ORDINANCE NO. 120643
Amending Chapter 2, Code of
Ordinances, by repealing Sections 2-1611 and 2-1950, and enacting in lieu
thereof new sections of like name and subject matter relating to the City’s
WHEREAS, the City’s
Investment Committee is charged with setting and monitoring investment policy
for investment of public funds, providing general
guidance for City investments, and implementing necessary monitoring systems;
the Investment Committee reviewed the investment policy as codified in Section
2-1950 at its regularly scheduled meeting on June 21, 2012, and approved
changes to said policy to clarify certain language as well as modify the scope
of permitted investments; NOW, THEREFORE,
BE IT ORDAINED
BY THE COUNCIL OF KANSAS CITY:
Section 1. That
Chapter 2, Code of Ordinances of the City of Kansas City, Missouri, is hereby
amended by repealing Sections 2-1611, Investment committee, and 2-1950,
Investment policy, and enacting in lieu thereof new sections of like number and
subject matter, to read as follows:
Sec. 2-1611. Investment
with state law (as amended from time to time), and as defined by section 2-1950
of the Code of Ordinances of the City of Kansas City, Missouri, the investment
committee shall establish an investment policy that reflects best practices for
the prudent investment of taxpayer funds, including, but not limited to,
investing taxpayer funds legally, safely, and with regard to the liquidity
needs of the city. The investment policy shall be approved by the city council.
Subsequently, the investment committee may make administrative changes to the
policy, notifying the chair of the city council standing committee cognizant of
investment matters of such changes. Substantive changes to the policy must be
approved by the city council. The investment committee shall meet on a regular
basis to approve the investment activities.
Sec. 2-1950. Investment Policy.
It is the policy of the City of Kansas City, Missouri (the “City”) to
invest public funds in a manner which will provide maximum security with the
highest investment return while meeting the daily operating cash flow
requirements of the City and conforming to all Missouri statutes, City Charter,
City Administrative Code, and City General Code of Ordinances governing the
investment of public funds.
The City’s investment policy shall be adopted by resolution of the City
of Kansas City, Missouri Investment Committee. The policy shall be reviewed on
an annual basis by the Director of Finance and any modifications made thereto
must be approved by the Investment Committee.
Authority to manage the City’s
investment program is derived from Article IV, Division 2, Section 407 of the
City Charter (Exhibit 1), and Chapter 2, Article XI, Sections 2-1611 through
2-1615 of the Code of Ordinances of the City of Kansas City, Missouri, (Exhibit
Management responsibility for the investment program is hereby delegated
to the Director of Finance, who shall establish procedures for the operation of
the investment program, consistent with this investment policy. Procedures
include (but are not limited to): Depository Trust Agreements, Safekeeping
Agreements, Wire Transfer Agreements, and Banking Service Contracts, (see
Exhibits 3, 4, 5, and 6, respectively). Agreements shall include explicit
delegation of authority to persons responsible for acting on behalf of the
City. No person may engage in an investment transaction except as provided
under terms of this policy and the procedures established by the Director of
Finance. The Director of Finance authorizes the City Treasurer or his/her
designee (Exhibit 19) to initiate investment transactions on behalf of the
City. The Director of Finance shall be responsible for all transactions
undertaken and shall establish a system of controls to regulate the activities
of subordinate officials.
The Investment Committee shall be composed of a member of the City
Council who serves on the Finance Committee as appointed by the Mayor, the
Director of Finance, the City Treasurer, the City Manager, and the City
Attorney, or their respective designees. The Investment Committee shall set
and monitor policies, provide general guidance for city investments and
implement necessary monitoring mechanisms. The Committee will meet regularly
to review performance, policy, procedures, market conditions, and legislation.
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.
The standard of prudence to be used by investment officials shall be the
“prudent person” standard and shall be applied in the context of managing an
overall portfolio. Investment officers acting in accordance with the
investment policy and written procedures and exercising due diligence shall be
relieved of personal responsibility and liability for an individual security’s
credit risk or market price changes, provided deviations from expectations are
reported in a timely fashion and appropriate action is taken to control adverse
The “prudent person” concept discourages speculative transactions; it
attaches primary significance to the preservation of capital and secondary
importance to the generation of income and capital gains. The “prudent person”
is expected to be a reasonably well informed person, not a professional
investor or market maker, who is obligated to act responsibly.
