HomeMy WebLinkAbout2019-12-17; City Council; Resolution 2019-257RESOLUTION NO. 2019-257
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA
APPROVING THE CITY'S INVESTMENT POLICY DATED DEC. 17, 2019, WHICH
INCLUDES TWO REVISIONS
WHEREAS, the City Council of the City of Carlsbad, California has adopted an Investment Policy
on Jan. 2, 1985, as required by Section 53646 of the California Government Code; and
WHEREAS, Section 53646(a) of the California Government Code states that the city treasurer
may annually render to the City Council a statement of investment policy; and
WHEREAS, the City Council shall consider such investment policy at a public meeting; and
WHEREAS, upon consideration the City Council may from time to time revise this policy as
deemed necessary to provide proper guidance to city staff and the city treasurer; and
WHEREAS, the city treasurer has reviewed the existing Investment Policy and has
recommended modifications this year.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1. The above recitations are true and correct.
2. The attached Investment Policy dated Dec. 17, 2019, (Attachment A) is hereby adopted and
supersedes the policy dated May 7, 2019.
3. That the City Council finds that the Investment Policy dated Dec. 17, 2019, conforms to
Sections 53601 and 53635 of the California Government Code.
PASSED, APPROVED AND ADOPTED at a regular meeting of the City Council of the City of
Carlsbad on the 17th day of December 2019, by the following vote, to wit:
AYES: Hall, Blackburn, Bhat-Patel, Schumacher.
NAYS: None.
ABSENT: None.
Dec. 17, 2019 Item #3 Page 4 of 21
CITY OF CARLSBAD
INVESTMENT POLICY
Dated December 17, 2019
(Supersedes Investment Policy dated 05/07 /19)
ATTACHMENT A
1.0 Introduction. The purpose of this document is to identify various policies and procedures that
enhance opportunities for a prudent and systematic investment policy and to organize and
formalize investment-related activities. Related activities which comprise good cash
management include accurate cash projections, the expeditious collection of revenue, the
control of disbursements, cost-effective banking relations, and arranging for a short-term
borrowing program which coordinates working capital requirements and investment
opportunities.
2.0 Policy. It is the policy ofthe City of Carlsbad to invest public funds not required for immediate
day-to-day operations in safe, liquid and medium-term investments. These investments shall
yield an acceptable return while conforming to all California statutes and the city's Investment
Policy.
3.0 Scope. It is intended that this policy cover the investment activities of all contingency reserves
and inactive cash under the direct authority of the city.
3.1 Pooled Investments. Investments for the city and its component units will be made
on a pooled basis including, but not limited to, the City of Carlsbad, the Housing Authority
of the City of Carlsbad, the City of Carlsbad Public Improvement Corporation, and the
Carlsbad Municipal Water District. The city's Comprehensive Annual Financial Report
identifies the fund types involved as follows:
• General Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Project Funds
• Enterprise Funds
• Internal Service Funds
• Redevelopment Funds
• Trust Funds
• Miscellaneous Special Funds
• Any new funds created by the City Council, unless specifically exempted
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ATTACHMENT A
3.2 Investments held separately. Investments of bond proceeds will be held separately
when required by the bond indentures or when necessary to meet arbitrage regulations.
If allowed by the bond indentures, or if the arbitrage regulations do not apply,
investments of bond proceeds will be held as part of the pooled investments.
4.0 Objectives. California Government Code §53600.5 outlines the primary objectives of a trustee
investing public money. The primary objectives, in order of priority, of the city's investment
activities shall be:
4.1 Safety. Safety of principal is the foremost objective of the investment program.
Investments of the city shall be undertaken in a manner that seeks to ensure preservation
of capital in the overall portfolio.
4.2 Liquidity. The city's investment portfolio will remain sufficiently liquid to enable the
city to meet all operating requirements which might be reasonably anticipated.
