2014-14 Code Amendment - Investment PolicyORDINANCE NO. 2014-14
AN ORDINANCE OF THE VILLAGE COUNCIL OF THE VILLAGE OF
NORTH PALM BEACH, FLORIDA, AMENDING ARTICLE I, "IN GENERAL,"
OF CHAPTER 2, "ADMINISTRATION," OF THE VILLAGE CODE OF
ORDINANCES BY AMENDING SECTION 2 -4, "INVESTMENT POLICY OF
THE VILLAGE," TO UPDATE THE INVESTMENT OBJECTIVES,
INCREASE THE MAXIMUM MATURITY DATES, ADD NEW SECTORS OF
INVESTMENT FOR DIVERSIFICATION AND YIELD, UPDATE THE
MAXIMUM ALLOCATIONS AND PROVIDE FOR ANNUAL REVIEW;
ADOPTING A GLOSSARY OF CASH AND INVESTMENT TERMS AND AN
INVESTMENT POOL /FUND QUESTIONNAIRE; PROVIDING FOR
CODIFICATION; PROVIDING FOR SEVERABILITY; PROVIDING FOR
CONFLICTS; AND PROVIDING FOR AN EFFECTIVE DATE.
WHEREAS, after consultation with the Village Audit Committee, Village Administration
recommended revising the Village's Investment Policy, as set forth in Section 2 -4 of the Village
Code of Ordinances, to update the investment objectives, increase the maximum maturity dates,
add new sectors of investment for diversification and yield, update the maximum allocation and
provide for annual review; and
WHEREAS, the Village Administration and Village Audit Committee further recommended
adopting both a Glossary of Cash and Investment Terms and an Investment Pool /Fund
Questionnaire to be included within the Village's Accounting Policies and Procedures Manual
for Internal Controls; and
WHEREAS, Village Council has determined that the adoption of this Ordinance is in the best
interests of the health, safety and welfare of the Village and its residents.
NOW, THEREFORE, BE IT ORDAINED BY THE VILLAGE COUNCIL OF THE VILLAGE
OF NORTH PALM BEACH, FLORIDA as follows:
Section 1. The foregoing recitals are ratified as true and correct and are incorporated herein.
Section 2. The Village Council hereby amends Chapter 2, "Administration," Article I, "In General,"
of the Village Code of Ordinances by amending Section 2 -4, "Investment Policy of the Village,"
to read as follows (additional language is underlined and deleted language is °tree a *i.,.,,,,g ):
Sec. 2 -4. - Investment policy of the village.
(a) Purpose. The purpose of this statement is to set forth the policy
and objectives governing the investment management of public funds of the
village that are in excess of the amounts needed to meet current expenses. This
investment policy places the highest priority on the safety and liquidity of funds.
Page 1 of 16
(b) Scope. This investment policy applies to all the investment activity
of the village, except for its employees' pension funds, which are organized and
administered separately, or for funds related to the issuance of debt where there
are other existing policies or indentures in effect for such funds.
Funds included:
(1) General fund.
(2) Special revenue funds.
(3) Enterprise funds.
(4) Capital projects funds.
(5) Any new funds created by the governing body unless specifically exempt.
(c) Investment Objectives. The primary objectives, in priority of order,
of investment activities, shall be safety of principal, liquidity of funds, and
maximizing investment income.
(1) Safety. Safety of principal is the foremost objective of investment
activities. Investments shall be undertaken in a manner that seeks
to insure preservation of capital in the overall portfolio. All other
investment objectives are secondary to the safety of principal. The
objective will be to mitigate credit risk and interest rate risk.
a. Credit risk. Credit risk, the risk of loss due to the failure of
the security issuer or backer, will be minimized by:
1. Limiting investments to the safest types of securities.
2. Pre - qualifying the financial institutions, broker dealers,
intermediaries, and advisers with which the village
will do business.
3. Diversifying the investment portfolio so that
potential losses on individual securities will not
place an undue financial burden on the village, and
4. Monitoring all of the village's investments to
anticipate and respond appropriately to changing
market conditions.
5. Quarterly reporting, in comparative format, of all
market values of invested funds and instruments.
Page 2 of 16
b. Interest rate risk. The village will minimize the risk that the
market value of securities in the portfolio will fall due to
changes in general interest rates, by:
1. Structuring the investment portfolio so that the
securities mature to meet cash requirements for
ongoing operations, thereby avoiding the need to sell
securities on the open market prior to maturity; and
2. Investing operating funds primarily in short-term
securities, money market mutual funds, or similar
investment pools unless it is anticipated that long-
term securities can be held to maturity without
jeopardizing the liquidity requirements.
(2) Liquidity.
a. General liquidity. 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 the securities mature concurrent with cash
needs to meet anticipated demands. Furthermore, since all
possible cash demands cannot be anticipated, the portfolio
should consist largely of securities with active secondary or
resale markets. Portions of the portfolio may be placed in
interest - bearing checking/savings accounts with qualified
public depositories, Securities and Exchange Commission
registered money market funds with the highest credit quality
rating from a nNationally rRecognized Statistical rRating ageney
Organization (NRSRO), or local government investment
pools which offer same -day liquidity for short-term funds.
b. Local liquidity. The chief financial officer of the village
shall establish and maintain a local, liquid fund in an
amount equal to, as a minimum, one - twelfth (1/12) of the
designated operating funds in the annual village budget.
(3) Investment income. Without compromising safety and liquidity, the
highest possible total return should be obtained on the village's funds.
Income will include interest /dividends received as well as any realized
or unrealized gains and losses of principal of the underlying security.
Return on investment is of least importance compared to the safety
liquidity objectives described above. However, return is attempted
through active management where the investment advisor utilizes a
total return strategy (which includes both realized and unrealized
gains and losses in the portfolio). This total return strategy seeks to
increase the value of the portfolio through reinvestment of income
and capital gains. The core of investments is limited to relatively low
risk securities in anticipation of earning a fair return relative to the
risk being assumed. Despite this, an investment advisor mqy trade
to recognize a loss from time to time to achieve a perceived relative
value based on its potential to enhance the total return of the portfolio.
Page 3 of 16
(d) Performance measurements. In order to assist in the evaluation of
the portfolio's performance, the village shall use nationally recognized
benchmarks for the short term and long term portfolios. Performance calculations
will not include any balances invested in overnight sweep accounts.
(1) Operating Funds or Short term portfolio. " nationally r-eeeg ize
Money Mafket F„ma index, sueh as Standafd and pow
V VYVIT
gross of fees yield will be used as -a bexelun Investment
performance of funds designated as short-term funds and other
funds that must maintain a high degree of liquidity will be
compared to the return of the S &P Rated GIP Index Government
30 -Day Gross of Fees Yield. Investments of current operating
funds shall have maturities of no longer than twelve (12 ) months.
(2) Core Funds or Long term portfolio. Investment performance of the
village portfolio will be compared to the Bank of America Merrill Lynch
1 -3 year United States Treasury Note Index or the equivalent
composed of U.S. Treasury or government securities, with duration
and asset mix that approximates the village portfolio. The
benchmark's performance will be compared to the portfolio's total
rate of return. Investments of long -term funds shall have a term
appropriate to the need for funds, but in no event shall exceed five
and one -half (5.50) eY ars.
(e) Prudence and ethical standards.
(1) Prudence. The standard of prudence to be used shall be the
"prudent person rule," which states that:
Investments should 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 the investment, considering the probable safety
of their capital as well as the probable income to be
derived from the investment.
The chief financial officer, or other persons performing the investment
functions, acting in accordance with written policies and procedures,
and exercising due diligence shall be relieved of personal responsibility
for an individual security's credit risk or market price changes,
provided deviations from expectations are reported immediately and
that appropriate action is taken to control adverse developments.
Page 4 of 16
While the standard of prudence to be used by authorized staff who
are officers or employees is the "prudent person" standard, any person
or firm hired or retained to invest, monitor, or advise concerning
these assets shall be held to the higher standard of "prudent expert".
The standard shall be that in investing and reinvesting moneys and
in acquiring, retaining managing, and disposing of investments of
these funds, the investment advisor shall exercise: the judgment, care,
skill, prudence, and diligence under the circumstances then prevailing,
which persons of prudence, discretion, and intelligence, acting in a
like capacity and familiar with such matters would use in the conduct
of an enterprise of like character and with like aims by diversifying
the investments of the funds, so as to minimize the risk, considering
the probable income as well as the probable safety of their ca ip tal.