(d) Ethics and Conflict
of Interest. Officers and employees involved in the investment process
shall refrain from personal business activity that could conflict with proper
execution of the investment program, or which could impair their ability to
make impartial investment decisions. Employees and investment officials shall
disclose to the Director of Finance any material financial interests in
financial institutions that conduct business within this jurisdiction, and they
shall further disclose any large personal financial/investment positions that
could be related to the performance of the City of Kansas City, Missouri’s
portfolio. Employees and officers shall subordinate their personal investment
transactions to those of the City of Kansas City, Missouri, particularly with
regard to the timing of purchases and sales.
This policy applies to all City of Kansas City, Missouri, monies
identified as idle, surplus, and reserve as defined in Article IV, Division 2,
Section 407 of the City Charter, (Exhibit 1), Chapter 2, Article XI, Section
2-1612 of the City Code of Ordinances, (Exhibit 2) and in written legal
opinions by the City Attorney or designee.
Funds included in the investment policy are accounted for in the City of
Kansas City, Missouri Comprehensive Annual Financial Report and include (but
are not limited to):
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Internal Service Funds
Trust and Agency Funds
Funds of other agencies who act as conduit issuers for bonds secured by
the City’s annual appropriation pledge subject to this policy include (but are
not limited to): Kansas City Municipal Assistance Corporation (KCMAC), Land
Clearance for Redevelopment Authority (LCRA), Port Authority of Kansas City,
Missouri (Port Authority), Industrial Development Authority (IDA), and Tax
Increment Financing Commission (TIF). Permitted investments are identified
within the bond documents for specific issues and approved by each agency’s
Pension and retirement funds are
directed by investment policies implemented by the Employee Retirement Pension
System Board of Trustees and the Firefighters Pension System Board of Trustees
and are therefore not included in the scope of this policy.
The primary objectives, in priority order, of the City of Kansas City,
Missouri’s investment activities shall be:
Legality. The Director of Finance and those authorized by him or her
will invest the City’s excess funds only within the legal guidelines set forth
by the Constitution and Statutes of the State of Missouri, City Charter and the
City Code of Ordinances. Any investment alternative outside these guidelines
is not permissible. Furthermore, the City of Kansas City, Missouri seeks to
promote and support the objectives of US foreign policy regarding terrorism.
Accordingly, investments in companies or their subsidiaries or affiliated
entities that are known to sponsor terrorism or aid the government in countries
that are known to sponsor terrorism are prohibited.
Safety. Safety of principal is the foremost objective of the investment
program. Investments of the City of Kansas City, Missouri shall be undertaken
in a manner that seeks to ensure the preservation of capital in the overall
portfolio. The objective will be to mitigate credit risk and interest rate
Credit Risk. The City of Kansas City, Missouri, will minimize
credit risk, the risk of loss due to the failure of the security issuer or
Establishing a pre-approved list of financial institutions and companies
to which the City will be restricted when purchasing commercial paper.
Conducting regular credit monitoring and due diligence of these issuers.
Pre-qualifying the financial institutions and broker/dealers with which
the City will do business for broker services and repurchase agreements.
Diversifying the portfolio with respect to maturity, issuer, and
security type so that potential losses on individual securities will be
Interest Rate Risk. The City of Kansas City, Missouri, will
minimize the risk that the market value of securities in the portfolio will
materially fall due to changes in general interest rates, by:
Targeting an effective duration of less than 1.5 and an effective
weighted average maturity of less than 2.5 years.
Holding at least 30% of the portfolio’s total market value in securities
with a maturity of 12 months or less.
Liquidity. The City of Kansas City, Missouri’s investment
portfolio will remain sufficiently liquid to enable the City of Kansas City,
Missouri to meet all operating requirements which might be reasonably
anticipated. This is accomplished by structuring the portfolio so that
securities mature concurrent with anticipated cash needs. Furthermore, since
all possible cash demands cannot be anticipated, the portfolio should consist
largely of securities with active secondary or resale markets.
