CC - Item 5C - City Investment PolicyROSEMEAD CITY COUNCIL
STAFF REPORT
TO: THE HONORABLE MAYOR AND CITY COUNCIL
FROM: GLORIA MOLLEDA, CITY MANAGER
DATE: MAY 30, 2018
SUBJECT: CITY INVESTMENT POLICY
SUMMARY
The City's Investment Policy (Policy) is reviewed annually to ensure that it best reflects current
investing conditions. As those conditions change, minor adjustments to the Policy may be made
to allow for the continuation of reasonable returns on investments, while maintaining the priority
of safety first. This report is an annual item in accordance with Government Code Section 53601
and no changes are being proposed. The investment priorities of the City's Policy remain, in
order of importance: 1) safety, 2) liquidity, 3) yield.
STAFF RECOMMENDATION
That the City Council approve the attached City Investment Policy.
FISCAL IMPACT - None
STRATEGIC PLAN IMPACT - None
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Prepared by:
Pearl Lieu, Finance Director
Attachment A: Investment Policy
ITEM NO. 5.0
Attachment A
City Investment Policy 2018-19
Attachment A
The City of Rosemead
Investment Policy
Fiscal Year 2018-19
Investment Philosophy
A. Policy
1. This investment policy is set forth by the City of Rosemead (the
City) for the following purposes:
a. To establish a clear understanding for the City Council, the
Finance Committee, City management, responsible
employees, citizens and third parties of the objectives,
policies and guidelines for the investment of the City's idle
and surplus funds.
b. To offer guidance to investment team members and any
external investment advisors on the investment of City
funds.
C. To establish a basis for evaluating investment results.
2. The City establishes investment policies which meet its current
investment goals. The City shall review this policy annually, and
may change its policies more frequently as its investment
objectives change.
B. Objectives
The primary objectives of investment activity, in order of priority, are
shown below, and shall be in conformity with California Government Code
section 53600.5:
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.
2. Liquidity— The investment portfolio will remain sufficiently liquid to
enable the City to meet all operating requirements as prescribed
by state law and which might be reasonably anticipated. An
adequate portion of the portfolio should be maintained in liquid
short-term securities that can be converted to cash if necessary to
meet disbursement requirements. Since unanticipated cash
requirements do, indeed, arise, most investments will be in
securities with active secondary or resale markets. Emphasis shall
be on marketable securities with low sensitivity to market risk.
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3. Yield — Yield should become a consideration only after the more
basic requirements of safety and liquidity have been met. The
investment portfolio shall be designed with the objective of
attaining a rate of return throughout budgetary and economic
cycles commensurate with the City's investment risk restraints and
the cash flow characteristics of the portfolio.
C. Prudence
The Prudent Investor Standard shall be used by investment
officials, and shall be applied in the context of managing an overall
portfolio. Investment staff acting in accordance with written
procedures and the investment policy and exercising due
diligence shall be relieved of personal responsibility for an
individual security's credit risk or market price changes, provided
deviations from expectations are reported within 30 days and
appropriate action is taken to control adverse developments.
2. The City adheres to the guidance provided by the "prudent
investor" standard, as codified in Government Code section
53600.3. This obligates a fiduciary to insure that: "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 investor 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. Within the limitations of this section and considering
individual investments as part to an overall strategy, investments
may be acquired as authorized by law."
D. State law, City statutes and City personnel and purchasing policies shall
be followed to avoid conflict of interest or the appearance thereof. In
addition to the applicable requirements of the Political Reform Act and the
Government Code Section 1090, the City Treasurer and City Manager,
members of the City Council, members of the Finance Committee, their
spouses and investment consultants 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 on behalf of the City. In addition, these individuals shall
disclose to the City Manager any financial interests in or financial
relationships with financial institutions that conduct business with the City,
and shall subordinate their personal investment transactions to those of
the City's, particularly with regard to the timing of purchases and sales.