4.3 Return on investment. Investment return becomes a consideration only after the
basic requirements of safety and liquidity have been met. The city treasurer shall attempt
to realize a yield on investments consistent with California statutes and the city's
Investment Policy.
The city treasurer should strive to maintain the level of investment of all contingency
reserves and inactive funds as close to 100% as possible. While the objectives of safety
and liquidity must first be met, it is recognized that portfolio assets represent a potential
source of significant revenues. It is to the benefit of the city that these assets be managed
to realize a yield on investments consistent with California statutes and the city's
Investment Policy.
5.0 Duties and Responsibilities. By the annual adoption of this policy, the management of
inactive cash and the investment of funds identified in paragraph 3.1 is the responsibility of the
city treasurer as directed by the City Council. Under the authority granted by the City Council, no
person may engage in an investment transaction covered by the terms of this policy unless
directed by the city treasurer.
In the execution of this delegated authority, the city treasurer may establish accounts with
qualified financial institutions and brokers/dealers for the purpose of effecting investment
transactions in accordance with this policy. The criteria used to select qualified financial
institutions and brokers/dealers are identified in paragraph 14 of this policy.
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ATTACHMENT A
The city treasurer may designate in writing an assistant to the city treasurer who, in the absence
of the city treasurer, will assume the city treasurer's duties and responsibilities. The city treasurer
shall retain full responsibility for all transactions undertaken under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the city's deputy city manager of
administrative services will assist the city treasurer in the gathering of information to create cash
flow estimates.
6.0 Prudence. California Government Code §53600.3 identifies as trustees those persons
authorized to make investment decisions on behalf of a local agency. As a trustee, the standard
of prudence to be used shall be the "Prudent Investor" standard and shall be applied in the
context of managing the overall portfolio. The 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.
It is the policy of this Council that investment officers acting in accordance with written
procedures and the Investment Policy and exercising due diligence shall be relieved of personal
responsibility for an individual security's credit risk changes or market price changes, provided
deviations from expectations are reported in a timely manner and appropriate action is taken to
control adverse developments.
7.0 Ethics and conflicts of interest. All participants in the city's investment process shall seek to
act responsibly as custodians of the public trust. Officers and employees involved in the
investment process shall refrain from personal business activity that could conflict with proper
execution of the investment program, or which could impair their ability to make impartial
investment recommendations and decisions. Investment officials and employees shall make all
disclosures appropriate under the Fair Political Practices Act and may seek the advice of the city
attorney and the Fair Political Practices Commission whenever there is a question of personal
financial or investment positions that could represent potential conflicts of interest.
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ATTACHMENT A
8.0 Authorized investments. Except for Certificates of Deposit, investments will be made only in
readily marketable securities actively traded in the secondary market.
8.1 Pooled investments. The city treasurer may invest city funds in the following
instruments as specified in the California Government Code §53601 and as further limited
in this policy.
8.1.1 Obligations of the US Government, government sponsored enterprise (GSE)
debt and its agencies.
8.1.2 Bankers Acceptances drawn on and accepted by a commercial bank.
Bankers' Acceptances may neither exceed 180 days maturity nor 25% of the
portfolio. Furthermore, no more than 30% of the portfolio may be invested in any
one commercial bank.
8.1.3 Certificates of Deposit shall not exceed five years to maturity. Investments
in Certificates of Deposit and checking accounts shall be fully insured up to the
amount allowed per account by the Federal Deposit Insurance Corporation or the
National Credit Union Administration. Furthermore, the combined investments in
Certificates of Deposit and Prime Commercial Paper, if a private sector entity is
used, shall not exceed, in total, more than 30% of the portfolio. The city may use
a private sector entity that assists in the placement of Certificates of Deposit.
8.1.4 Negotiable Certificates of Deposit issued by a nationally or state-chartered
bank may neither exceed five years to maturity nor exceed 30% of the portfolio.
