CITY OF RANCHO CUCAMONGA
STATEMENT OF
INVESTMENT POLICY
2024
Prepared by the Administrative Services Group
Jim Harrington, Treasurer
Elisa Cox, Assistant City Manager/Deputy Treasurer
Noah Daniels, Finance Director
Hiram Zavala, Management Analyst II
ATTACHMENT 1
CITY OF RANCHO CUCAMONGA
STATEMENT OF INVESTMENT POLICY
TABLE OF CONTENTS
Introduction ........................................................................................................ 1 Scope .................................................................................................................. 1 Delegation of Authority ................................................................................... 1-2 Prudence ............................................................................................................ 2 Objective ......................................................................................................... 2-3 Ethics and Conflicts of Interest ......................................................................... 3-4 Authorized Financial Dealers and Institutions ..................................................... 4 Authorized and Suitable Investments .............................................................. 4-8 Prohibited Investments ....................................................................................... 8 Review of Investment Portfolio .......................................................................... 8 Investment Pools ............................................................................................. 8-9 Collateralization .................................................................................................. 9 Safekeeping and Custody .................................................................................... 9 Diversification ................................................................................................... 10 Maximum Maturities ........................................................................................ 10 Internal Control ................................................................................................ 10 Performance ................................................................................................ 10-11 Reporting .......................................................................................................... 11 Investment Policy Adoption .............................................................................. 12 Glossary ....................................................................................................... 13-19
Statement of Investment Policy Page 1
CITY OF RANCHO CUCAMONGA
STATEMENT OF INVESTMENT POLICY
1.0 INTRODUCTION
This Statement of Investment Policy (“Policy”) provides guidelines for the prudent investment of the City of Rancho Cucamonga’s (“City”) idle cash and outlines the policies essential to ensuring the safety and financial strength of the City’s investment portfolio. Th is Policy is based on the principles of prudent money management and conforms to al l federal, state, and l ocal laws governing the inves tment of public funds . The goal of this Policy is to enhance the economic status of the City by protecting its pooled cash and to invest public funds to:
1. Meet the daily cash flow needs of the City;
2. Comply with all laws of the State of California regarding investment of public funds; and
3. Achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default.
2.0 SCOPE
This Policy applies to the investment activities of all funds of the City. These funds are accounted for in the City’s Annual Comprehensive Financial Report ( ACFR) and include: General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Proprietary Funds, as well as Agency Funds and a Private-Purpose Trust Fund.
Bond proceeds shall be invested in accordance with the requirements and restrictions outlined in bond documents as approved by the City Council . If the bond documents are silent as to the permitted investments, the bond proceeds will be invested in the securities permitted by this Policy. Notwithstanding the other provisions of this Policy, the percentage limitations listed elsewhere in this Policy do not apply to bond proceeds.
3.0 DELEGATION OF AUTHORITY
The City Council, as permitted under California Government Code §53607, delegates the responsibility to manage the City’s investment portfolio to the City Treasurer for a period of one- year, unless revoked. Subject to review, the City Council may renew the delegation of authority each year. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials, and their procedures, in the absence of the City Treasurer. Pursuant to Government Code §1190, the City
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Treasurer appoints the Assistant City Manager to act as Deputy Treasurer with responsibility to manage the City’s investment portfolio on a daily basis. The City Treasurer/Deputy Treasurer will maintain on file a written authorization designating those individuals to whom daily investment activities, such as carrying out the City Treasurer's/Deputy Treasurer’s investment instructions, confirming treasury transactions, and other routine activities, have been delegated.
As authorized by the City Council, the City may also utilize the services of an independent investment advisor to assist with the investment program under the supervision of the City Treasurer/Deputy Treasurer. The investment advisor shall follow this Policy and such other written instructions as are provided by the City. The investment advisor shall never take possession of the City’s funds or assets.
4.0 PRUDENCE
All persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard, as described in Government Code section 53600.3 which states:
When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.
