City of San Leandro
INVESTMENT POLICY STATEMENT
Legislative History:
Approved via: CC Res. 1999-142, 09/20/99
CC Res. 2000-121, 07/16/00
CC Res. 2001-214; 12/17/01
CC Res. 2003-144; 05/22/03
CC Res. 2004-116; 06/19/04
CC Res. 2005-081; 06/20/05
CC Res. 2006-063; 06/19/06
CC Res. 2007-098; 07/16/07
CC Res. 2008-083, 07/21/08
CC Res. 2009-108, 07/20/09
CC Res. 2010-072, 06/21/10
CC Res. 2011-111, 06/20/11
CC Res. 2012-093, 07/16/12
CC Res. 2013-063, 05/20/13
CC Res. 2014-048, 06/02/14
CC Res. 2015-111, 06/15/15
CC Res. 2016-080, 06/20/16
CC Res. 2017-087, 06/19/17
CC Res. 2018-062, 06/18/18
CC Res. 2019-106, 06/17/19
CC Res. 2020-097, 07/20/20
CC Res. 2021-079, 05/17/21
CC Res. 2022-066, 05/02/22
CC Res. 2023-047, 05/15/23
Attachment B
San Leandro Investment Policy Statement Page 2 of 18
I. Policy Statement
The City of San Leandro (City) invests public funds not required to meet current City obligations in compliance with the State of California (State) Government Code and this policy. The City’s overall goal is to invest as close to 100% of these funds as possible to provide the maximum return and security while meeting the City’s daily cash flow needs.
II. Policy Scope
This investment policy is applicable to all financial assets of the City of San Leandro, the Successor Agency to the Redevelopment Agency of the City of San Leandro, the City of San Leandro Parking Authority, the San Leandro Public Financing Authority, and the San Leandro Economic Development Agency. These assets are accounted for in the City’s Annual Comprehensive Financial Report in the following funds:
• General Fund
• Special Revenue Funds
• Capital Project Funds
• Debt Service Funds
• Enterprise Funds
• Internal Service Funds
• Agency Funds
This policy applies to component units and funds subsequently established by the City.
III. Delegation of Investment Authority/Prudence
California Government Code Sections 53600 and 53646 states that the ultimate responsibility for the prudent investment of public funds rests with the governing body, or City Council. Through City Council Resolution No. 94-143, the City Council has delegated investment authority to the Finance Director and his/her designee. The Finance Director and his/her designee are trustees and fiduciaries that shall use the “prudent investor” standard in managing the City’s portfolio. When investing, reinvesting, purchasing acquiring, exchanging, selling, or managing public funds, the 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 City, 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 City. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.
The City may engage the services of one or more external investment managers to assist in the management of the City’s investment portfolio in a manner consistent with the City’s objectives. Such managers must be registered under the Investment Advisers Act of 1940.
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IV. Investment Objectives
1. Safety: Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.
2. Liquidity: The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated.
3. Yield: The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints for safety and liquidity needs. Return on investment is of least importance compared to the safety and liquidity of the City’s assets as described above.
Other: Investments are to be made that will bear in mind the responsibility of city government to its citizens. Alternative investments which enhance the quality of life will be given full consideration.
V. Investment Criteria
The City invests its funds in accordance with the following criteria:
1. Ensure that funds not needed for current City obligations are fully invested.
2. Ensure that yield-restricted funds are monitored to ensure compliance with federal arbitrage rebate requirements.
3. Ensure that the specific requirements outlined in the Bond Indentures of Trust are maintained.
VI. Ethics and Conflicts of Interest
Officers and employees involved in the investment process will refrain from personal business activity that would conflict with the proper execution of the investment program or would impair their ability to make impartial investment decisions. Employees and investment officials will disclose to the Finance Director any material interests in financial institutions that conduct business with the City. Furthermore, they will disclose any personal financial/investment positions that could be related to the financial performance of the City, particularly at the time of investment purchases and sales. Investment officers and employees who fail to comply with this disclosure requirement will be subject to administrative action.