8.1.5 Prime Commercial Paper of the highest numerical rating of Moody's
Investment Services, Inc. or Standard & Poor's Financial Services, LLC. Further,
eligible paper is limited to issuing General Corporations that are organized and
operating within the United States and having total assets in excess of $500
million. If the issuer has other existing debt, it must have a "AA" or higher credit
rating from both Moody's Investment Services, Inc. and Standard & Poor's. Prime
Commercial Paper may neither exceed 270 days maturity nor 10% of the portfolio,
nor shall it represent more than 5% of the outstanding paper of an issuing
corporation.
8.1.6 Repurchase Agreements with a maximum maturity of one year. Repurchase
Agreements may not exceed 5% of the portfolio. The market value of securities
that underlay a Repurchase Agreement shall be valued at 102% or greater of the
funds borrowed against those securities.
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ATTACHMENT A
8.1.7 Corporate Notes with a maximum remaining maturity of five years or less,
issued by corporations organized and operating within the United States shall not
exceed 30% of the investment portfolio. The Corporate Notes shall carry a split
rating of "AA" by one of the three Nationally Recognized Statistical Rating
Organization {NRSRO) rating agencies, Moody's Investment Services, Inc.,
Standard & Poor's Financial Services, LLC., and Fitch Ratings, Inc. A second rating
of "A" by an NRSRO is required for any Corporate Note to be considered eligible
for inclusion in the portfolio.
New investments into corporations involved in the business of exploration,
extraction, or further processing of oil and gas are no longer eligible pursuant to a
decision by the Carlsbad City Council at their March 19, 2019 Council Meeting.
8.1.8 Money market funds whose portfolio consists of one or more of the
foregoing lawful investments.
8.1.9 Sweep accounts for the investment of overnight funds when the funds are
swept into investments allowed by this policy.
8.1.10 Local Agency Investment Fund {LAIF) ofthe State of California Investments
will be made in accordance with the laws and regulations governing those Funds.
8.1.11 California Asset Management Program {CAMP) investments will be made
in accordance with the laws and regulations governing those funds.
8.1.12 Supranational securities are defined as United States dollar denominated
senior unsecured, unsubordinated obligations issued or unconditionally
guaranteed by the International Bank for Reconstruction and Development {IBRD
or World Bank), International Finance Corporation (IFC), or Inter-American
Development Bank {IADB). These organizations were established by international
treaties, are headquartered in Washington D.C. and incorporated into U.S. Federal
Law by Congressional Acts.
Allowable investment instruments per State of California Code §S3601(q)
permits the securities of these three organizations to be incorporated into local
agency investment portfolios.
Securities eligible for investment shall have a maximum remaining maturity of five
years or less and be eligible for purchase and sale within the United States.
Supranational securities eligible for investment shall be rated "AA" or better from
at least two nationally recognized statistical rating organizations {NRSRO).
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ATTACHMENT A
Investments in supranational securities shall not exceed 10% of the City of
Carlsbad's investment portfolio.
8.1.13 A mortgage passthrough security, collateralized mortgage obligation,
mortgage-backed or other pay-through bond, equipment lease-backed certificate,
consumer receivable passthrough certificate, or consumer receivable-backed
bond. Securities eligible for investment under this subdivision shall be rated in a
rating category of "AA" or its equivalent or better by an NRSRO and have a
maximum remaining maturity of five years or less. Purchase of securities
authorized by this subdivision shall not exceed 20% of the city's portfolio.
8.2 Investments held separately. Investments of bond funds will be made in conformance
with the trust indenture for each issue. Such investments will be held separately when
required.
8.3 Housing Loans. Housing loans approved by the City Council to private developers and
homeowners, as part of the city housing program shall comply with California statutes,
but need not meet the investment objectives and the risk management requirements of
this Investment Policy. The City Council will manage these loans directly. As assets of the
city, individual loans will. be reported by the city treasurer and any changes will be
explained. Collections and conformance with the requirements of each individual housing
loan will be reported as an addendum to the city treasurer's investment report each
quarter.