Return on investment. The City of Kansas City, Missouri’s
investment portfolio shall be designed with the objective of attaining a market
rate of return throughout budgetary and economic cycles, taking into account
the City’s investment risk constraints and liquidity needs. The City of Kansas
City, Missouri’s investment strategy is active. The benchmark basis used by
the City Treasurer to determine whether market yields are being achieved shall
be The Bank of America Merrill Lynch 1-3 year index, or any successor index.
(g) Authorized and
The City of Kansas City, Missouri is empowered by City Charter to invest
in the following types of securities:
United States Treasury Securities (Bills, Notes, Bonds and Strips).
United States Agency/GSE Securities. The City may invest in obligations
issued or guaranteed by any agency of the United States Government and in
obligations issued by any government sponsored enterprise (GSE) which have a
liquid market and a readily determinable market value that are described as
U.S. Govt. Agency Coupon and Zero Coupon Securities.
U.S. Govt. Agency Discount Notes.
U.S. Govt. Agency Callable Securities. Restricted to securities
callable at par only.
U.S. Govt. Agency Step-Up Securities. The coupon rate is fixed for an
initial term. At the step-up date, the coupon rate rises to a new, higher
fixed interest rate.
U.S. Govt. Agency Floating Rate Securities. Restricted to coupons with
no interim caps that reset at least quarterly and that float off of only one
U.S. Govt. Agency/GSE Mortgage Backed Securities (MBS, CMO, Pass-Thru
Securities). Restricted to securities with final maturities of five (5) years
or less or have the final projected payment no greater than five (5) years when
analyzed in a +300 basis point interest rate environment.
Repurchase Agreements. The City may invest in contractual
agreements between the City and commercial banks or primary government
securities dealers. The Securities Industry & Financial Markets
Association’s (or any successor’s) guidelines for the Master Repurchase
Agreement will be used and will govern all repurchase agreement transactions
(Exhibit 18). All repurchase agreement transactions will be either physical
delivery or tri-party.
Bankers’ Acceptances. The City may invest in bankers’
acceptances issued by domestic commercial banks possessing the highest credit
rating issued by Moody’s Investor Services, Inc. or Standard and Poor’s
Commercial Paper. The City may invest in commercial paper issued
by domestic corporations, which has received the highest short-term credit
rating issued by Moody’s Investor Services, Inc. or Standard and Poor’s
Corporation. Eligible paper is further limited to issuing corporations that
have total assets in excess of five hundred million dollars ($500,000,000) and
are not listed on Credit Watch with negative implications by any nationally
recognized credit rating agency at the time of purchase.
Municipal Securities (State and Local Government Obligations).
The City may invest in municipal obligations that are issued in either
tax-exempt or taxable form.
Any full faith and credit obligations of the State of Missouri rated at
least A or A2 by Standard & Poor’s or Moody’s.
Any full faith and credit obligations of any city, county or school
district in the state of Missouri rated at least AA or Aa2 by Standard &
Poor’s or Moody’s.
Any full faith and credit obligations or revenue bonds of the City of
Kansas City, Missouri rated at least A or A2 by Standard & Poor’s or
Any full faith and credit obligation of any state or territory of the
United States of America rated at least AA or Aa2 by Standard & Poor’s or
Any full faith and credit obligations of any city, county or school
district in any state or territory of the United States of America rated AAA or
Aaa by Standard & Poor’s or Moody’s.
Any revenue bonds issued by the Missouri Department of Transportation
rated at least AA or Aa2 by Standard & Poor’s or Moody’s.
Any municipal obligation that is pre-refunded or escrowed to maturity as
to both principal and interest with escrow securities that are fully guaranteed
by the United States Government, without regard to rating by Standard &
Poor’s or Moody’s.
To provide for the safety and liquidity of the City of Kansas City,
Missouri’s funds, the investment portfolio will be subject to the following
Borrowing for investment purposes (“leverage”) is prohibited.
Instruments known as Structured Notes (e.g. inverse floaters, leverage
floaters, equity-linked securities) are not permitted. Investment in any
instrument which is commonly considered a “derivative” instrument (e.g.
options, futures, swaps, caps, floors, and collars) is prohibited.