VII. Authorized Financial Dealers andInstitutions
The Finance Director shall approve all financial institutions from which securities are purchased or sold and approve security broker/dealers selected after conducting a process of due diligence for internal transactions. These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). The City’s Finance Director/Treasurer will determine which financial institutions are authorized to provide investment services directly to the City. Institutions eligible to transact investment business with the City include:
1. Primary dealers and regional dealers.
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2. Nationally or state-chartered banks.
3. The Federal Reserve Bank.
4. Direct issuers of securities eligible for purchase.
A. Selection of financial institutions and broker/dealers authorized to engage in transactions with the City will be at the sole discretion of the City.
B. All financial institutions which desire to become qualified bidders for investment transactions (and which are not dealing only with the investment adviser) must supply the Finance Director/Treasurer with a statement certifying that the institution has reviewed the California Government Code Section 53600 et seq. and the City’s Investment Policy.
C. Selection of broker/dealers used by an external investment adviser retained by the City will be at the sole discretion of the investment adviser.
D. Public deposits will be made only in qualified public depositories as established by State law. Deposits will be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured maximum, will be collateralized in accordance with State law.
VIII. Authorized and Suitable Investments
All investments shall be made in accordance with California Government Code Sections 53600 et. seq. and as described within this Investment Policy.
No investment shall be made in any security that has a remaining term to maturity in excess of five years on settlement date unless City Council has granted express authority to make the investment either specifically or as part of an approved investment program.
The City’s investment portfolio may include the following instruments:
Bank Deposits FDIC insured or fully collateralized demand deposit accounts, savings accounts, market rate accounts, time certificates of deposits (“TCDs”) and other types of bank deposits in financial institutions located in California. The amount on deposit in any financial institution shall not exceed the shareholder’s equity. To be eligible to receive the City’s deposits, the financial institution must have received a minimum overall satisfactory rating, under the Community Reinvestment 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 Finance Director/Treasurer, at his/her discretion, may 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. The maturity of TCDs may not exceed 5 years in maturity. There is no limit on the percentage of the portfolio that may be invested in bank deposits. However, a maximum of 30% of the portfolio may be invested in TCDs.
Certificate of Deposit Account Registry Service (CDARS) No more than 30% of the total portfolio may be invested in a combination of certificates of deposit including CDARS.
The maturity of CDARS deposits does not exceed five years.
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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 are no limits on the dollar amount or percentage that the City may invest in Federal Agency or Government-Sponsored Enterprises (GSEs), provided that:
• No more than 30% of the portfolio may be invested in any single Agency/GSE issuer.
• The maximum maturity does not exceed five (5) years.
• The maximum percent of callable agency securities in the portfolio, excluding callable agency mortgage-backed securities, will be 20%.
U.S. Treasury Instruments include bills, notes and bonds or certificates of indebtedness for which the full faith and credit of the United States is pledged for the payment of principal and interest. There are no portfolio limitations on the amount that may be invested in U.S.
Treasury Instruments.
The State of California Local Agency Investment Fund (LAIF) (Government Code Section 16429.1). Local agencies may invest in LAIF, a pooled investment fund managed by the State Treasurer’s Office. The City may deposit up to the maximum program limit in each City account.
Banker’s Acceptances allows for 40% of the City’s portfolio to be invested in Banker’s Acceptances. These are known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank, with maturities no longer than 180 days. No more than 5% of the entire portfolio may be invested in the banker’s acceptances of a single bank.
The bank must have an “A” or its equivalent or higher money market rating from a nationally recognized statistical-rating organization (NRSRO).
Commercial Paper is a short-term, unsecured promissory note issued by financial and nonfinancial companies to raise short-term cash. Eligible commercial paper must be of the highest quality ranking or of the highest letter and number rating by an NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2):
1) The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars. (C) 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. 2) The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has program wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. (C) Has commercial paper that is rated “A- 1” or its equivalent or better by at least one NRSRO.
Maturities of individual commercial paper securities cannot exceed 270 days. No more than 40% of the portfolio may be invested in eligible commercial paper and no more than 5% may be invested in the commercial paper of any single issuer.