(2) Ethical standards. Officers and employees involved in the
investment process shall refrain from personal business activity
that could conflict with the proper execution and management of
the investment program, or that could impair their ability to make
impartial decisions. Employees and investment officials shall disclose
any material interest 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
whom business is conducted on behalf of the village.
(f) Authorized investments and pre - qualification. The village may
invest and reinvest, in accordance with the objectives stated in subsection (c), in
the financial instruments noted in the table insets below. When ,.,,nside, -inn s,,e
investments, the village shall use the following pre qualifieation parameters fe
°°ifi° institutions: The following are the guidelines for investments and limits
on security types, issuers, and maturities as established by the village. The chief
financial officer, or other persons performing the investment functions shall have
the option to further restrict investment percentages from time to time based on
market conditions. The percentage allocations requirements for investment types
and issuers are calculated based on the original cost of each investment, at the
time of purchase. Investments not listed in this policy are prohibited.
(1) Banks. The Village shall only select a QPD (Qualified Public
Depository) with a collateral pledge level of twenty -five percent
(25 %) or fifty percent (50 %) as established by the State Chief
Financial Officer pursuant to Section 280.04, Florida Statutes.
Tl1/J�4i �%�1I /I Sf /19�J�1 % %qh�f r�dif�llh� %�ip��
1 I � ♦ 1 I
♦ 1 I � � 1 I
Page 5of16
(-S) C-e dl
{7} Leeal government ins =esrtenpeE's. eemponents
TIVIur
that institution.
U.S Treasury & Government Guaranteed. U.S. Treasury obligations,
and obligations the principal and interest of which are backed or
guaranteed by the full faith and credit of the U.S. Government.
Federal A eenncy/GSE Debt obligations, participations or other
instruments issued or fully guaranteed by any U.S. Federal a engL
instrumentality or government- sponsored ente rise (GSE).
Supranationals. U.S. dollar denominated debt obligations of a
multilateral organization of governments where U.S. is a shareholder
and voting member.
Corporates. U.S. dollar denominated corporate notes, bonds or other
debt obligations issued or guaranteed by a domestic or foreign
corporation, financial institution, non - profit, or other entity.
Municipals. Obligations, including both taxable and tax - exempt,
issued or guaranteed by any State, territory or possession of the
United States, political subdivision, public corporation, authority,
agency board, instrumentality or other unit of local government of
any State or territory.
Agency Mortgage Backed Securities. Mortgage- backed securities
(MBS), backed by residential, multi - family or commercial
mortgages, that are issued or fully guaranteed as to principal and
interest by a U.S. Federal agency or government sponsored
enterprise, including but not limited to pass- throughs,
collateralized mortgage obligations (CMOs) and REMICs.
Page 6 of 16
Asset - Backed Securities. Asset - backed securities (ABS ) whose
underlying collateral consists of loans, leases or receivables,
including but not limited to auto loans /leases, credit card receivables,
student loans, equipment loans /leases, or home - equity loans.
Non - Negotiable Certificate of Deposit and Savings Accounts.
Non - negotiable interest bearing time certificates of deposit, or
savings accounts in banks organized under the laws of this state
or in national banks organized under the laws of the United States
and doing business in this state, provided that any such deposits are
secured by the Florida Security for Public Deposits Act, Chapter 280,
Florida Statutes.
tUO Commercial Paper. U.S. dollar denominated commercial paper
issued or guaranteed by a domestic or foreign copporation,
company, financial institution, trust or other entity, including both
unsecured debt and asset - backed programs.
(UI Money Market Funds. Shares in open -end and no -load money
market mutual funds, provided such funds are registered under the
Investment Company Act of 1940 and operate in accordance with
Rule 2a -7.
A thorough investigation of anv money market fund is reauired
prior to investing, and on an annual basis thereafter. The list of
questions that cover the major aspects of any investment pool /fund
set forth in the adopted Investment Pool /Fund Questionnaire must
be asked prior to investina. Additionallv. a current nrosnectus
must be obtained.
Local Government Investment Pools. State, local government or
privately-sponsored investment pools that are authorized pursuant
to state law. A thorough investigation of any intergovernmental
investment pool is required prior to investing, and on an annual
basis. The list of questions that cover the major aspects of any
investment pool /fund set forth in the adopted Investment
Pool /Fund Questionnaire must be asked prior to investing_
Additionally, a current prospectus must be obtained.
The Florida Local Government Surplus Funds Trust Funds
( "Florida Prime "). A thorough investigation of the Florida Prime
is required prior to investing, and on an annual basis. The list of
questions that cover the major aspects of any investment pool /fund
set forth in the adopted Investment Pool /Fund Questionnaire must
be asked prior to investing. Additionally, a current prospectus
must be obtained.
Page 7of16
(0 General investment and portfolio limits:
w
General investment limitations:
a. Investments must be denominated in U.S. dollars and
issued for legal sale in U.S. markets.
b. Minimum ratings are based on the highest rating by any
one Nationally Recognized Statistical Ratings Organization
( "NRSRO "), unless otherwise specified.
C. All limits and rating requirements apply at time of purchase.
d. Should a security fall below the minimum credit rating
requirement for purchase, the investment advisor will
notify the chief financial officer.
e. The maximum maturitv (or averaae life for MBS /ABS) of
any investment is five and one -half (5.50)years. Maturity
and average life are measured from settlement date. The
final maturity date can be based on any mandatory call, put,
pre - refunding date, or other mandatory redemption date.
Q General portfolio limitations:
a. The maximum effective duration of the aggregate portfolio
is three (3 ) years.
Maximum exposure to issuers in any non -U.S. country
cannot exceed ten percent (10 %) per country_
Investment in the following are permitted, provided they meet all
other policy requirements:
a. Callable, step -up callable, called, pre - refunded, putable and
extendable securities, as long as the effective final maturity
meets the maturity limits for the sector.
b. Variable -rate and floating -rate securities.
C. Subordinated, secured and covered debt. if it meets the
ratings requirements for the sector.
d. Zero coupon issues and strips, excluding agency mort age -
backed Interest -only structures (I /Os).
e. Treasury. TIPS.
Page 8 of 16
The following are not permitted investments, unless specifically
authorized by statute and with prior approval of the village council:
a. Trading for speculation
b. Derivatives (other than callables and traditional floatine or
variable -rate instruments)
C. Mortgage- backed interest -only structures (I /Os)
d. Inverse or leveraged floating -rate and variable -rate instruments
e. Currency, eqWly, index and event - linked notes (e.g. range notes),
or other structures that could return less than par at maturity
f. Private placements and direct loans. except as may be
legally permitted by Rule 144A or commercial paper issued
under a 4(2 ) exemption from registration
& Convertible, high yield, and non -U.S. dollar denominated debt
h. Short sales
i. Use of leverage
1 Futures and options
k. Mutual funds, other than fixed - income mutual funds and
ETFs, and money market funds
1. Equities, commodities, currencies and hard assets
(g h) Maturity and liquidity requirements. The village's investment
portfolio shall be structured to provide sufficient liquidity to pay obligations as
they come due. Furthermore, to the extent possible, an attempt will be made to
match investment maturities with known cash needs and anticipated cash flow
requirements. Unless matched to a specific cash flow, the village will not directly
invest in securities maturing more than tree -(3) five and one -half (5.50) years
from the date of purchase.
(h i) Portfolio composition. The following are the limits for investments
and limits on security issues, and maturities in the portfolio. The chief financial
officer has the option to further restrict investment in selected instruments, to
conform to the present market conditions.
Note: The table below defines two (2) types of village investments, "operating"
and "core":
Operating: Those liquid funds necessary to conduct routine village activity,
in addition to an amount determined by the village council and administration
sufficient to cover emergency situations and unforeseen capital expenditures.
Core: All funds not included in operating funds. In general, these funds
can be invested in issues with longer -term maturities.
Page 9 of 16
These terms shall be defined and the amounts will be designated at least once a year
during the village budget discussions. Changes during a year shall only be made by
resolution of the village council. These changes will apply to the end of the
current fiscal year and must be reconfirmed or changed as needed during the next
annual budget process.