The City Treasurer/Deputy Treasurer and authorized persons acting in accordance with this Policy and the “ prudent investor” standard and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments, whenever possible.
5.0 OBJECTIVE
The objective of the investment portfolio is to meet the short- and long-term cash flow demands of the City. To achieve this objective, the portfolio will be structured to provide safety of principal and liquidity, while then providing a reasonable return on investments.
The authority governing investments for municipal governments is set forth in Government Code Sections 53600 et seq. City strategy has been to limit investments more stringently than required under state law. The primary objectives of investment activities, in order of priority are:
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1. Safety - Safety and risk associated with an investment refers to the potential loss of principal, interest, or combination thereof. The City only invests in those instruments that are considered safe. Each investment transaction shall be undertaken in a manner that seeks to ensure , whenever possible , that all capital losses are avoided, whether from securities default, broker/dealer default, or erosion of market value . The City shall seek to preserve principal by mitigating two types of risk: credit risk and market risk.
• Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in only very safe securities and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm the City’s cash flow.
• Market risk, defined as the risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by struc turing the portfolio to align with the City’s anticipated cash flow needs. It is explicitly recognized, however, that in a diversified portfolio , occasional measured lo sses may occur and must be considered within the context of overall investment return and liquidity needs.
2. Liquidity - Liquidity is an important investment quality especially when the need for unexpected funds occasionally occurs. The City’s investment po rtfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated.
3. Yield - The City’s investment portfolio shall be designed with the objective of attaining a reasonable market rate of retu rn throughout budgetary and economic cycles, commensurate with the City’s investment risk constraints as long as it does not diminish the objectives of Safety and Liquidity.
6.0 ETHICS AND CONFLICTS OF INTEREST
The City Treasurer/Deputy Treasurer and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions.
Employees and investment officers shall disclose any material financial interest in financial institutions that conduct business with the City , and they s hall further disclose any personal financial/investment positions that could be affected by the performance of the City’s operations and functions or by the management of the City’s investment program. The Treasurer/Deputy Treasurer and investment employees are required to file annual disclosure statements as required by the Fair Political Practices Commission (FPPC).
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7.0 AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City Treasurer/Deputy Treasurer shall only execute investment transactions with those direct issuers authorized by this Policy (LAIF, LGIPs such as CAMP, money market funds, and banks). All other investment transactions will be conducted through the City’s investment advisor who will maintain their own list of approved issuers, brokers/dealers, and financial institutions with which to conduct transactions on the City’s behalf.
8.0 AUTHORIZED AND SUITABLE INVESTMENTS
The City is further governed by California Government Code Sections 53600 et. seq. to invest in specific types of securities. The City has further limited the types of sec urities in which it may invest. In the event an apparent discrepancy is found between this Policy and the Government Code, the more restrictive parameters will take precedence. Percentage holding limits listed in this Policy apply at the time the security is purchased. Credit ratings, where shown, specify the minimum credit rating category required at purchase. In the event a security held by the City is subject to a credit rating change that brings it below the minimum credit ratings specified in this Policy, the City Treasurer/Deputy Treasurer should notify the City Council of the change in the next monthly investment report. The course of action to be followed will then be decided on a case-by-case basis, considering such factors as the reason for the change, prognosis for recovery or further rate drops, and the market price of the security. Any security not listed in Section 8.0 is not a valid investment for the City. The concise list of approved securities is as follows:
• United States Treasury Securities: United States Treasury Bills, Bonds, and Notes or those instruments for which the full faith and credit of the United States are pledged for payment of principal and interest.
There is no limit on the percentage of the portfolio that can be invested in this category.
• United States Federal Agencies: Obligations issued by Federal Agencies or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
There is no limit on the percentage of the portfolio that can be invested in this category.
• Supranational Securities: United States 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. The maximum remaining maturity for supranational obligations must be
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five years or less, and they must be eligible for purchase and sale within the United States.
These investments must be rated in a rating category of “AA” or better by a NRSRO.
