HomeMy Public PortalAbout2021-01-19-Lynwood-Agenda-LPFAThis Agenda contains a brief general description of each item to be considered. Copies of the Staff reports or
other written documentation relating to each item of business referred to on the Agenda are on file in the Office of
the City Clerk and are available for public inspection. Any person who has a question concerning any of the
agenda items may call the City Manager at (310) 603-0220, ext. 200.
Procedures for Addressing the Council
IN ORDER TO EXPEDITE CITY COUNCIL BUSINESS, WE ASK THAT ALL PERSONS WISHING TO ADDRESS THE
COUNCIL SUBMIT YOUR COMMENTS IN ADVANCE TO CITYCLERK@LYNWOOD.CA.US OR FILL OUT A FORM
PROVIDED AT THE PODIUM, AND TO TURN IT IN TO THE CITY CLERK PRIOR TO THE START OF THE
MEETING. FAILURE TO FILL OUT SUCH A FORM WILL PROHIBIT YOU FROM ADDRESSING THE COUNCIL IN
THE ABSENCE OF THE UNANIMOUS CONSENT OF THE COUNCIL.
AGENDA
Lynwood Public Financing Authority
TO BE HELD ON
January 19, 2021
Web conference via ZOOM - To participate please join via Zoom or by telephone: 1-669-900-
9128 or 1-253-215-8782 Meeting ID: 835 2029 8238. Duly Posted 01/14/21 by MQ
If interpretation services are needed, please dial (310) 372-7549; conference code 673120
6:00 PM
1.CALL TO ORDER
2.CERTIFICATION OF AGENDA POSTING BY SECRETARY
3.ROLL CALL OF MEMBERS
Marisela Santana, President
Jorge Casanova, Vice President
Oscar Flores, Member
Jose Luis Solache, Member
Rita Soto, Member
4.GOVERNMENT CODE SECTION 54954.3
Members of the City Council are also members of Lynwood Public Financing Authority, which is
concurrently convening with the City Council this evening and each Council Member is paid an
Additional Stipend of $100 for Attending the Lynwood Public Financing Authority Meeting. Further,
the Authority is scheduled to meet four (4) timer per year. If additional meetings are required beyond
the scheduled four (4) meetings, the City Council will only get paid for the first four(4) meetings.
PUBLIC ORAL COMMUNICATIONS
(Regarding Agenda Items Only)
NON-AGENDA PUBLIC ORAL COMMUNICATIONS
THIS PORTION PROVIDES AN OPPORTUNITY FOR THE PUBLIC TO ADDRESS THE LYNWOOD PUBLIC
Lynwood Public Financing Authority - Page 1 of 30
FINANCING AUTHORITY ON ITEMS WITHIN THE JURISDICTION OF THE LYNWOOD PUBLIC FINANCING
AUTHORITY AND NOT LISTED ON THE AGENDA. IF AN ITEM IS NOT ON THE AGENDA, THERE SHOULD BE NO
SUBSTANTIAL DISCUSSION OF THE ISSUE BY LYNWOOD PUBLIC FINANCING AUTHORITY, BUT LYNWOOD
PUBLIC FINANCING AUTHORITY MAY REFER THE MATTER TO STAFF OR SCHEDULE SUBSTANTIVE
DISCUSSION FOR A FUTURE MEETING. (The Ralph M. Brown Act, Government Code Section 54954.2 (a).)
CONSENT CALENDAR
ALL MATTERS LISTED UNDER THE CONSENT CALENDAR WILL BE ACTED UPON BY ONE MOTION
AFFIRMING THE ACTION RECOMMENDED ON THE AGENDA. THERE WILL BE NO SEPARATE DISCUSSION ON
THESE ITEMS PRIOR TO VOTING UNLESS MEMBERS OF THE COUNCIL OR STAFF REQUEST SPECIFIC
ITEMS TO BE REMOVED FROM THE CONSENT CALENDAR FOR SEPARATE ACTION.
5.PREVIOUS MEETING MINUTES
Comments:
Approving previous meeting minutes for the Lynwood Public Financing Authority (CC)
December 15, 2020
Recommendation:
Staff recommends that the Lynwood Public Financing Authority approve the following minutes:
December 15, 2020
6.TREASURER'S INVESTMENT POLICY
Comments:
The investment policies and practices of the City of Lynwood are based on state laws and
principles of prudent money management. This statement is intended to provide guidelines for
the prudent investment of idle and surplus cash, while meeting the short and long-term cash flow
demands and it is submitted annually for City review. (CT)
Recommendation:
Staff recommends that the Lynwood Public Finance Authority adopt the following resolution
entitled: “A RESOLUTION OF THE LYNWOOD PUBLIC FINANCE AUTHORITY OF THE
CITY OF LYNWOOD APPROVING THE TREASURER’S INVESTMENT POLICY
STATEMENT."
ADJOURNMENT
THE LYNWOOD PUBLIC FINANCE AUTHORITY MEETINGS WILL BE POSTED AS
NEEDED. THE NEXT MEETING WILL BE HELD IN THE COUNCIL CHAMBERS OF CITY
HALL ANNEX, 11350 BULLIS ROAD, CITY OF LYNWOOD, CALIFORNIA.
Lynwood Public Financing Authority - Page 2 of 30
Agenda Item # 5.
AGENDA STAFF REPORT
DATE: January 19, 2021
TO: Honorable Mayor and Members of the City Council
APPROVED BY: Michelle G.Ramirez, Acting City Manager
PREPARED BY: Maria Quinonez, City Clerk
Silvia Pineda, Assistant to the City Clerk
SUBJECT: PREVIOUS MEETING MINUTES
Recommendation:
Staff recommends that the Lynwood Public Financing Authority approve the following minutes:
December 15, 2020
Background:
N/A
Discussion and Analysis:
N/A
Fiscal Impact:
N/A
Coordinated With:
N/A
ATTACHMENTS:
Description
Regular Meeting LPFA 12/15/20
Lynwood Public Financing Authority - Page 3 of 30 Agenda Item # 2
LYNWOOD PUBLIC FINANCING AUTHORITY MEETING
MEETING MINUTES
December 15, 2020
01. CALL TO ORDER
Web conference via ZOOM - To participate please join via Zoom or by telephone: 1-669-
900-9128 or 1-253-215-8782 Meeting ID: 835 2029 8238.
Meeting was called to order at 7:05 p.m.
President Santana presiding.
02. CERTIFICATION OF AGENDA POSTING BY CITY CLERK
Secretary Quinonez announced that the Agenda had been duly posted in accordance
with the Brown Act.
03. ROLL CALL OF COUNCIL MEMBERS
PRESENT: MEMBERS FLORES, SOLACHE, SOTO, VICE PRESIDENT
CASANOVA, AND PRESIDENT SANTANA
ABSENT: NONE
STAFF PRESENT: Acting City Manager Ramirez, City Attorney Tapia, City Treasurer
Camacho and City Clerk Quinonez.