Authorized r.,yest.,...ent..
re
Mg'��
Afini.it1-bH' ?4
Al"Xinit11i4 - -%
interest beefing
Opening
N/A
8.330,
(1 112 annual
village operating
4-00
t., more than Gnoi with any one-
depository institutiffli)
cheeks savings
aOGE)UHtS
core
WA
0%
4-00
(no more than 0 with any one
.Je tit..ti....\
interest bear-ing
time deposits
Operating
s
0
0442-h of annual Village
budget)
(HO HIM than 0
Gore
3years
0
4-00
(no m a than 33.33% with a one issuer)
The 1 .,..a1 Government
Surplus Funds Trust
Operatin
NLA
0
-15
G'unEVinte>•goyernme„tel
investment ., .,1
Cie
NAA
0
2-5
Rvnhe a Commission
to ed money
,,.vet funds
(no more than 33.331% w ith any one :....,.e.
Core
NJ A
0
-50
t.... MOW than 1Z 1ZO%.. with a
Dir -e..t obligations e
the United States
�
Operating
30 days
0
-50
�e
3 yews
0
1 ��
4-00
Federal Agenc
gig
N�A
0
0
Cie
Syears
0
50
t..O MOM than 109% with a e.4
Corporate Notes
gig
WA
0
0
C-Ofe
3 years
0
2-5
/..,... OM than 33.3 Goi with a one issu"4
!'O.. Me...:el Pyer
Oppratifig
=YCore
aQ41YS
0
7
4-5
.Vith EIR3V Effle iSSUeFJ
State and/or- Loeal
Government Taxable
Qpffa6ft
WA
0
0
0
/. o- m a than Goi m4h e one is e.�
Core
Page 10 of 16
Table insets:
Operating Funds (Short -Term Portfolio Perinitted Investments:
Authorized
Investments
Sector
Maximum ( %)
Sector
Minimum ( %)
Per Issuer
Minimum Ratings
Maturity
Maximum
Requirement
Range
Banks - Interest-
100%
8.33%
(1/12o
annual Village
°
50%
N/A
N/A
bearing checking
or savings
accounts
operating budget)
Non -Ne otg iable
(11/12" 91.6/0
of
annual Village
0%
33.33%
N/A
30 days
Certificate of
Deposits
operating budget)
Florida Local
25%
0%
N/A
Highest Fund
N/A
Ratmg
by all NRSROs
Governmen
Surplus Fund
who rate the fund
Trust Funds
(AAAm/Aaa -mf,
Florida Prime ")
or equivalent)
Intergovernmental
25 /0 °
0 /o o
N/A
Highest Fund
N/A
Quality and
Volatility Rating
Categories by all
Pools (LGIPs
NRSROs who rate
the LGIP,
(AAAm/AAAf,
S1, or equivalent
Money Market
o
50 /0
0
0 /0
o
33.33 /o
Highest Fund
N/A
Rating by all
NRSROs who rate
Funds (MMFs)
the fund
(AAAm/Aaa -mf,
or equivalent)
U.S. Treasury
50%
0%
N/A
N/A
30 days
Commercial
5%
0%
N/A
Highest ST Rating
30 Days
Category
(A- 1 /P -1, or
equivalent)
Paper
Page 11 of 16
Core Funds (Long -Term Portfolio) Permitted Investments:
Sector
Sector
Maximum
Per Issuer
Minimum Ratings Requirement'
Maximum
Maximum
Maturity
U.S. Treasury
100%
100%
N/A
5.50 Years
GNMA
40%
(5.50 Years
avg. life
Other
U.S. Government
10%
Guaranteed (e.g. AID, GTC)
for GNMA)
Federal Agency /GSE:
75%
40 %3
N/A
5.50 Years
FNMA, FHLMC, FHLB,
FFCB*
Federal Agency /GSE
10%
other than those above
Supranationals
where U.S. is a shareholder
25%
10%
Highest ST or Two Highest LT
5.50 Years
Rating Categories
(A- 1 /P -1, AA - /Aa3, or equivalent)
and voting member
Corporates
50%'
5%
Highest ST or Three Highest LT
5.50 Years
Rating Categories
(A- 1 /P -1, A - /A3 or equivalent)
Municipals
25%
5%
Highest ST or Three Highest LT
5.50 Years
Rating Categories
CSP -I /MIG 1, A - /A3, or equivalent)
Agency Mortgage- Backed
°
25 /0
40%'
N/A
5.50 Years
Securities (MBS)
4
Avg Life
Asset - Backed Securities
o
25 /0
o
5 /o
Highest ST or LT Rating
5.50 Years
Avg Life
CABS)
(A- 1 +/P -1, AAA/Aaa, or equivalent)
Non - Negotiable Certificate
50%
None, if fully
None, if fully collateralized.
2 Years
of Deposit or Savings Accounts
collateralized
Commercial Paper (CP)
50 %Z
5%
Highest ST Rating Category
270 Days
(A- 1 /P -1, or equivalent)
Money Market Funds
50%
25%
Highest Fund Rating by all
N/A
NRSROs who rate the fund
MMFs
(AAAm/Aaa -mf, or equivalent)
Intergovernmental Pools
o
50 /0
o
25 /o
Highest Fund Quality and Volatility
N/A
Rating Categories by all NRSROs
LGIPs
who rate the LGIP,
(AAAm/AAAf, S1, or equivalent)
Florida Local Government
25%
N/A
Hi hest Fund Rating by all
N/A
Surplus Funds Trust Funds
NRSROs who rate the fund
( "Florida Prime'
(AAAm/Aaa -mf, or equivalent)
Notes:
' Rating by at least one SEC - registered Nationally Recognized Statistical Rating Organization ( "NRSRO "),
unless otherwise noted. ST= Short-term: LT =Lon -tg erm.
2 Maximum allocation to all corporate and bank credit instruments is 50% combined.
3 Maximum exposure to any one Federal agency, including the combined holdin sg of Agency debt and
Agency MBS, is 40 %.
4 The maturity limit for MBS and ABS is based on the expected average life at time of settlement,
measured using Bloomberg or other industry standard methods.
* Federal National Mortgage Association (FNMA); Federal Home Loan Mortgage Corporation (FHLMC);
Federal Home Loan Bank or its District banks (FHLB); Federal Farm Credit Bank (FFCB).
Page 12 of 16
(i i) Risk and diversification. Assets held shall be diversified to control
the risk of loss resulting from the over - concentration of assets in a specific
maturity, issuer, instrument, dealer, or bank through which these instruments are
bought and sold. Diversification strategies shall be reviewed and revised
periodically as deemed necessary by the chief financial officer.
( k) Authorized investment institutions and dealers. A list will be
maintained of financial institutions authorized to provide investment services. In
addition, a list also will be maintained of approved security brokers /dealers
selected by creditworthiness. Authorized staff shall only purchase securities from
financial institutions, which are qualified as public depositories by the Treasurer,
or Chief Financial Officer of the State of Florida, "Primary Dealers" as designated bX
the Federal Reserve Bank of New York, or from direct issuers of commercial paper.
The village's investment advisor shall utilize and maintain its own list of
approved primary and non - primary dealers.
(l- 1) Third party custodial agreements. All securities purchased by the
village shall be properly designated as an asset of the village and shall be held in
safekeeping with ° this pat4 . eustedial institu in an account separate and
apart from the assets of the financial institution. A third party custodian is
defined as any bank depository chartered by the Federal Government, the State of
Florida, or any other state or territory of the United States which has a branch or
principal place of business in the State of Florida as defined in Section 658.12,
Florida Statutes, or by a national association organized and existing under the
laws of the United States which is authorized to accept and execute trusts and
which is doing business in the State of Florida. Certificates of deposits will be
placed in the provider's safekeeping department for the term of the deposit. The
third -party custodian will be required to designate all securities held as assets of
the village. No withdrawal of securities, in whole or in part, shall be made from
safekeeping, except by the chief financial officer, or his /her respective designees.
Securities transactions between a broker - dealer and the custodian involving
purchase or sale of securities by transfer of money or securities must be made on a
"delivery vs. payment" basis, if applicable, to ensure that the custodian will have
the security or money, as appropriate, in hand at the conclusion of the transaction.