8.4 New Securities. New types of securities authorized by California law, but which are
not currently allowed by the city's Investment Policy, must first be approved by the City
Council.
9.0 Collateralization, Perfection, Security and Contracts. When required by California statute or
this Investment Policy, any investment capable of being collateralized, shall be collateralized by
the required amounts imposed by law. To give greater security to the city's investments, when
an investment is collateralized and not perfected under existing law, an attempt to perfect the
collateralization should be made.
California Government Code §53652 requires that the depository secure active or inactive
deposits with eligible securities having a fair market value of at least 10% more than the total
amount of all deposits, and 50% in excess of the deposit when secured with mortgage pools.
California Government Code §53649 specifies that the city treasurer is responsible for entering
into deposit contracts with ·each depository.
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ATTACHMENT A
10.0 Unauthorized investments/investment activities. California Government Code §53601.6
disallows the following investments acquired after January 1, 1996: inverse floaters, range notes,
or interest-only strips that are derived from a pool of mortgages.
10.1 In addition, and more generally, investments are further restricted as follows:
10.1.2 No investment will be made in any security that could result in zero interest
accrual if held to maturity.
10.1.3 No investment will be made that could cause the portfolio to be leveraged.
10.1.4 Purchases of investments on margin will not be made.
11.0 Investment strategy.
11.1 Pooled Investments. A buy and hold strategy will generally be followed; that is,
investments once made will usually be held until maturity. A buy and hold strategy will
result in unrealized gains or losses as market interest rates fall or rise from the coupon
rate of the investment. Unrealized gains or losses, however, will diminish as the maturity
dates of the investments are approached or as market interest rates move closer to the
coupon rate of the investment. A buy and hold strategy requires that the portfolio be kept
sufficiently liquid to preclude the undesired sale of investments prior to maturity.
Occasionally, the city treasurer may find it advantageous to sell an investment prior to
maturity, but this should only be on an exception basis and only when it is in the best
interest of the city.
11.2 Investments held separately. Investments held separately for bond proceeds will
follow the trust indenture for each issue.
12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonable and
avoidable risks regarding specific security types or individual financial institutions. In addition to
the limitations on specific security types indicated in paragraph 8.0 of this Investment Policy, and
with the exception of U.S. Treasury/Federal agency securities and authorized pools, no more than
5% of the city's portfolio will be placed with any single issuer.
13.0 Maximum maturities and maximum modified duration.
13.1 Pooled Investments. A policy of laddered maturities will generally be followed for
pooled investments. The following maturity requirements will apply as of the month end
of each reporting period.
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ATTACHMENT A
13.1.1 Investments maturing within one year must be no less than two-thirds (2/3)
of the approved operating budget oft he current year. This requirement should be
met within three months following adoption of the current operating budget.
Remaining investments of the portfolio shall not have a maturity greater than five
years from the date of investment except as provided in paragraph 13.1.3 of this
Investment Policy.
13.1.2 The average portfolio investment maturity shall be three years or less. A
dollar-weighted average will be used in computing the average maturity of the
portfolio.
13.1.3 An investment which exceeds five years in length may be made upon the
following conditions. Before an investment, which is allowed by California statute,
is made in securities that mature more than five years from the date of purchase,
the city treasurer and the deputy city manager of administrative services will
review the city's long-term cash needs. Both must concur before such an
investment is made. A resolution authorizing such investment must first be
approved by the City Council. Investments beyond five years will not be greater
than 10% of the portfolio and will be counted in the percentage of the portfolio
that may mature beyond one year. No investments will be made that mature
beyond 10 years from the date of investment.
13.1.4 Callable investments will be recorded at their maturity dates.
13.2 Maximum modified duration. The investment restrictions identified in paragraphs
8 and 10, and the maturity requirements identified in paragraph 13.1, imply that the value
of city investments should not change more than 2.2% for every 1% change in market
interest rates. To ensure that this is the case, a maximum modified duration is established
at 2.2. This states that the unrealized gains and losses of the portfolio are not expected
to exceed two and two-tenths percent, 2.2% for every 1% change in market interest rates.