There is a 30% limit on the percentage of the portfolio that can be invested in this category.
The maximum remaining maturity of any investment in this category shall not exceed five- years.
• Municipals Notes or Bonds: Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the 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 states, in addition to California.
Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency.
Purchases are limited to securities rated in a rating category of “A” (long-term) or “A-1” (short-term) or their equivalents or better by a Nationally Recognized Statistical Rating Organization (“NRSRO”). (The minimum rating shall apply to any issuer , irrespective of any credit enhancement).
There is a 30% limit on the percentage of the portfolio that can be invested in this category.
• Negotiable Certificates of Deposit: Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association, a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases are limited to securities rated in a rating category of “A” (long-term) or “A-1” (short-term) or their equivalents or better by an NRSRO.
There is a 30% limit on the percentage of the portfolio that can be invested in this category.
• 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. Fo r securities eligible for investment under this subdivision not issued or guaranteed by the U.S.
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Treasury or a Federal Agency, the following limitations apply: Securities shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO.
There is a 20% limit on the percentage of the portfolio that can be invested in this category.
The maximum remaining maturity of any investment in this category shall not exceed five- years.
• Medium-Term Notes: Medium-Term Notes are defined as all corporate and depository institution debt securities. They must be issued by corporations organized and operating within the United States. Notes eligible for investment shall be rated in a rating category of “A” or its equivalent or better by an NRSRO.
There is a 30% limit on the percentage of the portfolio that can be invested in this category.
The maximum remaining maturity of any investment in this category shall not exceed five- years.
• Bankers’ Acceptances: Bankers’ acceptances, otherwise known as bills of exchange or time drafts, that are drawn on and accepted by a commercial bank. Purchases are limited to issuers that have short-term debt rated in a rating category of “A-1” or its equivalent or higher by an NRSRO.
There is a 40% limit on the percentage of the portfolio that can be invested in this category.
The maximum maturity shall not exceed 180 days.
• Commercial Paper: Must be of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by an NRSRO.
The entity that issues the commercial paper shall meet all the following conditions: (i) is organized and operating in the United States as a general corporation, (ii) has total assets in excess of five hundred million dollars ($500,000,000), and (iii) has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by an NRSRO.
T
here is a 40% limit on the percentage of the portfolio that can be invested in this category (the limit is 25% for agencies that have less than $100 million of investment assets). The maximum maturity shall not exceed 270 days.
• Repurchase Agreements (Repos): An executed Master Repurchase Agreement is required between the City and the broker dealer or financial Institution. The market value of securities that underlies a repurchase agreement shall be valued at 102 percent or greater of the funds
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borrowed against those securities and the value shall be adjusted no less than quarterly.
Collateral is restricted to U.S. Treasury and Federal Agency securities.
There is a 20% limit on the percentage of the portfolio that can be invested in this category.
The maximum maturity of any investment in this category shall not exceed one year.
• State of California Local Agency Investment Fund (LAIF): The Local Agency Investment Fund (LAIF) is a State of California managed investment pool established by the State Treasurer for the benefit of local agencies.
There is no limit on the percentage of the portfolio that can be invested in this category. The maximum investment in LAIF accounts is dependent upon limits established under the Local Agency Investment Fund guidelines and not Government Code.
• Local Government Investment Pool (LGIP): S hares of beneficial interest issued by a joint powers authority (JPA) organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in Government Code. Whenever the City has any funds invested in a LGIP, the City Treasurer/Deputy Treasurer shall maintain on file a copy of the LGIP’s current information statement and periodically review the LGIP’s investments.
There is no limit on the percentage of the portfolio that can be invested in this category.
• Money Market Funds (“MMF”): Government Money Market Funds meeting either of the following criteria: (A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs, or (B) Retained an investment advisor with not less than five years’ experience and registered or exempt from registration with the SEC, with assets under management in excess of five hundred million dollars ($500,000,000).