Securities held as collateral shall be held free and clear of any liens.
(I m) Master repurchase agreement. All approved institutions and
dealers transacting repurchase agreements shall execute and perform as stated in
the Securities Industry and Financial Markets Association ( SIFMA) master
repurchase agreement. All repurchase agreement transactions shall adhere to the
requirements of the SIFMA master repurchase agreement.
(m n) Bid requirement. An appropriate maturity date will be determined
for each investment based on cash -flow needs and market conditions. Based on
these considerations, the chief financial officer will analyze and select one or
more optimal types of investments, and a minimum of three (3) reputable,
qualified and financially sound banks and /or dealers must be contacted and asked
to provide and eempefifi,�� bids on the securities in question when feasible and
appropriate. Except as otherwise required by law, the bid deemed to best meet the
investment objectives specified in subsection 144 Lc) must be selected.
Page 13 of 16
(n o) Internal controls.
(1) The chief financial officer shall establish and maintain a written
system of internal controls made a part of the village's operational
procedures. The internal controls shall be designed to prevent
losses of funds, which might arise from fraud, employee error,
misrepresentation by third parties, or imprudent actions by
employees of the village. No person shall engage in an investment
transaction except as authorized in this policy.
(2) Independent auditors, as a normal part of the annual financial audit
to the village, shall conduct a review of the system of internal
controls to ensure compliance with policies and procedures as may
be required by the village.
(e p) Continuing education. The chief financial officer shall complete
eight (8) hours of continuing education annually in subjects or courses related to
investment practices and products.
(p ,q) Reporting. The chief financial officer or his or her respective
designee shall prepare a quarterly investment report, which shall include
securities in the portfolio by class and type, acquisition cost, income earned, yield,
maturity date and market value as of the report date. The report will be provided
to the legislative and governing body of the village and shall be available to the public.
(q r) Securities; disposition. Every security purchased on behalf of the
Village must be properly earmarked and:
(1) If registered with the issuer or agents, must be immediately placed
for safekeeping in a location that protects the village's interest in
the security;
(2) If in book entry form, must be held for the credit of the governing
body by a depository chartered by the federal government, the state,
or any other state or territory of the United States which has a branch
or principal place of business in the state as defined in Florida
Statutes section 658.12, or by national association organized and
existing under the laws of the United States which is authorized to
accept and exercise trusts and which is doing business in the state,
and must be kept in the depository in an account separate and apart
from the assets of the financial institution, or
(3) If physically issued to the holder but not registered with the issuer
or its agents, must be immediately placed for safekeeping in a
secured vault.
Page 14 of 16
(r s) Sale of securities. When invested funds are needed in whole or in
part for the purposes originally intended or for more optimal investments, the
chief financial officer may sell such investments at the then - prevailing market
price and place the proceeds into the proper account or fund.
(s t) Policy considerations.
(1) Exemptions. Any investment held prior to the adoption of this
policy that does not meet the guidelines of this policy shall be
exempted from the requirements of this policy. At maturity or
liquidation, such monies shall be reinvested only as provided by
this policy.
(2) Amendments. This policy shall be reviewed on an annual basis by
the village council at the "setting of council goals and objectives"
session of the annual budget. The village council must approve any
changes.
(t u) Delegation of authority. The finance director is the chief financial
officer of the village and is responsible for investment decisions and activities. No
person may engage in an investment transaction except as provided under the
terms of this policy and the procedures established hereunder.
Nothing set forth herein shall preclude the village from utilizing a
an
investment advisor to assist in managing the village's portfolio Such investment
advisor must be registered under the Investment Advisor's Act of 1940 The
investment advisor may invest funds on behalf of the village in accordance with
the mandates of pafagrap (h W this investment policy.
Authorized signatories are the chief financial officer, the village manager
and the village mayor. These individuals are also authorized to initiate wire
transfers for the village. All investment transactions require approval by two (2)
of the depository signatories.
(v,) The chief financial officer shall review the investment policy
annually and, if necessary, present modifications to the village council for approval
Section 3. The Village Council further adopts, as part of its Investment Policy, the Glossary
of Cash and Investment Management Terms, attached hereto as Attachment "A" and
incorporated herein by reference, and the Investment Pool /Fund Questionnaire, attached hereto
as Attachment "B" and incorporated herein by reference. The Glossary of Cash and Investment
Management Terms and the Investment Pool /Fund Questionnaire shall be included within the
Village's Accounting Policies and Procedures Manual for Internal Controls.
Page 15 of 16
Section 4. The provisions of Section 2 of this Ordinance shall become and be made a part of
the Code of Ordinances of the Village of North Palm Beach, Florida.
Section 5. If any section, paragraph, sentence, clause, phrase or word of this Ordinance is for
any reason held by a court of competent jurisdiction to be unconstitutional, inoperative or void,
such holding shall not affect the remainder of this Ordinance.
Section 6. All ordinances or parts of ordinances and resolutions or parts of resolutions in
conflict herewith are hereby repealed to the extent of such conflict.
Section 7. This Ordinance shall take effect immediately upon adoption.
PLACED ON FIRST READING THIS 13th DAY OF NOVEMBER, 2014.
PLACED ON SECOND, FINAL READING AND PASSED THIS 11th DAY OF DECEMBER, 2014
(Village Seal)
ATTEST:
VILLAG CLERK
APPROVED AS TO FORM AND
LEGAL SUFFICIENCY:
VILLAGE ATTORNEY
S.Z6' � (:n C,-),J,
MAYOR
Page 16 of 16
Attachment A
Glossary of Cash and Investment Management Terms
The following is a glossary of key investing terms, many of which appear in the Village's investment policy. This
glossary clarifies the meaning of investment terms generally used in cash and investment management. This
glossary has been adapted from the GFOA Sample Investment Policy and the Association of Public Treasurers of
the United States and Canada's Model Investment Policy.
Accrued Interest. Interest earned but which has not yet been paid or received.
Agency. See "Federal Agency Securities."
Ask Price. Price at which a broker /dealer offers to sell a security to an investor. Also known as "offered price."
Asset Backed Securities (ABS). A fixed - income security backed by notes or receivables against assets other than
real estate. Generally issued by special purpose companies that "own" the assets and issue the ABS. Examples
include securities backed by auto loans, credit card receivables, home equity loans, manufactured housing loans,
farm equipment loans, and aircraft leases.
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's). A draft or bill of exchange drawn upon and accepted by a bank. Frequently used to
finance shipping of international goods. Used as a short -term credit instrument, bankers' acceptances are traded
at a discount from face value as a money market instrument in the secondary market on the basis of the credit
quality of the guaranteeing bank.
Basis Point. One hundredth of one percent, or 0.01 %. Thus 1% equals 100 basis points.
Bearer Security. A security whose ownership is determined by the holder of the physical security. Typically, there
is no registration on the issuer's books. Title to bearer securities is transferred by delivery of the physical security
or certificate. Also known as "physical securities."
Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills program, a short -term debt securities
issuance program to supplement its existing discount note program. The program includes a schedule of larger,
weekly issues in three- and six -month maturities and biweekly issues in one -year for Benchmark Bills. Each issue is
brought to market via a Dutch (single price) auction. FNMA conducts a weekly auction for each Benchmark Bill
maturity and accepts both competitive and non - competitive bids through a web based auction system. This
program is in addition to the variety of other discount note maturities, with rates posted on a daily basis, which
FNMA offers. FNMA's Benchmark Bills are unsecured general obligations that are issued in book -entry form
through the Federal Reserve Banks. There are no periodic payments of interest on Benchmark Bills, which are sold
at a discount from the principal amount and payable at par at maturity. Issues under the Benchmark program
constitute the same credit standing as other FNMA discount notes; they simply add organization and liquidity to
the short -term Agency discount note market.
Benchmark Notes /Bonds: Benchmark Notes and Bonds are a series of FNMA "bullet" maturities (non - callable)
issued according to a pre- announced calendar. Under its Benchmark Notes /Bonds program, 2, 3, 5, 10, and 30 -year
maturities are issued each quarter. Each Benchmark Notes new issue has a minimum size of $4 billion, 30 -year new
issues having a minimum size of $1 billion, with re- openings based on investor demand to further enhance
liquidity. The amount of non - callable issuance has allowed FNMA to build a yield curve in Benchmark Notes and
Bonds in maturities ranging from 2 to 30 years. The liquidity emanating from these large size issues has facilitated
favorable financing opportunities through the development of a liquid overnight and term repo market. Issues
1
under the Benchmark program constitute the same credit standing as other FNMA issues; they simply add
organization and liquidity to the intermediate- and long -term Agency market.