A modified duration in excess of 2.2 would indicate that the portfolio is exposed to more
market risk than is desired by this policy. If the modified duration of 2.2 is exceeded, an
explanation will be made in the first monthly report following the occurrence.
13.3 Investments Held Separately. Maturities for investments held separately will
conform to the trust indenture for each issue.
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ATTACHMENT A
14.0 Selection of financial institutions and brokers/dealers. Investments shall be purchased only
through well established, financially sound institutions. The city treasurer may maintain a list of
financial institutions and broker/dealers who are approved to provide the city with investment
services. This list should be updated annually by the city treasurer to ensure compliance with this
investment policy. All financial institutions and broker/dealers who desire to become qualified
bidders for investment transactions will be given a copy of the city's Investment Policy, and a
return cover letter which they must sign indicating that the investment policy has been read,
understood and that their investment offers will comply with this policy. Qualified financial
institutions and broker/dealers must supply the city treasurer with the following:
14.1 Financial Institutions.
• Current audited financial statements
• Depository contracts, as appropriate
• A copy of the latest FDIC call report or the latest FHLBB report, as appropriate
• Proof that commercial banks, savings banks, or savings and loan associations are state
or federally chartered
14.2 Broker/Dealers.
• Current audited financial statements
• Proof that brokerage firms are members in good standing of a national securities
exchange, or
• A designation as a primary government dealer by the Federal Reserve Bank.
Commercial banks, savings banks, and savings and loan associations must maintain a minimum
net worth to asset ratio as provided by law (total regulatory net worth divided by total assets)
and must have had positive net earnings for the last reporting period.
15.0 Purchase, Sale, Payment, and Delivery. A competitive bid process, when deemed practical
by the city treasurer, will be used to place all investment transactions. It is recommended that
the city treasurer obtain two or more bids from broker/dealers before purchasing an investment,
and three or more quotes when selling an investment. When two or more investment
opportunities offer essentially the same maturity, liquidity, yield, and quality, the city treasurer
may give considerations to financial institutions based in the City of Carlsbad, the State of
California, and within the United States. Payment for securities will be done on a Delivery Versus
Payment (DVP) basis via the city's custodian. Delivery of securities will be made to the city in
accordance with the third-party custodial agreement.
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ATTACHMENT A
16.0 Safekeeping and custody. All security transactions, including collateral for repurchase
agreements, entered into by the city shall be conducted on a delivery-vs.-payment basis. All
securities owned by the city will be held by a third-party custodian designated by the city
treasurer and evidenced by a monthly statement from the custodian. All securities will be held in
the nominee name of the custodian unless the counterparty bank's trust department is used for
the delivery of the security, in which case the security will be held in the city's name. Collateral
for time deposits in banks will be held in the city's name in the bank's Trust Department or in the
Federal Reserve Bank.
17.0 Performance standard for pooled investments. Laddered maturities and a buy and hold
strategy for pooled investments will cause the investment portfolio to attain a market-average
rate of return throughout budgetary and economic cycles, commensurate with the investment
risk constraints and the city's cash flow needs. Since the amount maturing within one year must
be at least equal to two-thirds (2/3) of the currently approved operating budget, the rate of
return will be more closely related to, but lag behind, changes in short-term market rates. The
rate of return of the investment portfolio will be based on the maturity value of the investments.
A dollar-weighted average of yields to maturity will be used in calculating the rate of return of
the entire portfolio. The city's performance benchmarks may change from year to year but should
strive to mirror the assets held in the city's portfolio.
18.0 Reporting. California Government Codes §53607 and §53646 allow the City Council, at its
discretion, to require reports meeting the standards set forth in these sections, as well as any
additional information desired. Therefore, it is the policy of the city that the investments and
transactions described in these sections, and as outlined in 18.1 below be given to the City
Council, city manager, and internal auditor (or the deputy city manager of administrative services
in the absence of an internal auditor).
