HomeMy WebLinkAbout2004-0608B Revised Investment PolicyTROPHY CLUB MUNICIPAL UTILITY DISTRICT No.1
RESOLUTION NO.2004-0608B
A RESOLUTION OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT
NO.1,TROPHY CLUB,TEXAS,TO APPROVE AN UPDATED
INVESTMENT POLICY,ATTACHED AND INCORPORATED HEREIN
AS EXHIBIT "A";AND PROVIDING AN EFFECTIVE DATE.
WHEREAS,the Finance DireCtor has provided an updated Investment Policy for Trophy
Club Municipal District No.1 based upon his knowledge,training,law,and theory on public
funds investment;and
WHEREAS,the Board of Directors has reviewed the proposed Investment Policy and
investment strategies,a copy of which is attached and incorporated into this Resolution as Exhibit
"A",and
WHEREAS,the Board of Directors having determined that Exhibit "A"records all
changes made to the existing investment policies and strategies,and having determined it to be a
sound plan for the District,now desires to adopt such Investment Policy,Exhibit "A";
NOW,THEREFORE,BE IT RESOLVED BY TROPHY CLUB MUNICIPAL
UTILITY DISTRICT NO.1,TROPHY CLUB,TEXAS:
Section 1.That the foregoing recitals stated in the preamble are found to be true and
correct and are deemed incorporated into the body of this Resolution as if copied herein in their
entirety.
Section 2.That the Investment Policy attached hereto as Exhibit "A"is determined to be
sound and beneficial to the District and is hereby approved and adopted and any other
Resolutions or policies inconsistent with Exhibit "A"are hereby rescinded in their entirety.
Section 3.That this Resolution shall become effective from and after its date of passage
in accordance with law.
Trophy Club MUD 1
Resolution 2004-0608B
2
PASSED AND APPROVED by the Board of Directors of the Trophy Club Municipal Utility District
No.1,Trophy Club,Texas on this the 8th day of June,2004.
L 1::-r
"1,
President
Trophy Club MUD 1 .
[SEAL]
ATTEST:
}cuz
APPROVED TO AS FORM:
~~
Attorney
Trophy Club MUD 1
TROPHY CLUB
MUNICIPAL UTILITY DISTRICT No.1
INVESTMENT POLICY
Exhibit "A"
INVESTMENT POLICY
I.POLICY
It is the policy of the Municipal Utility District I of Trophy Club that after allowing for the
anticipated cash flow requirements of the Entity and giving due consideration to the safety
and risk of investment,all available funds shall be invested in conformance with these legal
and administrative guidelines,seeking to optimize interest earnings while maintaining
appropriate oversight of all investments.
Effective cash management is recognized as essential to good fiscal management.
Investment interest is a source of revenue to Entity funds.The Entity's investment portfolio
shall be designed and managed in a manner designed to maximize this revenue source,to be
responsive to public trust,and to be in compliance with legal requirements and limitations.
Investments shall be made with the primary objectives of:
*Safety and preservation of principal
Maintenance of sufficient liquidity to meet operating needs
Public trust from prudent investment activities
Optimization of interest earnings on the portfolio
*
*
*
II.PURPOSE
The purpose of this investment policy is to comply with the Municipal Utility District I of
Trophy Club requirements and Chapter 2256 of the Government Code ("Public Funds
Investment Act"),which require each Entity to adopt a written investment policy regarding
the investment of its funds and funds under its control.The Investment Policy addresses the
methods,procedures and practices that must be exercised to ensure effective and judicious
fiscal management of the Entity's funds.
III.SCOPE
This Investment Policy shall govern the investment of all financial assets of the Entity.
These funds are accounted for in the Entity's Comprehensive Annual Financial Report
(CAFR)and include,as applicable:
.General Fund
Special Revenue Funds
Capital Projects Funds
Enterprise Funds
.
.
.