Benchmark. A market index used as a comparative basis for measuring the performance of an investment
portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance,
and duration of the actual portfolio's investments.
Bid Price. Price at which a broker /dealer offers to purchase a security from an investor.
Bond. Financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the
bond) a specified stream of future cash - flows, including periodic interest payments and a principal repayment.
Book Entry Securities. Securities that are recorded in a customer's account electronically through one of the
financial markets electronic delivery and custody systems, such as the Fed Securities wire, DTC, and PTC
(as opposed to bearer or physical securities). The trend is toward a certificate -free society in order to cut down on
paperwork and to diminish investors' concerns about the certificates themselves. The vast majority of securities
are now book entry securities.
Book Value. The value at which a debt security is reflected on the holder's records at any point in time. Book value
is also called "amortized cost" as it represents the original cost of an investment adjusted for amortization of
premium or accretion of discount. Also called "carrying value." Book value can vary over time as an investment
approaches maturity and differs from "market value" in that it is not affected by changes in market interest rates.
Broker /Dealer. A person or firm transacting securities business with customers. A "broker" acts as an agent
between buyers and sellers, and receives a commission for these services. A "dealer" buys and sells financial assets
from its own portfolio. A dealer takes risk by owning inventory of securities, whereas a broker merely matches up
buyers and sellers. See also "Primary Dealer."
Bullet Notes /Bonds. Notes or bonds that have a single maturity date and are non - callable
Call Date. Date at which a call option may be or is exercised.
Call Option. The right, but not the obligation, of an issuer of a security to redeem a security at a specified value
and at a specified date or dates prior to its stated maturity date. Most fixed - income calls are a par, but can be at
any previously established price. Securities issued with a call provision typically carry a higher yield than similar
securities issued without a call feature. There are three primary types of call options (1) European - one -time calls,
(2) Bermudan - periodically on a predetermined schedule (quarterly, semi - annual, annual), and (3) American -
continuously callable at any time on or after the call date. There is usually a notice period of at least 5 business
days prior to a call date.
Callable Bonds /Notes. Securities which contain an imbedded call option giving the issuer the right to redeem the
securities prior to maturity at a predetermined price and time.
Certificate of Deposit (CD). Bank obligation issued by a financial institution generally offering a fixed rate of return
(coupon) for a specified period of time (maturity). Can be as long as 10 years to maturity, but most CDs purchased
by public agencies are one year and under.
Collateral. Investment securities or other property that a borrower pledges to secure repayment of a loan, secure
deposits of public monies, or provide security for a repurchase agreement.
Collateralization. Process by which a borrower pledges securities, property, or other deposits for securing the
repayment of a loan and /or security.
Collateralized Mortgage Obligation (CMO). A security that pools together mortgages and separates them into
short, medium, and long -term positions (called tranches). Tranches are set up to pay different rates of interest
2
depending upon their maturity. Interest payments are usually paid monthly. In "plain vanilla" CMOs, principal is
not paid on a tranche until all shorter tranches have been paid off. This system provides interest and principal in a
more predictable manner. A single pool of mortgages can be carved up into numerous tranches each with its own
payment and risk characteristics.
Commercial Paper. Short term unsecured promissory note issued by a company or financial institution. Issued at
a discount and matures for par or face value. Usually a maximum maturity of 270 days and given a short -term debt
rating by one or more NRSROs.
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.
Corporate Note. A debt instrument issued by a corporation with a maturity of greater than one year and less than
ten years.
Counterparty. The other party in a two party financial transaction. " Counterparty risk" refers to the risk that the
other party to a transaction will fail in its related obligations. For example, the bank or broker /dealer in a
repurchase agreement.
Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond's face value
Current Yield. Annual rate of return on a bond based on its price. Calculated as (coupon rate / price), but does not
accurately reflect a bond's true yield level.
Custody. Safekeeping services offered by a bank, financial institution, or trust company, referred to as the
"custodian." Service normally includes the holding and reporting of the customer's securities, the collection and
disbursement of income, securities settlement, and market values.
Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his /her own
account.
Delivery Versus Payment (DVP). Settlement procedure in which securities are delivered versus payment of cash,
but only after cash has been received. Most security transactions, including those through the Fed Securities Wire
system and DTC, are done DVP as a protection for both the buyer and seller of securities.
Depository Trust Company (DTC). A firm through which members can use a computer to arrange for securities to
be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System
and owned mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and
credit entries. Most corporate securities, commercial paper, CDs, and BAs clear through DTC.
Derivatives. (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or
more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon
notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange
rates, equities, or commodities). For hedging purposes, common derivatives are options, futures, interest rate
swaps, and swaptions. All Collateralized Mortgage Obligations (CMOs) are derivatives.
Derivative Security. Financial instrument created from, or whose value depends upon, one or more underlying
assets or indexes of asset values.
Designated Bond. FFCB's regularly issued, liquid, non - callable securities that generally have a 2 or 3 year original
maturity. New issues of Designated Bonds are $1 billion or larger. Re- openings of existing Designated Bond issues
are generally a minimum of $100 million. Designated Bonds are offered through a syndicate of two to six dealers.
Twice each month the Funding Corporation announces its intention to issue a new Designated Bond, reopen an
existing issue, or to not issue or reopen a Designated Bond. Issues under the Designated Bond program constitute
3
the same credit standing as other FFCB issues; they simply add organization and liquidity to the intermediate- and
long -term Agency market.
Discount Notes. Unsecured general obligations issued by Federal Agencies at a discount. Discount notes mature at
par and can range in maturity from overnight to one year. Very large primary (new issue) and secondary markets
exist.
Discount Rate. Rate charged by the system of Federal Reserve Banks on overnight loans to member banks.
Changes to this rate are administered by the Federal Reserve and closely mirror changes to the "fed funds rate."
Discount Securities. Non - interest bearing money market instruments that are issued at discount and redeemed at
maturity for full face value. Examples include: U.S. Treasury Bills, Federal Agency Discount Notes, Bankers'
Acceptances, and Commercial Paper.
Discount. The amount by which a bond or other financial instrument sells below its face value. See also
"Premium."
Diversification. Dividing investment funds among a variety of security types, maturities, industries, and issuers
offering potentially independent returns.
Dollar Price. A bond's cost expressed as a percentage of its face value. For example, a bond quoted at a dollar
price of 95 %, would have a principal cost of $955 per $1,000 of face value.
Duff & Phelps. One of several NRSROs that provide credit ratings on corporate and bank debt issues.
Duration. The weighted average maturity of a security's or portfolio's cash - flows, where the present values of the
cash -flows serve as the weights. The greater the duration of a security /portfolio, the greater its percentage price
volatility with respect to changes in interest rates. Used as a measure of risk and a key tool for managing a
portfolio versus a benchmark and for hedging risk. There are also different kinds of duration used for different
purposes (e.g. MacAuley Duration, Modified Duration).
Fannie Mae. See "Federal National Mortgage Association."
Fed Money Wire. A computerized communications system that connects the Federal Reserve System with its
member banks, certain U. S. Treasury offices, and the Washington D.C. office of the Commodity Credit
Corporation. The Fed Money Wire is the book entry system used to transfer cash balances between banks for
themselves and for customer accounts.
Fed Securities Wire. A computerized communications system that facilitates book entry transfer of securities
between banks, brokers and customer accounts, used primarily for settlement of U.S. Treasury and Federal Agency
securities.
Fed. See "Federal Reserve System."
Federal Agency Security. A debt instrument issued by one of the Federal Agencies. Federal Agencies are
considered second in credit quality and liquidity only to U.S. Treasuries.
Federal Agency. Government sponsored /owned entity created by the U.S. Congress, generally for the purpose of
acting as a financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the
economy considered to otherwise have restricted access to credit markets. The largest Federal Agencies are
GNMA, FNMA, FHLMC, FHLB, FFCB, SLMA, and TVA.
Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commercial banks,
currently to a limit of $250,000 per depositor per bank.