Unless otherwise prohibited by State law, City statutes, policies or
regulations, it is permissible for the City to purchase securities from firms
in which members of the Finance Committee are officers, partners,
members, or employees, provided that: (1) multiple bids are obtained for
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such purchases; (2) the affected member abstains from participation in
the recommendation of the Finance Committee as to the firm with which
the member has an employment or ownership relationship; (3) the
member's relationship to the securities firm is stated in the minutes of the
Finance Committee; and (4) the affected member of the Finance
Committee does not participate in the sale of securities to the City as an
officer, partner, member, or employee of the securities firm; and (5) the
firm meets the requirements of Section II. C. of this Investment Policy. All
bond issue providers including but not limited to underwriters, bond
counsel, financial advisors, brokers and dealers, will disclose any fee
sharing arrangements or fee splitting to the City Manager prior to the
execution of any transactions. The providers must disclose the
percentage share and approximate dollar amount share to the City prior
to the execution of any transactions.
II. Operational and Procedural Matters
A. Scope
This investment policy applies to all financial assets and investment
activities of the City except for proceeds of debt issuance. Debt proceeds
shall be invested in accordance with the investment objectives of the City
as set forth in this policy: however, such proceeds are invested in
accordance with permitted investment provisions of their specific bond
indentures. All deviations from investments authorized in this policy for
other City funds shall be disclosed to the City Council at the time bond
documents are considered for approval. Proceeds of debt issuance shall
be subject to the operational and reporting requirements of this policy.
B. Delegation and Authority
Authority to manage the City's investment program is derived from
the California Government Code Sections 53600 et seq.
2. The City of Rosemead Municipal Code, Chapter 2.16.010,
authorizes the City Treasurer to invest funds in accordance with
California Government Code Section 53600 et seq. The
Treasurer shall be responsible for all transactions undertaken by
the City's internal staff, and shall establish a system of controls to
I
egulate the activities of internal staff and external investment
advisors engaged in accordance with Section II B (5).
3. In the absence of the City Treasurer, the investment
responsibilities are hereby delegated to the Director of Finance.
4. In the absence of both the City Treasurer and the Director of
Finance, the City Manager has that responsibility.
5. The City Council may, upon recommendation of the Finance
Committee, engage the services of one or more external
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investment managers to assist in the management of the City's
investment portfolio in a manner consistent with the City's
objectives. Such external managers may be granted limited
discretion to purchase and sell investment securities in
accordance with this Investment Policy. Such managers must be
registered under the Investment Advisers Act of 1940, or be
exempt from such registration. Such external managers shall be
prohibited from 1) selecting broker/dealers, 2) executing
safekeeping arrangements, and 3) executing wire transfers. This
Section does not preclude the City Treasurer from retaining
portfolio consultants within existing authority.
C. Authorized Financial Dealers and Institutions
The Treasurer will maintain a list of financial institutions authorized
to provide investment services to the City. Institutions eligible to
transact investment business with the City include:
a. Primary government dealers as designated by the Federal
Reserve Bank,
b. Nationally or state -charted banks,
G. The Federal Reserve Bank, and
d. Direct issuers of securities eligible for purchase by the City.
2. Selection of financial institutions and broker/dealers authorized to
engage in transactions with the City shall be at the sole discretion
of the City.
3. The Treasurer and the Finance Committee shall obtain
information from qualified financial institutions to determine if the
institution makes markets in securities appropriate for the City's
needs, can assign qualified sales representatives and can provide
written agreements to abide by the conditions set forth in the City
of Rosemead Investment Policy. Investment accounts with all
financial institutions shall be standard non -discretionary accounts
and may not be margin accounts.
4. All financial institutions which desire to become qualified bidders
for investment transactions must supply the Treasurer with the
following:
a. Audited financial statements for the institution's three most
recent fiscal years.
b. At least three references from California local agencies
whose portfolio size, investment objectives and risk
preferences are similar to the City's.