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ATTACHMENT A
18.1 Pooled investments. The investment report will be submitted monthly by the city
treasurer within 30 days following the end of the month covered by the report. The
monthly report will include the following elements:
• Itemized listing of portfolio investments by type, yield to maturity, and issuer
• Par value, dollar amount invested, amortized cost, and current market value as of the
date of the report will be given for the total of all securities, investments, and moneys
held by the city and its component units. The source of the market values will be cited
• Credit ratings of corporate notes
• Accrued income
• Weighted average yield of the portfolio
• Weighted average days to maturity of the portfolio from the date of the report
• Weighted average modified duration of the portfolio
• Dollar amount and percentage of portfolio maturing within one year
• Dollar amount and percentage of portfolio maturing between one and 5 years
• Percent that each type of investment represents in the portfolio
• Investment transactions for the reporting period excluding due dates
• Fund source of investments when available
• Statement that the investment portfolio has the ability to meet the city's cash flow
demands for the next six (6) months
• Statement of compliance of the portfolio with the city's Investment Policy. When
applicable, any material exceptions will be noted
An annual report for pooled investments will also be made to the City Council following the close
of the fiscal year. Among other items, the annual report will include an analysis of the
composition of the portfolio with regard to fund source; a review of trends regarding the size of
the fund, portfolio yields, and cash income; and a statement regarding anticipated fund activity
in the next fiscal year.
18.2 Investments held separately. A report of investments held separately will be made
quarterly. Within 30 days following the end of the quarter the report will be submitted as
an exhibit in the city treasurer's monthly report. The quarterly report will contain the
information required by California Government Code §53646 when available.
19.0 Short-term borrowing. The city is permitted by law to borrow money to meet current short-
term cash flow needs. These needs may arise either because projected cash disbursements
exceed projected cash receipts, or because the city's cash accounts may be temporarily
overdrawn due to the efforts to invest 100% of inactive funds at all times. To provide for these
contingencies the city treasurer is authorized to take the following actions:
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ATTACHMENT A
19.1 Short-term loan. When there is a shortfall between projected cash revenues and
projected cash disbursements, the city treasurer may secure a loan in the amount that
would equal the cash deficit plus projected cash disbursements for one month. Any such
loan will be repaid within one year.
19.2 Line of credit. The city treasurer may maintain a line of credit with the city's bank in
an amount to cover sums temporarily overdrawn because of efforts to invest all inactive
funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified in this
Investment Policy may occur for pooled investments because of events subsequent to the
purchase of investment instruments, e.g., the rating of a corporate note held in the portfolio is
downgraded below an "AA"/" A" rating, or total assets in the portfolio decline causing the
percentage invested in corporate notes to rise above 30%, or an unforeseen expenditure causes
investments maturing within one year to fall below two-thirds (2/3) of the approved operating
budget of the current fiscal year. California Government Code §53601 specifies a percentage
limitation for a particular category of investment. That percentage is applicable only at the date
of purchase. The city treasurer shall also review exceptions of Corporate Notes downgraded
below "AA" /"A" rating, as well as the percentage limitation of any investment which exceeds the
maximum allowed under this policy for possible corrective action. Exceptions may be temporary
or more lasting; they may be self-correcting or require specific action. If specific action is
required, the city treasurer will determine the course of action that will correct exceptions to
move the portfolio into compliance with State and city requirements. Decisions to correct
exceptions will not expose the assets of the portfolio to undue risk and will not impair the
meeting of financial obligations as they fall due. Any subsequent investments will not extend
existing exceptions. Exceptions, and the decisions to correct the exceptions, will be reviewed with
the Investment Review Committee referred to in paragraph 22.0 below.
21.0 Internal control. This policy and the strategy for and conduct of the investment of city funds
will be reviewed by an Investment Review Committee as set forth below and by the city's auditors
in the conduct of their annual audit of the city.