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Medium-Term Corporate Notes are corporate bonds and notes of industrial companies, banks, bank holding companies, insurance companies, thrifts, and finance companies with a maximum maturity of five years. Issuers must be corporations organized and operating in the United States or by depository institutions licensed by the United States or any state and operating within the United States. Securities issued by corporations must be rated “A” or its equivalent or better by an NRSRO. Purchases may not exceed 30% of the City’s portfolio with a maximum percentage of 5% per issuer.
Negotiable certificates of deposit 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. Purchases of negotiable certificates of deposit shall not exceed 30% of the City’s portfolio with a maximum percentage of 5% per issuer. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decision making authority in the administrative office manager’s office, budget office, auditor-controller’s office, or treasurer’s office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit.
Repurchase Agreements are agreements between the City and seller for the City to purchase government securities to be resold back to the seller at a specific date and for a specific amount. The legal maximum maturity on these investments is 360 days; however, repurchase agreements are generally short-term investments. Holdings cannot exceed 20% of the City’s portfolio.
Money Market Mutual Funds consisting of investment securities permitted under Sections 53601 and 53635 of the California Government Code. To be eligible for City investments, companies providing mutual funds shall have either or both of the following:
1. The highest rating provided by not less than two of the three largest nationally recognized statistical-rating services (NSRSO).
2. An investment advisor registered with the Securities and Exchange Commission for not less than five years having investment experience in the underlying securities and with assets under management in excess of $500 million.
Holdings cannot exceed 20% of the City’s portfolio.
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Other Investment Pools – Shares of beneficial interest issued by a joint powers authority organized pursuant to California Government Code Section 6509.7 that invests in the securities and obligations authorized in California Government Code Section 53601 subdivisions (a) to (r), inclusive. 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 United States Securities and Exchange Commission.
2. The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
3. The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
Municipal Obligations including,
Securities Issued by the City of San Leandro and its Agencies. The City may elect to sell or purchase its securities through secondary markets when conditions are favorable.
Registered state warrants or treasury notes or bonds of California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by California or by a department, board, agency, or authority of California.
Bonds, notes, warrants, or other evidences of indebtedness of a local agency within California, 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.
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.
A Mortgage Passthrough Security, Collateralized Mortgage Obligation, MortgageBacked or Other Pay-Through Bond, Equipment Lease-Backed Certificate, Consumer Receivable Passthrough Certificate, or Consumer Receivable-Backed Bond. For securities eligible for investment under this subdivision not issued or guaranteed by the United States, a Federal Agency, or a United States governmentsponsored enterprise, the following limitations apply • The securities are rated “AA” or its equivalent or higher by a NRSRO. • No more than 20% of the total portfolio may be invested in these securities. • No more than 5% of the portfolio may be invested in any single issuer. • The maximum legal final maturity does not exceed five (5) years.
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Supranational Securities, provided that:
• Issues are senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter-American Development Bank (IADB).
• The securities are rated “AA” or its equivalent or higher by an NRSRO. • No more than 30% of the total portfolio may be invested in thesesecurities. • No more than 10% of the portfolio perissuer.
• The maximum maturity does not exceed 5years.
See Appendix A City of San Leandro Summary of Eligible Investments on pages 11 and 12 for a tabular listing of the restrictions regarding authorized investments.
IX. Investment Pools/Mutual Funds
The City will conduct a thorough investigation of investment pools prior to making an investment. To become eligible, an investment pool will provide the following:
• A description of eligible securities and a written statement of investment policy and objectives.
• A description of interest calculation methods, how interest is distributed, and how gains and losses are treated.
• A description of safekeeping procedures and settlement processes, how often securities are priced, and how often the program is audited. • A description of who are eligible to invest in the program and how often, and any limitations on deposits and/or withdrawals.
• A schedule for receiving statements and portfolio listings. • Any policies regarding the use of reserves or retained earnings by thepool. • A fee schedule and a description of how and when fees areassessed. • Any policies regarding the pool’s eligibility for bond proceeds if applicable.
