquidity needs for investments are met will the yield be considered. Sometimes yield is described as the rate of return. The objective of Fullerton’s portfolio shall be to attain a market- average rate of return through economic cycles. The market-average rate of return is defined as the average return on a six-month U.S. Treasury Bill.
D. Diversification – The City’s investment portfolio will be diversified to avoid concentrating investments in specific security types or in individual financial institutions.
SECTION 5. P RUDENCE
Investments made by the City Treasurer in the name of the City of Fullerton shall be made with judgment and care 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. The standard of prudence to be used by the City Treasurer shall be the prudent investor standard, as defined in Government Code Section 53600.3 and shall be applied in managing the overall investment portfolio. The City Treasurer, acting in accordance with this Investment Policy and exercising due diligence, shall have a duty to report in a timely manner to the City Manager and City Council in the event of adverse developments affecting the City’s investments.
SECTION 6. INVESTMENT PROCEDURES
The City Treasurer will prepare written investment procedures consistent with this policy. The procedures will include: safekeeping, wire transfer instructions and agreements, permitted and prohibited instrument features, banking service contracts, authorized dealers/brokers, collateral/ depository agreements, internal controls and delegation of authority to persons responsible for investment transactions.
SECTION 7. ETHICS AND CONFLICTS OF INTEREST
In addition to state and local statutes relating to conflicts of interest, all persons involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program or which could impair their ability to make impartial investment decisions. Employees and investment officers are required to file annual disclosure statements as required for "public officials who manage public investments" (as defined and required by the Political Reform Act and related regulations, being Government Code Sections 81000 and the Fair Political Practices Commission [FPPC]). 3 SECTION 8. AUTHORIZED INVESTMENTS
A summary and description of authorized investment instruments is listed below:
Security Type Minimum Rating
Requirement
Maturity
Limits
Maximum Allocation
Limit
Maximum
Issuer
Limit
A. United States Treasury Securities None 5 years 100% 100% B. U.S. Government Agencies None 5 Years 100% 40%
B. U.S. Federal Instrumentalities None 5 Years 100% 40% C. Bankers Acceptances Prime 180 Days 40% 5%
D. Commercial Paper Prime 270 Days 25%* 5%
E. Asset-Backed Commercial Paper Prime 270 Days 25%* 5% F. Negotiable Certificates of Deposit “A” 5 Years 30% 5% F. Collateralized Certificates of Deposit None 5 Years 25% 10% G. Repurchase Agreements None 1 Year 25% 20%
H. LAIF None None Lesser of 50M or 60% N/A
I. Orange County Investment Pool None None 0% 0%
J. Medium Term Notes “A” 5 Years 30% 5%
K. Asset Backed Securities “AA” 5 Years 20% 5%
L. Municipal Bonds “A” 5 Years 20% 5%
M Supranational Debt “AA” 5 Years 30% 5%
N. Money Market Funds AAAm N/A 20% 10%
O. Joint Power Authority Pools AAA N/A 40% 40%
* The 25% limitation applies in the aggregate to both commercial paper and asset -backed commercial paper such that no more than 25% of the City’s total portfolio may be invested in any combination of securities authorized by Section 8.D and 8.E of this Policy.
The City’s investments are governed by the California Government Code. Investments may be made in the following types of securities and permitted percentages within an investment type:
A. United States Treasury Securities: Highly liquid and guaranteed as to principal and interest by the United States government with a final maturity not exceeding five years from the date of trade settlement. There is no percentage limit for this category.
B. Federal Agency or United States Government -Sponsored Enterprise (GSE) Obligations: Obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or US government - sponsored enterprises with a final maturity not exceeding five years from the date of trade settlement. There is no limit to the amount of the City’s portfolio that may be invested in Federal Agency or GSE securities, except that the aggregate investment in federal agency mortgage-backed securities shall not exceed 20% of the City’s total portfolio. Furthermore, the aggregate investment in any one federal agency or GSE issuer shall not exceed 40% of the City’s total portfolio.
C. Bankers Acceptances: Negotiable time drafts which are drawn on foreign or domestic banks to finance the export, import, shipment, and storage of goods. The drafts are sold at a discount and redeemed by the accepting bank at maturity for full face value. Maturities range from 1 to 180 days. Bankers Acceptances can only be purchased if the issuing bank is rated P-1 (Moody’s) or A-1 (Standard & Poor’s). Purchases may not exceed forty percent (40%) of the City of Fullerton and Fullerton Successor Agency’s combined 4 portfolio, and no more than five percent 5%) of the combined portfolio may be invested in the Bankers Acceptances of any one commercial bank.
D. Commercial Paper: Issued by corporations and financial institutions. Commercial paper must be rated P-1 by Moody’s Investors Service or A-1 by Standard and Poor’s. Purchases of this category shall not exceed 270 days to maturity or twenty-five percent (25%) of the City of Fullerton and Fullerton Successor Agency’s combined portfolio and no more than five percent (5%) of the combined portfolio may be invested in the outstanding commercial paper of any single issuer. The diversification requirements of this section shall be considered in combination with amounts held in Section 8.E (Asset -Backed Commercial Paper) of this Policy.
E. Asset-Backed Commercial Paper: Issued by entities organized within the United States as a special purpose corporation, trust, or limited liability company and of “prime” credit quality. The entity that issues the asset -backed commercial paper must meet all of the following conditions: (a) is rated “A -1” (or the equivalent) or higher by at least one nationally recognized statistical rating organization; and (b) has program wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. Purchases of this category shall not exceed 270 days to maturity or twenty- five percent (25%) of the City of Fullerton and Fullerton Successor Agency’s combined portfolio and no more than five percent (5%) of the combined portfolio may be invested in the outstanding asset-backed commercial paper of any single issuer. The diversification requirements of this section shall be considered in combination with amounts held in Section 8.D (Commercial Paper) of this Policy.
F. Certificates of Deposit:
1. Negotiable certificates of deposit (NCD’s) are money market instruments 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 federally licensed or state-licensed branch of a foreign bank.
The maturity of NCD’s shall not exceed five years, and purchases of NCD’s shall not exceed thirty percent (30%) of the portfolio. Securities in t his category exceeding federal deposit insur ance limits shall be issued by institutions with a long-term debt rating of at least “A” by a nationally recognized rating organization, as designated by the Security and Exchange Commission and shall be evaluated in terms of the credit worthiness of the issuer.