04. GOVERNMENT CODE SECTION 54954.3
Mayor Castro stated the following:
Members of the City Council are also members of the Lynwood Public Financing
Authority, which is concurrently convening with the City Council this evening and each
Council Member is paid an additional stipend of $100 for attending the Lynwood Public
Financing Authority Meeting. Further, the Authority is scheduled to meet four (4) times
per year. If additional meetings are required beyond the scheduled four (4) meetings, the
City Council will only get paid for the first four (4) meetings.
PUBLIC ORAL COMMUNICATIONS
(Regarding Agenda Items Only)
NONE
Lynwood Public Financing Authority - Page 4 of 30 Agenda Item # 2
NON-AGENDA PUBLIC ORAL COMMUNICATIONS
NONE
CITY COUNCIL ORAL AND WRITTEN COMMUNICATION
NONE
CONSENT CALENDAR
05. PREVIOUS MEETING MINUTES
MOTION: It was moved by Commissioner Solache, seconded by Commissioner
Soto to approve the consent calendar. Motion carried by unanimous consent.
ROLL CALL:
AYES: MEMBERS FLORES, SOLACHE, SOTO, VICE PRESIDENT CASANOVA,
AND PRESIDENT SANTANA
NOES: NONE
ABSTAIN: NONE
ABSENT: NONE
ADJOURNMENT
Having no further discussion, it was moved by Vice President Casanova, seconded by
Commissioner Soto to adjourn the Lynwood Public Financing Authority at 7:08 p.m.
Motion carried by unanimous consent.
ROLL CALL:
AYES: MEMBERS FLORES, SOLACHE, SOTO, VICE PRESIDENT CASANOVA,
AND PRESIDENT SANTANA
NOES: NONE
ABSTAIN: NONE
ABSENT: NONE
_________________________ _______________________
Maria Quinonez, Secretary Marisela Santana, President
Lynwood Public Financing Authority - Page 5 of 30 Agenda Item # 2
Agenda Item # 6.
AGENDA STAFF REPORT
DATE: January 19, 2021
TO: Honorable Mayor and Members of the City Council
APPROVED BY: Michelle Ramirez, Acting City Manager
PREPARED BY: Gabriela Camacho, City Treasurer
Sheila Harding, Deputy City Treasurer
SUBJECT: TREASURER'S INVESTMENT POLICY
Recommendation:
Staff recommends that the Lynwood Public Finance Authority adopt the following resolution entitled: “A
RESOLUTION OF THE LYNWOOD PUBLIC FINANCE AUTHORITY OF THE CITY OF LYNWOOD
APPROVING THE TREASURER’S INVESTMENT POLICY STATEMENT."
Background:
The investment policies and practices of the City of Lynwood are based on state laws and principles of prudent
money management. This statement is intended to provide guidelines for the prudent investment of idle and
surplus cash, while meeting the short and long-term cash flow demands and it is submitted annually for City
review. The primary goals of these policies are:
1. To assure compliance with all federal, state, and local laws governing the investment of monies under the
control of the Treasurer.
1. To protect the principal and asset holdings of the City’s portfolio.
1. To ensure that adequate liquidity is provided for the prompt and efficient handling of City disbursements.
1. To generate the maximum amount of investment income within the parameters of these investment policies
and guidelines for suitable investments.
Discussion and Analysis:
Cities are required to review their Investment Policy and Strategy and seek council's approval annually. No
changes have been made to the policy since it's last review and approved on March 3, 2020.
Lynwood Public Financing Authority - Page 6 of 30 Agenda Item # 3
It is the Policy of the City of Lynwood, that giving due regard to the safety and risk of investment, all available funds
shall be managed in conformance with these legal and administrative guidelines (the Policy) and, to the maximum
extent possible, surplus funds shall be invested at the highest rates obtainable at the time of investment. Adequate
operating funds shall be maintained in a depository institution(s), which affords the City safety with respect to its
funds, as well as the ability to meet all of the City’s cash receipt and disbursement needs.
Fiscal Impact:
There is no fiscal impact.
Coordinated With:
City Manager's Office
City Attorney
FHN Financial Main Street Advisors
ATTACHMENTS:
Description
Resolution
Treasurer's Investment Policy - 2021
Lynwood Public Financing Authority - Page 7 of 30 Agenda Item # 3
RESOLUTION NO.
A RESOLUTION OF THE LYNWOOD PUBLIC FINANCE AUTHORITY OF
THE CITY OF LYNWOOD APPROVING THE TREASURER’S
STATEMENT OF INVESTMENT POLICY
WHEREAS, the Treasurer is responsible for the Lynwood Public Finance
Authority’s cash flow whereby funds are transferred from various accounts to meet
operating obligations; and
WHEREAS, the Treasurer is also responsible for the investment of idle cash; and
WHEREAS, the Treasurer has prepared guidelines for a prudent investment
policy; and
WHEREAS, the policy contains certain investment criteria; and
WHEREAS, the basic premise of the policy is to ensure the safety of funds and
assure that the Lynwood Public Finance Authority’s cash needs are met.
NOW, THEREFORE, THE LYNWOOD PUBLIC FINANCE AUTHORITY DOES
HEREBY FIND, PROCLAIM, ORDER, AND RESOLVE AS FOLLOWS:
Section 1. The Lynwood Public Finance Authority hereby approves the Treasurer’s
Statement of Investment Policy attached hereto as Exhibit “A” is hereby approved.
Section 2. The City Clerk shall certify to the adoption of this resolution and hereafter
the same shall be in full force and effect.
PASSED, APPROVED and ADOPTED this 19th day of January 2021.
________________________________
Marisela Santana, President
ATTEST: APPROVED AS TO CONTENT:
_____________________________ __________________________
Maria Quinonez, City Clerk Michelle Ramirez,
Acting as Chief Administrative Officer
APPROVED AS TO FORM:
Noel Tapia, City Attorney
Lynwood Public Financing Authority - Page 8 of 30 Agenda Item # 3
Revised 1-12-21
PURPOSE
The purpose of this Statement of Investment Policy (“Policy”) is to establish guidelines for
the prudent investment of the City of Lynwood’s idle cash or reserve cash and outlines the
policies essential to ensure the safety and financial strength of the City’s investment
portfolio.
This policy is based on the principles of prudent money management and conforms to all
applicable Federal and State Laws governing the investment of public funds under the
control of the Treasurer.
1.0 POLICY:
Annually, in accordance with California Government Code (CGC) Section 53646,
the Treasurer will render to the City Council a Statement of Investment Policy for
consideration and approval at a public meeting. Any investments currently held at
that time that do not meet the guidelines of this policy, as changed from time to
time by the City Council, shall be exempt from the requirements of this policy.
However, at the investment maturity or liquidation, such funds shall be reinvested
only as provided by this policy, which offer guidance to brokers and any external
investment advisors on the investment of City funds. This investment policy
applies to all investment activities of the City, except for the Employees Retirement
and Deferred compensation funds are excluded because it is separately managed
by a third party administrator. This policy applies to all City funds, except for bond
proceeds that are managed by trustees. Trustees must comply with the provision
of bond’s indenture agreements.