Whenever the City has any funds invested in an MMF, the City Treasurer/Deputy Treasurer shall maintain on file a copy of the MMF’s current information statement. A maximum of 20% of the City’s portfolio may be invested in this category.
There is a 20% limit on the percentage of the portfolio that can be invested in this category.
• Bank Deposits: FDIC insured or collateralized demand deposit accounts, savings accounts, market rate accounts, certificates of deposits and other types of bank deposits in financial institutions located in California. The amount on deposit in any financial instit ution shall not exceed the shareholder's equity. To be eligible to receive City deposits, the financial institution must have received a minimum overall satisfactory rating, under the Community Redevelopment Act, for meeting the credit needs of California Communities in its most recent evaluation. Bank deposits are required to be collateralized as specified under Government Code Section 53630 et seq. The City Treasurer/Deputy Treasurer, at his/her discretion, may
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waive the collateralization requirements for any portion that is covered by federal deposit insurance. The City shall have a signed agreement with any depository accepting City funds per Government Code Section 53649. There is no limit on the percentage of the portfolio that may be invested in this category.
There is no limit on the percentage of the portfolio that can be invested in this category.
However, a maximum of 10 percent of the portfolio may be invested in time deposits.
9.0 PROHIBITED INVESTMENTS
Any security type or structure not specifically approved by this policy is hereby specifically prohibited. Security types which are thereby prohibited include, but are not limited to, inverse floaters, derivatives, range notes, interest only strips that are derived from a pool of mortgages, or in any investment that could result in zero interest accrual if held to maturity.
10.0 REVIEW OF INVESTMENT PORTFOLIO
The securities held by the City must be in compliance with Section 8.0 “Authorized and Suitable Investments” at the time of purchase. If, subsequent to the date of purchase , a security is determined to be no longer in compliance with Section 8.0, the City Treasurer/Deputy Treasurer shall report the non -compliant security to the City Council and shall include a disclosure in the monthly Investment Report if the security is held at the date the report is prepared.
The City’s external, independent auditors perform an annual review of the City ’s Investment Policy, investment process, and related internal controls. The annual review process is performed as part of the City’s annual external financial audit.
11.0 INVESTMENT POOLS
The Local Agency Investment Fund (LAIF) is a voluntary investment alternative for California’s local governments and special districts authorized by the California Government Code. LAIF is a State of California managed investment pool established by the State Treasurer for the benefit of local agencies.
The City’s participation in LAIF was approved by the City Council with other authorized investments in July 1987. It is a permitted investment with the knowledge that the fund may invest in some vehicles allowed by statute but not otherwise authorized under the City’s authorized investments. All securities in LAIF are purchased under the authority of Government Code Sections 16430 and 16480. All investments are purchased at market value, and market valuation is conducted monthly.
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The City may also invest in shares of beneficial interest issued by a joint powers authority (“JPA”) organized pursuant to Section 6509.7 of the California Government Code that invests in the securities and obligations specified in the code and which shall retain an investment advisor that meets the following criteria:
1. Be registered or exempt from registration with the Securities and Exchange Commission;
2. Have assets under management in excess of five hundred million dollars ($500,000,000), and
3. Have not less than five (5) years of experience investing in the securities and ob ligations authorized herein.
12.0 COLLATERALIZATION
All bank deposits must be FDIC insured or collateralized in accordance with Government Code Section 53630 et seq.
13.0 SAFEKEEPING AND CUSTODY
To protect against potential losses by the collapse of individual securities dealers, al l trades will be transacted on a delivery-versus-payment (DVP) basis. This means that the securities shall be delivered to the City’s designated custodian upon receipt of the payment by the City. The securities shall be held in safekeeping by a third -party custodian, acting as agent for the City under the terms of a custody agreement executed by the bank and City. The third -party custodian shall be required to issue a monthly safekeeping report to the City that lists the specific investment, rate, maturity and other pertinent information.