2. Certificates of Deposit (CD’s) are unsecured direct obligations of a U.S. bank or a savings and loan association. CD’s are secured by collateral such as U.S. government securities or mortgages and allow selection of the exact amount and date of maturity, as well as the exact depository. Federal Deposit Insurance Corporation (FDIC) coverage is provided for government deposits, but limited to the first $250,000 on deposit on behalf of a given entity at a single financial institution. However, California law requires that deposits of public funds shall be collateralized if not insured. Therefore, all City deposits in excess of FDIC insurance shall be collateralized. Purchases of this category shall not exceed five years and shall not exceed twenty five percent (25%) of the portfolio nor shall the City deposit more than 10% of its total portfolio in the collateralized certificates of deposit in any one bank.
3. Notwithstanding Section 53601 or any other provision of California code, The City has the authority under law to invest funds, at its discretion, and may invest a 5 portion of its surplus funds in certificates of deposit at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of certificates of deposit, provided that the purchases of certificates of deposit pursuant to this section, Section 53635.8, and subdivision (i) of Section 53601 do not, in total, exceed 30 percent of the agency’s funds that may be invested for this purpose.
G. Repurchase Agreements (Repo’s): A Repurchase Agreement consists of two simul - taneous transactions. One is the purchase of securities by an investor from a bank, the other is the commitment by the bank to repurchase the securities at the same price at a mutually agreed upon future date. The investor receives an agreed upon rate of interest, generally at money market rates. Repo’s shall be collateralized and written against U.S.
Treasury, federal agency or government sponsored enterprises permitted by this statement of investment policy. The purchased securities (the “collateral”) shall have a minimum market value of 102% of the dollar value of the funds invested. Purchases in this category shall not have a final termination date exceeding (360) from the date of trade settlement. No more than twenty five percent (25%) of the City’s portfolio shall be invested in repurchase agreements.
H. State of California Local Agency Investment Fund (LAIF): Provides high liquidity allowing deposits to be credited to the City’s checking account within twenty -four (24) hours. State Pool funds are operated directly by the Office of the State Treasurer, who commingles state and local funds. No more than sixty percent (60%), or $75 million, whichever is less, of each of the City’s and Successor Agency’s monies may be invested with the State of California Local Agency Investment Fund.
I. Orange County Investment Pool (OCIP): The OCIP may be considered as a future investment option once the Pool is restructured and the Orange County Treasurer offers cities the opportunity to participate again. However, prior to such investment, that option shall be re-evaluated by the Treasurer and Investment Advisory Committee (see Section 15), and returned to Council for approval.
J. Medium-Term Corporate 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. Such securities must be rated in a rating category of “A” or higher by a nationally recognized rating service at the time of purchase. In the event the corporation falls below an “A” credit rating, an evaluation shall be conducted to determine its credit risk. The decision to sell the investment o r hold till maturity will be assessed depending upon its credit risk. The maturity of medium -term corporate notes shall not exceed five years, and purchases shall not exceed thirty percent (30%) of the portfolio. No more than five percent (5%) of the combined portfolio may be invested in the outstanding debt of any single corporate issuer.
K. Asset Backed Securities: A mortgage passthrough security, collateralized mortgage obligation, mortgage- backed or other pay -through bond, equipment lease- backed certificate, consumer receivable passthrough certificate, or consumer receivable- backed bond. Securities not issued or guaranteed by an agency or issuer identified in subdivision 53601(b) or 53601(f), the following limitations apply: eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO, these securities shall have a maximum remaining maturity of five years or less, and the purchase of securities authorized by this subdivision shall not exceed 20 percent of the agency’s surplus moneys that may be invested pursuant to this section. No more 6 than five percent (5%) of the combined portfolio may be invested in any single asset backed issuer.
L. Municipal Bonds: issued by the State of California and any local agency within the State, including bonds payable solely out of revenues from a revenue producing property owned, controlled or operated by a State or by a department, board, agency or authority of any of the other 49 United States, in addition to California. Such securities must be rated in a rating category of “A” or higher by a nationally recognized rating service at the time of purchase. In the event the municipality falls below an “A” credit rating, an evaluation shall be conducted to determine its credit risk. The decision to sell the investment or hold till maturity will be assessed depending upon its credit risk. The maturity of municipal bonds shall not exceed five years, and purchases shall not exceed twenty percent (20%) of the portfolio. No more than five percent (5%) of the combined portfolio may be invested in the outstanding commercial paper of any single issuer.
M. Supranational Debt: the debt of an international or multi-lateral financial agency used to finance economic and infrastructure development, environmental protection, poverty reduction and renewable energy around the world. The City may invest in U.S. dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation or Inter -American Development Bank. Obligations eligible for investment under t his subdivision shall be rated “AA” or its equivalent or better by a NRSRO and may not exceed thirty (30%) of the City’s investment portfolio. No more than five percent (5%) of the combined portfolio may be invested in the outstanding debt of any single supranational issuer.
N. Money Market Funds. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940. To be eligible for investment pursuant to this subdivision these companies shall either:
(1) attain the highest ranking letter or numerical rating provided by not less than two of the three largest NRSRO’s; or
(2) have an investment advisor registered or exempt from registration with the SEC with not less than five years of experience managing money market mutual funds and with assets under management in excess of $1 billion.
Furthermore, no more than 10% of the City’s total portfolio may be invested in any one money market fund.
O. Joint Power Authority Pools. Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (q), inclusive of California Code 53601. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
(1) The adviser is registered or exempt from registration with the Securities and Exchange Commission.
7 (2) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive of California Code 53601. (3) (3) The adviser has assets under management in excess of five hundred million dollars ($500,000,000)
The purchase price of shares shall not exceed 40% of the City’s total portfolio and shall not include any commission that the companies may charge.
SECTION 9. PROHIBITED INVESTMENTS
It shall be the policy of the City to not invest any funds in inverse floaters, range notes, or mortgage-derived interest only strips, or any security that could result in zero interest accrual if held to maturity, and other similar derivative products. No investment prohibited by California Government Section 53601.6 shall be permitted herein.
Notwithstanding the prohibition noted above, the City may invest in securities issued by, or backed by, the United States government that could result in zero- or negative-interest accrual if held to maturity, in the event of, and for the duration of, a period of negative market interest rates. A local agency may hold these instruments until their maturity dates.
It shall be the policy of the City of Fullerton to not invest directly in Reverse Repurchase Agreements. Further, the City shall not be permitted to invest in any pool which has more than ten percent (10%) of its total portfolio in Reverse Repurchase Agreements.
In the event of a ratings downgrade of a security in the City’s portfolio by any of the nationally recognized statistical rating organizations (NRSRO) to a rating category below the minimum required for purchase, the City Treasurer will document such downgrade in writing. The City Treasurer will also communicate to the Director of Administrative Services a recommended course of action for said security.
However, callable securities, which otherwise meet the quality, maturity, and percent limitations assigned to their respective security category, are considered to be an acceptable investment.