4
Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A government sponsored enterprise (GSE)
system that is a network of cooperatively -owned lending institutions that provides credit services to farmers,
agricultural cooperatives and rural utilities. The FFCBs act as financial intermediaries that borrow money in the
capital markets and use the proceeds to make loans and provide other assistance to farmers and farm - affiliated
businesses. Consists of the consolidated operations of the Banks for Cooperatives, Federal Intermediate Credit
Banks, and Federal Land Banks. Frequent issuer of discount notes, agency notes and callable agency securities.
FFCB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have
minimal credit risk due to its importance to the U.S. financial system and agricultural industry. Also issues notes
under its "designated note" program.
Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by depository institutions in excess of current
reserve requirements, and frequently loaned or borrowed on an overnight basis between depository institutions.
Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository institution lending Federal Funds
to another depository institution. The Federal Reserve influences this rate by establishing a "target" Fed Funds rate
associated with the Fed's management of monetary policy.
Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A government sponsored enterprise
(GSE) system, consisting of wholesale banks (currently twelve district banks) owned by their member banks, which
provides correspondent banking services and credit to various financial institutions, financed by the issuance of
securities. The principal purpose of the FHLB is to add liquidity to the mortgage markets. Although FHLB does not
directly fund mortgages, it provides a stable supply of credit to thrift institutions that make new mortgage loans.
FHLB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have
minimal credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of
discount notes, agency notes and callable agency securities. Also issues notes under its "global note" and "TAP"
programs.
Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac "). One of the large Federal Agencies. A
government sponsored public corporation (GSE) that provides stability and assistance to the secondary market for
home mortgages by purchasing first mortgages and participation interests financed by the sale of debt and
guaranteed mortgage backed securities. FHLMC debt is not an obligation of, nor is it guaranteed by the U.S.
government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system
and housing market. Frequent issuer of discount notes, agency notes, callable agency securities, and MBS. Also
issues notes under its "reference note" program.
Federal National Mortgage Association (FNMA or "Fannie Mae "). One of the large Federal Agencies. A
government sponsored public corporation (GSE) that provides liquidity to the residential mortgage market by
purchasing mortgage loans from lenders, financed by the issuance of debt securities and MBS (pools of mortgages
packaged together as a security). FNMA debt is not an obligation of, nor is it guaranteed by the U.S. government,
although it is considered to have minimal credit risk due to its importance to the U.S. financial system and housing
market. Frequent issuer of discount notes, agency notes, callable agency securities and MBS. Also issues notes
under its "benchmark note" program.
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System.
Federal Reserve System (the Fed). The independent central bank system of the United States that establishes and
conducts the nation's monetary policy. This is accomplished in three major ways: (1) raising or lowering bank
reserve requirements, (2) raising or lowering the target Fed Funds Rate and Discount Rate, and (3) in open market
operations by buying and selling government securities. The Federal Reserve System is made up of twelve Federal
Reserve District Banks, their branches, and many national and state banks throughout the nation. It is headed by
the seven member Board of Governors known as the "Federal Reserve Board" and headed by its Chairman.
Financial Industry Regulatory Authority, Inc. ( FINRA). A private corporation that acts as a self - regulatory
organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). Though
sometimes mistaken for a government agency, it is a non - governmental organization that performs financial
5
regulation of member brokerage firms and exchange markets. The government also has a regulatory arm for
investments, the Securities and Exchange Commission (SEC).
Fiscal Agent /Paying Agent. A bank or trust company that acts, under a trust agreement with a corporation or
municipality, in the capacity of general treasurer. The agent performs such duties as making coupon payments,
paying rents, redeeming bonds, and handling taxes relating to the issuance of bonds.
Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on corporate and municipal debt
issues.
Floating Rate Security (FRN or "floater "). A bond with an interest rate that is adjusted according to changes in an
interest rate or index. Differs from variable -rate debt in that the changes to the rate take place immediately when
the index changes, rather than on a predetermined schedule. See also "Variable Rate Security."
Freddie Mac. See "Federal Home Loan Mortgage Corporation."
Ginnie Mae. See "Government National Mortgage Association."
Global Notes: Notes designed to qualify for immediate trading in both the domestic U.S. capital market and in
foreign markets around the globe. Usually large issues that are sold to investors worldwide and therefore have
excellent liquidity. Despite their global sales, global notes sold in the U.S. are typically denominated in U.S. dollars.
Government National Mortgage Association (GNMA or "Ginnie Mae "). One of the large Federal Agencies.
Government -owned Federal Agency that acquires, packages, and resells mortgages and mortgage purchase
commitments in the form of mortgage- backed securities. Largest issuer of mortgage pass- through securities.
GNMA debt is guaranteed by the full faith and credit of the U.S. government (one of the few agencies that are
actually full faith and credit of the U.S. government).
Government Securities. An obligation of the U.S. government, backed by the full faith and credit of the
government. These securities are regarded as the highest quality of investment securities available in the U.S.
securities market. See "Treasury Bills, Notes, Bonds, and SLGS."
Government Sponsored Enterprise (GSE). Privately owned entity subject to federal regulation and supervision,
created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy such as
students, farmers, and homeowners. GSEs carry the implicit backing of the U.S. government, but they are not
direct obligations of the U.S. government. For this reason, these securities will offer a yield premium over U.S.
Treasuries. Examples of GSEs include: FHLB, FHLMC, FNMA, and SLMA.
Government Sponsored Enterprise Security. A security issued by a Government Sponsored Enterprise. Considered
Federal Agency Securities.
Index. A compilation of statistical data that tracks changes in the economy or in financial markets.
Interest -Only (10) STRIP. A security based solely on the interest payments from the bond. After the principal has
been repaid, interest payments stop and the value of the security falls to nothing. Therefore, IOs are considered
risky investments. Usually associated with mortgage- backed securities.
Internal Controls. An internal control structure ensures that the assets of the entity are protected from loss, theft,
or misuse. The internal control structure is 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.
Internal controls should address the following points:
1. Control of collusion - Collusion is a situation where two or more employees are working in
conjunction to defraud their employer.
0
2. Separation of transaction authority from accounting and record keeping - A separation of duties
is achieved by separating the person who authorizes or performs the transaction from the people
who record or otherwise account for the transaction.
3. Custodial safekeeping - Securities purchased from any bank or dealer including appropriate
collateral (as defined by state law) shall be placed with an independent third party for custodial
safekeeping.
4. Avoidance of physical delivery securities - Book -entry securities are much easier to transfer and
account for since actual delivery of a document never takes place. Delivered securities must be
properly safeguarded against loss or destruction. The potential for fraud and loss increases with
physically delivered securities.
5. Clear delegation of authority to subordinate staff members - Subordinate staff members must
have a clear understanding of their authority and responsibilities to avoid improper actions. Clear
delegation of authority also preserves the internal control structure that is contingent on the
various staff positions and their respective responsibilities.
6. Written confirmation of transactions for investments and wire transfers - Due to the potential
for error and improprieties arising from telephone and electronic transactions, all transactions
should be supported by written communications and approved by the appropriate person.
Written communications may be via fax if on letterhead and if the safekeeping institution has a
list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and third -party custodian - The
designated official should ensure that an agreement will be entered into and will address the
following points: controls, security provisions, and responsibilities of each party making and
receiving wire transfers.
Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction of interest
rates. Considered risky as their value moves in the opposite direction of normal fixed - income investments and
whose interest rate can fall to zero.
Investment Advisor. A company that provides professional advice managing portfolios, investment
recommendations, and /or research in exchange for a management fee.
Investment Adviser Act of 1940. Federal legislation that sets the standards by which investment companies, such
as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and
securities valuations.
Investment Grade. Bonds considered suitable for preservation of invested capital, including bonds rated a
minimum of Baa3 by Moody's, BBB- by Standard & Poor's, or BBB- by Fitch. Although "BBB" rated bonds are
considered investment grade, most public agencies cannot invest in securities rated below "A."
Liquidity. Relative ease of converting an asset into cash without significant loss of value. Also, a relative measure
of cash and near -cash items in a portfolio of assets. Additionally, it is a term describing the marketability of a
money market security correlating to the narrowness of the spread between the bid and ask prices.