2.0 SCOPE:
Policy statements outlined in this document apply to the City’s pooled funds, as
well as other financial assets under the City Treasurer’s control unless exempted
by resolution or by statute. These funds are accounted for in the City of Lynwood
Comprehensive Annual Financial Report (CAFR), and include:
General Fund
Special Revenue Funds
Capital Project Funds
Enterprise Funds
Trust and Agency Funds
Retirement Pension Funds
Internal Service Funds
Fiduciary-Agency Fund
Any new fund created by the City Council unless specifically exempted
All monies entrusted to the Treasurer shall be invested in accordance to California
Government Code Section 53601, 53602 and 53635.
Lynwood Public Financing Authority - Page 9 of 30 Agenda Item # 3
INVESTMENT POLICY
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3.0 PRUDENCE:
The standard of prudence to be used by investment officials shall be the “prudent
investor” standard (CGC Section 53600.3) and shall be applied in the context of
managing an overall portfolio which states that:
“a trustee shall act with care, skill, prudence, and diligence under the
circumstances then prevailing, including, but not limited to, the general economic
conditions and the anticipated needs of the agency, that a prudent person acting
in a like capacity and familiarity with those matters would use in the conduct of
funds of a like character and with like aims to safeguard the principal and maintain
the liquidity needs of the City”.
At the time of purchase, it is the City’s intent to hold all investments until maturity
to ensure the return of all invested principal. However, it is recognized that market
prices of securities will vary depending on economic and interest rate condition at
any point in time.
The City Treasurer, and other individuals who may be designated to manage the
City’s investment portfolio, when acting within the intent and scope of this
investment policy and other authorized written procedures, and when exercising
due diligence, are relieved of personal liability for the individual security’s credit
risk or market price change of a security or other investment, provided that
deviations from expectations are reported to the City of Lynwood in a timely
manner and that appropriate action is taken to mitigate unforeseen adverse
conditions.
4.0 OBJECTIVES:
Within the overriding requirement of compliance with all Federal, State and local
laws governing the investment of moneys under the control of the Treasurer, and
as specified in CGC Section 53600.5, when investing, reinvesting, purchasing,
acquiring, exchanging, selling or managing public funds, the primary objective of
a trustee shall be to safeguard the principal of the funds under its control. The
secondary objective shall be to meet the liquidity needs of the depositor. The third
objective shall be to achieve a market rate of return on the funds under its control.
Taking into account the City’s daily and periodic cash flow needs, the City desires
to invest all temporarily idle funds as close to 100% as is reasonably possible. At
least 30% of the overall investment portfolio will be comprised of investments
maturing in one year or less. No single investment shall be purchased with a term
to maturity at the date of purchase that exceeds 5 years, except as special
circumstances dictate and with the expressed approval of the City Treasurer.
The basic goal of the City’s investment policy is to ensure safety and availability of
temporarily idle funds when they are needed. The primary objectives, in priority
order, of the investment activities shall be:
Safety: Safety of principal is the foremost objective of the investment
program. Each investment transaction must seek to ensure that capital
losses are avoided, whether from securities default, broker-dealer default,
Lynwood Public Financing Authority - Page 10 of 30 Agenda Item # 3
INVESTMENT POLICY
3
or erosion of market value. The City will endeavor to preserve principal by
mitigating both credit risk and market risk, as specified below.
Credit risk, which is defined as the risk of loss due to insolvency or other
failure of the issuer of a security, must be mitigated by purchasing
investment grade securities and by diversifying the investment portfolio so
that the failure of any one issuer does not unduly harm the City’s capital
base and cash flow.
Market risk, which is defined as market value fluctuations, must be
mitigated by limiting the average maturity of the City’s investment portfolio
to three years, limiting the maximum maturity of any one security to five
years, structuring the portfolio to take into account historic and current cash
flow analysis, eliminating the need to sell securities for the sole purpose of
short term speculation.
Liquidity: Because the City operates its own water utility and bills monthly
for utility services, cash flow is generated on a daily basis. Historical cash
flow trends must be compared to current cash flow requirements on an
ongoing basis to ensure that the City’s investment portfolio will remain
sufficiently liquid to enable the City to meet all reasonable anticipated
operating requirements. In managing City funds for cash flow needs, it is
generally not the intention to liquidate a security prior to maturity in order
to meet expected cash flow needs. However, it is important that when
exceptional conditions require, and there are unexpected cash flow
demands, a security sale can be done quickly.
Return on the Investment: The investment portfolio shall be designed
and managed with the objective of attaining a market rate of return
throughout budgetary and economic cycles, taking into account the
investment objectives, authorized investments and the cash flow needs of
the City.
5.0 DELEGATION OF AUTHORITY:
In accordance with Section 53607 of the Government Code, the City of Lynwood
management responsibility for the investment program is hereby delegated to the
Treasurer, who shall be responsible for all transactions undertaken and shall
establish a system of control to regulate the activities of subordinate officials, and
their procedures in the absence of the Treasurer. Under the provision of CGC
Section 53600.3, the Treasurer is a trustee and a fiduciary subject to the prudent
investor standard. The City may delegate to the City Treasurer the authority to
invest or reinvest City funds for a one-year period.
The Treasurer may delegate all, or a portion of his/her investment authority to a
Deputy City Treasurer. Prior to the delegation of the investment authority to a
Deputy City Treasurer, the Treasurer shall notify the City council and request
confirmation of the delegation. Delegation of investment authority will not remove
or abridge the Treasurer’s investment responsibility.
Lynwood Public Financing Authority - Page 11 of 30 Agenda Item # 3
INVESTMENT POLICY
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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 external managers may be granted
discretion to purchase and sell investment securities in accordance with this
Investment Policy.
The Treasurer shall establish written investment policy procedures for the
operation of the investment program consistent with this policy. The procedures
should include reference to: safekeeping, wire transfer agreements, banking
service contracts and collateral/depository agreements. Such procedures shall
include explicit delegation of authority to persons responsible for investment
transactions. No person may engage in an investment transaction except as
provided under the terms of this policy and the procedures established by the
Treasurer.
The Treasurer and Deputy Treasurer shall attend at least one training session
within twelve months after taking office or being appointed, and at least annually
thereafter. The training session should be sponsored by a professional
organization, such as, but not limited to: Government Finance Officers Association
(GFOA), California Society of Municipal Finance Officers (CSMFO), Municipal
Treasurers Association of the United States & Canada (MTA, US&C), California
Municipal Treasurer Association (CMTA), and Government Investment Officers
Association (GIOA). Training must include some or all of the following
components: investment controls, security risks, strategy risk, market risks, and
compliance with Federal, State and local laws.
6.0 ETHICS AND CONFLICT OF INTEREST:
Elected officials, City officers, employees and any other individual involved in the
investment operations are prohibited 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, or which could give the
appearance thereof. Furthermore, these same individuals shall disclose any
material financial interest in financial institutions that conduct business within their
jurisdiction, and they shall further disclose any large personal financial/investment
positions that could be related to the performance of the City. The Treasurer shall
immediately disclose any financial interest which is subject to disclosure under the
California Political Reform Act or would constitute a conflict of interest under
Government Code Section 1090 to the City Manager. All other City Investment
Officials shall immediately disclose any financial interest which is subject to
disclosure under the California Political Reform Act or would constitute a conflict
of interest under Government Code Section 1090 to the City Manager.