SECTION 10. SAFEKEEPING AND CUSTODY
All security transactions shall be conducted on a delivery-versus-payment (DVP) basis. Securities shall be held in third-party safekeeping of the City’s bank or other designated third-party trust, in the City’s name and evidenced by purchase confirmation and safekeeping receipts.
SECTION 11. DIVERSIFICATION
The portfolio shall consist of a mix of securities purchased through various issuers, with varying maturities. The primary purpose for diversifying a portfolio is to reduce risk in terms of maturity, instrument types and issuer, while attaining an average market rate of return.
SECTION 12. AUTHORIZED FINANCIAL BROKERS AND INSTITUTIONS
The City Treasurer shall maintain a listing of financial institutions and broker/dealers authorized to provide investment and depository services and who maintain an office in the State of California.
All financial institutions and brokers/dealers who desire to become bidders for investment transactions must supply the City with the following: audited financial statements, proof of National Association of Security Dealers’ certification, completed authorization to trade 8 agreement, proof of California registration, and shall acknowledge by written receipt of having read this Investment Policy. The City shall annually send a copy of the current investment policy to all financial institutions and broker/dealers approved to do business with the City.
Should the City contract with a third-party investment management firm to manage all or a portion of the City’s investment portfolio, the investment management firm is herein authorized to utilize its own list of approved broker dealers and shall provide such list to the City annually or upon the City’s request.
SECTION 13. DEPOSITORY SERVICES
Public deposits shall only be made in qualified public depositories as established by California law. In selecting depositories pursuant to the Code, Section 53600, et seq., the credit worthiness, financial stability, and financial history of the institution, as well as the cost and scope of services and interest rates offered shall be considered. No funds will be deposited in an institution unless that institution has been evaluated by a nationally recognized independent rating service as satisfactory or better.
Under the provisions of the California Government Code, banks and savings and loan associations must secure public funds deposits with eligible securities having a market value of 110% of the total amount of the deposits. State law also allows as an eligible security, first trust deeds having a value of one hundred fifty percent (150%) of the total amount of the deposits. A third class of collateral is letters of credit drawn on the Federal Home Loan Bank (FHLB).
Deposits of $250,000 or less which are insured pursuant to federal law by the Federal Deposit Insurance Corporation (FDIC), or the National Credit Union Administration (NCUA) may be excluded from the independent rating service evaluation requirement.
The City Treasurer may waive, at his/her discretion, security for that portion of a deposit which is insured pursuant to federal law. Currently, the first two hundred, fifty thousand dollars ($250,000) of a deposit is federally insured. It is to the City’s advantage to waive this collateral requirement for the first $250,000 to achieve a higher interest rate.
SECTION 14. INVESTMENT MATURITY
State law (Government Code Section 53601) provides that city treasurers may not invest funds in securities which have a term remaining to maturity in excess of five years from the date of investment, unless the City Council “...grants express authority to make that investment either specifically or as a part of an investment program approved by the City Council no less than three months prior to the investment.”
It shall be the duty of the City Treasurer, to the extent possible; to match the investments with anticipated cash flow requirements. The prescribed method of the City of Fullerton shall be referred to as “layering” the investments. Monies not needed to cover immediate operating costs may be invested up to a five -year maturity. The duration of the long- term portfolio(s) shall be managed in a range of +/ - 25% of the benchmarks set forth in Section 16 (b) and (c), below.
Portfolio duration may deviate from these ranges at the City’s discretion based upon changes in the City’s circumstances.
SECTION 15. PORTFOLIO ADJUSTMENTS
The diversification requirements set forth in Section 8 relating to the maximum allowable percentage for a particular issuer or investment type shall apply at the time of purchase. Due to 9 fluctuations in the aggregate invested balance, these maximum percentages may be exceeded from time to time and shall not require liquidation to realign the portfolio. However, consideration should be given to this matter when future purchases are made and the Treasurer shall consider rebalancing the portfolio after evaluating the expected length of time that it will be imbalanced.
The credit rating requirements set forth in Section 8 shall apply at the time of purchase. Should the credit rating of a security owned by the City be downgraded to a level below that required by this Investment Policy, the City will review the credit situation and determine if such securities should be sold or retained in the portfolio based upon its remaining term to maturity, the credit outlook for the issuer, and other relevant facts and circumstances. If the decision is made to retain a downgraded security, it will be closely monitored by the City and reported on quarterly to the Investment Committee.
Should any investment fall out of compliance with any other guidelines of this policy after its purchase, the City will review the situation and determine if such securities should be sold or retained in the portfolio based upon its remaining term to maturity, the credit outlook for the issuer, and other relevant facts and circumstances. If the decision is made to retain such a security, it will be closely monitored by the City and reported on quarterly to the Investment Committee.
SECTION 16. PERFORMANCE STANDARD
In order to assist in the evaluation of the Portfolio’s performance, the City will use performance benchmarks for the short-term and long-term portfolios. The use of benchmarks will allow the City to measure its returns against other investors in the same markets. A benchmark should not be chosen which would induce the individual making the investment to take on undue risk in order to outperform the benchmark.
(a) The 3 month Treasury bill or the average of the monthly LAIF rate will be used as a benchmark for comparison with the Portfolio’s net book value rate of return for current operating funds (short-term portfolio). The duration of the index should be similar to that of the short-term portfolio for performance comparison.
(b) Investment performance of funds designated as Core Funds and other non- operating funds that have a longer-term investment horizon (long-term portfolio) will be compared to the BofA Merrill Lynch 1-3 Year Government/Credit Index. The appropriate index will have a duration and asset mix that approximates that of the Investment Portfolio and will be utilized as a benchmark to be compared to the Investment Portfolio’s total rate of return. (c) Investment performance of funds designated as Reserve Funds and other non-operating funds that have a longer -term investment horizon (reserve portfolio) will be compared to the BofA Merrill Lynch 1-5 Year Government/Credit Index. The appropriate index will have a duration and asset mix that approximates that of the Investment Portfolio and will be utilized as a benchmark to be compared to the Investment Portfolio’s total rate of return.
SECTION 17. REPORTING
The Treasurer shall submit on a quarterly basis a report to the City Council showing the type of investment, issuer, date of maturity, amount of deposit, current market value for all securities, rate of interest, interest earned, and such other information as may be required by the City Council. 10 SECTION 18. DELEGATION OF AUTHORITY
The City Council, consistent with Section 53607 of the Government Code, delegates the authority to make investments on the City’s behalf to the City Treasurer. The City Treasurer shall assume full responsibility for all investment transactions made under this delegation of authority, and report these transactions quarterly to the City Council.