Contracting to sell securities not yet acquired in order to purchase
other securities for purposes of speculating on developments or trends in the
market is prohibited.
It is the policy of the City of Kansas City, Missouri to actively manage
the investment portfolio within the constraints outlined in this investment
policy versus an exclusive “buy and hold” philosophy. The prohibition of
speculative investments precludes pursuit of gain or profit through unusual
risk. However, trading in response to changes in market value or market
direction is warranted under an active portfolio management strategy.
(h) Basis of Award.
Generally, investment transactions will be conducted through a
competitive offer/bid process consisting of at least three offers/bids from
those broker/dealers on the City’s approved broker/dealer list. Exceptions to
this requirement include (but are not limited to):
Market conditions or limited inventory situations may result in an
immediate purchase from one broker/dealer without utilizing the competitive bid
process so the security can be obtained in a timely manner. Securities
purchased in this fashion must have, at a minimum, documentation attached
reflecting the current interest rate environment and a brief explanation
regarding all pertinent information relevant to the transaction.
Security transactions initiated to either increase income or restructure
various segments of the portfolio, i.e. “securities swaps”, will be evaluated
on their own merit and potential profitability. For purposes of this policy,
“securities swaps” shall mean the sale of one or more currently held securities
and the immediate purchase of one or more replacement securities.
From time to time the U.S. Government and certain Government
Sponsored Enterprises initiate “buyback” or “tender” programs. It is the
intent of this policy to allow the City to participate in such buyback or
tender programs to the extent the participation in the program benefits the
City’s investment program.
Comparison to market price
will be performed by the Treasury Division Investment staff through a
nationally recognized financial publication or service (i.e., The Wall Street
Journal, Bloomberg or DTN) providing daily market pricing.
The City may temporarily exchange securities held in the portfolio for
cash or other authorized securities of at least equal value with no maturity
more than one year beyond the maturity of any of the traded obligations.
Securities lending may be transacted through the City’s custodial bank,
through a third party lender, or directly with approved broker/dealers. Direct
broker/dealers must have a signed Bond Market Association Securities Lending
Agreement on file with the City.
All securities being transferred must be delivered versus payment.
Securities lending transactions may be entered into for periods of 90
days or less.
The City Treasurer shall develop cash collateral investment guidelines
for the reinvestment of any collateral made by the City’s securities lending
agent and is responsible for periodic monitoring of these investments for
investment programs. The City of Kansas City, Missouri may initiate
special investment programs from time to time, including, but not limited to,
the City-Wide Time Deposit Program, the Linked-Deposit Program, and the Loan
Loss Reserve Deposit Program, to encourage equal community investment.
The City of Kansas City, Missouri will diversify its investments by
security type and institution. The City’s investment portfolio shall be
Continuously investing a portion of the portfolio in readily available
funds to ensure that appropriate liquidity is maintained in order to meet
Limiting investments in securities that have a higher credit risk.
Investing in securities of varying maturities.
The following guidelines represent maximum limits established for diversification
U.S. Treasuries and securities having principal and/or interest guaranteed
by the U.S. government 100%
Collateralized time and demand deposits 100%
U.S. Government agencies and government-sponsored
mortgage-backed securities) 80%
Collateralized repurchase agreements 50%
U.S. Government agency callable securities 30%
Commercial Paper 30%
In addition, the City’s portfolio may not contain commercial paper of
any one corporation, the total value of which exceeds 2% of the City’s
aggregate investment portfolio.
Bankers’ Acceptances 30%
Certificates of Deposit 25%
Municipal Securities (State and Local Government Obligations)............30%
In addition, the City’s portfolio may not contain municipal obligations
of any one issuer, the total value of which exceeds two percent (2%) of the
City’s aggregate investment portfolio, unless the obligation is pre-refunded or
escrowed to maturity with securities guaranteed by the United States
To the extent possible, the City of Kansas City, Missouri will attempt to
match its investments with anticipated cash flow requirements. In accordance
with Chapter 2, Article XI, Section 2-1612 of the City Code of Ordinances
(Exhibit 2) and except for certain mortgage-backed securities as defined in
Section VII.A.2.f (above), and except for state and local government
obligations that are pre-refunded to a call date earlier than the maturity
date, the City of Kansas City, Missouri will not directly invest in securities
with a stated final maturity date more than five (5) years from the date of
(m) Authorized Dealers and
The City Treasurer will maintain a list of financial institutions
authorized, in accordance with Banking Institution Selection Criteria (Exhibits
7 & 17) to provide investment services.
The City Treasurer will maintain a list of security dealers authorized,
in accordance with the Security Dealers Selection Criteria (Exhibit 8) to
provide investment services. If the Dealer satisfies all of the requirements,
they will be added to the list of firms eligible to provide investment services
to the City.
Periodic reviews of the financial condition and registration of
qualified bidders will be conducted by the City Treasurer.
Collateralization, pursuant to Missouri Revised Statutes 2000, Chapter 110, Sections 110.010 through 110.020,
(Exhibit 9), City Code of Ordinances Chapter 2, Article XI, Section 2-1614,
(Exhibit 10), or contractual agreement, will be required on demand deposit
accounts, money market banking accounts, certificates of deposit and time
Collateral which is accepted,
at the discretion of the Director of Finance, is specified in the Missouri
Revised Statutes, Chapter 30, Section 30.270 (Exhibit 11).
Collateral shall have a market value equal to one hundred two (102)
percent of the amount of the City investment less any amount insured by the
Federal Deposit Insurance Corporation, or other governmental agency performing
Securities pledged as collateral will always be held by the Federal Reserve
Bank with whom the City of Kansas City, Missouri has a current Custodial
Agreement (Exhibit 13). A clearly marked evidence of ownership, Safekeeping
Receipt (Exhibit 16) must be supplied to the City of Kansas City, Missouri and
The right of collateral substitution is granted.
Safekeeping and Custody.
All security transactions entered into by the City of Kansas City,
Missouri shall be conducted on a delivery-versus-payment (DVP-delivery of
securities with an exchange of money for the securities) basis.
Any security transaction performed on a “free delivery” (or delivery
versus receipt- delivery of securities with an exchange of a signed receipt for
the securities) basis must be pre-approved by the City Treasurer or Director of
Securities will be held in the City’s name by a third party trust
custodian designated by the Director of Finance and evidenced by safekeeping
receipts, City Code of Ordinances Chapter 2, Article XI, Section 2-1613,
The Director of Finance has established and implemented internal
controls within the Treasury Division to prevent loss of public funds arising
from fraud, employee error, misrepresentation by third parties, or imprudent
actions by employees of the Treasury Division. Internal controls most
important to protect the City’s assets are:
The Director of Finance shall designate in writing those individuals in
addition to the Director of Finance and City Treasurer, within the Treasury
Division, who are authorized to invest City monies. Such authorization letters
shall be delivered to each authorized financial institution or security dealer.
Those individuals making an investment of City monies with an authorized
financial institution or security dealer shall provide instruction for delivery
of the security being purchased. In addition, the safekeeping financial
institution shall be provided details for the security purchase and to deliver
payment upon delivery of the security.
Those individuals making the investment of City monies shall provide
details of said investment to personnel within the Treasury Division for entry
into the investment portfolio records.
Investment personnel shall be responsible for accounting for all
investment transactions in the City’s financial system. The Cash Management
Section will verify and reconcile all investment transactions to the City’s
general ledger and to the City’s bank accounts.
With regard to bank-to-bank (“draw down”) wires and outgoing wire
transfers, authorized Treasury Division personnel may initiate all bank-to-bank
wires and all wire transfers. All wire transfers must be approved by a
secondary approver prior to final processing by the bank.
The City’s investment portfolio shall be subject to an annual audit by
an independent audit firm of the City. In addition, the investment portfolio
records shall be available to the City Auditor for audit at any time.
The Treasury Division is charged with the responsibility of preparing
the following monthly investment reports:
Monthly Investment Portfolio Report; listing of all investment
transactions by type, security description, average maturity date, cost,
acquisition date, and yield. (Exhibit 14).
Investment and Bank Account Recap Report for monthly financial reports
submitted to City Council; totals by category, security definition, and
purpose. (Exhibit 15).
The market value of the portfolio shall be calculated monthly and a
Statement of Market Value shall be issued at least monthly to the Investment
Committee of the City. This will ensure that a review of the investment
portfolio, in terms of value and price volatility, has been performed.
The Treasury Division will also maintain all security transaction
(o) Glossary. (Definitions
provided by Municipal Treasurers’ Association of the United States and Canada,
the Investment Guidelines for Missouri Political Subdivisions, the GFOA’s
Investing Public Funds, and by Bloomberg.)
Accretion. The periodic upward adjustment of the principal
value of a fixed income security purchased at a discount from its par value or
Accrued interest. The
accumulated interest due on a bond as of the last interest payment made by the
Agency. A debt security issued by a federal or federally
Amortization. The opposite
of accretion. The periodic downward adjustment of the principal value of a
fixed-income security purchased at a premium from its par value or maturity
Asked. The indicated
price at which a seller is willing to sell a security or commodity.
Average life. The average
length of time that an issue of serial bonds and/or term bonds with a mandatory
sinking fund feature is expected to be outstanding
Bankers’ acceptance (BA). A draft or
bill of exchange accepted by a bank or trust company. The accepting
institution guarantees payment of the bill, as well as the issuer.
Basis point. A unit of
measurement used in the valuation of fixed-income securities equal to 1/100 of
1 percent of yield.
Benchmark. A comparative
base for measuring the performance or risk tolerance of the investment
portfolio. A benchmark should represent a close correlation to the level of
risk and the average duration of the portfolio’s investments.
Bid. The indicated
price at which a buyer is willing to purchase a security or commodity.
Book value. The value at which a security is carried on the
inventory lists or other financial records of an investor.
Broker. A broker
brings buyers and sellers together for a commission paid by the initiator of
the transaction or by both sides; he does not position. In the money market,
brokers are active in markets in which banks buy and sell money and in
Buyback. In the fixed
income sense, a program in which an issuer offers to repurchase its debt
obligations at market prices.
Callable bond. A bond that
the issuer has the right to redeem prior to maturity. Some callable bonds may
be redeemed on one call date while others have multiple call dates. Some
callable bonds may be redeemed at par while others can only be redeemed at a
Call risk. The risk to a
bondholder that a bond may be redeemed prior to maturity.
Certificate of deposit (CD). A deposit of
funds, in a bank or savings and loan association, for a specified term that
earns interest at a specified rate or rate formula, evidenced by a
certificate. They may be for terms as short as 1 week or as long as or longer
than 10 years.
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.
Commercial paper. Unsecured,
short-term promissory notes issued by corporations for specific amounts and
with specific maturity dates. Firms with lower ratings or firms without
well-known names usually back their commercial paper with guarantees or bank
letters of credit. Commercial paper may be sold on a discount basis or may
bear interest. Terms can be as short as 1 day and usually do not exceed 270
Comprehensive annual financial
report (CAFR). The official annual report for the City of Kansas
City, Missouri. It includes five combined statements for each individual fund
and account group prepared in conformity with Generally Accepted Accounting
Principles (GAAP). It also includes supporting schedules necessary to
demonstrate compliance with finance-related legal and contractual provision,
extensive introductory material, and a detailed Statistical Section.
Convexity. A measure of a
bond’s price sensitivity to changing interest rates. A high convexity
indicates greater sensitivity of a bond’s price to interest rate changes.
Coupon. (a) the annual rate of interest that a bond’s issuer
promises to pay the bondholder on the bond’s face value. (b) A certificate
attached to a bond evidencing interest due on a payment date.
Credit risk. The risk to an investor than an issuer will default in
the payment of interest and/or principal on a security.
Current yield. A yield calculation determined by dividing the annual
interest received on a security by the current market price of that security.
Dealer. A dealer, as opposed to a broker, acts as a principal
in all transactions, buying and selling for his own account.
Dealer bank. A bank that
continuously deals in government and agency securities.
Debenture. A bond secured
only by the general credit of the issuer.
Delivery versus payment. There are two
methods of delivery of securities: delivery versus payment and delivery versus
receipt (also called “free”). 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
Derivative security. A financial
instrument created from, or whose value depends upon, one or more underlying
assets or indexes of asset values.
Discount. The difference
between the cost price of a security and its value at maturity when quoted at
lower than face value. A security selling below original offering price
shortly after sale also is considered to be at a discount.
Discount rate. The rate of
interest at which the Federal Reserve Bank lends overnight money to commercial
banks who are members of the Federal Reserve System.
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.
investment funds among a variety of securities offering independent returns.
Duration. See Modified
Effective duration. See Modified
Federal credit agencies. Agencies of
the Federal government set up to supply credit to various classes of
institutions and individuals, e.g., S&L’s, small business firms, students,
farmers, farm cooperatives and exporters.
Federal Deposit Insurance Corporation
(FDIC). A federal agency that insures bank deposits for public
funds, currently up to $100,000 per time deposit and $100,000 per demand
Federal funds rate. The rate of interest at which banks lend excess funds
to other banks. This rate is currently pegged by the Federal Reserve through
open market operations.
Federal Home Loan Banks (FHLB). Government
sponsored wholesale banks (currently 12 regional banks) which lend funds and
provide correspondent banking services to member commercial banks, thrift
institutions, credit unions and insurance companies. The mission of the FHLBs
is to liquefy the housing related assets of its members who must purchase stock
in their district Bank.
Federal National Mortgage Association
(FNMA). FNMA, like GNMA, was chartered under the Federal
National Mortgage Association Act in 1938. FNMA is a federal corporation
working under the auspices of the Department of Housing and Urban Development
(HUD). It is the largest single provider of residential mortgage funds in the
United States. Fannie Mae, as the corporation is called, is a private
stockholder-owned corporation. The corporation’s purchases included a variety
of adjustable mortgages and second loans, in addition to fixed-rate mortgages.
FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes
and guarantees that all security holders will receive timely payment of
principal and interest.
Federal Open Market Committee
(FOMC). Consists of seven members of the Federal Reserve Board
and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member while the other Presidents
serve on a rotating basis. The Committee periodically meets to set Federal
Reserve guidelines regarding purchases and sales 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. 12 Regional Banks and about 5,700
commercial banks that are members of the system.
Government agency. An agency of
the federal government whose debt obligations are unconditionally backed by the
full faith and credit of the United States of America. Examples include: GNMA.
Government National Mortgage Association
(GNMA or Ginnie Mae). Securities influencing the volume of bank credit
guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings
and loan associations, and other institutions. Security holder is protected by
full faith and credit of the U.S. Government. Ginnie Mae securities are backed
by FHA, VA or FmHA mortgages. The term “pass-throughs” is often used to
describe Ginnie Mae securities.
enterprises (GSE’s). An agency of the federal government whose debt
obligations are not unconditionally backed by the full faith and credit
of the United States of America, but a market perception that there is an
implicit government guarantee. Examples include: FHLB, FFCB, FNMA, FHLMC,
SLMA, FMAC and TVA.
Interest rate. See “Coupon
Interest rate risk. The risk
associated with declines or rises in interest rates which causes an investment
in a fixed-income security to increase or decrease in value.
Investment policy. A concise and
clear statement of the objectives and parameters formulated by an investor or
investment manager for a portfolio of investment securities.
Investment grade obligations. An investment
instrument suitable for purchase by institutional investors under the prudent
person rule. Investment-grade is restricted to those obligations rated BBB or
higher by a nationally recognized rating agency.
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, securities are said to be liquid if the
spread between bid and asked prices is narrow and reasonable size can be done
at those quotes.
Local governmental investment
pool (LGIP). The aggregate of all funds from political subdivisions
that are placed in the custody of the State Treasurer for investment and
Mark to market. The process
whereby the book value or collateral value of a security is adjusted to reflect
its current market value.
Market risk. The risk that
the value of a security will rise or decline as a result of changes in market
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
purchase/repurchase securities. The master agreement governs each specific
repo transaction and 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
Maturity. The date upon
which the principal or stated value of an investment becomes due and payable.
Modified (effective) duration. The percentage
price change of a security or a basket of securities for a given change in
yield. The higher the modified duration of a security, the higher its risk.
Money market. The market in
which short-term debt instruments (bills, commercial paper, bankers’
acceptances, etc.) are issued and traded.
Securities created whereby the issuer
pools numerous home mortgages that it owns and then issues one security, or
tranches of securities, secured by the underlying mortgages.
National Association of Securities
Dealers (NASD). A self-regulatory organization of brokers and dealers
in the over-the-counter securities business.
Nominal yield. The stated rate
of interest that a bond pays its current owner, also known as the coupon rate
or interest rate.
Offers. See “Asked.”
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.
Operating funds. Includes all
investable funds of the political entity with the exception of bond proceeds,
retirement funds and self-insurance funds. Investable funds shall include all
fund balances and surplus funds.
Par. The face value
or principal value of a bond, typically $1,000 per bond.
Portfolio. Collection of
securities held by an investor.
Premium. The amount by
which the price paid for a security exceeds its par value.
Primary dealer. A group of
government securities dealers and banks that can buy and sell government
securities while working directly with the Federal Reserve Bank of New York.
Primary dealers include Securities and Exchange Commission (SEC) registered
securities broker-dealers, banks and a few unregulated firms.
Prime rate. A preferred
interest rate charged by commercial banks to their most creditworthy
customers. Many interest rates are keyed to this rate.
Prudent person rule. An investment
standard in which a trustee may invest in a 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
Regional dealer. A securities
broker/dealer that operates primarily in a specific geographic area of the
Reinvestment risk. The risk that
a fixed income investor will be unable to reinvest income proceeds from a
security holding at the same rate of return currently being generated by that
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 RPs extensively to finance their positions. Exception:
When the Fed is said to be doing RPs, it is lending money, that is, increasing
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 vault for protection.
Sec Rule 15C3-1. See Uniform
Net Capital Rule.
Secondary market. A market made for the purchase and sale of outstanding
debt issues following the initial distribution.
Securities & Exchange Commission
(SEC). Agency created by Congress to protect investors in
securities transactions by administering securities legislation.
Structured notes. Notes issued
by Government Sponsored Enterprises (FHLB, FNMA, FHLMC, SLMA, etc.) and
Corporations which have imbedded options (e.g., call features, step-up coupons,
floating rate coupons, derivative-based returns) into their debt structure.
Their market performance is impacted by the fluctuation of interest rates, the
volatility of the imbedded options, and shifts in the shape of the yield curve.
Swap. The exchange
of securities for a realized profit greater than if the security was held to
maturity or to restructure the maturity characteristics of the portfolio.
Tender. To formally
bid on a security or to surrender one’s shares in response to such a bid.
Total return. The sum of all
investment income plus changes in the capital value of the portfolio.
Treasury bills. A non-interest
bearing discount security issued by the U.S. Treasury to finance the national
debt. Most bills are issued to mature in three months, six months or one year.
Treasury bonds. Long term U.S.
Treasury securities having initial maturities of more than ten years.
Treasury notes. Intermediate
term coupon bearing U.S. Treasury securities having initial maturities from two
to ten years.
Uniform net capital rule. A Securities
and Exchange Commission regulation that outlines the net capital ratio, which
is all monies due to the firm, including margin loans, divided by liquid
assets. Member firms must maintain a ratio of at least 15 to 1.
Volatility. A degree of
fluctuation in the price and valuation of securities.
Weighted average maturity (WAM). The average maturity, on a dollar weighted basis, of
all the securities that comprise a portfolio. As applied to mortgage-backed
securities, it is the average maturity of the principal repayments of that
Yield. The rate of
annual income return on investment, expressed as a percentage.
Income yield is obtained by
dividing the current dollar income by the current market price for the
Net yield or Yield to 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.
Yield to call. The rate of
return the investor receives from a bond assuming the bond is redeemed prior to
its stated maturity date.
Yield to maturity. The rate of
return yielded by a debt security held to maturity when both interest payments
and the investor’s potential capital gain or loss are included in the
calculation of return.
Zero coupon securities. An investment
security that is issued at a discount and makes no periodic interest payments.
The rate of return consists of gradual accretion of the principal of the
security and is payable at par upon maturity. U.S. Treasury Bills, Federal
Agency Discount Notes, and Commercial Paper are all issued in zero coupon form.
Approved as to form and legality:
Assistant City Attorney