7.0 AUTHORIZED DEALERS AND INSTITUTIONS:
The City may conduct investment transactions only with banks, savings and loans
associations, and registered broker-dealers. Any investments other than those
purchased directly from a issuer must be purchased from (i) an individual or entity
licensed by the State as a broker-dealer, as defined in Section 25004 of the
Corporations Code, and which is a member of the Financial Industry Regulatory
Authority, (FINRA) or (ii) from a member of a federally-regulated securities
Lynwood Public Financing Authority - Page 12 of 30 Agenda Item # 3
INVESTMENT POLICY
5
exchange, or (iii) a national or state charted bank; or (iv) a federal or state
association (as defined by Section 5102 of the Financial Code); or (v) a brokerage
firm designated as a primary government dealer by the Federal Reserve Bank.
The City Treasurer, either directly or through an authorized party, must investigate
and evaluate all financial institutions, on an annual basis, that desire to do business
with the City in order to determine whether they are adequately capitalized and
whether they make markets in securities that are appropriate to the City’s needs.
This may be accomplished by the following: a financial institution to complete and
return an appropriate questionnaire, audited financial statements and proof of
Financial Industry Regulatory Authority (FINRA) registration and good standing.
Nothing in this section precludes the City from engaging the services of a
Registered Investment Advisory firm to assist the City, on a discretionary basis,
with the investment of the City’s portfolio.
8.0 AUTHORIZED AND SUITABLE INVESTMENTS:
Investments must be made in accordance with the “Prudent Investor Rule” that is
cited under the heading “Prudence.”
The City is subject to California Government Code, Sections 53600 et seq. within
the context of these limitations, the following investments are authorized, subject
to the restrictions noted below:
A. United States Treasury Obligations, Bills, Notes, and Bonds or similar
instruments for which the full faith and credit of the United States is pledged
for payment of principal and interest. There is no limitation on the
percentage of the City’s surplus funds that can be invested in these
instruments. The maximum maturity period may not exceed 5 years.
B. US Agency and/or Obligations, Securities that represent an obligation of
several agencies or instrumentalities which administer selected lending
programs of the U.S. Government. These agencies include, but are not
limited to, obligations issued by banks for cooperatives, federal land banks,
federal intermediate credit banks, the Federal Home Loan Board (FHLB),
Federal Home Loan Mortgage Corporation (FHLMC), Federal Farm Credit
Bank (FFCB), and the Federal National Mortgage Association (FNMA).
Although there is no percentage limitation on investments in these
obligations, the “Prudent Investor Rule” applies to obligations issued by any
of these agencies, because U.S. Government backing is implied rather
than guaranteed. The maximum maturity period may not exceed 5 years.
C. Commercial Paper rated “P-1” by Moody’s Investor Services or “A-1” by
Standard & Poor’s, and issued by a domestic corporation having assets in
excess of $500,000,000 and has a long-term debt rating of “A2” or higher
by Moody’s or “A” or higher rating by S&P. The purchase of eligible
commercial paper may not exceed 270 days maturity nor represent more
than 5% of the outstanding paper of an issuing corporation. No more than
2% of the market value of the portfolio may be invested in commercial
paper issued by one corporation. Medium term corporate holdings must be
Lynwood Public Financing Authority - Page 13 of 30 Agenda Item # 3
INVESTMENT POLICY
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included when calculating this 2% limitation. The Purchase of commercial
paper not to exceed 25% of the City’s surplus funds.
D. FDIC Insured Certificates of Deposit issued by a nationally or state-
chartered bank, or a state of federal savings and loan association, or by a
state-licensed branch of a foreign bank. The invested amount per
institution shall not exceed the current FDIC insured limit (currently
$250,000). Purchases of eligible FDIC insured certificates of deposit shall
not exceed five years to maturity.
E. Negotiable Certificates of Deposit issued by a national or state-charted
bank or a state or federal saving and loan association. Negotiable
certificates of deposit may not exceed 30% of the City’s total portfolio.
Certificates purchased from a bank may not exceed 30% of the City’s total
portfolio. Certificates purchased from a bank may not exceed the
shareholder’s equity in the bank. Certificates over $500,000 purchased
from savings and loan associations may not exceed the net worth of the
association. The maximum maturity period may not exceed 5 years.
F. State of California Local Agency Investment Fund (LAIF) Funds may be
invested in LAIF; a State of California managed investment pool, up to the
maximum dollar amounts per separate legal entity in conformance with the
account balance limits authorized by the State Treasurer. Annual review
of LAIF’s Pool Money Investment Board Annual Report will be conducted
to continue to ensure LAIF’s investment policy, standards, and rate of
return are compatible with the City’s risk tolerance. Maximum investment
limits are dependent upon limits established under the Local Agency
Investment Funds guidelines.
G. Funds held under the terms of a Trust Indenture or other contract or debt
issuance agreement may be invested according to the provisions of those
indentures’ agreements.
H. The City may invest in non-negotiable time deposits that are collateralized
as required by the California Government Code, and that are maintained in
banks and savings and loans associations that meet the requirement for
accepting deposits of public funds. Because time deposits are not liquid,
no more than 25% of the City’s temporarily idle funds may be invested in
this category. A maximum maturity period may not exceed one year.
I. Medium term corporate notes with a maximum maturity of 5 years may be
purchased. Securities eligible for investment must be rated “A2” or higher
by Moody’s or “A” or higher rating by S&P. Medium term notes may not
exceed 30% of the market value of the City’s portfolio, and not more than
2% of the market value of the portfolio may be invested in notes issued by
any one corporation. Commercial paper holdings must be included when
calculating this 2% limitation. The maximum maturity period may not
exceed 5 years.
J. Shares of beneficial interest issued by diversified management
companies, that are money market funds (MMFs) registered with the
Lynwood Public Financing Authority - Page 14 of 30 Agenda Item # 3
INVESTMENT POLICY
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Securities and Exchange Commission under the Investment Advisory
Company Act of 1940 (15 U.S.C. Sec 80a-1 et seq.). To be eligible for
investment pursuant to this subdivision these companies shall either (I)
attain the highest ranking letter or numerical rating provided by not less
than two of the three largest nationally recognized rating services or (2)
have an investment advisor registered or exempt from registration with the
Securities and Exchange Commission with not less than five years’
experience investing in money market instruments with assets in excess
of $500,000,000.
The purchase price of the MMF shares shall not exceed 20% of the City's
surplus funds. No more than 10% of the City’s surplus funds may be
invested in shares of any one MMF.
K. Supranational Debt Obligations. United States dollar-denominated
senior unsecured unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and Development
of the World Bank (IBRD), International Finance Corporation (IFC), and
Inter-American Development Bank (IABD), with maximum remaining
maturity of five years or less, and eligible for purchase and sale within the
United States. Investments must have a minimum rating of AA or better
by at least two of the following NRSRO’s: Moody’s, S&P, or Fitch, and
shall not exceed 30% of the City’s surplus funds, and not more than 5% of
the market value of the portfolio may be invested in notes issued by any
one supranational. The maximum maturity period may not exceed 5 years.