SECTION 19. INVESTMENT ADVISORY COMMITTEE
To strengthen sound investment strategies and provide control over the City’s investments, an Investment Advisory Committee has been established to review and make recommendations on investment policy and strategy of the City of Fullerton and the Fullerton Successor Agency. The Committee is comprised of the following members:
1. One City Council member (appointed by Council).
2. Three Fullerton citizens, appointed by the City Council, with professional financial management experience in either financial planning, commercial banking, investment banking, or a related field. The citizens chosen by City Council to serve on the Investment Advisory Committee shall serve four- year terms, and shall be removable from the Committee at the will of the Council.
3. City Manager.
4. Director of Administrative Services.
5. City Treasurer (if duties are not assigned to the Director of Administrative Services).
The Committee shall meet quarterly to:
a. Review the City’s investments which are currently held. b. Recommend modifications of this Investment Policy to the City Council.
c. Develop and carry out the ongoing investment strategy in accordance with this Investment Policy.
During the meetings, action minutes will be taken and available for public review.
The Committee shall not inhibit the daily operations performed by the City Treasurer, but rather provide guidelines for the investment of the City’s portfolio. Individual trades need not be approved by the Committee provided they fall within the scope of this Investment Policy.
SECTION 20. INVESTMENT POLICY ADOPTION
The City of Fullerton’s Investment Policy shall be submitted to the City Council as needed for review and approval of any modifications. The basic premise underlying this Investment Policy is to ensure that idle funds are safe, available when needed, and invested at the highest yield possible after safety and liquidity standards are met.
11 SECTION 21. GLOSSARY
Because this policy is to be available to the public as well as the governing body, it is important that a glossary of related terminology be part of the policy. Please refer to Attachment A for the terms.
1 ATTACHMENT A
GLOSSARY OF INVESTMENT TERMS
Accrued Interest. Interest earned but which has not yet been paid or received.
Agency. See "Federal Agency Securities."
Ask Price. Price at which a broker/dealer offers to sell a security to an investor. Also known as “offered price.”
Asset Backed Securities (ABS). A fixed-income security backed by notes or receivables against assets other than real estate. Generally issued by special purpose companies that “own” the assets and issue the ABS. Examples include securities backed by auto loans, credit card receivables, home equity loans, manufactured housing loans, farm equipment loans and aircraft leases.
Average Life.
The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding.
B of A Merrill Lynch 1 -3 Year U.S. Corporate/Government Bond Index AA or Better. This index includes publicly issued U.S. Treasury debt, U.S. government agency debt, taxable debt issued by U.S. states and territories and their political subdivisions, debt issued by U.S. and non- U.S. corporations, non-U.S. government debt and supranational debt. This index will be utilized as a performance benchmark for the City’s core portfolio.
Bankers' Acceptance (BA's). A draft or bill of exchange drawn upon and accepted by a bank.
Frequently used to finance shipping of international goods. Used as a short-term credit instrument, bankers' acceptances are traded at a discount from face value as a money market instrument in the secondary market on the basis of the credit quality of the guaranteeing bank.
Basis Point. One hundredth of one percent, or 0.01%. Thus 1% equals 100 basis points.
Bearer Security. A security whose ownership is determined by the holder of the physical security.
Typically, there is no registration on the issuer’s books. Title to bearer securities is transferred by delivery of the physical security or certificate. Also known as “physical securities.”
Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills program, a short - term debt securities issuance program to supplement its existing discount note program. The program includes a schedule of larger, weekly issues in three - and six -month maturities and biweekly issues in one -year for Benchmark Bills. Each issue is brought to market via a Dutch (single price) auction. FNMA conducts a weekly auction for each Benchmark Bill maturity and accepts both competitive and non- competitive bids through a web based auction system. This program is in addition to the variety of other discount note maturities, with rates posted on a daily basis, which FNMA offers. FNMA's Benchmark Bills are unsecured general obligations that are issued in book- entry form through the Federal Reserve Banks. There are no periodic payments of interest on Benchmark Bills, which are sold at a discount from the principal amount and payable at par at maturity. Issues under the Benchmark program constitute the same credit standing as other FNMA discount notes; they simply add organization and liquidity to the short -term Agency discount note market.
Benchmark Notes/Bonds: Benchmark Notes and Bonds are a series of FNMA “bullet” maturities (non-callable) issued according to a pre-announced calendar. Under its Benchmark Notes/Bonds 2 program, 2, 3, 5, 10 and 30- year maturities are issued each quarter. Each Benchmark Notes new issue has a minimum size of $4 billion, 30 - year new issues having a minimum size of $1 billion, with re-openings based on investor demand to further enhance liquidity. The amount of non-callable issuance has allowed FNMA to build a yield curve in Benchmark Notes and Bonds in maturities ranging from 2 to 30 years. The liquidity emanating from these large size issues has facilitated favorable financing opportunities through the development of a liquid overnight and term repo market. Issues under the Benchmark program constitute the same credit standing as other FNMA issues; they simply add organization and liquidity to the intermediate- and long-term Agency market.
Benchmark. A market index used as a comparative basis for measuring the performance of an investment portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance and duration of the actual portfolio's investments.
Bid Price. Price at which a broker/dealer offers to purchase a security from an investor.
Bond Market Association (BMA). The bond market trade association representing the largest securities markets in the world. In addition to publishing a Master Repurchase Agreement, widely accepted as the industry standard document for Repurchase Agreements, the BMA also recommends bond market closures and early closes due to holidays.
Bond. Financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Book Entry Securities. Securities that are recorded in a customer’s account electronically through one of the financial markets electronic delivery and custody systems, such as the Fed Securities wire, DTC and PTC (as opposed to bearer or physical securities). The trend is toward a certificate-free society in order to cut down on paperwork and to diminish investors’ concerns about the certificates themselves. The vast majority of securities are now book entry securities.
Book Value. The value at which a debt security is reflected on the holder's records at any point in time. Book value is also called “amortized cost” as it represents the original cost of an investment adjusted for amortization of premium or accretion of discount. Also called “carrying value.” Book value can vary over time as an investment approaches maturity and differs from “market value” in that it is not affected by changes in market interest rates.
Broker/Dealer. A person or firm transacting securities business with customers. A “broker” acts as an agent between buyers and sellers, and receives a commission for these services. A “dealer” buys and sells financial assets from its own portfolio. A dealer takes risk by owning inventory of securities, whereas a broker merely matches up buyers and sellers. See also "Primary Dealer."
Bullet Notes/Bonds. Notes or bonds that have a single maturity date and are non-callable.
California Local Agency Bonds: Bonds that are issued by a California county, city, city and county, including a chartered city or county, school district, community college district, public district, county board of education, county superintendent of schools, or any public or municipal corporation.