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C. A statement certifying that the institution has reviewed the
California Government Code Section 53600 et seq, and
the City's Investment Policy and that all securities offered
to the City shall comply fully and in every instance with all
provisions of the California Government Code.
5. The signatures of two individuals shall be required for the opening
and closing of any bank account and broker account (the
Treasurer or City Manager, and the Mayor or Mayor Pro Tem).
The Finance Supervisor, who is independent of the investment
function, shall keep a record of all opened and closed accounts.
On an annual basis, the Finance Supervisor shall provide this list
of accounts to the City's independent auditor.
6. Public deposits shall be made only in qualified public depositories
within the State of California as established by State law.
Deposits shall be insured by the Federal Deposit Insurance
Corporation, or, to the extent the amount exceeds the insured
maximum, shall be collateralized with securities in accordance
with State law.
7. Whenever possible, investment staff shall obtain a minimum of
two quotations, preferably three, prior to entering into an
investment transaction. Staff will buy or sell at the price that is
most advantageous to the City and meets investment
requirements.
D. Delivery vs. Payment
All investment transactions of the City shall be conducted using standard
delivery -vs. -payment procedures.
E. Safekeeping of Securities
To protect against potential losses by collapse of individual securities
dealers, and to enhance access to securities, interest payments and
maturity proceeds, all securities owned by the City shall be held in
safekeeping by a third party bank trust department, acting as agent for
the City under the terms of a custody agreement executed by the bank
and by the City.
From time to time, the City may invest funds received late in the day in
one to thirty day repurchase agreements with its depository bank.
Securities used as collateral for such repurchase agreements may be
held in safekeeping by the City's depository bank.
Investments are to be held in the City's name in conjunction with industry
standards, including collateral held for repurchase agreements by
depository banks.
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III. Permitted Investments and Portfolio Risk Management
A. Investments authorized for purchase by City staff. All investments shall
be made in accordance with Sections 53600 et seq. of the Government
Code of California and as described within this Investment Policy. Limits
identified are to be based on the "market value" of the investment.
Permitted investments under this policy include:
1. Securities issued by the US Treasury, provided that there shall be
no maximum allowable investment in US Treasury securities.
2. Securities issued and backed as to payment by one of the
following Government Sponsored Entities (GSE's): the Federal
Farm Credit Bank, Federal Home Loan Bank, Federal Home Loan
Mortgage Corporation, and the Federal National Mortgage
Association, provided that
a. A maximum of the greater of $14 million or 70% of the
portfolio be invested in agency securities, and
b. No more than the greater of $7 million or 35% of the
portfolio be invested in securities issued by any single
agency.
C. Investment in mortgage-backed bonds and collateralized
mortgage obligations (CMOs) is prohibited, even if such
bonds are issued by agencies of the US Government.
3. Banker's Acceptances provided that:
a. They are issued by domestic institutions the short-term
obligations of which are rated a minimum of P1 by Moody's
Investor Services (Moody's) or Al by Standard & Poor
(S&P).
b. The acceptance is eligible for purchase by the Federal
Reserve System.
C. The maturity does not exceed 180 days.
d. No more than the greater of $4 million or 20% of the total
portfolio may be invested in banker's acceptances, and
4. Time deposits (Negotiable certificates of deposit) in nationally or
state -chartered banks, a savings association or a federal
association (as defined by Section 5102 of the Financial Code) in
excess of insured amounts which are fully collateralized with
securities in accordance with California law, or that are federally
insured provided that:
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a. No more than 30% of the portfolio shall be invested in a
combination of federally insured and collateralized time
deposits, and
b. The federally insured and/or collateralized time deposits
are issued by institutions which have long-term debt rated
"A" or higher by S&P or "A2" or higher by Moody's; and/or
have short-term debt rated Al by S&P or P1 by Moody's.