9.0 UNAUTHORIZED INVESTMENTS:
State and Federal laws notwithstanding, any investment not specifically described
herein including, but not limited to, reverse repurchase agreements, derivatives,
options, futures, zero coupon bonds, inverse floaters, range notes, first mortgages
or trust deeds, collateralized mortgage obligations, (CMO’s), limited partnerships,
real estate investments, trusts (REIT’s), open-end mutual funds with a weighted
average maturity greater than 180 days, unregulated and/or uninsured investment
pools, common stock, preferred stock, commodities, precious metals, securities
with high price volatility, limited marketability (less than three active bidders),
securities that may default on interest payments and any other speculative
investment deemed inappropriate under the prudent investor standard are strictly
prohibited.
10.0 REVIEW OF INVESTMENT PORTFOLIO
The securities held by the City of Lynwood must be in compliance with Section 8.0
Authorized and Suitable Investments at the time of purchase. The Quarterly
Investment report will identify any securities that do not comply. The Treasurer
shall report any instances of noncompliance identified through the review of the
portfolio to the City Council.
11.0 COLLATERAL REQUIREMENTS:
Lynwood Public Financing Authority - Page 15 of 30 Agenda Item # 3
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Collateral for Certificates of Deposit (CD) and Negotiated Certificates of Deposit
(NCD) must comply with Government Code, Chapter 4, Bank Deposit law Section
16500 et seq. and the Savings and Loan and Credit Union Deposit Law
Government Code Section 16600 et seq.
In order to reduce market risk and provide a level of security for all funds, the
market value of securities that underlay Certificates of Deposit shall be valued at
110% of the market value of principal and accrued interest. Repurchase
Agreements shall be valued at 102% of the market value of principal and accrued
interest.
In conformity with the provisions of the Federal Bankruptcy Code that provide for
the liquidation of securities held as collateral, the only securities acceptable as
collateral are certificates of deposit, commercial paper, eligible bankers
acceptances, and medium term notes or securities that are the direct obligation of,
or are fully guaranteed as to principal and interest by the United States or any City
of the United States.
An independent third party with whom the City has a current custodial agreement
will always hold collateral.
The right of collateral substitution is granted with prior approval of the City
Treasurer.
12.0 SAFEKEEPING AND CUSTODY
All securities owned by the City shall be held in safekeeping by the City’s custodial
bank or by a third party bank trust department, acting as agent for the City under
the terms of a custody agreement or master repurchase agreement. All security
transactions, including collateral for repurchase agreements, entered into by the
City shall be conducted on a Delivery-Versus-Payment (DVP) basis through the
City’s safekeeping agent. Securities held in custody for the City shall be
independently audited on an annual basis to verify investment holdings.
13.0 DIVERSIFICATION:
The Treasurer shall maintain a diversified portfolio to minimize the risk of loss
resulting from over concentration of assets in a specific maturity, issuer, or security
type. With the exception of U.S. Treasury securities, Federal agencies, and LAIF,
no more than 50% of the City’s total investment portfolio will be invested in with a
single institution. Additionally, no more than 2%, calculated at the time of
purchase, of the portfolio shall be invested in one name or with one credit
counterparty.
14.0 MAXIMUM MATURITIES:
To the extent possible the portfolio will attempt to match its investments with
anticipated cash flow requirements. Matching maturities with cash flow dates will
reduce the need to sell securities prior to maturity, thus reducing a potential
realized loss. The portfolio will not directly invest in securities maturing more than
five (5) years from the date of purchase pursuant to Government Code Section
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53601. (Excluding LAIF). The weighted average maturity of the portfolio shall not
exceed 3 years.
Reserve funds may be invested in securities exceeding one year if the maturity of
such investments is made to coincide as nearly as practicable with the expected
use of the funds. No portion of the portfolio may exceed five years.
15.0 INTERNAL CONTROL:
The Treasurer is responsible for establishing and maintaining an internal control
structure designed to ensure that the City’s assets are protected from loss, theft or
misuse. The internal control structure shall be designed to provide reasonable
assurance that those objectives are met. The concept of reasonable assurance
recognizes that the cost of a control should not exceed the benefits to be derived
and that the valuation of costs and benefits requires estimates and judgments by
management. Internal control procedures shall address:
Separation of duties
Control of collusion
Custodial safekeeping
Avoidance of physical delivery of securities
Written confirmation of transfers for investments and wire transfers
Written procedures for placing investment transactions
Delegation of authority to investment officials
16.0 PERFORMANCE STANDARDS:
The investment portfolio shall be designed with the objective of obtaining a market
rate of return throughout budgetary and economic cycles, commensurate with
investment risk constraints and cash flow needs:
a. Investment Strategy: The portfolio’s basic investment strategy is to buy
and hold investments until maturity. However the Treasurer may sell a
security due to adverse changes in credit risk or, due to unexpected cash
flow needs, or to improve the quality, yield, or target duration of the
portfolio.
b. Market Yield (Benchmark): The City portfolio is managed with the objective
of obtaining a market rate of return, commensurate with identified risk
constraints and cash flow characteristics. The appropriate benchmarks will
be periodically reviewed by the City Treasurer.
17.0 REPORTING:
In compliance with Government code Section 53607 and 53646, the Treasurer
shall provide the City Council quarterly investment reports, which provide a clear
picture of the status of the current investment portfolio.
The Quarterly Investment Report will include the following information: portfolio
statistics, portfolio performance, compliance reporting requirements, and
investment trading:
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Portfolio Statistics
Classification of the investment, the percentage of the total portfolio which
each type of investment represents, issuer, CUSIP, purchase date, rating of
security, date of maturity, par and dollar amount invested on all securities and
investments.
Current market value and the source of the market value.
Weighted average maturity of the investment portfolio.
Maturity aging by type of investment.
Unrealized gain or loss resulting from appreciation or depreciation in the
market value of securities.
Compliance Reporting Requirements
Cash management projection: Statement denoting the ability of the City to
meet its expected obligations over the next six months.
Statement of compliance with the Policy: Reasons for and number of
violations or exceptions to the investment policy during the quarter being
reported on, as well as prior violations or exceptions which have not yet been
corrected.
Investment Trading Activity
All investment transactions occurring during the quarter whether or not the
transaction has been fully settled.
A description of any security purchased during the quarter with a maturity
exceeding five years.
A description of any security downgraded below the minimum acceptable
ratings level (below prime for short term ratings, or below investment grade
for long term ratings).
18.0 INVESTMENT POLICY ADOPTION:
The Treasurer shall annually render to the City Council a Statement of Investment
policy as required in Section 53646(a) of the Government Code. The City’s
investment policy shall be adopted by resolution of the City Council and shall be
reviewed annually; any modification made thereto must be approved by the
legislative body.
19.0 GLOSSARY
Definitions of investment-related terms are listed on Exhibit A.
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EXHIBIT A
GLOSSARY
ACCRETION: Adjustment of the difference between the price of a bond bought at an
original discount and the par value of the bond.