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.GASB-34 Funds
Debt Service Funds,including reserves and sinking funds,to the extent not
required by law or existing contract to be kept segregated and managed
separately
Economic Development 4-A and 4-B funds
Marshall Creek Park funds
Any new fund created by the Entity,unless specifically exempted from this
Policy by the Board of Trustees (Board)or by law.
.
.
.
.
This Investment Policy shall apply to all transactions involving the financial assets and
related activity for all the foregoing funds.However,this policy does not apply to the assets
administered for the benefit of the Entity by outside agencies under deferred compensation
programs.
IV.INVESTMENT OBJECTIVES
The Entity shall manage and invest its cash with four primary objectives,listed in order of
priority:safety,liquidity,public trust,and yield,expressed as optimization of interest
earnings.The safety of the principal invested always remains the primary objective.All
investments shall be designed and managed in a manner responsive to the public trust and
consistent with state and local law.
The Entity shall maintain a comprehensive cash management program,which includes
collection of account receivables,vendor payments in accordance with invoice terms,and
prudent investment of available cash.Cash management is defined as the process of
managing monies in order to insure maximum cash availability and maximum earnings on
short-term investment of idle cash.
Safety rPFIA 2256.005(b )(2)1
Safety of principal is the foremost objective of the investment program.Investments shall
be undertaken in a manner that seeks to ensure the preservation of capital in the overall
portfolio.The objective will be to mitigate credit and interest rate risk.
[)Credit Risk -The Entity will minimize credit risk,the risk of loss due to the
failure of the issuer or backer of the investment,by:
.Limiting investments to the safest types of investments
.Pre-qualifying the financial institutions and broker/dealers with which
the Entity will do business
.Diversifying the investment portfolio so that potential losses on
individual issuers will be minimized.
[)Interest Rate Risk -the Entity will minimize the risk that the interest earnings
and the market value of investments in the portfolio will fall due to changes in
general interest rates,by:
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.Structuring the investment portfolio so that investments mature to meet
cash requirements for ongoing operations,thereby avoiding the need to
liquidate investments prior to maturity.
Investing operating funds primarily in certificates of deposit,shorter-
term securities,money market mutual funds,or local government
investment pools functioning as money market mutual funds.
Diversifying maturities and staggering purchase dates to minimize the
impact of market movements over time.
.
.
LiQuiditv rPFIA 2256.005(b)(2)1
The investment portfolio shall remain sufficiently liquid to meet all operating requirements
that may be reasonably anticipated.This is accomplished by structuring the portfolio so that
investments mature concurrent with cash needs to meet anticipated demands.Because all
possible cash demands cannot be anticipated,a portion of the portfolio will be invested in
shares of money market mutual funds or local government investment pools that offer
same-day liquidity.In addition,a portion of the portfolio will consist of securities with
active secondary or resale markets.
Public Trust
All participants in the Entity's investment process shall seek to act responsibly as
custodians of the public trust.Investment officers shall avoid any transaction that might
impair public confidence in the Entity's ability to govern effectively.
Yield (Optimization of Interest Earnings)rPFIA 2256.005(b)(3)1
The investment portfolio shall be designed with the objective of attaining a market rate of
return throughout budgetary and economic cycles,taking into account the investment risk
constraints and liquidity needs.Return on investment is of secondary importance compared
to the safety and liquidity objectives described above.
v.RESPONSIBILITY AND CONTROL
Delegation of Authoritv rPFIA 2256.005(1)1
In accordance with the Municipal Utility District 1 of Trophy Club requirements and the
Public Funds Investment Act,the Municipal Utility District 1 Board designates the Director
of Finance as the Entity's Investment Officer.An Investment Officer is authorized to
execute investment transactions on behalf of the Entity.No person may engage in an
investment transaction or the management of Entity funds except as provided under the
terms of this Investment Policy as approved by the Municipal Utility District 1 Board.The
investment authority granted to the investing officer is effective until rescinded by the
Municipal Utility District 1 Board.
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Qualitvand Capability of Investment Mana2ement rPFIA 2256.005(b )(3)1
The Entity shall provide periodic training in investments for the designated investment
officers and other investment personnel through courses and seminars offered by
professional organizations,associations,and other independent sources in order to insure
the quality and capability of investment management in compliance with the Public Funds
Investment Act.
Trainin2 ReQuirement(PFIA 2256.008)
In accordance with the Municipal Utility District 1 of Trophy Club requirements and the
Public Funds Investment Act,designated Investment Officers shall attend an investment
training session no less often than once every two years commencing September 1,1997
and shall receive not less than 10 hours of instruction relating to investment responsibilities.
A newly appointed Investment Officer must attend a training session of at least 10 hours of
instruction within twelve months of the date the officer took office or assumed the officer's
duties.The investment training session shall be provided by an independent source.For
purposes of this policy,an "independent source"from which investment training shall be
obtained shall include a professional organization,an institution of higher education or any
other sponsor other than a business organization with whom the Entity may engage in an
investment transaction.
Internal Controls (Best Practice)
The Director of Finance is responsible for establishing and maintaining an internal control
structure designed to ensure that the assets of the entity are protected from loss,theft,or
misuse.The internal control structure shall be designed to provide reasonable assurance
that these objectives are met.The concept of reasonable assurance recognizes that (1)the
cost of a control should not exceed the benefits likely to be derived;and (2)the valuation of
costs and benefits requires estimates and judgments by management.
Accordingly,the Director of Finance shall establish a process for annual independent
review by an external auditor to assure compliance with policies and procedures.The
internal controls shall address the following points.
.Control of collusion.
.Separation of transactions authority from accounting and record keeping.
.Custodial safekeeping.
.A voidance of physical delivery securities.
.Clear delegation of authority to subordinate staff members.
.Written confirmation for telephone (voice)transactions for investments and wire
transfers.
.Development of a wire transfer agreement with the depository bank or third party
custodian.
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Prudence (PFIA 2256.006)
The standard of prudence to be applied by the Investment Officer shall be the "prudent
investor"rule.This rule states that "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."In determining whether an Investment Officer has exercised prudence with
respect to an investment decision,the determination shall be made taking into
consideration:
.The investment of all funds,or funds under the Entity's control,over which the
officer had responsibility rather than a consideration as to the prudence of a
single investment.
Whether the investment decision was consistent with the written approved
investment policy of the Entity.
.
Indemnification (Best Practice)
The Investment Officer,acting in accordance with written procedures and exercising due
diligence,shall not be held personally responsible for a specific investment's credit risk or
market price changes,provided that these deviations are reported immediately and the
appropriate action is taken to control adverse developments.
Ethics and Conflicts of Interest rPFIA 2256.005(01
Officers and employees involved in the investment process shall refrain from personal
business activity that would conflict with the proper execution and management of the
investment program,or that would impair their ability to make impartial decisions.
Employees and Investment Officers shall disclose any material interests in financial
institutions with which they conduct business.They shall further disclose any personal
financial/investment positions that could be related to the performance of the investment
portfolio.Employees and officers shall refrain from undertaking personal investment
transactions with the same individual with which business is conducted on behalf of the
Entity.
An Investment Officer of the Entity who has a personal business relationship with an
organization seeking to sell an investment to the Entity shall file a statement disclosing that
personal business interest.An Investment Officer who is related within the second degree
by affinity or consanguinity to an individual seeking to sell an investment to the Entity shall
file a statement disclosing that relationship.A statement required under this subsection
must be filed with the Texas Ethics Commission and the Municipal Utility District 1 of
Trophy Club.
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VI.SUITABLE AND AUTHORIZED INVESTMENTS
Portfolio Management
The Entity currently has a "buy and hold"portfolio strategy.Maturity dates are matched
with cash flow requirements and investments are purchased with the intent to be held until
maturity.However,investments may be liquidated prior to maturity for the following
reasons:
.An investment with declining credit may be liquidated early to minimize loss of
principal.
Cash flow needs of the Entity require that the investment be liquidated..
Investments rPFIA 2256.005(b)(4)(A)1
Entity funds governed by this policy may be invested in the instruments described below,all
of which are authorized by Chapter 2256 of the Government Code (Public Funds
Investment Act).Investment of Entity funds in any instrument or security not authorized
for investment under the Act is prohibited.The Entity will not be required to liquidate an
investment that becomes unauthorized subsequent to its purchase.
I.Authorized
1.Obligations of the United States of America,its agencies and instrumentalities.
2.Certificates of Deposit issued by a bank organized under Texas law,the laws of
another state,or federal law,that has its main office or a branch office in Texas,
or by a savings and loan association or a savings bank organized under Texas
law,the laws of another state,or federal law,that has its main office or a branch
office in Texas and that is guaranteed or insured by the Federal Deposit
Insurance or its successor or secured by obligations in a manner and amount
provided by law for deposits of the Entity.
3.Money Market Mutual funds that are 1)registered and regulated by the
Securities and Exchange Commission,2)have a dollar weighted average stated
maturity of 90 days or less,4)rated AAA by at least one nationally recognized
rating service,and 4)seek to maintain a net asset value of $1.00 per share.
4.Local government investment pools,which 1)meet the requirements of Chapter
2256.016 of the Public Funds Investment Act,2)are rated no lower than AAA
or an equivalent rating by at least one nationally recognized rating service,and
3)are authorized by resolution or ordinance by the Board.
All prudent measures will be taken to liquidate an investment that is downgraded to less
than the required minimum rating.(PFIA 2256.021)
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II.Not Authorized rPFIA 2256.009(b)(1-4)1
Investments including interest-only or principal-only strips of obligations with underlying
mortgage-backed security collateral,collateralized mortgage obligations with an inverse
floating interest rate or a maturity date of over 10 years are strictly prohibited.
VII.INVESTMENT PARAMETERS
Maximum Maturities rPFIA 2256.005(b )(4)(B)1
The longer the maturity of investments,the greater their price volatility.Therefore,it is the
Entity's policy to concentrate its investment portfolio in shorter-term securities in order to
limit principal risk caused by changes in interest rates.
The Entity attempts to match its investments with anticipated cash flow requirements.The
Entity will not directly invest in securities maturing more than two (2)years from the date
of purchase;however,the above described obligations,certificates,or agreements may be
collateralized using longer dated investments.
The composite portfolio will have a weighted average maturity of 365 days or less.This
dollar-weighted average maturity will be calculated using the stated final maturity dates of
each security.[PFIA 2256.005(b)(4)(C)]
Diversification rPFIA 2256.005(b)(3)1
The Entity recognizes that investment risks can result from issuer defaults,market price
changes or various technical complications leading to temporary illiquidity.Risk is
controlled through portfolio diversification that shall be achieved by the following general
guidelines:
.Limiting investments to avoid overconcentration in investments from a specific
issuer or business sector (excluding U.S.Treasury securities and certificates of
deposit that are fully insured and collateralized in accordance with state and
federal law),
Limiting investment in investments that have higher credit risks (example:
commercial paper),
Investing in investments with varying maturities,and\
Continuously investing a portion of the portfolio in readily available funds such
as local government investment pools (LGIPs),or money market funds to ensure
that appropriate liquidity is maintained in order to meet ongoing obligations.
.
.
.
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The following maximum limits,by instrument,are established for the Entity's total
portfolio:
1.U.S.Treasury Securities .........................................
2.Agencies and Instrumentalities .................................
3.Certificates of Deposit ..............................................
4.Money Market Mutual Funds ...................................
5.Authorized Pools......................................................
85%
85%
85%
50%
100%
VIII.SELECTION OF BANKS AND DEALERS
Depositorv
At least every three (3)years,a Depository shall be selected through the Entity's banking
services procurement process,which shall include a formal request for proposal (RFP).The
selection of a depository will be determined by competitive bid and evaluation of bids will
be based on the following selection criteria:
.The ability to qualify as a depository for public funds in accordance with state
law.
The ability to provide requested information or financial statements for the
periods specified.
The ability to meet all requirements in the banking RFP.
Complete response to all required items on the bid form
Lowest net banking service cost,consistent with the ability to provide an
appropriate level of service.
The credit worthiness and financial stability of the bank.
.
.
.
.
.
Authorized BrokerslDealers (PFIA 2256.025)
The Entity shall,at least annually,review,revise,and adopt a list of qualified broker/dealers
and financial institutions authorized to engage in securities transactions with the Entity.
Those firms that request to become qualified bidders for securities transactions will be
required to provide a completed broker/dealer questionnaire that provides information
regarding creditworthiness,experience and reputation.and 2)a certification stating the firm
has received,read and understood the Entity's investment policy and agree to comply with
the policy.Authorized firms may include primary dealers or regional dealers that qualify
under Securities &Exchange Commission Rule l5C3-l (Uniform Net Capital Rule),and
qualified depositories.All investment providers,including financial institutions,banks,
money market mutual funds,and local government investment pools,must sign a
certification acknowledging that the organization has received and reviewed the Entity's
investment policy and that reasonable procedures and controls have been implemented to
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preclude investment transactions that are not authorized by the Entity's policy.[PFIA
2256.005(k-I)]
Competitive Bids (Best Practice)
It is the policy of the Entity to require competitive bidding for all individual security
purchases and sales except for:a)transactions with money market mutual funds and local
government investment pools and b)treasury and agency securities purchased at issue
through an approved broker/dealer or financial institution.
Deliverv vs.Payment rPFIA 2256.005(b)(4)(E)1
Securities shall be purchased using the delivery vs.payment method with the exception of
investment pools and mutual funds.Funds will be released after notification that the
purchased security has been received.
IX.SAFEKEEPING OF SECURITIES AND COLLATERAL
Safekeepin2 and Custodian A2reements (Best Practice)
The Entity shall contract with a bank or banks for the safekeeping of securities either owned
by the Entity as part of its investment portfolio or held as collateral to secure demand or
time deposits.Securities owned by the Entity shall be held in the Entity's name as
evidenced by safekeeping receipts of the institution holding the securities.
Collateral for deposits will be held by a third party custodian designated by the Entity and
pledged to the Entity as evidenced by safekeeping receipts of the institution with which the
collateral is deposited.Original safekeeping receipts shall be obtained.Collateral may be
held bv the depository banks trust devartment,a Federal Reserve Bank or branch of a
Federal Reserve bank,a Federal Home Loan Bank.or a third party bank avproved by the
Entity.
Collateral Policy (PFCA 2257.023)
Consistent with the requirements of the Public Funds Collateral Act,it is the policy of the
Entity to require full collateralization of all Entity funds on deposit with a depository bank,
other than investments.In order to anticipate market changes and provide a level of
security for all funds,the collateralization level will be 102%of market value of principal
and accrued interest on the deposits or investments less an amount insured by the FDIC.At
its discretion,the Entity may require a higher level of collateralization for certain
investment securities.Securities pledged as collateral should be held by an independent
third party with which the Entity has a current custodial agreement.The Director of
Finance is responsible for entering into collateralization agreements with third party
custodians in compliance with this Policy.The agreements are to specify the acceptable
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investment securities for collateral,including provisions relating to possession of the
collateral,the substitution or release of investment securities,ownership of securities,and
the method of valuation of securities.A clearly marked evidence of ownership (safekeeping
receipt)must be supplied to the Entity and retained.Collateral shall be reviewed at least
quarterly to assure that the market value of the pledged securities is adequate.
Collateral Defined
The Entity shall accept only the following types of collateral:
.Obligations of the United States or its agencies and instrumentalities
.Direct obligations of the state of Texas or its agencies and instrumentalities
.Collateralized mortgage obligations directly issued by a federal agency or
instrumentality of the United States,the underlying security for which is guaranteed by
an agency or instrumentality of the United States
.Obligations of states,agencies,counties,cities,and other political subdivisions of any
state rated as to investment quality by a nationally recognized rating firm not less than A
or its equivalent with a remaining maturity of ten (10)years or less
.A surety bond issued by an insurance company rated as to investment quality by a
nationally recognized rating firm not less than A
.A letter of credit issued to the Entity by the Federal Home Loan Bank
Subject to Audit
All collateral shall be subject to inspection and audit by the Director of Finance or the
Entity's independent auditors.
x.PERFORMANCE
Performance Standards
The Entity's investment portfolio will be managed in accordance with the parameters
specified within this policy.The portfolio shall be design~d with the objective of obtaining
a rate of return through budgetary and economic cycles,commensurate with the investment
risk constraints and the cash flow requirements of the Entity.
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Performance Benchmark (Best Practice)
It is the policy of the Entity to purchase investments with maturity dates coinciding with
cash flow needs.Through this strategy,the Entity shall seek to optimize interest earnings
utilizing allowable investments available on the market at that time.Market value will be
calculated on a quarterly basis on all securities owned and compared to current book value.
XI.REPORTING (PFIA 2256.023)
Methods
The Investment Officer shall prepare an investment report on a quarterly basis that
summarizes investment strategies employed in the most recent quarter and describes the
portfolio in terms of investment securities,maturities,and shall explain the total investment
return for the quarter.
The quarterly investment report shall include a summary statement of investment activity
prepared in compliance with generally accepted accounting principals.This summary will
be prepared in a manner that will allow the Entity to ascertain whether investment activities
during the reporting period have conformed to the Investment Policy.The report will be
provided to the Municipal Utility District 1 Board.The report will include the following:
.A listing of individual securities held at the end of the reporting period.
Unrealized gains or losses resulting from appreciation or depreciation by listing
the beginning and ending book and market value of securities for the period.
Additions and changes to the market value during the period.
Average weighted yield to maturity of portfolio as compared to applicable
benchmark.
Listing of investments by maturity date.
Fully accrued interest for the reporting period
The percentage of the total portfolio that each type of investment represents.
Statement of compliance of the Entity's investment portfolio with state law and
the investment strategy and policy approved by the Municipal Utility District 1
Board.
.
..
.
.
.
.
An independent auditor will perform a formal annual review of the quarterly reports with
the results reported to the governing body [PFIA 2256.023(d)].
Monitorin2 Market Value rPFIA 2256.005(b)(4)(D)1
Market value of all securities in the portfolio will be determined on a quarterly basis.These
values will be obtained from a reputable and independent source and disclosed to the
governing body quarterly in a written report.
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XII.INVESTMENT POLICY ADOPTION [PFIA 2256.005(e)]
The Entity's Investment Policy shall be adopted by resolution of the Municipal Utility
District 1 Board.It is the Entity's intent to comply with state laws and regulations.The
Entity's investment policy shall be subject to revisions consistent with changing laws,
regulations,and needs of the Entity.The Municipal Utility District 1 Board shall adopt a
resolution stating that it has reviewed the policy and investment strategies annually,
approving any changes or modifications.
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GLOSSARY
AGENCIES:Federal agency securities.
ASKED:The price at which securities are offered.
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.
BID:The price offered by a buyer of securities.(When you are selling securities,you ask
for a bid.)See Offer.
BROKER:A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD):A time deposit with a specified maturity evidenced
by a certificate.Large-denomination CD's are typically negotiable.
COLLA TERAL:Securities,evidence of deposit or other property that a borrower pledges
to secure repayment of a loan.Also refer to securities pledged by a bank to secure deposits
of public moneys.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR):The official annual
report for the Municipal Utility District 1 of Trophy Club.
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.
DEALER:A dealer,as opposed to a broker,acts as a principal in all transactions,buying
and selling for his own account.
DEBENTURE:A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT:There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt.Delivery versus payment is delivery of
securities with an exchange of money for the securities.Delivery versus receipt is delivery
of securities with an exchange of a signed receipt for the securities.
DISCOUNT:The difference between the cost price of a security and its maturity when
quoted at lower than face value.A security selling below offering price shortly after sale
also is considered to be at a discount.
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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.
DIVERSIFICATION:Dividing investment funds amount a variety of securities offering
independent returns.
FEDERAL CREDIT AGENCIES:Agencies of the Federal government set up to supply
credit to various classes of institutions and individuals,e.g.,S&L's,small business firms,
students,farmers,farm cooperatives,and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC):A federal agency that
insures bank deposits,currently up to $100,000 per deposit.
FEDERAL FUNDS RATE:The rate of interest at which Fed funds are traded.This rate
is currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB):The institutions that regulate and lend to
savings and loan associations.The Federal Home Loan Banks playa role analogous to that
played by the Federal Reserve Banks with member commercial banks.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA):FNMA,like GNMA
was chartered under the Federal National Mortgage Association Act in 1938.FNMA is a
federal corporation working under the auspices of the Department of Housing and Urban
Development (HUD).It is the largest single provider of residential mortgage funds in the
United States.Fannie Mae,as the corporation is called,is a private stockholder-owned
corporation.The corporation's purchase include a variety of adjustable rate mortgages and
second loans,in addition to fixed-rate mortgages.FNMA's securities are also highly liquid
and are widely accepted.FNMA assumes and guarantees that all security holders will
receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC):Consists of seven members of
the Federal Reserve Bank Board and five of the twelve Federal Reserve Bank Presidents.
The Presidents 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,DC
regional banks and about 5,700 commercial banks that are members of the system.
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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 the FHA,V A,or FMHM mortgages.The term
"passthroughs"is often used to describe "Ginnie Mae".
LIQUIDITY:A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value.In the money market,a security is said to be liquid if the
spread between bid and asked prices is narrow and reasonable size can be done at those
quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP):The aggregate of all funds
from political subdivisions that are placed in the custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE:The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT:A written contract covering all future
transactions between the parties to repurchase -reverse repurchase agreements that
establishes each party's rights in the transactions.A master agreement will often specify,
amount other things,the right of the buyer-lender to liquidate the underlying securities in
the event of default by the seller-borrower.
MONEY MARKET:The date upon which the principal or stated value of an investment
becomes due and payable.
OFFER:The price asked by a seller of securities.(When you are buying securities,you
ask for an offer.)See Asked and Bid.
OPEN MARKET OPERATIONS:Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of money 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.
PORTFOLIO:Collection of securities held by an investor.
PRIMARY DEALER:A group of government securities dealers who submit daily reports
of market activity and positions and monthly financial statements to the Federal Reserve
Bank of New York and are subject to its informal oversight.Primary dealers include
Securities and Exchange Commission (SEC)-registered securities broker-dealers,banks,
and a few unregulated firms.
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PRUDENT PERSON RULE:An investment standard.In some states the law requires
that a fiduciary,such as a trustee,may invest money only in a list of securities selected by
the custody sate-the so-called legal list.In other states the trustee may invest in security if it
is one that 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.
RA TE 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 the current
income return.
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.
Dealer use RP extensively to finance their positions.Exception:When the Fed is said to be
doing RP,it is lending money that is,increasing bank reserves.
SAFEKEEPING:A service to customers rendered by banks for a fee whereby securities
and valuables of all types and descriptions are held in the bank's vaults for protection.
SECONDARY MARKET:A market made for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION:Agency created by Congress to
protect investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1:See Uniform Net Capital Rule.
TREASURY BILLS: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 NOTES:A non-interest bearing 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.
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UNIFORM NET CAPITAL RULE:Securities and Exchange Commission requirement
that member firms as well as nonmember broker-dealers in securities maintain a maximum
ratio of indebtedness to liquid capital of 15 to 1;also called net capital rule and net capital
ratio.Indebtedness covers all money owed to a firm,including margin loans and
commitments to purchase securities,one reason new public issues are spread among
members of underwriting syndicates.Liquid capital includes cash and assets easily
converted into cash.
YIELD:The rate of annual income return on an investment,expressed as a percentage.(a)
Income Yield is obtained by dividing the current dollar income by the current market price
for the security.(b)Net Yield to 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.
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