The only exception to the foregoing shall be dep ository accounts and security purchases made with investment pools and certificates of deposit since the purchased securities are not deliverable. Evidence of these investments will be held in the City’s vault . No outside broker/dealer or advisor may have access to City funds, accounts or investments, and any transfer of funds to or through an outside broker/dealer must be approved by the City Treasurer/Deputy Treasurer.
The City strives to maintain the level of investment of all funds as near 100% as possible, through daily and projected cash flow determinations. Idle cash management and investment transactions are the responsibility of the City Treasurer/Deputy Treasurer.
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14.0 DIVERSIFICATION
It is the policy of the City to diversify its investment portfolio. Assets shall be diversified to eliminate the risk of loss resulting from over-concentration of assets in a specific issuer, security type, and maturities. Diversification strategies shall be determined and revised periodically. The purpose of diversifying is to reduce overall portfolio risks while attaining an average market rate of return; therefore, it needs to be conceptualized in terms of maturity, instrument types and issuer. To promote diversification, no more than 5% of the portfolio may be invested in the securities of any one issuer, regardless of security type; excluding U.S. Treasuries, federal agencies, supranationals, and pooled investments such as LAIF, money market funds, or local government investment pools.
15.0 MAXIMUM MATURITIES
To the extent possible, the City will attempt to match security maturities to anticipated cash flow requirements. Where this Policy does not list a specific maturity limit, this Policy permits up to 10% of the portfolio to be invested in securities with remaining maturities between 5 and 10 years. For purposes of compliance with this Policy, an investment’s term or remaining maturity shall be measured from the settlement date to final maturity.
16.0 INTERNAL CONTROL
The City Treasurer/Deputy Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The procedures should include references to individuals authorized to execute transactions or transfers, safekeeping agreements, repurchase agreements, wire transfer agreements, collateral/depository agreements and banking services contracts, as appropriate.
The internal control structure shall be designed to provide reasonable assurance th at 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 costs and benefits requires estimates and judgement by management. The City Treasurer/Deputy Treasurer shall establish an annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures set forth in this Policy. Also, see Section 9.0 of this Policy.
17.0 PERFORMANCE
The investment performance of the City’s operating portfolio shall be evaluated and compared to an appropriate benchmark in order to assess the success of the investment program relative to the City’s Safety, Liquidity, and Yield objectives. This review will be conducted annually with the City Treasurer, City Manager, Assistant City Manager, and Finance Director, and, if necessary,
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consideration will be given to making adjustments to future investment strategies as market conditions permit.
18.0 REPORTING
The City Treasurer shall prepare and submit a monthly investment report to the City Council and City Manager, which shall include all securities, excluding those held by and invested through trustees. The report shall include the following:
• A monthly report of transactions.
• The type of investment, name of the issuer, date of purchase, date of maturity, par and dollar amount invested in all securities.
• The weighted average maturity of the investments.
• Any funds, investments, or programs including loans that are under the management of contracted parties.
• A description of the compliance with this Policy.
• A statement of the City’s ability to meet its pooled expenditure requirements for the next six months or provide an explanation as to why sufficient money shall or may not be available.
• The investment portfolio report shall include current market value information for all investments. A monthly market value will be obtained for each security owned by the City.
For purposes of reporting, the market value of each security may be obtained from the City’s custodian bank or other pricing source(s) utilized by the City’s investment advisor.
The City Treasurer shall be responsible for reviewing and modifying investment guidelines as conditions warrant and is required to submit same for re -approval to the City Council on an annual basis with or without changes. However, the City Treasurer may, at any time, further restrict the items approved for purchase as deemed appropriate.
The basic premise underlying the City’s investment philosophy is, and will continue to be, to ensure that money is always safe and available when needed.
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GLOSSARY OF TERMS
The glossary is provided for general information only. It is not to be consider a part of the Policy for determining Policy requirements or terms.
AGENCIES: Agencies of or sponsored by the Federal government set up to supply credit to various classes of institutions. Examples include Federal Home Loan Banks (FHLB), Federal Farm Credit Bank (FFCB), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA).
ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report of the City of Rancho Cucamonga. It includes five combined statements for each individual fund and account group prepared in conformity with
Generally Accepted Accounting Principles (GAAP). It also includes supporting schedules necessary to demonstrate compliance with GAAP, finance‐related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section.
ASKED: The price at which securities are offered by a selling party to a buying party.
ASSET‐BACKED SECURITIES (ABS):
Securities whose income payments and hence value is
derived from and collateralized (or "backed") by a specified pool of underlying assets which are receivables. The pools of underlying assets can comprise common payments credit cards, auto loans, mortgage loans, and other types of assets. Interest and principal are paid to investors from borrowers who are paying down their debt.
BANKERS’ ACCEPTANCE (BA): A draft, bill, or exchange accepted by a bank or trust company.
The accepting institution guarantees payment of the bill, as well as the issuer.
BASIS POINT: One basis point is one‐hundredth of a percent (i.e., 0.01%).
BEAR MARKET: A period of generally pessimistic attitudes and declining market prices.
BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investments.
BID:
The price offered by a buyer of securities. (When selling securities, you ask for a bid.)
BOND EQUIVALENT YIELD: The basis on which yields on notes and bonds are quoted.
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BOOK VALUE (COST VALUE): The value at which a debt security is shown on the holder’s balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount.
BROKER/DEALER: An individual or firm that brings buyers and sellers together in a securities transaction.
BULL MARKET: A
period of generally optimistic attitudes and increasing market prices.
CALLABLE SECURITIES: A security that is redeemable by the issuer before the scheduled maturity.
Bonds are usually called when the interest rates fall so significantly that the issuer can save money by floating new bonds at lower rates.
CALIFORNIA ASSET MANAGEMENT
PROGRAM (“CAMP”): A California Joint Powers Authority (“JPA”) established in 1989 to provide California public agencies with professional investment services. Investments offered through the Cash Reserve Portfolio (the “Pool” or the “CAMP Pool”) and CAMP Term are permitted for all local agencies under California Government Code Section 53601(p). The Program also offers educational resources, market updates and arbitrage rebate compliance services.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a Certificate.
Large denomination CD’s are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure repayment of a loan.
Also, refers to securities pledged by a bank to secure deposits of public monies.
CORPORATE MEDIUM‐TERM NOTE: Corporate and depository institution debt securities with a maximum remaining maturity of five years or less, 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.
COUPON: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a payment date.
DEALER: A
dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
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DELIVERY VERSUS PAYMENT (DVP): Delivery of securities with a simultaneous exchange of money for the securities.
DERIVATIVES: Financial products dependent for their value on (or derived from) an underlying financial instrument, a commodity, or an index.
DISCOUNT: The difference between the cost price of a security and its maturity when quoted at
lower than face value. A security selling below original offering price shortly after sale also is at a discount.
DISCOUNT SECURITIES: Non‐interest bearing, money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g. U.S. Treasury Bills.
DIVERSIFICATION: Dividing
investment funds among a variety of securities offering independent returns.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits up to $250,000 per deposit.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal funds to another.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12
regional banks), which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district bank.
FEDERAL NATIONAL
MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder‐owned corporation. The corporation’s purchases include a variety of adjustable mortgages, second loans, and fixed‐rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically
meets to set Federal Reserve guidelines regarding purchases
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and sales of Government Securities in the open market to influence the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and comprising a seven‐member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks
that are members of the system.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB): The independent organization that establishes and improves standards of accounting and financial reporting for the United States, state and local governments.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by
GNMA and issued by mortgage bankers,
commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term “pass‐through” is often used to describe Ginnie Maes.
INTEREST ONLY STRIP: Investments created by separating the principal and interest portions of a debt security or pool of securities into separate investments. Interest only strips are most common with mortgage‐backed securities. The investor benefits if interest rates rise and principal repayments slow, but if interest rates fall and principal repayments accelerate, the investor will receive less interest. Once the principal amount has been repaid, interest payments stop, and the value of an interest only strip falls to zero.