AGENCIES: Federal agency securities and/or Government-sponsored enterprises
(GSEs), also known as U.S. Government instrumentalities. Securities issued by
Government National Mortgage Association (GNMA) are considered true agency
securities, backed by the full faith and credit of the U.S. Government. GSEs are financial
intermediaries established by the federal government to fund loans to certain groups of
borrowers, for example homeowners, farmers and students and are privately owned
corporations with a public purpose. The most common GSEs are Federal Farm Credit
System Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Association,
and Federal National Mortgage Association.
AMORTIZATION: Accounting procedure that gradually reduces the cost value of a
limited life or intangible asset through periodic charges to income. For fixed assets, the
term used is “depreciation”. It is common practice to amortize any premium over par value
paid in the purchase of preferred stock or bond investments.
APPRECIATION: Increase in the value of an asset such as a stock bond, commodity or
real estate.
ASKED PRICE: The price a broker/dealer offers to sell securities.
ASSET BACKED: A type of security that is secured by receivables, such as credit card
and auto loans. These securities typically pay principal and interest monthly.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
This money market instrument is used to finance international trade.
BASIS POINT: One-hundredth of one percent (i.e., 0.01%).
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 investment.
BID PRICE: The price a broker/dealer offers to purchase securities.
BOND: A financial obligation for which the issuers promises to pay the bondholder a
specified stream of future cash flows, including periodic interest payments and a principal
repayment.
BOOK 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, and includes interest earnings and realized gains and losses on the portfolio.
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BOOK VALUE: The value at which a debt security is shown on the holder’s balance
sheet. Book value is acquisition cost less amortization of premium or accretion of
discount.
BROKER: A broker acts as an intermediary between a buyer and seller for a commission
and does not trade for his/her own risk and account or inventory.
CALLABLE SECURITIES: A security that can be redeemed by the issuer before the
scheduled maturity date.
CASH FLOW: An analysis of all changes that affect the cash account during a specified
period.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by
a certificate. Large-denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATION (CMO): A type of mortgage-backed
security that creates separate pools of pass-through rates for different classes of
bondholders with varying maturities, called tranches. The repayments from the pool of
pass-through securities are used to retire the bonds in the order specified by the bonds'
prospectus.
COMMERCIAL PAPER: Short-term, unsecured, negotiable promissory notes of
corporations.
COMMERCIAL RECEIVABLES: Business debt owed to a creditor which may be used
as collateral for asset backed securities. These receivables include equipment leases,
building leases, and other business loans.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
financial report for the City. It includes combined statements and basic financial
statements for each individual fund and account group prepared in conformity with
Generally Accepted Accounting Principles (GAAP).
CONDUIT FINANCING: A financing in which a governmental agency issues debt and
the proceeds of the issue are loaned to a nongovernmental borrower who then applies the
proceeds for a project financing or (if permitted by federal tax laws for a qualified 501(c)(3)
bond) for working capital purposes.
CONSUMER RECEIVABLES: Consumer debt owed to a creditor which may be used as
collateral for asset backed securities. These receivables include credit card, auto, and
home equity loans.
CORPORATE NOTE: Debt instrument issued by a private corporation.
COUPON: The annual rate at which a bond pays interest.
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CREDIT ANALYSIS: An analysis of the economic and financial conditions to determine
creditworthiness or the ability to meet debt obligations.
CREDIT RATINGS: A grade given to a debt instrument that indicates its credit quality.
Private independent rating services such as Standard & Poor's, Moody's and Fitch provide
these evaluations of the issuer's financial strength, or its ability to pay principal and interest
in a timely fashion. High graded credit ratings are as follows:
Moody's Standard & Poor’s Fitch
Long
Term
Short
Term
Long
Term
Short
Term
Long
Term
Short
Term
Aaa
P1
AAA
A1+
AAA
A1+
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A1 A+
A2 A A
A3 P2 A- A2 A- A2 Baa1 BBB+ BBB+
CREDIT RISK: The risk that an obligation will not be paid and a loss will result due to a
failure of the issuer of a security.
CUSIP: Stands for Committee on Uniform Securities Identification Procedures. A CUSIP
number identifies most securities, including: stocks of all registered U.S. and Canadian
companies, and U.S. government and municipal bonds. The CUSIP system—owned by
the American Bankers Association and operated by Standard & Poor’s—facilitates the
clearing and settlement process of securities. The number consists of nine characters
(including letters and numbers) that uniquely identify a company or issuer and the type of
security.
CURRENT YIELD: The annual interest on an investment divided by the current market
value. Since the 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.
CUSTODIAN: A bank or other financial institution that keeps custody of stock certificates
and other assets.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying
and selling for his/her own risk and account or inventory.
DEBENTURES: A bond secured only by the general credit of the issuers.
DEFEASED BOND ISSUES: Issues that have sufficient money to retire outstanding debt
when due, so that the agency is released from the contracts and covenants in the bond
documents.
DELIVERY VERSUS PAYMENT (DVP): Delivery of securities with a simultaneous
exchange of money for the securities.
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DERIVATIVE: A financial instrument that is based on, or derived from, some underlying
asset, reference date, or index.
DIRECT ISSUER: Issuer markets its own paper directly to the investor without use of an
intermediary.
DISCOUNT: The difference between the cost of a security and its value at maturity when
quoted at lower than face value.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns and risk profiles.
DURATION: A measure of the timing of the cash flows, such as the interest payments
and the principal repayment, to be received from a given fixed-income security. This
calculation is based on three variables: term to maturity, coupon rate, and yield to
maturity. Duration measures the price sensitivity of a bond to changes in interest rates.
EARNED INCOME YIELD THIS PERIOD (annualized): The Total net Earnings this
period divided by Average Daily Portfolio Balance and the number of days in the period,
multiplied by 365 (or 360 depending on the profile setting), and then multiplied by 100.
FACE VALUE: The principal amount owed on a debt instrument. It is the amount on
which interest is computed and represents the amount that the issuer promises to pay at
maturity.
FAIR VALUE: The amount at which a security could be exchanged between willing
parties, other than in a forced or liquidation sale. If a market price is available, the fair
value is equal to the market value.
FANNIE MAE: Trade name for the Federal National Mortgage Association (FNMA), a
U.S. Government sponsored enterprise.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
provides insurance on bank deposits, guaranteeing deposits to a set limit per account,
currently $100,000.
FEDERAL FARM CREDIT BANK (FFCB): Government-sponsored enterprise that
consolidates the financing activities of the Federal Land Banks, the Federal Intermediate
Credit Banks and the Banks for Cooperatives. Its securities do not carry direct U.S.
government guarantees.
FEDERAL FUNDS RATE: The rate of interest at which Federal funds are traded. This
rate is considered to be the most sensitive indicator of the direction of interest rates, as it
is currently pegged by the Federal Reserve through open-market operations.
FEDERAL GOVERNMENT AGENCY SECURITIES: Federal Agency 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.