22.0 Review. An Investment Review Committee is hereby established to conduct reviews of the
city's investment portfolio, the strategy being utilized for the investment of city funds, and the
city's Investment Policy. This committee will be composed of the city treasurer (acting as the
chair), the city attorney, the city manager, the deputy city manager of administrative services,
and the assistant to the city treasurer or delegate from each such department. Additionally, the
city treasurer may appoint other city residents as advisors to the committee. The committee will
convene periodically as necessary or desirable but, no less frequently than once each quarter.
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ATTACHMENT A
23.0 Investment policy adoption. California Government Code §S3646(a) (2) allows the city
treasurer to render to the City Council and the Investment Review Committee a statement of
Investment Policy and recommends that one be presented each year. Therefore, the city's
Investment Policy and any modifications thereto shall be considered no less often than annually
at a public meeting. Adoption of the Investment Policy and any changes must be made by
resolution ofthe City Council.
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ATTACHMENT A
GLOSSARY
Amortized Cost: The cost of investments adjusted for amortized premiums and discounts.
Amortized cost is used to maintain comparability with market value.
Arbitrage Regulation: Laws to control the use of profit making by purchasing securities on one
market for immediate resale on another to profit from a price difference.
Bankers Acceptances: An investment vehicle created to facilitate international commercial trade
transactions. The bank accepts responsibility to repay a loan to the holder of the investment
vehicle created in a commercial transaction. The credit worthiness of Bankers Acceptances is
enhanced because they are secured by the issuing bank, the goods themselves, and the importer.
Bankers Acceptances are sold on a discounted basis.
Bond Indenture: A written agreement specifying the terms and conditions for issuing bonds,
stating the form of the bond being offered for sale, interest to be paid, the maturity date, call
provisions and protective covenants, if any, collateral pledged, the repayment schedule, and
other terms. It describes the legal obligations of a bond issuer and the powers of the bond
trustee, who has the responsibility for ensuring that interest payments are made to registered
bondholders.
Book Value: A term synonymous with amortized cost.
Buy and Hold Strategy: Investments in which management has the positive intent and ability to
hold each issue until maturity.
Certificate of Deposit: A deposit account paying interest for a fixed term, with the understanding
_that funds cannot be withdrawn before maturity without giving notice.
Collateralization: An asset used to secure a debt in part or in full by pledge of collateral. The
collateral is used as security to help ensure payment or performance of an obligation.
Commercial Paper: A short-term IOU, or unsecured money market obligation, issued by prime
rated commercial firms and financial companies, with maturities from 2 days up to 270 days. A
promissory note of the issuer used to finance current obligations and is a negotiable instrument.
Delivery versus Payment: A securities industry term indicating payment is due when the buyer
has securities in hand or a book entry receipt.
Embedded Option: A statement within the bond structure that would alter the interest rate
earned by the bond.
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ATTACHMENT A
Interest-Only Strips: Mortgage backed instrument where investor receives only the interest, no
principal, from a pool of mortgages. Issues are highly interest rate sensitive. Cash flows vary
between interest periods. As well, the maturity date may occur earlier than that stated if all loans
within the pool are pre-paid. High prepayments on underlying mortgages can return less to the
holder that the dollar amount invested.
Inverse Floater: A bond or note that does not earn a fixed rate of interest. Rather, the interest
rate that is earned is tied to a specific interest-rate index identified in the bond/note structure.
The interest rate earned by the bond/note will move in the opposite direction of the index, e.g.,
if market interest rates as measured by the selected index rises, the interest rate earned by the
bond/note will decline. An inverse floater increases the market rate risk and modified duration
of the investment.
Laddered Portfolio: A bond investment portfolio with securities in each maturity range (e.g.
monthly) over a specified period (e.g. five years).
Leverage: Investing with borrowed money with the expectation that the interest earned on the
investment will exceed the interest paid on the borrowed money.