X. Credit Downgrade
If a security owned by the City is downgraded to a level below the requirements of this policy, making the security ineligible for additional purchases, the following steps will be taken:
• Any actions taken related to the downgrade by the investment manager will be communicated to the City in a timely manner (within two business days). • If a decision is made to retain the security, the credit situation will be monitored and reported to the City.
XI. Socially Responsible Investing
The investment policy prohibits investing in an entity that has a main business line according to revenue in any of the following industries according to Bloomberg Sectors (BB Sectors): (1) Firearms & Ammunition, (2) Explosives, (3) Coal, (4) Oil & Gas, (5) Oil & Gas Services, (6) Pipelines, (7) Private Corrections, or (8) Tobacco.
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XII. Competitive Transactions
All investment transactions shall be conducted on a competitive basis with quotes from a minimum of three brokers or financial institutions when possible.
XIII. Safekeeping
Purchased securities are held in third party safekeeping by the trust department of the City's bank or other designated third party in the City's name and control. All security transactions entered into by the City will be conducted on a delivery-versus-payment (DVP) basis and evidenced by a receipt issued by the safekeepingagent.
XIV. Collateralization
Collateralization will be required on two types of investments: time certificates of deposit and repurchase agreements. To anticipate market changes and provide a level of security for all funds, securities pledged as collateral for time certificate of deposits shall be limited to Treasury and Agency securities and have a market value of at least 110% of principal and accrued interest. . Investments in Repurchase Agreements must be collateralized with collateral limited to Treasury and Agency securities at 102% of market value of principal and accrued interest.
An independent third party with whom the City of San Leandro has a current custodial agreement will always hold collateral. A clearly marked evidence of ownership must be supplied to the City.
XV. Internal Control and Review
The Finance Director will establish an annual review process to ensure compliance with the established Investment Policy and routine reporting requirements.
XVI. Performance Standards
The investment portfolio shall be designed with the overall objective of obtaining a total rate of return throughout economic cycles, commensurate with investment risk constraints and cash flow needs.
An appropriate performance benchmark shall be established against which portfolio performance shall be compared on a regular basis. The selected performance benchmark shall be representative of the City’s overall investment objectives and liquidity requirements.
Other market investments that may be used as yield comparisons include:
• The State of California Local Agency Investment Fund (LAIF) • The two-year U.S. TreasuryBill
• The five-year U.S. Treasury Note
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XVII. Reporting
California Government Code Section 53646 states that the Finance Director may render a quarterly report on the status of the City’s investment portfolio to the City Manager and the City Council within 45 days after the end of the calendar quarter. The report will provide detailed information regarding the type of investments, the amount invested with various institutions, purchase and maturity dates, and interest yield on all investments. The report shall state if the City’s investments are in compliance with this policy and if the City will be able to meet its cash obligations during the next six-month period. The Finance Director will post a monthly transactions report on the portfolio’s activity on the City’s public website that will be available to the City Manager, Finance Committee, City Council, and the general public consistent with the requirements of the California Government Code Section 53607.
XVIII. Prohibited Investment Vehicles and Practices
• State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to futures and options. • In accordance with Government Code, Section 53601.6, investment in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited. • Investment in any security that could result in a zero-interest accrual if held to maturity is prohibited. Under a provision sunsetting on January 1, 2026, securities backed by the U.S. Government that could result in a zero- or negative- interest accrual if held to maturity are permitted.
• Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited.
• Purchasing or selling securities on margin is prohibited. • The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited.
• The purchase of foreign currency denominated securities is prohibited. • Agencies that are not Qualified Institutional Buyers (QIB) as defined by the Securities and Exchange Commission are prohibited from purchasing Private Placement Securities. The SEC defines a QIB as having at least $100,000,000 in securities owned and invested.
XIX. Investment Policy Adoption
This policy will be reviewed annually with the City Council to ensure compliance with the objectives of safety, liquidity and yield and adherence with applicable laws. The City Council Finance Committee will review and approve all changes to this policy statement prior to submittal to the full City Council for approval.