Call Date. Date at which a call option may be or is exercised. 3 Call Option. The right, but not the obligation, of an issuer of a security to redeem a security at a specified value and at a specified date or dates prior to its stated maturity date. Most fixed-income calls are a par, but can be at any previously established price. Securities issued with a call provision typically carry a higher yield than similar securities issued without a call feature. There are three primary types of call options (1) European - one-time calls, (2) Bermudan - periodically on a predetermined schedule (quarterly, semi-annual, annual), and (3) American - continuously callable at any time on or after the call date. There is usually a notice period of at least 5 business days prior to a call date.
Callable Bonds/Notes. Securities, which contain an imbedded call option giving the issuer, the right to redeem the securities prior to maturity at a predetermined price and time.
Certificate of Deposit (CD). Bank obligation issued by a financial institution generally offering a fixed rate of return (coupon) for a specified period of time (maturity). Can be as long as 10 years to maturity, but most CDs purchased by public agencies are one year and under.
Collateral. Investment securities or other property that a borrower pledges to secure repayment of a loan, secure deposits of public monies, or provide security for a repurchase agreement.
Collateralization. Process by which a borrower pledges securities, property, or other deposits for securing the repayment of a loan and/or security.
Collateralized Mortgage Obligation (CMO). A security that pools together mortgages and separates them into short, medium, and long- term positions (called tranches). Tranches are set up to pay different rates of interest depending upon their maturity. Interest payments are usually paid monthly. In “plain vanilla” CMOs, principal is not paid on a tranche until all shorter tranches have been paid off. This system provides interest and principal in a more predictable manner. A single pool of mortgages can be carved up into numerous tranches each with its own payment and risk characteristics.
Commercial Paper. Short term unsecured promissory note issued by a company or financial institution. Issued at a discount and matures for par or face value. Usually a maximum maturity of 270 days, and given a short-term debt rating by one or more NRSROs.
Convexity. A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond's price to interest rate changes.
Corporate Note. A debt instrument issued by a corporation with a maturity of greater than one year and less than ten years.
Counterparty. The other party in a two party financial transaction. "Counterparty risk" refers to the risk that the other party, to a transaction, will fail in its related obligations. For example, the bank or broker/dealer in a repurchase agreement.
Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond’s face value.
C
urrent Yield. Annual rate of return on a bond based on its price. Calculated as (coupon rate /price), but does not accurately reflect a bond’s true yield level.
Custody. Safekeeping services offered by a bank, financial institution or trust company, referred to as the “custodian.” Service normally includes the holding and reporting of the customer's securities, the collection and disbursement of income, securities settlement and market values. 4 Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.
Delivery Versus Payment (DVP). Settlement procedure in which securities are delivered versus payment of cash, but only after cash has been received. Most security transactions, including those through the Fed Securities Wire system and DTC, are done DVP as a protection for both the buyer and seller of securities.
Depository Trust Company (DTC). A firm through which members can use a computer to arrange for securities to be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and credit entries. Most corporate securities, commercial paper, CDs and BAs clear through DTC.
Derivatives. For hedging purposes, common derivatives are options, futures, swaps and swaptions. All Collateralized Mortgage Obligations (“CMOs”) are derivatives. (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities).
Derivative Security. Financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values.
Designated Bond.
FFCB’s regularly issued, liquid, non-callable securities that generally have a 2 or 3 year original maturity. New issues of Designated Bonds are $1 billion or larger. Re- openings of existing Designated Bond issues are generally a minimum of $100 million. Designated Bonds are offered through a syndicate of two to six dealers. Twice each month the Funding Corporation announces its intention to issue a new Designated Bond, reopen an existing issue, or to not issue or reopen a Designated Bond. Issues under the Designated Bond program constitute the same credit standing as other FFCB issues; they simply add organization and liquidity to the intermediate- and long-term Agency market.
Discount Notes. Unsecured general obligations issued by Federal Agencies at a discount.
Discount notes mature at par and can range in maturity from overnight to one year. Very large primary (new issue) and secondary markets.
Discount Rate. Rate charged by the system of Federal Reserve Banks on overnight loans to member banks. Changes to this rate are administered by the Federal Reserve and closely mirror changes to the “fed funds rate.”
Discount Securities. Non-interest bearing money market instruments that are issued at discount and redeemed at maturity for full face value. Examples include: U.S. Treasury Bills, Federal Agency Discount Notes, Bankers' Acceptances and Commercial Paper.
Discount. The amount by which a bond or other financial instrument sells below its face value.
See also "Premium."
Diversification. Dividing investment funds among a variety of security types, maturities, industries and issuers offering potentially independent returns.
Dollar Price. A bond’s cost expressed as a percentage of its face value. For example, a bond quoted at a dollar price of 95 ½, would have a principal cost of $955 per $1,000 of face value. 5 Duff & Phelps. One of several NRSROs that provide credit ratings on corporate and bank debt issues.
Duration. The weighted average maturity of a security’s or portfolio’s cash flows, where the present values of the cash flows serve as the weights. The greater the duration of a security/portfolio, the greater its percentage price volatility with respect to changes in interest rates. Used as a measure of risk and a key tool for managing a portfolio versus a benchmark and for hedging risk. There are also different kinds of duration used for different purposes (e.g.
MacAuley Duration, Modified Duration).
Fannie Mae. See "Federal National Mortgage Association."
Fed Money Wire. A computerized communications system that connects the Federal Reserve System with its member banks, certain U. S. Treasury offices, and the Washington D.C. office of the Commodity Credit Corporation. The Fed Money Wire is the book entry system used to transfer cash balances between banks for themselves and for customer accounts.
Fed Securities Wire. A computerized communications system that facilitates book entry transfer of securities between banks, brokers and customer accounts, used primarily for settlement of U.S.
Treasury and Federal Agency securities.
Fed. See "Federal Reserve System."
Federal Agency Security. A debt instrument issued by one of the Federal Agencies. Federal Agencies are considered second in credit quality and liquidity only to U.S. Treasuries.
Federal Agency. Government sponsored/owned entity created by the U.S. Congress, generally for the purpose of acting as a financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the economy considered to otherwise have restricted access to credit markets. The largest Federal Agencies are GNMA, FNMA, FHLMC, FHLB, FFCB, SLMA, and TVA.
Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commercial banks, currently to a limit of $250,000 per depositor per bank.
Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A government sponsored enterprise (GSE) system that is a network of cooperatively-owned lending institutions that provides credit services to farmers, agricultural cooperatives and rural utilities. The FFCBs act as financial intermediaries that borrow money in the capital markets and use the proceeds to make loans and provide other assistance to farmers and farm-affiliated businesses. Consists of the consolidated operations of the Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks. Frequent issuer of discount notes, agency notes and callable agency securities. FFCB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and agricultural industry. Also issues notes under its “designated note” program.
Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by depository institutions in excess of current reserve requirements, and frequently loaned or borrowed on an overnight basis between depository institutions.
Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository institution lending Federal Funds to another depository institution. The Federal Reserve influences this rate 6 by establishing a "target" Fed Funds rate associated with the Fed's management of monetary policy.
Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A government sponsored enterprise (GSE) system, consisting of wholesale banks (currently twelve district banks) owned by their member banks, which provides correspondent banking services and credit to various financial institutions, financed by the issuance of securities. The principal purpose of the FHLB is to add liquidity to the mortgage markets. Although FHLB does not directly fund mortgages, it provides a stable supply of credit to thrift institutions that make new mortgage loans.
FHLB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of discount notes, agency notes and callable agency securities.
Also issues notes under its “global note” and “TAP” programs.
Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"). One of the large Federal Agencies. A government sponsored public corporation (GSE) that provides stability and assistance to the secondary market for home mortgages by purchasing first mortgages and participation interests financed by the sale of debt and guaranteed mortgage backed securities.
FHLMC debt is not an obligation of, nor is it gua ranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of discount notes, agency notes, callable agency securities and MBS. Also issues notes under its “reference note” program.
Federal National Mortgage Association (FNMA or "Fannie Mae"). One of the large Federal Agencies. A government sponsored public corporation (GSE) that provides liquidity to the residential mortgage market by purchasing mortgage loans from lenders, financed by the issuance of debt securities and MBS (pools of mortgages packaged together as a security). FNMA debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and housing market.
Frequent issuer of discount notes, agency notes, callable agency securities and MBS. Also issues notes under its “benchmark note” program.
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System.
Federal Reserve System (the Fed). The independent central bank system of the United States that establishes and conducts the nation's monetary policy. This is accomplished in three major ways: (1) raising or lowering bank reserve requirements, (2) raising or lowering the target Fed Funds Rate and Discount Rate, and (3) in open market operations by buying and selling government securities. The Federal Reserve System is made up of twelve Federal Reserve District Banks, their branches, and many national and state banks throughout the nation. It is headed by the seven -member Board of Governors known as the “Federal Reserve Board” and headed by its Chairman.
Financial Industry Regulatory Authority, Inc (FINRA). A private corporation that acts as a self- regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). Though sometimes mistaken for a government agency, it is a non - governmental organization that performs financial regulation of member brokerage firms and exchange markets. The government also has a regulatory arm for investments, the Securities and Exchange Commission.
Fiscal Agent/Paying Agent. A bank or trust company that acts, under a trust agreement with a corporation or municipality, in the capacity of general treasurer. The agent performs such duties 7 as making coupon payments, paying rents, redeeming bonds, and handling taxes relating to the issuance of bonds.
Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
Floating Rate Security (FRN or “floater”). A bond with an interest rate that is adjusted according to changes in an interest rate or index. Differs from variable-rate debt in that the changes to the rate take place immediately when the index changes, rather than on a predetermined schedule.
See also “Variable Rate Security.”
Freddie Mac. See "Federal Home Loan Mortgage Corporation".
Ginnie Mae. See "Government National Mortgage Association".
Global Notes: Notes designed to qualify for immediate trading in both the domestic U.S. capital market and in foreign markets around the globe. Usually large issues that are sold to investors worldwide and therefore have excellent liquidity. Despite their global sales, global notes sold in the U.S. are typically denominated in U.S. dollars.
Government National Mortgage Association (GNMA or "Ginnie Mae"). One of the large Federal Agencies. Government -owned Federal Agency that acquires, packages, and resells mortgages and mortgage purchase commitments in the form of mortgage- backed securities.
Largest issuer of mortgage pass -through securities. GNMA debt is guaranteed by the full faith and credit of the U.S. government (one of the few agencies that is actually full faith and credit of the U.S.).
Government Securities. An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, Bonds, and SLGS."
Government Sponsored Enterprise (GSE). Privately owned entity subject to federal regulation and supervision, created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy such as students, farmers, and homeowners. GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over U.S. Treasuries. Some consider GSEs to be stealth recipients of corporate welfare. Examples of GSEs include: FHLB, FHLMC, FNMA and SLMA.
Government Sponsored Enterprise Security. A security issued by a Government Sponsored Enterprise. Considered Federal Agency Securities.
Index. A compilation of statistical data that tracks changes in the economy or in financial markets.
Interest-Only (IO) STRIP. A security based solely on the interest payments from the bond. After the principal has been repaid, interest payments stop and the value of the security falls to nothing.
Therefore, IOs are considered risky investments. Usually associated with mortgage- backed securities.
Internal Controls. An internal control structure ensures that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of 8 costs and benefits requires estimates and judgments by management. Internal controls should address the following points:
1. Control of collusion - Collusion is a situation where two or more employees are working in conjunction to defraud their employer.
2. Separation of transaction authority from accounting and record keeping - By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved.
3. Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping.
4. Avoidance of physical delivery securities - Book-entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities.
5. Clear delegation of authority to subordinate staff members - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions.
Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities.
6. Written confirmation of transactions for investments and wire transfers - Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and third-party custodian - The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers.
Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction of interest rates. Considered risky as their value moves in the opposite direction of normal fixed-income investments and whose interest rate can fall to zero.
Investment Advisor. A company that provides professional advice managing portfolios, investment recommendations and/or research in exchange for a management fee.
Investment Adviser Act of 1940. Federal legislation that sets the standards by which investment companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and securities valuations.
Investment Grade. Bonds considered suitable for preservation of invested capital; bonds rated a minimum of Baa3 by Moody’s, BBB- by Standard & Poor’s, or BBB- by Fitch. Although “BBB” rated bonds are considered investment grade, most public agencies cannot invest in securities rated below “A.”
Liquidity. Relative ease of converting an asset into cash without significant loss of value. Also, a relative measure of cash and near-cash items in a portfolio of assets. Also, a term describing 9 the marketability of money market security correlating to the narrowness of the spread between the bid and ask prices.
Local Agency Investment Fund (LAIF): A voluntary investment fund open to state and local government entities and certain non-profit organizations in California in which organization pools their funds for investment. LAIF is managed by the State Treasurer’s Office.
Long-Term Core Investment Program. Funds that are not needed within a one year period.
Market Value. The fair market value of a security or commodity. The price at which a willing buyer and seller would pay for a security.