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FEDERAL HOME LOAN BANKS (FHLB): Government sponsored enterprise (currently
made up of 12 regional banks) that regulates and lends funds and provides correspondent
banking services to member commercial banks, thrift institutions, credit unions and
insurance companies. Although the banks operate under federal charter with government
supervision, the securities are not guaranteed by the U. S. Government.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Government
sponsored enterprise that helps maintain the availability of mortgage credit for residential
housing. FHLMC finances these operations by marketing guaranteed mortgage
certificates and mortgage participation certificates. Its discount notes and bonds do not
carry direct U.S. government guarantees.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): Government sponsored
enterprise that is the largest single provider of residential mortgage funds in the United
States. FNMA 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
securities do not carry direct U.S. Government guarantees.
FEDERAL OPEN MARKET COMMITTEE (FOMC): A committee of the Federal Reserve
Board, which establishes monetary policy and executes it through temporary and
permanent changes to the supply of bank reserves.
FEDERAL RESERVE SYSTEM: The central bank of the U.S. which consists of a seven
member Board of Governors, 12 regional banks and about 5,700 commercial banks that
are members.
FED WIRE: A wire transmission service established by the Federal Reserve Bank to
facilitate the transfer of funds through debits and credits of funds between participants
within the Fed system.
FREDDIE MAC: Trade name for the Federal Home Loan Mortgage Corporation
(FHLMC), a U.S. government sponsored enterprise.
FITCH INDIVIUAL BANK RATINGS: Individual Ratings are assigned to banks that are
legal entities. These ratings, which are internationally comparable, attempt to assess how
a bank would be viewed if it were entirely independent and could not rely on external
support. These ratings are designed to assess a bank's exposure to, appetite for, and
management of risk, and thus represent the agency's view on the likelihood that it would
run into significant financial difficulties such that it would require support. The ratings are
as follows:
A. A very strong bank - Characteristics may include outstanding profitability and
balance sheet integrity, franchise, management, operating environment or
prospects.
B. A strong bank - There are no major concerns regarding the bank.
Characteristics may include strong profitability and balance sheet integrity,
franchise, management, operating environment or prospects.
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C. An adequate bank, which, however, possesses one or more troublesome
aspects. There may be some concerns regarding its profitability and balance
sheet integrity, franchise, management, operating environment or prospects
.
D. A bank that has weaknesses of internal and/or external origin. There are
concerns regarding its profitability and balance sheet integrity, franchise,
management, operating environment or prospects. Banks in emerging
markets are necessarily faced with a greater number of potential deficiencies
of external origin.
E. A bank with very serious problems, which either requires or is likely to require
external support.
F. A bank that has either defaulted or, in Fitch Ratings' opinion, would have
defaulted if it had not received external support. Examples of such support
include state or local government support, (deposit) insurance funds,
acquisition by some other corporate entity or an injection of new funds from
its shareholders or equivalent.
Note: Gradations may be used among the ratings A to E: i.e. A/B, B/C, C/D, and D/E. No
gradations apply to the F rating.
GINNIE MAE: Trade name for the Government National Mortgage Association (GNMA),
a direct obligation bearing the full faith and credit of the U.S. Government.
GOVERNMENT ACCOUNTING STANDARDS BOARD (GASB): A standard-setting
body, associated with the Financial Accounting Foundation, which prescribes standard
accounting practices for governmental units.
GUARANTEED INVESTMENT CONTRACTS (GICS): An agreement acknowledging
receipt of funds, for deposit, specifying terms for withdrawal, and guaranteeing a rate of
interest to be paid.
INACTIVE DEPOSITS: Funds not immediately needed for disbursement.
INTEREST RATE: The annual yield earned on an investment, expressed as a
percentage.
INTEREST RATE RISK: The risk of gain or loss in market values of securities due to
changes in interest-rate levels. For example, rising interest rates will cause the market
value of portfolio securities to decline.
INVESTMENT AGREEMENTS: A contract providing for the lending of issuer funds to a
financial institution which agrees to repay the funds with interest under predetermined
specifications.
INVESTMENT GRADE (LONG TERM RATINGS): The minimum, high quality ratings for
long term debt such as corporate notes. Investment Grade ratings are as follows: A3
(Moody’s), A- (S&P), and A- (Fitch).
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INVESTMENT PORTFOLIO: A collection of securities held by a bank, individual,
institution or government agency for investment purposes.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash with
minimum risk of principal.
LOCAL AGENCY INVESTMENT FUND (LAIF): An investment pool sponsored by the
State of California and administered/managed by the State Treasurer. Local government
units, with consent of the governing body of that agency, may voluntarily deposit surplus
funds for the purpose of investment. Interest earned is distributed by the State Controller
to the participating governmental agencies on a quarterly basis.
LOCAL AGENCY INVESTMENT POOL: A pooled investment vehicle sponsored by a
local agency or a group of local agencies for use by other local agencies.
MARK TO MARKET: Current value of securities at today's market price.
MARKET RISK: The risk that the value of securities will fluctuate with changes in overall
market conditions or interest rates. Systematic risk of a security that is common to all
securities of the same general class (stocks, bonds, notes, money market instruments)
and cannot be eliminated by diversification (which may be used to eliminate non-
systematic risk).
MARKET VALUE: The price at which a security is currently being sold in the market.
See FAIR VALUE.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase agreements and reverse repurchase
agreements that establish each party's rights in the transactions. A master agreement will
often specify, among other things, the right of the buyer-lender to liquidate the underlying
securities in the event of default by the seller-borrower.
MATURITY: The date that the principal or stated value of a debt instrument becomes due
and payable.
MEDIUM-TERM NOTES (MTNs): Unsecured, investment-grade senior debt securities of
major corporations which are sold in relatively small amounts either on 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. This is a measure of a portfolio’s or security’s exposure to market risk.
MONEY MARKET: The market in which short term debt instruments (Treasury Bills,
Discount Notes, Commercial Paper, Banker’s Acceptances and Negotiable Certificates of
Deposit) are issued and traded.
MORTGAGED BACKED SECURITIES: A type of security that is secured by a mortgage
or collection of mortgages. These securities typically pay principal and interest monthly.
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MUNICIPAL BONDS: Debt obligations issued by states and local governments and their
agencies, including cities, counties, government retirement plans, school districts, state
universities, sewer districts, municipally owned utilities and authorities running bridges,
airports and other transportation facilities.
MUTUAL FUND: An entity that pools money and can invest in a variety of securities which
are specifically defined in the fund’s prospectus.
NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate of deposit
which can be sold in the open market prior to maturity.
NET PORTFOLIO YIELD: Calculation in which the 365-day basis equals the annualized
percentage of the sum of all Net Earnings during the period divided by the sum of all
Average Daily Portfolio Balances.
NEW ISSUE: Term used when a security is originally “brought” to market.
NOTE: A written promise to pay a specified amount to a certain entity on demand or on
a specified date.
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 and credit in the economy. Purchases
inject reserves into the bank system and stimulate growth 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.
PAR VALUE: The amount of principal which must be paid at maturity. Also referred to
as the face amount of a bond. See FACE VALUE.
PORTFOLIO: The collection of securities held by an individual or institution.
PREMIUM: The difference between the par value of a bond and the cost of the bond,
when the cost is above par.
