HomeMy WebLinkAboutA437 - Revisions to City's Investment Policy i
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CITY OF AMES
INVESTMENT
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Revised April 2018
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TABLE OF CONTENTS
Page
Purpose.........................................................................................................................1
Policy.............................................................................................................................1
Scope............................................................................................................................1
Objectives .....................................................................................................................2
Standardsof Care .........................................................................................................3
Investment Authority and Responsibility........................................................................4
InvestmentProcedures .................................................................................................5
Authorized Financial Dealers and Institutions ...............................................................5
Suitability.......................................................................................................................6
AuthorizedInvestments.................................................................................................6
Prohibited Investments and Investment Practices.........................................................7
Master Repurchase Agreements...................................................................................8
InvestmentPools...........................................................................................................8
Safekeepingand Custody .............................................................................................9
Collateral/Security for Deposit of Public Funds ...........................................................10
Diversification..............................................................................................................10
MaximumMaturities ....................................................................................................11
Reporting.....................................................................................................................11
PolicyConsideration....................................................................................................12
Appendix .....................................................................................................................13
Glossary ...........................................................................................................13
Broker/Dealer Questionnaire & Certification.....................................................21
Amended April-07
CITY OF AMES, IOWA
INVESTMENT POLICY
1.0 PURPOSE
The purpose of this investment policy is to set investment objectives, policies,
establish guidelines, and define responsibilities for the investment of funds for the
City of Ames.
2.0 POLICY
The policy of the City of Ames is to invest all funds in a manner that will provide
the highest investment return while meeting cash flow demands and maintaining
maximum security through diversification and adherence to the City's objectives.
This policy is intended to comply with the Code of Iowa for investment of public
funds.
This policy is static and general in nature; it defines authorized investments and
guides the investment decisions and security selection process. The City's
Investment Policy will be regularly reviewed and adjusted to create a portfolio
that is suitable for the City given current conditions.
3.0 SCOPE
This investment policy applies to all funds and investment transactions of the
City. These funds are accounted for in the Comprehensive Annual Financial
Report, which includes the following:
3.1 General Fund
3.2 Special Revenue Funds
3.3 Capital Projects Funds (includes restricted bond proceeds)
3.4 Enterprise Funds (includes restricted sinking funds)
3.5 Trust and Agency Funds
3.6 Internal Service Funds
3.7 Any new fund created by the City of Ames, unless specifically exempted
The restricted sinking funds and bond proceeds are invested in compliance with
this investment policy and applicable bond resolutions.
Individual employee retirement funds and deferred compensation are excluded
from this policy.
3.8 Pooling of Funds
Except for cash in certain restricted and special funds, the City of Ames will
consolidate cash balances from all funds to maximize investment earnings
and to increase efficiencies with regard to investment pricing, safekeeping
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and administration. Investment income will be allocated to the various funds
based on their respective participation and in accordance with generally
accepted accounting principles.
4.0 OBJECTIVES
The primary objectives, in priority order, for the City of Ames investment activities
shall be safety, liquidity, and yield:
4.1 Safety
With safety being the foremost objective, care must be taken to ensure the
preservation of capital and the protection of principal. The objective will
be to mitigate credit risk and interest rate risk by following the guidelines
listed below.
a. Credit Risk
The City of Ames will minimize credit risk (the risk of loss due to the
failure of the security issuer or backer) by:
• Limiting investments to those addressed in Section 10.0 of this
investment policy.
• Pre-qualifying the financial institutions, broker/dealers,
intermediaries, and advisors with whom the City will do
business.
• Diversifying the investment portfolio by agency and issuer so
that potential losses on individual securities can be minimized.
• Holding a minimum of 5% of the total portfolio in highly
marketable short-term treasuries, checking with interest,
government pooled account, or a combination of all three.
b. Interest Rate Risk
The City of Ames will minimize interest rate risk, which is the risk
that the market value of securities in the portfolio will fall due to
changes in market interest rates, by:
• Structuring the investment portfolio so that securities mature to
meet cash requirements for operations, thereby avoiding the
need to sell securities in the open market prior to maturity.