Mark-to-market. Adjusting the value of an asset to its market value, reflecting in the process unrealized gains or losses.
Master Repurchase Agreement. A widely accepted standard agreement form published by the Bond Market Association (BMA) that is used to govern and document Repurchase Agreements and protects the interest of parties in a repo transaction.
Maturity Date. Date on which principal payment of a financial obligation is to be paid.
Medium Term Notes (MTN's). Used frequently to refer to corporate notes of medium maturity (5-years and under). Technically, any debt security issued by a corporate or depository institution with a maturity from 1 to 10 years and issued under an MTN shelf registration. Usually issued in smaller issues with varying coupons and maturities, and underwritten by a variety of broker/dealers (as opposed to large corporate deals issued and underwritten all at once in large size and with a fixed coupon and maturity).
Money Market. The market in which short -term debt instruments (bills, commercial paper, bankers’ acceptance, etc.) are issued and traded.
Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in money market instruments, such as: U.S. Treasury bills, commercial paper, bankers' acceptances, and repurchase agreements. Money market mutual funds are registered with the SEC under the Investment Company Act of 1940 and are subject “rule 2a- 7” which significantly limits average maturity and credit quality of holdings. MMF’s are managed to maintain a stable net asset value (NAV) of $1.00. Many MMFs carry ratings by a NRSRO.
Moody's Investors Service. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
Mortgage Backed Securities (MBS). Mortgage-backed securities represent an ownership interest in a pool of mortgage loans made by financial institutions, such as savings and loans, commercial banks, or mortgage companies, to finance the borrower's purchase of a home or other real estate. The majority of MBS are issued and/or guaranteed by GNMA, FNMA and FHLMC.
There are a variety of MBS structures, some of which can be very risky and complicated. All MBS have reinvestment risk as actual principal and interest payments are dependent on the payment of the underlying mortgages which can be prepaid by mortgage holders to refinance and lower rates or simply because the underlying property was sold.
Mortgage Pass-Through Securities. A pool of residential mortgage loans with the monthly interest and principal distributed to investors on a pro-rata basis. Largest issuer is GNMA. 10 Municipal Note/Bond. A debt instrument issued by a state or local government unit or public agency. The vast majority of municipals are exempt from state and federal income tax, although some non-qualified issues are taxable.
Mutual Fund. Portfolio of securities professionally managed by a registered investment company that issues shares to investors. Many different types of mutual funds exist (bond, equity, money fund); all except money market funds operate on a variable net asset value (NAV).
Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs ($100,000 and larger) that are issued in bearer form and can be traded in the secondary market.
Net Asset Value. The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this from the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund's portfolio. (See below.)
[(Total assets) - (Liabilities)]/ (Number of shares outstanding)
NRSRO. A “Nationally Recognized Statistical Rating Organization.” A designated rating organization that the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody’s, S&P, Fitch and Duff & Phelps.
Offered Price. See also "Ask Price."
Open Market Operations. Federal Reserve monetary policy tactic entailing the purchase or sale of government securities in the open market by the Federal Reserve System from and to primary dealers in order to influence the money supply, credit conditions, and interest rates.
Par Value. Face value, stated value or maturity value of a security.
Physical Delivery. Delivery of readily available underlying assets at contract maturity.
Portfolio. Collection of securities and investments held by an investor.
Premium. The amount by which a bond or other financial instrument sells above its face value.
See also "Discount."
Primary Dealer. Any of a group of designated government securities dealers designated by to the Federal Reserve Bank of New York. Primary dealers can buy and sell government securities directly with the Fed. Primary dealers also submit daily reports of market activity and security positions held to the Fed and are subject to its informal oversight. Primary dealers are considered the largest players in the U.S. Treasury securities market.
Prime Paper. Commercial paper of high quality. Highest rated paper is A-1+/A-1 by S&P and P- 1 by Moody’s.
Principal. Face value of a financial instrument on which interest accrues. May be less than par value if some principal has been repaid or retired. For a transaction, principal is par value multiplied by price and includes any premium or discount.
Prudent Investor Standard. Standard that requires that when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, 11 prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. More stringent than the “prudent person” standard as it implies a level of knowledge commensurate with the responsibility at hand.
Range Note. A type of structured note that accrues interest daily at a set coupon rate that is tied to an index. Most range notes have two coupon levels; a higher accrual rate for the period the index is within a designated range, the lower accrual rate for the period that the index falls outside the designated range. This lower rate may be zero and may result in zero earnings.
Rate of Return. Amount of income received from an investment, expressed as a percentage of the amount invested.
Realized Gains (Losses). The difference between the sale price of an investment and its book value. Gains/losses are “realized” when the security is actually sold, as compared to “unrealized” gains/losses which are based on current market value. See “Unrealized Gains (Losses).”
Reference Bills: FHLMC’s short-term debt program created to supplement its existing discount note program by offering issues from one month through one year, auctioned on a weekly or on an alternating four-week basis (depending upon maturity) offered in sizeable volumes ($1 billion and up) on a cycle of regular, standardized issuance. Globally sponsored and distributed, Reference Bill issues are intended to encourage active trading and market -making and facilitate the development of a term repo market. The program was designed to offer predictable supply, pricing transparency and liquidity, thereby providing alternatives to U.S. Treasury bills. FHLMC’s Reference Bills are unsecured general corporate obligations. This program supplements the corporation’s existing discount note program. Issues under the Reference program constitute the same credit standing as other FHLMC discount notes; they simply add organization and liquidity to the short-term Agency discount note market.
Reference Notes: FHLMC’s intermediate -term debt program with issuances of 2, 3, 5, 10 and 30-year maturities. Initial issuances range from $2 - $6 billion with re -openings ranging $1 - $4 billion. The notes are high- quality bullet structures securities that pay interest semiannually.
Issues under the Reference program constitute the same credit standing as other FHLMC notes; they simply add organization and liquidity to the intermediate- and long-term Agency market.
Repurchase Agreement (Repo). A short-term investment vehicle where an investor agrees to buy securities from a counterparty and simultaneously agrees to resell the securities back to the counterparty at an agreed upon time and for an agreed upon price. The difference between the purchase price and the sale price represents interest earned on the agreement. In effect, it represents a collateralized loan to the investor, where the securities are the collateral. Can be DVP, where securities are delivered to the investor’s custodial bank, or “tri -party” where the securities are delivered to a third party intermediary. Any type of security can be used as “collateral,” but only some types provide the investor with special bankruptcy protection under the law. Repos should be undertaken only when an appropriate BMA approved master repurchase agreement is in place.
Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view of the original seller of securities. Used by dealers to finance their inventory of securities by essentially borrowing at short-term rates. Can also be used to leverage a portfolio and in this sense, can be considered risky if used improperly.