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. These dealers are authorized
to buy and sell government securities in direct dealing with the Federal Reserve Bank of
New York in its execution of market operations to carry out U.S. monetary policy. Such
dealers must be qualified in terms of reputation, capacity, and adequacy of staff and
facilities.
PRIME (SHORT TERM RATING): High quality ratings for short term debt such as
commercial paper. Prime ratings are as follows: P1 (Moody’s), A1 (S&P), and F1 (Fitch).
PRINCIPAL: The face value or par value of a debt instrument, or the amount of capital
invested in a given security.
PROSPECTUS: A legal document that must be provided to any prospective purchaser of
a new securities offering registered with the Securities and Exchange Commission that
typically includes information on the issuer, the issuer’s business, the proposed use of
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proceeds, the experience of the issuer’s management, and certain certified financial
statements (also known as an “official statement”).
PRUDENT INVESTOR STANDARD: A standard of conduct for fiduciaries. 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 their
capital as well as the probable income to be derived.
PUBLIC DEPOSITS: A bank that is qualified under California law to accept a deposit of
public funds.
PURCHASE DATE: The date in which a security is purchased for settlement on that or a
later date. Also known as the “trade date”.
RATE OF RETURN: 1) The yield, which can be attained on a security, based on its
purchase price or its current market price. 2) Income earned on an investment, expressed
as a percentage of the cost of the investment.
REALIZED GAIN (OR LOSS): Gain or loss resulting from the sale or disposal of a
security.
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 (RP or REPO): A transaction in which a counterparty or
the holder of securities (e.g. investment dealer) sells these securities to an investor (e.g.
the City) with a simultaneous agreement to repurchase them at a fixed date. The security
"buyer" (e.g. the City) in effect lends the "seller" money for the period of the agreement,
and the terms of the agreement are structured to compensate the “buyer” for this. Dealers
use RP extensively to finance their positions. Exception: When the Fed is said to be
doing RP, it is lending money, which is, increasing bank reserves.
REVERSE REPURCHASE AGREEMENT (REVERSE REPO): The opposite of a
repurchase agreement. A reverse repo is a transaction in which the City sells securities
to a counterparty (e.g. investment dealer) and agrees to repurchase the securities from
the counterparty at a fixed date. The counterparty in effect lends the seller (e.g. the City)
money for the period of the agreement with terms of the agreement structured to
compensate the buyer.
RISK: Degree of uncertainty of return on an asset.
SAFEKEEPING: A service which banks offer to clients for a fee, where physical securities
are held in the bank’s vault for protection and book-entry securities are on record with the
Federal Reserve Bank or Depository Trust Company in the bank’s name for the benefit of
the client. As agent for the client, the safekeeping bank settles securities transactions,
collects coupon payments, and redeems securities at maturity or on call date, if called.
SECURITIES AND EXCHANGE COMMISSION (SEC): Agency created by Congress to
protect investors in securities transactions by administering securities legislation.
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SEC RULE 15C3-1: See UNIFORM NET CAPITAL RULE.
SECONDARY MARKET: A market for the repurchase and resale of outstanding issues
following the initial distribution.
SECURITIES: Investment instruments such as notes, bonds, stocks, money market
instruments and other instruments of indebtedness or equity.
SETTLEMENT DATE: The date on which a trade is cleared by delivery of securities
against funds.
SPREAD: The difference between two figures or percentages. It may be the difference
between the bid (price at which a prospective buyer offers to pay) and asked (price at
which an owner offers to sell) prices of a quote, or between the amount paid when bought
and the amount received when sold.
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.
STUDENT LOAN MARKET ASSOCIATION (SLMA): Government-sponsored enterprise
that purchases student loans from originating financial institutions and provides financing
to state student loan agencies. It provides a national secondary market for federally-
sponsored student loans and credit to participants in the post secondary education lending
sector.
SUBORDINATED DEBT: Debt over which senior debt has priority. In the event of a
bankruptcy, subordinated debt holders receive payment only after senior debt holders are
paid in full.
TIME DEPOSIT: A deposit with a California bank or savings and loan association for a
specific amount and with a specific maturity date and interest rate. Deposits of up to
$100,000 are insured by FDIC. Deposits over $100,000 are collateralized above the
insurance with either government securities (at 110% of par value), first trust deeds (at
150% of par value), or letters of credit (at 105% of par value).
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, and includes interest earnings and realized and unrealized gains and losses on the
portfolio. For bonds held to maturity, total return is the yield to maturity.
TRUSTEE OR TRUST COMPANY OR TRUST DEPARTMENT OF A BANK: A financial
institution with trust powers which acts in a fiduciary capacity for the benefit of the
bondholders in enforcing the terms of the bond contract.
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UNDERWRITER: A dealer which purchases a new issue of municipal securities for
resale.
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.
U.S. GOVERNMENT AGENCY SECURITIES: Securities issued by U.S. government
agencies, most of which are secured only by the credit worthiness of the particular agency.
See AGENCIES.
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 the benchmark for interest
rates on all other securities in the U.S. The Treasury issues both discounted securities
and fixed coupon notes and bonds. The income from Treasury securities is exempt from
state and local, but not federal, taxes.
TREASURY BILLS: Securities issued at a discount with initial maturities of one
year or less. The Treasury currently issues three-month and six-month Treasury
bills at regular weekly auctions. It also issues very short-term “cash management”
bills as needed to smooth out cash flows.
TREASURY NOTES: Intermediate-term coupon-bearing securities with initial
maturities of one year to ten years.
TREASURY BOND: Long-term coupon-bearing securities with initial maturities
of ten years or longer.
UNREALIZED GAIN (OR LOSS): Gain or loss that has not become actual. It becomes
a realized gain (or loss) when the security in which there is a gain or loss is actually sold.
See REALIZED GAIN (OR LOSS).
VOLATILITY: Characteristic of a security, commodity or market to rise or fall sharply in
price within a short-term period.
WEIGHTED AVERAGE MATURITY: The average maturity of all the securities that
comprise a portfolio that is typically expressed in days or years.
WEIGHTED AVERAGE YIELD AT THE END OF PERIOD: The summation of each
investment’s period-end scheduled book value multiplied by its ending sub-period yield
and divided by the total scheduled book value. Investments maturing on or before the end
date of the report period will not affect the weighted average yield.
WHEN ISSUED (WI): Short form of “when, as, and if issued.” WI refers to a transaction
made conditionally because a security, although authorized, has not yet been issued with
the exception of new Treasury, Agency, and Corporate issuances to settle within 21 days.
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YIELD: The annual rate of return on an investment expressed as a percentage of the
investment. See CURRENT YIELD; YIELD TO MATURITY.
YIELD CURVE: Graph showing the relationship at a given point in time between yields
and maturity for bonds that are identical in every way except maturity.
YIELD TO MATURITY: Concept used to determine the rate of return if an investment is
held to maturity. It takes into account purchase price, redemption value, time to maturity,
coupon yield, and the time between interest payments. It is the rate of income return on
an investment, minus any premium or plus any discount, with the adjustment spread over
the period from the date of purchase to the date of maturity of the bond, expressed as a
percentage.
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