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Appendix A
City of San Leandro
Summary of Eligible Investments
Investment Type Maximum
Maturity Maximum Amount Other Requirements
Time Certificates
of Deposit (TCDs)
and CDARs
5 Years 30% max of Portfolio
CDs require Market Value
of Collateral at Least 110%
of Deposit if not FDIC
insured; CDARs are FDIC
insured
U.S. Government
Agency Securities
5 Years, Longer
Maturities if
Approved by
Council
30% max per Issuer None
U.S. Treasury
Securities
5 Years, Longer
Maturities if
Approved by
Council
None None
State Local
Agency
Investment Fund
(LAIF)
N/A Maximum Program
Limits None
Bankers
Acceptances 180 Days 5% max per Issuer 40% max of Portfolio Minimum Rating of “A”
from an NRSRO
Commercial Paper 270 Days 5% max per Issuer
40% max of Portfolio
Prime Quality Rating of “A1” and “P-1” from an
NRSRO.
Medium Term
Corporate Notes 5 Years 5% max per Issuer
30% max of Portfolio
Minimum Rating of “A” from
an NRSRO.
Negotiable
Certificates of
Deposit
5 Years 5% max per Issuer
30% max of Portfolio None
Repurchase
Agreements 1 Year 20% of Portfolio Master Agreement & Fully Collateralized
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Money Market
Mutual Funds N/A 20% max of Portfolio
Highest Rating from at
Least Two Rating Agencies
and/or Advisor with 5 Years
of Experience Managing
Assets in Excess of $500
Million
Other Investment
Pools N/A N/A
Must Provide
Comprehensive
Information Prior to City
Investment
Municipal
Obligations N/A N/A
City Issued Securities
Usually Purchased When
Originally Issued
Asset-Backed
and MortgageBacked
Securities
5 Years 5% max per Issuer
20% max of Portfolio
Minimum ration of “AA” by an
NRSO No limitation on
mortgage securities when
issuer is US Treasury,
Federal Agency, or
Government Sponsored
Enterprise
Supranational
Securities 5 Years 10% max per Issuer 30% max of Portfolio Permitted issuers are
International Bank for
Reconstruction and
Development (IBRD),
International Finance
Corporation (IFC), and InterAmerican Development Bank
(IADB)
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Appendix B
Glossary of Investment Terms
AGENCIES. Shorthand market terminology for any obligation issued by a government-sponsored entity (GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market.
FHLB issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing market. FHLMC, also called “FreddieMac” issues discount notes, bonds and mortgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues discount notes, bonds and mortgage pass-through securities.
GNMA. The Government National Mortgage Association, known as “GinnieMae,” issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the US government.
TVA. The Tennessee Valley Authority provides flood control and power and promotes development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount notes and bonds.
ASKED. The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of revolving lines of credit.
AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected.
BANKER’S ACCEPTANCE. A money market instrument created to facilitate international trade transactions. It is highly liquid and safe because the risk of the trade transaction is transferred to the bank which “accepts” the obligation to pay the investor.
BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of securities allowed under a specific investment policy.
BID. The price at which a buyer offers to buy a security.
BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position.
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CALLABLE. A callable security gives the issuer the option to call it from the investor prior to its maturity. The main cause of a call is a decline in interest rates. If interest rates decline since an issuer issues securities, it will likely call its current securities and reissue them at a lower rate of interest. Callable securities have reinvestment risk as the investor may receive its principal back when interest rates are lower than when the investment was initially made.
CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate.
Large denomination CDs may be marketable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows local agencies to purchase more than $250,000 in CDs from a single financial institution (must be a participating institution of CDARS) while still maintaining FDIC insurance coverage. CDARS is currently the only entity providing this service. CDARS facilitates the trading of deposits between the California institution and other participating institutions in amounts that are less than $250,000 each, so that FDIC coverage is maintained.
COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the cash flows of mortgage securities (and whole loans) to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities.
COMMERCIAL PAPER. The short-term unsecured debt of corporations.
COST YIELD. The annual income from an investment divided by the purchase cost. Because it does not give effect to premiums and discounts which may have been included in the purchase cost, it is an incomplete measure of return.
COUPON. The rate of return at which interest is paid on a bond.
CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer.