Local Government Investment Pool (LGIP). An investment by local governments in which their money is pooled as
a method for managing local funds, (e.g., Florida State Board of Administration's Florida Prime Fund).
Long -Term Core Investment Program. Funds that are not needed within a one -year period.
Market Value. The fair market value of a security or commodity. The price at which a willing buyer and seller
would pay for a security.
Mark -to- market. Adjusting the value of an asset to its market value, reflecting in the process unrealized gains or
losses.
Master Repurchase Agreement. A widely accepted standard agreement form published by the Securities Industry
and Financial Markets Association (SIFMA) that is used to govern and document Repurchase Agreements and
protect the interest of parties in a repo transaction.
Maturity Date. Date on which principal payment of a financial obligation is to be paid
Medium Term Notes (MTN's). Used frequently to refer to corporate notes of medium maturity (5 -years and
under). Technically, any debt security issued by a corporate or depository institution with a maturity from 1 to 10
years and issued under an MTN shelf registration. Usually issued in smaller issues with varying coupons and
maturities, and underwritten by a variety of broker /dealers (as opposed to large corporate deals issued and
underwritten all at once in large size and with a fixed coupon and maturity).
Money Market. The market in which short -term debt instruments (bills, commercial paper, bankers' acceptance,
etc.) are issued and traded.
Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in money market instruments, such
as: U.S. Treasury bills, commercial paper, bankers' acceptances, and repurchase agreements. Money market
mutual funds are registered with the SEC under the Investment Company Act of 1940 and are subject to "rule 2a-
7" which significantly limits average maturity and credit quality of holdings. MMF's are managed to maintain a
stable net asset value (NAV) of $1.00. Many MMFs carry ratings by a NRSRO.
Moody's Investors Service. One of several NRSROs that provide credit ratings on corporate and municipal debt
issues.
Mortgage Backed Securities (MBS). Mortgage- backed securities represent an ownership interest in a pool of
mortgage loans made by financial institutions, such as savings and loans, commercial banks, or mortgage
companies, to finance the borrower's purchase of a home or other real estate. The majority of MBS are issued
and /or guaranteed by GNMA, FNMA, and FHLMC. There are a variety of MBS structures with varying levels of risk
and complexity. All MBS have reinvestment risk as actual principal and interest payments are dependent on the
payment of the underlying mortgages which can be prepaid by mortgage holders to refinance and lower rates or
simply because the underlying property was sold.
Mortgage Pass - Through Securities. A pool of residential mortgage loans with the monthly interest and principal
distributed to investors on a pro -rata basis. The largest issuer is GNMA.
Municipal Note /Bond. A debt instrument issued by a state or local government unit or public agency. The vast
majority of municipals are exempt from state and federal income tax, although some non - qualified issues are
taxable.
Mutual Fund. Portfolio of securities professionally managed by a registered investment company that issues
shares to investors. Many different types of mutual funds exist (e.g., bond, equity, and money market funds); all
except money market funds operate on a variable net asset value (NAV).
Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs ($100,000 and larger) that are issued
in bearer form and can be traded in the secondary market.
Net Asset Value. The market value of one share of an investment company, such as a mutual fund. This figure is
calculated by totaling a fund's assets including securities, cash, and any accrued earnings, then subtracting the
Ej
total assets from the fund's liabilities, and dividing this total by the number of shares outstanding. This is calculated
once a day based on the closing price for each security in the fund's portfolio. (See below.)
[(Total assets) - (Liabilities)] /(Number of shares outstanding)
NRSRO. A "Nationally Recognized Statistical Rating Organization" (NRSRO) is a designated rating organization that
the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank
debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody's, S &P,
Fitch, and Duff & Phelps.
Offered Price. See also "Ask Price."
Open Market Operations. A Federal Reserve monetary policy tactic entailing the purchase or sale of government
securities in the open market by the Federal Reserve System from and to primary dealers in order to influence the
money supply, credit conditions, and interest rates.
Par Value. The face value, stated value, or maturity value of a security.
Physical Delivery. Delivery of readily available underlying assets at contract maturity.
Portfolio. Collection of securities and investments held by an investor.
Premium. The amount by which a bond or other financial instrument sells above its face value. See also
"Discount."
Primary Dealer. A designation given to certain government securities dealer by the Federal Reserve Bank of New
York. Primary dealers can buy and sell government securities directly with the Fed. Primary dealers also submit
daily reports of market activity and security positions held to the Fed and are subject to its informal oversight.
Primary dealers are the largest buyers and sellers by volume in the U.S. Treasury securities market.
Prime Paper. Commercial paper of high quality. Highest rated paper is A- 1 + /A -1 by S &P and P -1 by Moody's.
Principal. Face value of a financial instrument on which interest accrues. May be less than par value if some
principal has been repaid or retired. For a transaction, principal is par value times price and includes any premium
or discount.
Prudent Expert Rule. Standard that requires that a fiduciary manage a portfolio with the care, skill, prudence, and
diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of a like character and with like aims. This statement
differs from the "prudent person" rule in that familiarity with such matters suggests a higher standard than simple
prudence.
Prudent Investor Standard. Standard that requires that when investing, reinvesting, purchasing, acquiring,
exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the
circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated
needs of the agency, that a prudent 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 agency. More stringent than the "prudent person" standard as it implies a level of knowledge
commensurate with the responsibility at hand.
Qualified Public Depository - Per Subsection 280.02(26), F.S., "qualified public depository" means any bank,
savings bank, or savings association that:
1. Is organized and exists under the laws of the United States, the laws of this state or any other
state or territory of the United States.
E
2. Has its principal place of business in this state or has a branch office in this state which is
authorized under the laws of this state or of the United States to receive deposits in this state.
3. Has deposit insurance under the provision of the Federal Deposit Insurance Act, as amended, 12
U.S.C. ss.1811 et seq.
4. Has procedures and practices for accurate identification, classification, reporting, and
collateralization of public deposits.
5. Meets all requirements of Chapter 280, F.S.
6. Has been designated by the Chief Financial Officer as a qualified public depository.
Range Note. A type of structured note that accrues interest daily at a set coupon rate that is tied to an index.
Most range notes have two coupon levels; a higher accrual rate for the period the index is within a designated
range, the lower accrual rate for the period that the index falls outside the designated range. This lower rate may
be zero and may result in zero earnings.
Rate of Return. Amount of income received from an investment, expressed as a percentage of the amount
invested.
Realized Gains (Losses). The difference between the sale price of an investment and its book value. Gains /losses
are "realized" when the security is actually sold, as compared to "unrealized" gains /losses which are based on
current market value. See "Unrealized Gains (Losses)."
Reference Bills: FHLMC's short -term debt program created to supplement its existing discount note program by
offering issues from one month through one year, auctioned on a weekly or on an alternating four -week basis
(depending upon maturity) offered in sizeable volumes ($1 billion and up) on a cycle of regular, standardized
issuance. Globally sponsored and distributed, Reference Bill issues are intended to encourage active trading and
market - making and facilitate the development of a term repo market. The program was designed to offer
predictable supply, pricing transparency, and liquidity, thereby providing alternatives to U.S. Treasury bills.
FHLMC's Reference Bills are unsecured general corporate obligations. This program supplements the corporation's
existing discount note program. Issues under the Reference program constitute the same credit standing as other
FHLMC discount notes; they simply add organization and liquidity to the short -term Agency discount note market.
Reference Notes: FHLMC's intermediate -term debt program with issuances of 2, 3, 5, 10, and 30 -year maturities.
Initial issuances range from $2 - $6 billion with re- openings ranging $1- $4 billion.
The notes are high - quality bullet structures securities that pay interest semiannually. Issues under the Reference
program constitute the same credit standing as other FHLMC notes; they simply add organization and liquidity to
the intermediate- and long -term Agency market.
Repurchase Agreement (Repo). A short -term investment vehicle where an investor agrees to buy securities from
a counterparty and simultaneously agrees to resell the securities back to the counterparty at an agreed upon time
and for an agreed upon price. The difference between the purchase price and the sale price represents interest
earned on the agreement. In effect, it represents a collateralized loan to the investor, where the securities are the
collateral. Can be DVP, where securities are delivered to the investor's custodial bank, or "tri- party" where the
securities are delivered to a third party intermediary. Any type of security can be used as "collateral," but only
some types provide the investor with special bankruptcy protection under the law. Repos should be undertaken
only when an appropriate Securities Industry and Financial Markets Association (SIFMA) approved master
repurchase agreement is in place.
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Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view of the original seller of securities.
Used by dealers to finance their inventory of securities by essentially borrowing at short -term rates. Can also be
used to leverage a portfolio and in this sense, can be considered risky if used improperly.
Safekeeping. Service offered for a fee, usually by financial institutions, for the holding of securities and other
valuables. Safekeeping is a component of custody services.
Secondary Market. Markets for the purchase and sale of any previously issued financial instrument.
Securities Industry and Financial Markets Association ( SIFMA). The bond market trade association representing
the largest securities markets in the world. In addition to publishing a Master Repurchase Agreement, widely
accepted as the industry standard document for Repurchase Agreements, the SIFMA also recommends bond
market closures and early closes due to holidays.
Securities Lending. An arrangement between and investor and a custody bank that allows the custody bank to
"loan" the investors investment holdings, reinvest the proceeds in permitted investments, and shares any profits
with the investor. Should be governed by a securities lending agreement. Can increase the risk of a portfolio in that
the investor takes on the default risk on the reinvestment at the discretion of the custodian.
Sinking Fund. A separate accumulation of cash or investments (including earnings on investments) in a fund in
accordance with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other
entity responsible for debt service), for the purpose of assuring timely availability of moneys for payment of debt
service. Usually used in connection with term bonds.
Spread. The difference between the price of a security and similar maturity U.S. Treasury investments, expressed
in percentage terms or basis points. A spread can also be the absolute difference in yield between two securities.
The securities can be in different markets or within the same securities market between different credits, sectors,
or other relevant factors.
Standard & Poor's. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
STRIPS (Separate Trading of Registered Interest and Principal of Securities). Acronym applied to U.S. Treasury
securities that have had their coupons and principal repayments separated into individual zero - coupon Treasury
securities. The same technique and "strips" description can be applied to non - Treasury securities (e.g., FNMA
strips).
Structured Notes. Notes that have imbedded into their structure options such as step -up coupons or derivative -
based returns.
Supranational. Supranational organizations are international financial institutions that are generally established by
agreements among nations, with member nations contributing capital and participating in management. These
agreements provide for limited immunity from the laws of member countries. Bonds issued by these institutions
are part of the broader class of Supranational, Sovereign, and Non -U.S. Agency (SSA) sector bonds. Supranational
bonds finance economic and infrastructure development and support environmental protection, poverty
reduction, and renewable energy around the globe. For example, the World Bank, International Finance
Corporation (IFC), and African Development Bank (AfDB) have "green bond" programs specifically designed for
energy resource conservation and management. Supranational bonds, which are issued by multi - national
organizations that transcend national boundaries. Examples include the World Bank, African Development Bank,
and European Investment Bank.
Swap. Trading one asset for another.
TAP Notes: Federal Agency notes issued under the FHLB TAP program. Launched in 6/99 as a refinement to the
FHLB bullet bond auction process. In a break from the FHLB's traditional practice of bringing numerous small issues
to market with similar maturities, the TAP Issue Program uses the four most common maturities and reopens them
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up regularly through a competitive auction. These maturities (2, 3, 5, and 10 year) will remain open for the
calendar quarter, after which they will be closed and a new series of TAP issues will be opened to replace them.
This reduces the number of separate bullet bonds issued, but generates enhanced awareness and liquidity in the
marketplace through increased issue size and secondary market volume.
Tennessee Valley Authority (TVA). One of the large Federal Agencies. A wholly owned corporation of the United
States government that was established in 1933 to develop the resources of the Tennessee Valley region in order
to strengthen the regional and national economy and the national defense. Power operations are separated from
non -power operations. TVA securities represent obligations of TVA, payable solely from TVA's net power proceeds,
and are neither obligations of nor guaranteed by the United States. TVA is currently authorized to issue debt up to
$30 billion. Under this authorization, TVA may also obtain advances from the U.S. Treasury of up to $150 million.
Frequent issuer of discount notes, agency notes, and callable agency securities.
Total Return. Investment performance measured over a period of time that includes coupon interest, interest on
interest, and both realized and unrealized gains or losses. Total return includes, therefore, any market value
appreciation /depreciation on investments held at period end.
Treasuries. Collective term used to describe debt instruments backed by the U.S. government and issued through
the U.S. Department of the Treasury. Includes Treasury bills, Treasury notes, and Treasury bonds. Also a
benchmark term used as a basis by which the yields of non - Treasury securities are compared (e.g., "trading at 50
basis points over Treasuries ").
Treasury Bills (T- Bills). Short -term direct obligations of the United States government issued with an original term
of one year or less. Treasury bills are sold at a discount from face value and do not pay interest before maturity.
The difference between the purchase price of the bill and the maturity value is the interest earned on the bill.
Currently, the U.S. Treasury issues 4 -week, 13 -week, and 26 -week T- Bills.
Treasury Bonds. Long -term interest - bearing debt securities backed by the U.S. government and issued with
maturities of ten years and longer by the U.S. Department of the Treasury.
Treasury Notes. Intermediate interest - bearing debt securities backed by the U.S. government and issued with
maturities ranging from one to ten years by the U.S. Department of the Treasury. The Treasury currently issues 2-
year, 3 -year, 5 -year, and 10 -year Treasury Notes.
Trustee. A bank designated by an issuer of securities as the custodian of funds and official representative of
bondholders. Trustees are appointed to insure compliance with the bond documents and to represent
bondholders in enforcing their contract with the issuer.
Uniform Net Capital Rule. SEC Rule 15c3 -1 that outlines the minimum net capital ratio (ratio of indebtedness to
net liquid capital) of member firms and non - member broker /dealers.
Unrealized Gains (Losses). The difference between the market value of an investment and its book value.
Gains /losses are "realized" when the security is actually sold, as compared to "unrealized" gains /losses which are
based on current market value. See also "Realized Gains (Losses)."
Variable -Rate Security. A bond that bears interest at a rate that varies over time based on a specified schedule of
adjustment (e.g., daily, weekly, monthly, semi - annually, or annually). See also "Floating Rate Note."
Weighted Average Maturity (or just "Average Maturity"). The average maturity of all securities and investments
of a portfolio, determined by multiplying the par or principal value of each security or investment by its maturity
(days or years), summing the products, and dividing the sum by the total principal value of the portfolio. A simple
measure of risk of a fixed - income portfolio.
Weighted Average Maturity to Call. The average maturity of all securities and investments of a portfolio, adjusted
to substitute the first call date per security for maturity date for those securities with call provisions.
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Yield Curve. A graphic depiction of yields on like securities in relation to remaining maturities spread over a time
line. The traditional yield curve depicts yields on U.S. Treasuries, although yield curves exist for Federal Agencies
and various credit quality corporates as well. Yield curves can be positively sloped (normal) where longer -term
investments have higher yields, or "inverted" (uncommon) where longer -term investments have lower yields than
shorter ones.
Yield to Call (YTC). Same as "Yield to Maturity," except the return is measured to the first call date rather than the
maturity date. Yield to call can be significantly higher or lower than a security's yield to maturity.
Yield to Maturity (YTM). Calculated return on an investment, assuming all cash -flows from the security are
reinvested at the same original yield. Can be higher or lower than the coupon rate depending on market rates and
whether the security was purchased at a premium or discount. There are different conventions for calculating YTM
for various types of securities.
Yield. There are numerous methods of yield determination. In this glossary, see also "Current Yield," "Yield Curve,"
"Yield to Call," and "Yield to Maturity."
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Attachment B
Investment Pool /Fund Questionnaire
1. A description of eligible investment securities, and a written statement of investment policy and
objectives.
2. A description of interest calculations and how it is distributed, and how gains and losses are treated.
3. A description of how the securities are safeguarded (including the settlement processes), and how often
the securities are priced and the program audited.
4. A description of who may invest in the program, how often, what size deposit and withdrawal are
allowed.
5. A schedule for receiving statements and portfolio listings.
6. Are reserves, retained earnings, etc. utilized by the pool /fund?
7. A fee schedule, and when and how is it assessed.
8. Is the pool /fund eligible for bond proceeds and /or will it accept such proceeds?