INVERSE FLOATER: Debt securities that have a floating coupon rate that adjusts inversely to movements in a benchmark interest rate. They can offer a hedge against falling interest rates. However, the structure of these investments can magnify changes in the security’s market value. Furthermore, if interest rates rise, the investor may end up with a security that pays little to no interest with a diminished security value.
INVESTMENT AGREEMENTS: An
agreement with a financial institution to borrow public funds subject to certain negotiated terms and conditions concerning collateral, liquidity and interest rates.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of
all funds from political subdivisions
that are placed in the custody of the State Treasurer for investment and reinvestment.
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LOCAL GOVERNMENT INVESTMENT POOL (LGIP): A type of pooled investment program formed by a joint powers authority in which funds from its local agency investors are aggregated together for investment purposes.
MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold.
MARKET RATE
OF RETURN: A rate of return commensurate with the market for similar securities (maturity, credit rating, duration and liquidity) would be considered a market rate of return.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase–reverse, repurchase agreements that establishes each party’s rights in
the transactions. A master agreement will often specify, among other things, the right of the buyer‐lender to liquidate the underlying securities in the event of default by the seller‐borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due and payable.
MONEY
MARKET: The market in which short‐term debt instruments (bills, commercial paper, bankers’ acceptances, etc.) are issued and traded.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO): A credit rating agency approved by the U.S. Securities and Exchange Commission (SEC) that provides credit ratings that are used by the U.S. government
and investors as benchmarks. Examples include
Standard & Poor’s Corporation, Moody’s Investor Services, Inc. and Fitch, Inc.
OFFER: The price asked by a seller of securities. (When buying securities, you ask for an offer.)
OPEN MARKET OPERATIONS: Federal Reserve activity. Under the Federal Reserve Act, the Fed uses purchases
and sales of Government and Federal Agency securities to add to or subtract from commercial bank reserves. Goals are to sustain economic growth, high employment and reasonable price stability.
PAPER GAIN OR LOSS: Term used for unrealized gain or loss on securities being held in a portfolio based on comparison of current market quotes and their original cost. This situation exists if the security is held while there is a difference between cost value (book value) and the market value.
PORTFOLIO: Collection of securities held by an investor.
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PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity, positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker/dealers, banks and a few unregulated firms.
PRUDENT INVESTOR STANDARD: An investment standard to be followed by those authorized to make investment decisions on behalf of a local agency. Those authorized shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of that agency.
RANGE NOTE: A structured investment that pays interest as long as a benchmark interest rate is within a specified interest rate range. These securities provide higher than market interest rates, but the investor will not receive any interest if the benchmark interest rate moves outside the
specified range. The investor is betting interest rates will remain relatively stable.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond; the current income return.
SAFEKEEPING: The service
to customers by banks and trust companies when the bank or trust company stores the securities for protection, receives coupon payments and redeems issues at maturity.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution of securities.
SECURITIES & EXCHANGE COMMISSION:
Agency created by Congress to protect investors in securities transactions by administering securities legislation.
SEC RULE 15(C) 3‐1: See Uniform Net Capital Rule.
SUPRANATIONALS: Development banks that share the same goal of providing an improved standard of living in their member countries, but each having different mandates. There are three banks (supranationals) in which California local agencies can invest in their debt obligations; the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC) and Inter‐American Development Bank (IADB).
TREASURY BILLS: A non‐interest‐bearing discount security issued by the U.S. Treasury to finance the national debt.
Most bills are issued to mature in three months, six months, or one year.
TREASURY BONDS: Long‐term coupon‐bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of over 10 years.
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TREASURY NOTES: Medium‐term coupon‐bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from one to 10 years.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker‐dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15‐1; also, called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities. Liquid capital includes cash and assets easily converted to cash without penalty.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
YIELD TO MATURITY: The current income yield on an investment, minus any premium above par, or plus any discount from par in the purchase price with the adjustment spread over the period from date of purchase to maturity of
the bond.