Local Agency Investment Fund (LAIF): A voluntary investment program offering participating
agencies the opportunity to participate in a major portfolio which daily invests hundreds of
millions of dollars, using the investment expertise of the State Treasurer's Office Investment staff
at no additional cost to the taxpayer. Investment in LAIF, considered a short-term investment, is
readily available for cash withdrawal daily.
Market Risk: The risk that market interest rates will rise causing a loss of value in investments
held. All investments made by the city involve a degree of market risk. See also "Unrealized Gains
(Losses).
Modified Duration: A measure of the sensitivity that the value of a fixed-income security has to
changes in market rates of interest. Modified duration is the best single measure of a portfolio's
or security's exposure to market risk. Modified duration identifies the potential gain/loss in value
before the gain/loss actually occurs. It is a prospective measurement, e.g., a modified duration
of 1.5 indicates that when and if a 1% change in market interest rates occurs, a 1.5% change in
the value of a security will result. Investments with modified durations of one to three are
considered to be relatively conservative.
Negotiable Certificates of Deposit: A large denomination ($100,000 or more) interest bearing
time deposits, paying the holder a fixed amount of interest at maturity. Issues can be sold to a
new owner before maturity.
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Nominee Name: The registered owner of a stock or bond if different from the beneficial owner,
who acts as holder of record for securities and other assets. Typically, this arrangement is done
to facilitate the transfer of securities when it is inconvenient to obtain the signature of the real
owner, or the actual owner may not wish to be identified. Nominee ownership simplifies the
registration and transfer of securities.
NRSRO: A nationally recognized statistical rating organization (NRSRO) is a credit rating agency
that issues credit ratings that the U.S. Securities and Exchange Commission permits other
financial firms to use for certain regulatory purposes. Three of the primary recognized rating
agencies are Moody's Investment Services, Inc., Standard & Poor's and Fitch.
Pooled Investment: A grouping of resources for the common advantage of the participants.
Range Note: An investment whose coupon payment varies (e.g. either 7% or 3%) and is
dependent on whether· the current benchmark (e.g. 30-year Treasury) falls within a pre-
determined range (e.g. between 6.75% and 7.25%).
Repurchase Agreement: A contract to purchase and subsequently sell securities at a specified
date and price.
Supranational Organization: A supranational organization is formed by a group of countries
through an international treaty. Member states transcend national boundaries or interests to
share in the decision-making process to promote economic development in the member
countries.
Supranational Securities: Supranational securities are United States dollar denominated senior
unsecured, unsubordinated obligations issued or unconditionally guaranteed by the
International Bank for Reconstruction and Development (IBRD or World Bank), International
Finance Corporation (IFC), or Inter-American Development Bank (IADB). These organizations
were established by international treaties, are headquartered in Washington D.C and
incorporated into U.S. Federal Law by Congressional Acts.
The State of California Code §S3601(q) permits the securities of these three organizations to be
incorporated into local agency investment portfolios.
Sweep Account: A short-term income fund into which all uninvested cash balances from the non-
interest-bearing checking account are automatically transferred daily.
Third-Party Custodian: A corporate agent, usually a commercial bank, who, acting as trustee,
holds securities under a written agreement for a corporate client and buys and sells securities
when instructed. Custody services include securities safekeeping, and collection of dividends and
interest. The bank acts only as a transfer agent and makes no buy-sell recommendations.
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Unrealized Gains (Losses): An increase (decrease) in the value of investments representing the
difference between the amortized cost of the investments and their current market value.
Increases (decreases) in value are caused primarily by changes in market interest rates
subsequent to purchasing the investments. Increases (decreases) in value indicate two things: 1.
The portfolio has a potential gain (loss) in principal if the securities are sold, and 2. The portfolio
is over performing (underperforming) the current market for similar investments. An increase in
value indicates the portfolio is earning relatively more interest than current market conditions,
and a decrease in value indicates that the portfolio is earning relatively less interest than current
market conditions.
Zero Accrual Periods: A period in which an investment accumulates no interest.
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