12 Safekeeping. Service offered for a fee, usually by financial institutions, for the holding of securities and other valuables. Safekeeping is a component of custody services.
Secondary Market. Markets for the purchase and sale of any previously issued financial instrument.
Securities Lending. An arrangement between and investor and a custody bank that allows the custody bank to “loan” the investors investment holdings, reinvest the proceeds in permitted investments, and shares any profits with the investor. Should be governed by a securities lending agreement. Can increase the risk of a portfolio in that the investor takes on the default risk on the reinvestment at the discretion of the custodian.
Sinking Fund. A separate accumulation of cash or investments (including earnings on investments) in a fund in accordance with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other entity responsible for debt service), for the purpose of assuring timely availability of moneys for payment of debt service. Usually used in connection with term bonds.
Spread. The difference between the price of a security and similar maturity U.S. Treasury investments, expressed in percentage terms or basis points. A spread can also be the absolute difference in yield between two securities. The securities can be in different markets or within the same securities market between different credits, sectors, or other relevant factors.
Standard & Poor's. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
STRIPS (Separate Trading of Registered Interest and Principal of Securities). Acronym applied to U.S. Treasury securities that have had their coupons and principal repayments separated into individual zero- coupon Treasury securities. The same technique and "strips" description can be applied to non-Treasury securities (e.g. FNMA strips).
Structured Notes. Notes that have imbedded into their structure options such as step- up coupons or derivative- based returns.
Supranational Debt. The debt of an international or multi-lateral financial agency used to finance economic and infrastructure development, environmental protection, poverty reduction and renewable energy around the world. Supranational debt is typically rated AAA by most NRSRO’s as theses entities are well-capitalized, have significant capital commitments from a diverse capital base, conservative lending and risk management practices and strong supervision.
Swap. Trading one asset for another.
TAP Notes: Federal Agency notes issued under the FHLB TAP program. Launched in 6/99 as a refinement to the FHLB bullet bond auction process. In a break from the FHLB’s traditional practice of bringing numerous small issues to market with similar maturities, the TAP Issue Program uses the four most common maturities and reopens them up regularly through a competitive auction. These maturities (2, 3, 5 and 10 year) will remain open for the calendar quarter, after which they will be closed and a new series of TAP issues will be opened to replace them. This reduces the number of separate bullet bonds issued, but generates enhanced awareness and liquidity in the marketplace through increased issue size and secondary market volume.
13 Tennessee Valley Authority (TVA). One of the large Federal Agencies. A wholly owned corporation of the United States government that was established in 1933 to develop the resources of the Tennessee Valley region in order to strengthen the regional and national economy and the national defense. Power operations are separated from non-power operations.
TVA securities represent obligations of TVA, payable solely from TVA's net power proceeds, and are neither obligations of nor guaranteed by the United States. TVA is currently authorized to issue debt up to $30 billion.
Under this authorization, TVA may also obtain advances from the U.S. Treasury of up to $150 million. Frequent issuer of discount notes, agency notes and callable agency securities.
Total Return. Investment performance measured over a period of time that includes coupon interest, interest on interest, and both realized and unrealized gains or losses. Total return includes, therefore, any market value appreciation/depreciation on investments held at period end.
Treasuries. Collective term used to describe debt instruments backed by the U.S. Government and issued through the U.S. Department of the Treasury. Includes Treasury bills, Treasury notes, and Treasury bonds. Also a benchmark term used as a basis by which the yields of non-Treasury securities are compared (e.g., "trading at 50 basis points over Treasuries").
Treasury Bills (T-Bills). Short-term direct obligations of the United States Government issued with an original term of one year or less. Treasury bills are sold at a discount from face value and do not pay interest before maturity. The difference between the purchase price of the bill and the maturity value is the interest earned on the bill. Currently, the U.S. Treasury issues 4 -week, 13- week and 26-week T-Bills
Treasury Bonds. Long-term interest-bearing debt securities backed by the U.S. Government and issued with maturities of ten years and longer by the U.S. Department of the Treasury. The Treasury stopped issuing Treasury Bonds in August 2001.
Treasury Notes. Intermediate interest-bearing debt securities backed by the U.S. Government and issued with maturities ranging from one to ten years by the U.S. Department of the Treasury.
The Treasury currently issues 2-year, 5-year and 10-year Treasury Notes.
Trustee. A bank designated by an issuer of securities as the custodian of funds and official representative of bondholders. Trustees are appointed to insure compliance with the bond documents and to represent bondholders in enforcing their contract with the issuer.
Uniform Net Capital Rule. SEC regulation 15C3-1 that outlines the minimum net capital ratio (ratio of indebtedness to net liquid capital) of member firms and non-member broker/dealers.
Unrealized Gains (Losses). The difference between the market value of an investment and its book value. Gains/losses are “realized” when the security is actually sold, as compared to “unrealized” gains/losses which are based on current market value. See also “Realized Gains (Losses).”
Variable-Rate Security. A bond that bears interest at a rate that varies over time based on a specified schedule of adjustment (e.g., daily, weekly, monthly, semi -annually or annually). See also “Floating Rate Note.”
Weighted Average Maturity (or just “Average Maturity”). The average maturity of all securities and investments of a portfolio, determined by multiplying the par or principal value of each security or investment by its maturity (days or years), summing the products, and dividing 14 the sum by the total principal value of the portfolio. A simple measure of risk of a fixed- income portfolio.
Weighted Average Maturity to Call. The average maturity of all securities and investments of a portfolio, adjusted to substitute the first call date per security for maturity date for those securities with call provisions.
Yield Curve. A graphic depiction of yields on like securities in relation to remaining maturities spread over a time line. The traditional yield curve depicts yields on U.S. Treasuries, although yield curves exist for Federal Agencies and various credit quality corporates as well. Yield curves can be positively sloped (normal) where longer-term investments have higher yields, or “inverted” (uncommon) where longer-term investments have lower yields than shorter ones.
Yield to Call (YTC). Same as “Yield to Maturity,” except the return is measured to the first call date rather than the maturity date. Yield to call can be significantly higher or lower than a security’s yield to maturity.
Yield to Maturity (YTM). Calculated return on an investment, assuming all cash flows from the security are reinvested at the same original yield. Can be higher or lower than the coupon rate depending on market rates and whether the security was purchased at a premium or discount.
There are different conventions for calculating YTM for various types of securities.
Yield. There are numerous methods of yield determination. In this glossary, see also "Current Yield,” "Yield Curve," "Yield to Call" and "Yield to Maturity." PSA with Chandler Asset Management Inc.
EXHIBIT D
CERTIFICATES OF INSURANCE