C. The maturity of such deposits does not exceed five years.
5. Commercial paper, provided that:
a. The maturity does not exceed 180 days from the date of
purchase.
b. The issuer is a corporation organized and operating in the
United States with assets in excess of $500 million.
C. The paper is rated a minimum of P1 by Moody's and Al by
S&P, and has a minimum long-term credit rating of A by
both rating agencies.
d. No more than 15% of the portfolio is invested in
commercial paper.
6. State of California Local Agency Investment Fund (LAIF), provided
that:
a. LAIF investments in instruments prohibited by or not
specified in the City's policy do not exclude it from the
City's list of allowable investments, provided that the fund's
reports allow the Treasurer to adequately judge the risk
inherent in LAIF's portfolio, and provided that disclosure of
such investments, if any, is made annually to the City
Council.
7. Medium -Term Corporate Notes
a. Must, be rated "A" or better by a nationally recognized
rating service.
b. Investment in these securities shall not exceed $2 million.
C. , The maximum stated final maturity of these securities shall
be five years.
8. From time to time, the investment strategy may be to capture high
yields with the purchase of safe, low risk, highly liquid
investments. Government Code Section 53601 states: "... no
investment shall be made in any security ... that at the time of
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investment has a term remaining to maturity in excess of five
years, unless the legislative body has granted express authority to
make that investment either specifically or as a part of an
investment program approved by the legislative body no less than
three months prior to the investment." Accordingly and in addition
to the Government Code, investments with remaining maturities in
excess of five years, the following requirements must be met:
a. The security must be a U.S. Treasury Note or bond, a
Federal National Mortgage Association (FNMA) debenture
or Federal Home Loan Bank (FHLB) debenture.
b. A maximum of twenty-five (25) percent of the City's funds
can be invested in securities with a term remaining to
maturity of between five and seven years.
C. No securities may be purchased by the City of Rosemead
or the Rosemead Community Development Commission
(RCDC) with a term remaining to maturity in excess of five
years without approval of the City Council or the RCDC no
less than three months prior to the investment.
B. Prohibited Investment Vehicles and Practices
State law notwithstanding, any investments not specifically
described herein including, but not limited to, medium-term
corporate notes, mutual funds, other than government money
market funds, unregulated and/or unrated investment pools or
trusts, except as specified above, futures and options, strips,
except for federal agency strips, variable rate securities and
securities with embedded options.
2. Trading securities for the sole purpose of speculating on the future
direction of interest rates is prohibited.
3. Purchasing or selling securities on margin is prohibited.
4. The use of reverse repurchase agreements, securities lending or
any other form of borrowing or leverage is prohibited.
5. Borrowing for investment purposes is prohibited.
C. Investments and practices permitted for use by external investment
managers.
Professional investment managers that may be retained by the
City may request more latitude in their choice of investment
vehicles and practices than is allowed under this policy. As an
integral part of their service to the City, such advisers shall
recommend additional investment vehicles and practices, with
limitations and restrictions on their use. The City Council must
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approve the investment vehicles and practices, upon the
recommendation of the Finance Committee, and adopt an
appropriate amendment to this policy prior to their implementation.
D. Mitigating Credit Risk in the Portfolio
Credit risk is the risk that a security or a portfolio will lose some or all of its
value due to real or perceived change in the ability of the issuer to repay
its debt. The City shall mitigate credit risk by adopting the following
strategies:
1. The diversification requirements included in Section III (A) are
designed to mitigate credit risk in the portfolio.
2. No more than the greater of $1 million or 5% of the total portfolio
may be invested in securities of any single issuer, except that
limits on investment securities issued by government agencies
shall be governed by Section III A 2 b. Limits are to be based on
the "market value" of the investment.
3. The City may elect to sell a security prior to its maturity and record
a capital gain or loss in order to improve the quality, liquidity or
yield of the portfolio in response to market conditions or the City's
risk preferences.
4. If securities owned by the City are downgraded by either Moody's
or S&P to a level below the quality required by this Investment
Policy, it shall be the City's policy to review the credit situation and
make a determination as to whether to sell or retain such
securities in the portfolio.
a. If a security is downgraded two grades below the leve
required by the City, the security shall be sold immediately.
b. If a security is downgraded one grade below the level
required by this policy, the Treasurer will use discretion in
determining whether to sell or hold the security based on
its current maturity, the loss in value, the economic outlook
for the issuer, and other relevant factors.
C. If a decision is made to retain a downgraded security in the
portfolio, its presence in the portfolio will be monitored and
reported monthly to the City Manager and City Council.
E. Mitigating Market Risk in the Portfolio
Market risk is the risk that the portfolio will decline in value (or will not
optimize its value) due to changes in the general level of interest rates.
The City recognizes that, over time, longer-term portfolios achieve higher
returns. On the other hand, longer-term portfolios have higher volatility of
return. The City shall mitigate market risk by providing adequate liquidity
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for short-term cash needs, and by making some longer-term investments
only with funds which are not needed for cash flow purposes. The City
further recognizes that certain types of securities, including variable rate
securities, securities with principal pay downs prior to maturity, and
securities with embedded options, will affect the market risk profile of the
portfolio differently in different interest rate environments. The City,
therefore, adopts the following strategies to control and mitigate its
exposure to market risk:
The maximum stated final maturity of individual securities in the
portfolio shall be five years.
2. The City shall maintain a minimum of one month of projected
capital and operating expenditures (excluding expenditures
financed with bond proceeds) in investments maturing within thirty
days.
3. To the extent necessary, investment maturities shall match the
City's projected cash flow requirements over the following twelve
months.
4. Except for calls, the City shall invest only in securities which do
not include embedded options (i.e. puts, swaps, etc.).
5. The City shall not invest in securities which may return all or part
of their principal prior to their stated final maturity date more than
four times in any 12 consecutive month period.
6. The City may elect to sell a security prior to its maturity and record
a capital gain or loss in order to change the portfolios exposure to
market risk.
7. In order to minimize the need to sell securities prior to their stated
maturity, and to eliminate reliance on interest rate forecasting, the
City shall structure its investment portfolio as a maturity ladder.
Funds not required for purposes of meeting cash flow needs (see
Section III E 2-3) shall be invested in permitted securities with the
objective of maintaining the average duration of the portfolio in line
with the duration of the Benchmark Index.
IV. Specific Objectives and Expectations
A. Overall objective. 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.
B. Specific objective. The investment performance objective for the portfolio
shall be to earn a total rate of return over a market cycle which is
approximately equal to the return on the Benchmark Index. The
Benchmark Index, an index with characteristics similar to those of the
portfolio in terms of types of securities and maturities, will be set at the
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beginning of each year. In addition, an index comprised of U.S. Treasury
securities with a maturity distribution similar to that of the Benchmark
Index will be presented for comparison purposes.
V. Reporting, Disclosure and Program Evaluation
A. Quarterly Reports
Quarterly investment reports shall be submitted by the Finance Director
to the Finance Committee within 30 days of the last day of the quarter.
These reports shall disclose information about the risk characteristics of
the City's portfolio and shall include:
1. Treasurer's Quarterly Report cover page:
a) Cash receipts, disbursements and balances in total,
b) a summary of the portfolio at quarter -end,
C) information regarding interest earnings,
d) a statement of compliance with investment policy, including
a schedule of any transactions or holdings which do not
comply with this policy or with the California Government
Code, including a justification for their presence in the
portfolio and a timetable for resolution,
e) a statement of the City's ability to meet its expenditure
requirements for the next six months,
f) cost and market value of the portfolio,
g) sector allocation
2. One-page summary report of portfolio characteristics including
modified duration of the portfolio and the benchmark index,
average maturity, maturity distribution in years, average yield and
time weighted total rate of return.
3. Graphical comparison of the portfolio composition and maturity
distribution information for the current month compared to the prior
month.
4. Reconciliation of cash disbursements.
5. Listing of individual investment transactions during the month as
required by Government Code Section 53607.
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e
C.
E.
Attachment A
An asset listing showing par value, cost and accurate and
complete market value of each security, type of investment,
issuer, maturity date and interest rate.
Annual Reports
The investment policy shall be reviewed and adopted at least
annually within the first 90 days of each fiscal year to ensure its
consistency with the overall objectives of preservation of principal,
liquidity and return, and its relevance to current law and financial
and economic trends.
2. A comprehensive annual financial report for the prior fiscal year
shall be presented in conjunction with the investment policy
review. This report shall include comparisons of the City's return
to the Benchmark Index return, shall suggest policies and
improvements that might enhance the investment program, and
shall include an investment plan for the coming year.
Internal Controls
The Finance Director is responsible for establishing and maintaining an
internal control structure designed to ensure that the assets of the entity
are protected from loss, theft or misuse. The internal control structure
shall be designed to provide reasonable assurance that these objectives
are met. Internal controls shall be in writing and shall address the
following points: control of collusion, separation of transaction authority
from accounting and record keeping, safekeeping of assets and written
confirmation of telephone transactions for investments and wire transfers.
Annual Audit
The Finance Director shall establish an annual process of independent
review by an external auditor to assure compliance with internal controls
in coordination with the City's annual financial audit.
Special Audits
The City Council may at any time order an audit of the investment
portfolio and/or the City Treasurer's investment practices.
Independent Investment Advisor
In its discretion, the City Council may retain the services of an
independent investment adviser to review the investment program from
time to time. The adviser will review compliance with policies and
procedures, independently calculate the market value of the City's
holdings, report on overall portfolio risk exposure and investment results,
and make recommendations, if needed, regarding investment strategy,
risk, or any aspect of the investment program.
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G. Finance Committee (RMC § 2.36)
Responsibilities
It shall be the responsibility of the Finance Committee to:
1. Oversee the implementation of the City's investment program,
assuring its consistency with the investment policy and
recommend changes to the investment policy for consideration by
the City Council.
2. Receive and review the quarterly investment reports described in
Section V (A) at their quarterly meetings.
3. Approve the lists of authorized banks, dealers, brokers and direct
issuers used by the City, as well as any additions to or deletions
from such lists.
4. Review the City's portfolio activity and performance for suitability
and compliance with this policy.
5. Make recommendations to the Finance Director regarding portfolio
activity, performance and compliance with this policy.
6. Make recommendations to the City Council regarding the hiring of
external managers and permitted investments and investment
strategies for such external managers.
7. Make recommendations to the City Council and the RCDC
Commissioners regarding the use of specific local agency
investment pools.
& Inform the City Council of unaddressed concerns with the
management of the City's investment portfolio.
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GLOSSARY OF INVESTMENT TERMS
Agencies — Agencies of the Federal government set up to supply credit to
various classes of institutions (e.g., S &Ls, small business firms, students,
farmers, housing agencies, etc.)
Asked — The price at which securities are offered.
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.
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 — Price a prospective buyer is ready to pay.
Broker/Dealer — Individual or firm acting as principal in securities transaction.
Callables — Securities that the issuer has the right to redeem prior to maturity.
Certificates of Deposit (CD) — A time deposit with a specific maturity
evidenced by a certificate.
Collateral — Securities pledged to secure repayment of a loan.
Comprehensive Annual Financial Report (CAFR) — An official annual
financial report. It includes five combined statements for each individual fund
and account group prepared in conformity with GAAP. It also includes
supporting schedules necessary to demonstrate compliance with finance -related
legal and contractual provisions, extensive introductory material and a detailed
statistical section.
Coupon — a) The annual rate of interest that a bond's issuer promises to pay
the bondholder on the bond's face value; b) A certificate attached to a bond
evidencing interest due on a payment date.
Custody — A banking service that provides safekeeping for the individual
securities in a customer's investment portfolio under a written agreement which
also calls for the bank to collect and pay out income, to buy, sell, receive and
deliver securities when ordered to do so by the principal.
Debenture — A bond secured only by the general credit of the issuer
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Delivery vs. Payment — There are two methods of delivery of securities:
Delivery versus payment and delivery versus receipt. Delivery versus payment is
delivery of securities with a simultaneous exchange of money. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the
securities.
Derivatives — a) 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; b) Financial contracts based upon notional
amounts whose value is derived from an underlying index or security (interest
rates, foreign exchange rates, equities or commodities).
Discount -- The difference between the cost price of a security and its maturity
when quoted at lower than face value. A security selling below original offering
price shortly after sale also is considered to be at a discount.
Discount Securities — Non-interest bearing money market instruments that are
issued 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.
Executive Finance Committee — A committee chaired and appointed by the
City Treasurer to oversee the day-to-day investment program of the City.
Federal Credit Agencies --- Agencies of the Federal government set up to supply
credit to various classes of institutions and individuals, e.g., S&L's, small
business firms, students, farmers, farm cooperatives and exporters.
Federal Deposit Insurance Corporation (FDIC) — A federal agency that
insures bank deposits, currently up to $250,000.00 per deposit.
Federal Funds Rate — The rate of interest associated with borrowing a Federal
Reserve bank's excess reserves. This rate is currently pegged by the Federal
Reserve through open -market operations.
Federal Home Loan Banks (FHLB) — overnment sponsored wholesale banks
(currently 12 regional banks) which lend funds and provide correspondent
banking services to member commercial banking services to member
commercial banks, draft institutions, credit unions and insurance companies.
The mission of FHLB's is to liquefy the housing related assets of its members
who must purchase stock in their district Bank.
Federal National Mortgage Association (FNMA) — A publicly owned
government sponsored corporation chartered in 1938 to purchase mortgages
from lenders and resell them to investors. FNMA is a federal corporation working
under the auspices of the Department of Housing (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 and second
loans, in addition to 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.
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Attachment A
Federal Open Market Committee (FOMC) — a committee that sets interest rate
and credit policies for the Federal Reserve System, the United States' central
bank. The FOMC has 12 members. Seven are the members of the Federal
Reserve Board, appointed by the president of the United States. The other five
are presidents of the 12 regional Federal Reserve banks. Of the five, four are
picked on a rotating basis; the other is the president of the Federal Reserve Bank
of New York, who is a permanent member. The committee decides whether to
increase or decrease interest rates through open market operations of buying or
selling government securities. The committee's decisions are closely watched
and interpreted by economists and stock and bond market analysts, who try to
predict whether the Fed is seeking to tighten credit to reduce inflation or to
loosen credit to stimulate the economy.
Federal Reserve System — System established by the Federal Reserve Act of
1913 to regulate the U.S. monetary and banking system. The Federal Reserve
System (the Fed) is comprised of 12 regional Federal Reserve Banks, their
branches, and all national and state that are a part of the system. The Federal
Reserve System's main functions are to regulate the national money supply, set
reserve requirements for member banks, supervise the printing of currency at the
mint, act as clearinghouse for transfer of funds throughout the banking system,
and examine member banks to make sure they meet various Federal Reserve
regulations.
Government National Mortgage Association (GNMA or Ginnie Mae) —
Government-owned corporations, nicknamed Ginnie Mae, which is an agency of
the U.S. Department of Housing and Urban Development. Security holder is
protected by full faith and credit of the U.S. government. Ginnie Mae securities
are backed by the FHA, VA or FmHA mortgages. The term "pass throughs" is
often used to describe Ginnie Maes.
Intermediate Maturity — Investment period greater than one year but less than
five years and one day.
Finance Committee — A committee chaired by the City Treasurer to advise the
City Treasurer on policies governing the City's investment program.
Liquidity — The ability to turn an asset into cash. The ability to buy or sell an
asset quickly and in large volume without substantially affecting the asset's price.
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.
Long -Term Maturity — Investment period greater than five years.
Long -Term Investment — Maturity on investment greater than five years, as of
the date of purchase.
Market Value — The price at which a security is trading, usually the liquidation
value.
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Attachment A
Master Repurchase Agreement — A written contract covering all future
transactions between the parties to repurchase ---reverse repurchase agreements
that establish each party's rights in the transactions. A master repurchase
agreement will often specify 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 (Treasury
bills, commercial paper, bankers' acceptances, etc.) are issued and traded.
Offer — Price at which someone who owns a security offers to sell it, also known
as the asked price.
Open Market Operations — Activities by which the Securities Department of the
Federal Reserve Bank of New York, popularly called the desk, carries out
instructions of the Federal Open Market Committee designed to regulate the
money supply. Open market operations are the Federal Reserve's most
important and most flexible monetary policy tool.
Portfolio — Collection of securities held by an investor.
Primary Dealer — Investment dealers authorized to buy and sell government
securities in direct dealings with the Federal Reserve Bank of New York in its
execution of Fed Open Market Operations. Such dealers must be qualified in
terms of reputation, capacity, and adequacy of staff and facilities.
Prudent Person Rule — Standard adopted by some U.S. states to guide those
with responsibility for investing money of others. Such fiduciaries, such as
trustees, must act as a prudent man or woman would be expected to act, with
discretion and intelligence, to seek reasonable income, preserve capital, and in
general, avoid speculative investments. States not using the prudent -man
system use the legal list system, allowing fiduciaries to invest only in a restricted
list of securities, called the legal list.
Qualified Investment — An investment instrument (such as an insured
certificate of deposit of $100,000 with California chartered savings and loan)
which is approved by this policy or pursuant to procedures set forth in this policy.
Range Note — An investment instrument that pays a high interest rate, if a given
index falls within a stipulated range, but pays no interest if the stipulated index
falls outside that range.
Rate of Return — The yield obtainable on security based on its purchase price
or its current market price.
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Attachment A
Repurchase Agreement (RP or REPO) — Agreement between a seller and a
buyer, usually of U.S. government securities, whereby the seller agrees to
repurchase the securities as an agreed upon price and usually, at a stated time.
The security "buyer" in effect lends the "seller" money for the period of the
agreement, and the terms of the agreement are structured to compensate him for
this. Dealers use RP extensively to finance their positions. Exception: when the
Fed is said to be doing RP, it is lending money, that is, increasing bank reserves.
Required Reports — Sections 53600 et seq. of the Government Code specify
that certain information be transmitted to the City's governing body and chief
executive officers by the City's chief fiscal or investment officer periodically.
Safety — The ability of a security issuer to guarantee redemption of their
security.
Safekeeping — see custody
Secondary Market — A market made for the purchase and sale of outstanding
issues following the initial distribution.
Securities & Exchange Commission — Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
SEC Rule 15C3-1 — See Uniform Net Capital Rule.
Short-term Maturities — Investment period of one year or less.
Treasury Bills — A non-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three
months, six months or one year.
Treasury Bonds — Long-term coupon -bearing U.S. Treasury securities issued
as direct obligations of the U.S. Government and having initial maturities of more
than 10 years.
Treasury Notes — Medium-term coupon bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial maturities
from two to ten 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 to 1; also called net capital
rule and net capital ratio. Indebtedness covers all money owed to a firm,
including margin loans and commitments to purchase securities, one reason new
public issues are spread among members.
Yield — Percentage rate of interest received versus the purchase price of the
instrument if held to maturity.
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