CURRENT YIELD. The annual income from an investment divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor’s cost, current yield is unrelated to the actual return the investor will earn if the security is held to maturity.
DEALER. A dealer acts as a principal in security transactions, selling securities from and buying securities for his own position.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser’s agent.
DERIVATIVE. Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components (“Stripped” coupons and principal). A derivative is also defined as a San Leandro Investment Policy Statement Page 15 of 18
financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate, or index.
DISCOUNT. The difference between the par value of a bond and the cost of the bond, when the cost is below par. Some short-term securities, such as T-bills and banker’s acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons, trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality.
DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk.
DURATION. The weighted average time to maturity of a bond where the weights are the present values of the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See modified duration).
FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks.
The Federal Reserve Bank through open-market operations establishes it.
FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves.
LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate higher than the cost of borrowing.
LIQUIDITY. The speed and ease with which an asset can be converted to cash.
LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government entities and certain non-profit organizations in California that is managed by the State Treasurer’s Office.
LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer’s Office Local Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities (JPAs). These funds are not subject to the same SEC rules applicable to money market mutual funds.
MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining debt early. Unlike a call option, with a make whole call provision, the issuer makes a lump sum payment that equals the net present value (NPV) of future coupon payments that will not be paid because of the call. With this type of call, an investor is compensated, or "made whole."
MARGIN. The difference between the market value of a security and the loan a broker makes using that security as collateral.
MARKET RISK. The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates.
MARKET VALUE. The price at which a security can be traded.
MARKING TO MARKET. The process of posting current market values for securities in a portfolio.
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MATURITY. The final date upon which the principal of a security becomes due and payable.
MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts on either a continuous or an intermittent basis.
MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.
MODIFIED DURATION. The percent change in price for a 100 basis point change in yields. Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk.
MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, commercial paper, and banker’s acceptances) are issued and traded.
MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security.
MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and operating expenses.
MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund’s prospectus. Mutual funds can be invested in various types of domestic and/or international stocks, bonds, and money market instruments, as set forth in the individual fund’s prospectus. For most large, institutional investors, the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).
A credit rating agency that the Securities and Exchange Commission in the United States uses for regulatory purposes. Credit rating agencies provide assessments of an investment's risk. The issuers of investments, especially debt securities, pay credit rating agencies to provide them with ratings. The three most prominent NRSROs are Fitch, S&P, and Moody's.
NEGOTIABLE CD. A short-term debt instrument that pays interest and is issued by a bank, savings or federal association, state or federal credit union, or state-licensed branch of a foreign bank. Negotiable CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor (investor).
PREMIUM. The difference between the par value of a bond and the cost of the bond, when the cost is above par.
PREPAYMENT SPEED. A measure of how quickly principal is repaid to investors in mortgage securities.
PREPAYMENT WINDOW. The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed.
PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S.
Government securities market.
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PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries. In California, the rule is stated as “Investments shall be managed with the care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and with like aims to accomplish similar purposes.” REALIZED YIELD. The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities, which have not been sold from the portfolio.
REGIONAL DEALER. A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and that is not a primary dealer.
REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller’s point of view, the same transaction is a reverse repurchase agreement.
SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the customer’s name.
STRUCTURED NOTE. A complex, fixed income instrument, which pays interest, based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes which have coupons that increase when other interest rates are falling, and which fall when other interest rates are rising, and "dual index floaters," which pay interest based on the relationship between two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements.
SUPRANATIONAL. A Supranational is a multi-national organization whereby member states transcend national boundaries or interests to share in the decision making to promote economic development in the member countries.
TOTAL RATE OF RETURN. A measure of a portfolio’s performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains, and losses in the portfolio.
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds.
TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted instruments, and are called Treasury bills. The Treasury currently issues threeand six-month T-bills at regular weekly auctions. It also issues “cash management” bills as needed to smooth out cash flows.
TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes, and pay interest semi-annually.
TREASURY BONDS. All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually.
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VOLATILITY. The rate at which security prices change with changes in general economic conditions or the general level of interest rates.
YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost.