HomeMy Public PortalAboutResolution No. 398-12 05-01-2012Resolution No. 398-12
A RESOLUTION APPROVING A CITY OF RICHLAND HILLS
INVESTMENT POLICY
WHEREAS, Chapter 2256 of the Texas Government Code, commonly known as the
"Public Funds Investment Act," required the city to adopt an investment policy by rule,
order, ordinance, or resolution; and
WHEREAS, the Public Funds Investment Act requires the treasurer; the chief financial
officer, if not the treasurer; and the investment officer of the city to attend investment
training; and
WHEREAS, the City of Richland Hills approves of the investment training courses
sponsored or endorsed by the Government Finance Officers Association of Texas, the
Government Treasurers Organization of Texas, the Texas Municipal League, and the
North Central Texas Council of Governments; and
WHEREAS, the treasurer; the chief financial officer, if not the treasurer; and the
investment officer have attended an investment training sponsored by the North Central
Texas Council of Governments and the Government Finance Officers Association of
Texas, as required by the Public Funds Investment Act; and
WHEREAS, The City Council has reviewed the attached investment policy and the
City's investment strategies, as required by law; and
WHEREAS, the attached investment policy and incorporated revision comply with the
Public Funds Investment Act, as amended, and authorize the investment of city funds in
safe and prudent investments.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Richland
Hills:
That the City of Richland Hills has complied with the requirements of the Public
Funds Investment Act, as amended, and the attached invest(~ent policy is hereby
adopted as the investment policy of the city effective ` , 2012. The
following changes to the investment policy and investme s strategies were made:
none.
PASSED, ADOP~E AND APPROVED by the City Council of the City of Richland
Hills this the ~ day of _ , 2012.
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City of Richland Hills
Investment Policy
It is the policy of the City of Richland Hills to invest public funds in a manner which will
provide the highest investment return with the maximum security while meeting the daily
cash flow demands of the entity and conforming to all state and local statutes
governing the investment of public funds.
The purpose of this document is to set forth specific investment policy and strategy
guidelines for the City of Richland Hills in order to achieve the goals of safety, liquidity,
yield, and public trust for all investment activity. The City Council of the City of Richland
Hills shall review its investment strategies and policy not less than annually. This
Investment Policy serves to satisfy the statutory requirement of the Public Funds
Investment Act, Chapter 2256, Texas Government Code, to define, adopt, and review a
formal investment strategy and policy.
SCOPE
This Investment Policy applies to all the financial assets of the City of Richland Hills.
These funds are accounted for in the City's Comprehensive Annual Financial Report
~,. (CAFR) and include:
• General Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Projects Funds
• Proprietary Funds
• All Other Funds
INVESTMENT OBJECTIVE
The City of Richland Hills shall manage and invest its investments with four objectives,
listed in order of priority: Safety, Liquidity, Public Trust, and Return on Investments. The
safety of the principal invested always remains the primary objective. All investments
shall be designed and managed in a manner responsive to the public trust and
consistent with State and Local laws.
Safety
Safety of principal is the foremost objective of the investment program. Investments of
the City of Richland Hills shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. To attain this objective, diversification is
required in order that potential losses on individual securities do not exceed the income
generated from the remainder of the portfolio.
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Liquidity
The City of Richland Hills investment portfolio will remain sufficiently liquid to enable
the City to meet all operating requirements which might be reasonably anticipated.
Public Trust
Investments shall be made with judgment and care, under circumstances, then
prevailing, which persons of prudence, discretion and intelligence exercise in the
management of their own affairs, not for speculation, but for investment, considering
the probable safety of capital as well as the probable income to be derived. Unless
authorized by law, a person may not deposit, withdraw, transfer, or manage in any other
manner the funds of the investing entity.
Return on Investment
The City of Richland Hills 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 constraints and the cash flow characteristics of the
portfolio.
INVESTMENT STRATEGY
The City of Richland Hills maintains portfolios which utilize four specific investment
strategy considerations designed to address the unique characteristics of the fund
groups represented in the portfolios:
A. Investment strategies for operating funds are to assure that anticipated
cash flows are matched with adequate investment liquidity. The
secondary objective is to create a portfolio structure which will experience
minimal volatility during economic cycles. This may be accomplished by
purchasing high quality, short to medium term securities which will
complement each other. The dollar weighted average maturity of
365 days or less will be calculated using the stated final maturity date
of each security.
B. Investment strategies for the debt service funds shall have as the primary
objective the assurance of investment liquidity to cover the debt service
obligation on the required payment date. Securities purchased shall not
have a stated maturity date which exceeds the debt service payment date.
C. Investment strategies for debt service reserve funds shall have as the
primary objective the ability to generate a dependable revenue stream
to the appropriate debt service fund from securities with a low degree of
volatility. Securities should be of high quality and, except as may be
required by the bond ordinance specific to an individual issue, of short
to medium term maturities.
D. Investment strategies for special projects, special purpose, or construction
fund portfolios will have as their primary objective the assurance that
anticipated cash flows are matched with adequate investment liquidity.
err These portfolios should include at least 10% in highly liquid securities
to allow for flexibility and unanticipated project outlays. The stated final
maturity dates of securities held should not exceed the estimated project
completion date.
RESPONSIBILITY AND CONTROL
Delegation of Authority and Training
The City Manager and the Finance/Accounting Manager are designated as Investment
Officer(s) of the City and are responsible for investment decisions and activities. The
Investment Officer(s) shall attend a training session not less than once in a two-year
period and receive not less than 10 hours of instruction relating to investment
responsibilities. The training provider must be an independent source. The City
Manager will retain ultimate responsibility for investment decisions.
Internal Control
The Investment Officer 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 internal control structure shall be designed to provide reasonable
assurance that these objectives are met. The concept of reasonable assurance
recognizes that (1) the cost of a control should not exceed the benefits likely to be
derived; and (2) the valuation of costs and benefits requires estimates and judgments
by management.
The Investment Officer shall establish a process for annual independent review by an
external auditor to assure compliance with policies and procedures. The internal
controls shall address the following points:
A. Control of collusion.
B. Separation of transaction authority from accounting and record keeping.
C. Custodial safekeeping.
D. Avoidance of physical delivery securities.
E. Clear delegation of authority to subordinate staff members.
F. Written confirmation for telephone (voice) transactions for investments
and wire transactions.
G. Development of a wire transfer agreement with the depository bank or
third party custodian.
An independent auditor must formally review at least annually the quarterly investment
reports prepared to comply with Section 2256.023 of the Texas Government Code and
report the results of that review to the City Council.
Ethics and Conflicts of Interest
Officials and employees involved in the investment process shall refrain from personal
business activities that could conflict with proper execution of the investment program,
or which could impair their ability to make impartial investment decisions. Investment
Officers or employees with investment responsibility must disclose to the Texas Ethics
Commission and the City Council any personal business relationships or material
financial interests with anyone attempting to sell an investment to the City.
REPORTING
Quarterly Reporting
The Investment Officer(s) shall submit a signed quarterly investment report that
summarizes current market conditions, economic developments and anticipated
investment conditions. The report shall summarize investment strategies employed in
the most recent quarter, and describe the portfolio in terms of investment securities,
maturities, risk characteristics, and shall explain the total investment return for the
quarter.
Annual Report
Within 60 days of the end of the fiscal year, the Investment Officer(s) shall present an
annual report on the investment program and investment activity.
Methods
The quarterly investment report shall provide a status of the current investment portfolio
and transactions made over the last quarter. The report will be provided to the City
Manager and City Council and include the following:
A. A listing of individual securities held at the end of the reporting period.
B. Unrealized gains or losses resulting from appreciation or depreciation by
listing the beginning and ending book and market value of securities for
the period. Market price is the net selling price of securities as quoted by
a recognized market pricing source quoted on the valuation date.
C. Additions and changes to the market value during the period and fully
accrued interest for the reporting period.
D. Average weighted yield to maturity of portfolio on City investments as
compared to applicable benchmark.
E. Listing of investments by maturity date, by type of asset and fund type.
F. The percentage of the total portfolio which each type of investment
represents.
G. A statement of compliance of the City's investment portfolio with State
laws and the investment strategy and policy approved by the City Council.
H. Be jointly prepared and signed by all investment officers.
INVESTMENT PORTFOLIO
Authorized and Suitable Investments
Assets of the City of Richland Hills may be invested in the following instruments,
provided, however, that at no time shall assets of the City be invested in any instrument
or security not authorized for investment under the Act, as the Act may from time to time
be amended.
A. Obligations of the United States or its agencies and instrumentalities with
stated maturity not to exceed two years.
B. Direct obligations of the State of Texas or its agencies.
C. Other obligations, the principal of and interest on which are
unconditionally guaranteed or insured by the State of Texas of the United
States or its agencies and instrumentalities with stated maturity not to
exceed two years.
D. Obligations of states, agencies, counties, cities, and other political
subdivisions of any state having been rated as to investment quality
by a nationally recognized investment rating firm and having received
a rating of not less than A or its equivalent.
E. Certificates of deposit issued by state and national banks domiciled in
Texas that are:
(a) guaranteed or insured by the Federal Deposit Insurance
Corporation, or its successor, or
(b) secured by obligations that are described by A through D above,
which are intended to include all direct federal agency or
instrumentality issued mortgage backed securities that have
a market value of not less than the principal amount of the
certificates or in other manner and amount provided by law
for deposits of Participants.
F. Fully collateralized repurchase agreements having a defined
termination date, secured by direct obligations of the U.S. or its
agencies and instrumentalities, pledged with a third party, selected
or approved by the political entity, other than an agency for the pledged.
Repurchase agreements must be purchased through a primary
government securities dealer, as defined by the Federal Reserve, or a
bank domiciled in Texas. Each counter-party to a repurchase transaction
is required to sign a copy of the Public Securities Association Master
Repurchase Agreement. An executed copy of the Agreement must be on
file before the City will enter into any transactions with a counter party.
G. Joint pools of political subdivisions in the State of Texas which invest in
instruments and follow practices allowed by current law. A pool must be
continuously rated no lower than AAA or AAA-m or at an equivalent rating
by at least one nationally recognized rating service.
Unauthorized Investments
The City's authorized investment alternatives are more restrictive than those allowed by
State law. State law specifically prohibits investment in the following investment
securities:
A. Obligations whose payment represents the coupon payments on the
outstanding principal balance of the underlying mortgage-backed security
collateral and pays no principal.
B. Obligations whose payment represents the principal stream of cash flow
from the underlying mortgage-backed security collateral and bears no
interest,
C. Collateralized mortgage obligations that have a stated final maturity
date of greater than ten years.
D. Collaterlized mortgage obligations the interest rate of which is determined
by an index that adjusts opposite to the changes in a market index.
This policy prohibits investments in options, financial futures contracts, and day trading
of long term securities.
Holding Period
The City of Richland Hills intends to match the holding periods of investment funds with
liquidity needs of the City. In no case will the average maturity of investments of the
City's operating funds exceed one year with no individual maturity exceeding two years.
The maximum final stated maturity of any investment shall not exceed two years except
that assets held in reserve funds may be invested in maturities up to five years.
Risk and Diversification
The City of Richland Hills recognizes that investment risks can result from issuer
defaults, market price changes or various technical complications leading to temporary
risks to liquidity. Risk is controlled through portfolio diversification which shall be
achieved by the following general guidelines:
A. Risk of issuer default is controlled by limiting investments to those
instruments allowed by the Act, which are described herein.
B. Risk of market price changes shall be controlled by avoiding over-
concentration of assets in a specific maturity sector, limitation of average
maturity of operating funds investments to one year, and avoidance of
over-concentration of specific instruments other than U. S. Treasury
Securities and Insured or Collaterlized Certificates of Deposit.
C. Risk to liquidity due to technical complications shall be controlled by the
selection of securities dealers as described herein.
Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles,. commensurate with the investment risk
constraints and the cash flow needs.
The City's investment strategy is passive. Given this strategy, the basis used by the
Treasury to determine whether market yields are being achieved shall be the six month
U.S. Treasury Bill.
AUTHORIZED FINANCIAL INSTITUTIONS
Depository
A qualified depository shall be selected through the City s banking services
procurement process, which shall include a formal request for proposal (RFP). The
centralization of depository services is designed to maximize investment capabilities
while minimizing service costs. The selection of a depository shall be based on the
financial institution offering the most favorable terms and conditions at the least cost,
while adhering to the guidelines and provisions within the request for proposal. In
selecting a depository ,the City shall give consideration to the financial institution s
credit characteristics, financial history, service capabilities, location within City limits,
and costs for required services. The City's depository contract shall be for three years
with an option to extend for two additional years upon mutual agreement of the
depository and the City. Specialized services may be contracted for by the City with
another financial institution or company if the depository cannot provide such service or
charges more than another financial institution for the same service with little or no
appreciable benefit.
Certificates of Deposit
Banks seeking to establish eligibility for the City's competitive certificate of deposit
purchase program shall submit for review annual financial statements, evidence of
federal insurance and other information as required by the Investment Officer.
Selection of Investment Brokers/Dealers and Advisors
Selection will be performed by the Investment Officer(s), with ratification and approval
~~,~„ by the City Council. Selected Investment Advisors and BrokerlDealers shall provide
timely transaction confirmations and monthly portfolio reports. Prospective
Broker/Dealers shall provide financial and other information as requested by the
Investment Officer sufficient to evaluate their fiscal condition and ability to service the
City. The Investment Officer(s) will establish criteria to evaluate Investment Advisors
and Broker/Dealers, including:
1.) Adherence to the City's policies and strategies,
2.) Investment performance and transaction pricing within
accepted risk constraints,
3.) Responsiveness to the City's request for services, information
and open communication,
4.) Understanding of the inherent fiduciary responsibility of
investing public funds, and
5.) Similarity in philosophy and strategy with the City's objectives.
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Treasurer.
A current audited financial statement is required to be on file for each financial institution
and broker/dealer in which the City invests.
Approved Broker/Dealers
Broker/Dealer or other institutions eligible to transact investment business with the City
shall be presented a written copy of this Investment Policy. Additionally, the registered
principal of the business organization, or equivalent to a registered principal acceptable
to
to the City, seeking to transact investment business shall execute a Certification to the
effect that the registered principal has:
1.) received and thoroughly reviewed this Investment Policy,
2.) acknowledged that their organization has implemented reasonable
procedures and controls in an effort to preclude imprudent investment
activities with the City.
3.) supplied audited financial statements;
4.) supplied proof of National Association of Securities Dealers certification
5.) supplied proof of state registration, and;
6.) completed broker/dealer questionnaire.
Investment Officials shall not knowingly conduct business with any firm with whom
public entities have sustained losses on investments. All Securities dealers shall
provide the City references from Public entities which they are currently serving.
SAFEKEEPING AND CUSTODY
Collateralization
All deposits and investments of City Funds shall be collateralized consistent with state
law. In order to anticipate market changes and provide a level of security for all funds,
the Collateralization level will be 102% of market value of principal and accrued interest
on the deposits or investments less an amount insured by the FDIC. Evidence of the
pledge collateral shall be maintained by the Finance/Accounting Manager or a third
party financial institution. Repurchase agreements shall be documented by a specific
agreement noting the collateral pledge in each agreement, and collateral shall be
valued daily. Collateral shall be reviewed at least monthly to assure that the market
value of the pledged securities is adequate.
Safekeeping Agreement
Collateral pledged to secure deposits of the City shall be held by a safekeeping
institution in accordance with a Safekeeping Agreement which clearly defines the
procedural steps for gaining access to the collateral should the City of Richland Hills
determine that the city's funds are in jeopardy. The safekeeping institution, or Trustees,
shall be the Federal Reserve Bank or an institution approved by the City and not
affiliated with the firm pledging the collateral. The safekeeping agreement shall include
the signatures of authorized representatives of the City, the firm pledging the collateral,
and the Trustee.
Collateral Defined
The City of Richland Hills shall accept only the following securities as collateral:
A. FDIC insurance coverage
B. A bond, bill, certificate of indebtedness, or Treasury Note of the United
States, or other evidence of indebtedness of the United States that is
guaranteed as to principal and interest by the United States.
C. Obligations, the principal and interest on which, are unconditionally
guaranteed or insured by the State of Texas.
`"~-` D. A bond of the State of Texas or a county, city or other political subdivision
of the State of Texas having been rated as investment grade (investment
rating no less than "a" or its equivalent) by a nationally recognized rating
agency with a remaining maturity of ten years or less.
Subject to Audit
All collateral shall be subject to inspection and audit by the Investment Officer or the
City's independent auditors.
Collateral Substitution
Collateralized certificates of deposit and repurchase agreements often require
substitution of collateral. Any broker, dealer, or financial institution requesting
substitution must contact the Investment Officer(s) for approval and settlement. The
substituted security's value will be calculated and substitution approved if its value is
equal to or greater than the required security level. The Investment Officer(s), or a
designee, must provide written notification of the decision to the bank or the
safekeeping agent holding the security prior to any security release. Substitution is
allowable for all transactions, but should be limited, if possible, to minimize potential
administrative problems and transfer expense. The Investment Officer may limit
substitution and assess appropriate fees if substitution becomes excessive or abusive.
Delivery vs. Payment
Treasury Bills, Notes, Bonds, Repurchase Agreements and Government Agencies'
securities shall be purchased using the delivery vs. payment method. That is, funds
shall not be wired or paid until verification has been made that the correct security was
received by the Trustee. The security shall be held in the name of the City or held on
behalf of the City. The Trustee's records shall assure the notation of the City's
ownership of or explicit claim on the securities. The original copy of all safekeeping
receipts shall be delivered to the City.
INVESTMENT POLICY ADOPTION
The City of Richland Hills investment policy, which includes strategies for each fund,
shall be adopted by resolution of the City Council. The policy shall be reviewed
annually and any modifications thereto must be approved by the City Council.
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GLOSSARY
AGENCIES: Federal agency securities.
ASKED: The price at which securities are offered.
BANKERS ACCEPTANCE (BA): A draft or bill exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the
issuer.
BID: The price offered by a buyer of securities. (When you are selling securities, you
ask for a bid.) See Offer.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specified 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 refer to securities pledged by a bank to
secure deposits of public moneys.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report
for the City of Richland Hills. 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 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 issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt. Delivery versus payment is
delivery of securities with an exchange of money for the securities. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the securities.
DISCOUNT: The difference between the cost price of a security and its maturity when
quoted at lower than face value. A security selling below offering price shortly after sale
also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are
issued at a discount and redeemed at maturity for full face value, e.g. U.S. Treasury
Bills.
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DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply
credit to various classes of institutions and individuals, e.g. S&L s, small business firms,
students, farmers, farm cooperatives, and exporters.
FEDERAL FUNDS RATE: The rate of interest at which FED funds are traded. This
rate is currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to
savings and loans associations. The Federal Home Loan Banks play a role analogous
to that played by the Federal Reserve Banks vis-a-vis member commercial banks.
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 rate 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.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the
`' Federal Reserve Bank Board and five of the twelve Federal Reserve Bank Presidents.
The President of the New York Federal Reserve Bank is a permanent member, while
the other Presidents serve on a rotating basis. The Committee periodically meets to set
Federal Reserve guidelines regarding purchases and sale of Government Securities in
the open market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by
Congress and consisting of a seven member Board of Governors in Washington, D.C.
regional banks and about 5,700 commercial banks that are members of the system.
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 association, and other
institution. 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
passthroughs is often used to describe Ginnie Mae .
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread between bid and asked prices is narrow and reasonable quantities can be
purchased at those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): 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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MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties 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.
MONEY MARKET: The date upon which the principal or stated value of an investment
becomes due and payable.
OFFER: The price asked by a seller of securities. (When you are buying securities,
you ask for an offer.) See Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of money ~7 credit in the economy. Purchases
inject reserves into the bank system and stimulaYerowth of money and credit; sales
have the opposite effect. Open market operations are the Federal Reserve s most
important and most flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the Federal
Reserve 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 PERSON RULE: An investment standard. In some states the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected
by the custody estate-the so called legal list. In other states the trustee may invest in
security if it is one which would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of capital .
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes
under the laws of this state, which has segregated for the benefit of the commission
eligible collateral having a value of not less than its maximum liability and which has
been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity on a bond or the
current income return.
is
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price on a
fixed date. 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.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank s vaults for
protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding
issues following the initial distribution.
SECURITIES AND 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.
TREASURY BILLS: Anon-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 NOTES: Intermediate-term, coupon-bearing U.S. Treasury securities
having initial maturities from one 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 of underwriting syndicates. Liquid capital includes cash and
assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a
percentage. (a) Income Yield is obtained by dividing the current dollar income by the
current market price for security. (b) Net Yield to Yield Maturity is the current income
yield minus any premium above par or plus any discount from par in purchase price,
with the adjustment spread over the period from the date of purchase to the date of
maturity of the bond.
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