• Purchasing investments with the intent to hold until maturity.
• Investing operating funds primarily in shorter-term securities,
money market mutual funds, or similar investment pools and
limiting the average maturity of the portfolio in accordance with
this policy (see Section 17.1).
4.2 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 securities mature
concurrent with cash needs to meet anticipated demands (static liquidity).
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Furthermore, since all possible cash demands cannot be anticipated, the
portfolio should consist largely of securities with active secondary or
resale markets (dynamic liquidity). Alternatively, a portion of the portfolio
may be placed in money market mutual funds or local government
investment pools which offer same-day liquidity for short-term funds.
4.3 Yield
The portfolio shall be designed to obtain a reasonable rate of return
throughout budgetary and economic cycles. The return on investments is
to be accorded secondary importance compared to the safety and liquidity
objectives described above. The core of investments will focus on
relatively low risk securities with an expectation of earning a reasonable
return relative to the risk being assumed. Securities shall not be sold prior
to maturity, with the following exceptions:
• A security with declining value may be sold early to minimize
loss of principal.
• A security may be exchanged to improve the quality, yield, or
target duration in the portfolio.
• A security may be sold in order to satisfy liquidity requirements.
When selling a security prior to maturity, the City Treasurer must be
prepared to justify the reasons and explain any gains or losses.
It is important to remember that compliance with the policy does not
measure return, but rather manages risk. Policy compliance does not
provide a benchmark to meet or exceed, but is a model to follow. The City
will benchmark its portfolio performance to the appropriate "treasuries
constant maturity" rate based on portfolio maturities of the investment
plan.
5.0 STANDARDS OF CARE
5.1 Prudence
The standard of prudence to be used by investment officials shall be the
"prudent person" standard and shall be applied in the context of managing
an overall portfolio. Investment officers acting in accordance with written
procedures and this investment policy 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 in a timely fashion and the liquidity and the sale of securities are
carried out in accordance with the terms of this policy.
The "prudent person" standard states that, "Investments shall be made
with judgment and care, under circumstances then prevailing, which
persons of prudence, discretion and intelligence exercise in the
management of their own affairs, not for speculation, but for investment,
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considering the probable safety of their capital as well as the probable
income to be derived."
5.2 Ethics and Conflicts of Interest
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 to the City Manager's office any material interests in
financial institutions with which they conduct business. They shall further
disclose any personal financial/investment positions that could be related
to the performance of the investment portfolio. Employees and officers
shall refrain from undertaking personal investment transactions with the
same individual with whom business is conducted on behalf of the City of
Ames.
The City investment program shall be managed in a professional and prudent
manner worthy of the public trust and review.
6.0 INVESTMENT AUTHORITY AND RESPONSIBILITY
6.1 Authority
In accordance with Section 1213.10 of the Code of Iowa, the responsibility
for conducting investment transactions resides with the City Treasurer.
The City Treasurer, under the general direction of the City Council, shall
be responsible for all transactions undertaken and shall establish a system
of controls to regulate activities.
The Code of Iowa Section 12B.1013 requires the City governing body to
adopt a written investment policy and distribute copies to the following..
• The governing body or officer of the City of Ames to which the
policy applies.
• All depository institutions or fiduciaries for public funds of the City of
Ames.
• The external auditor engaged to audit any fund of the City of Ames.
6.2 Responsibility Assigned
The City Treasurer shall invest all funds for the City in accordance with the
investment policy. In the absence of the City Treasurer, authority is
delegated first to the Director of Finance, and then to the Assistant City
Manager with supervision responsibility over the Finance Department. All
designees shall act in accordance with the established policies and
internal controls set forth in the investment policy.
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7.0 INVESTMENT PROCEDURES
The City Treasurer shall establish written investment procedures consistent with
this investment policy for the operation of the investment program. Procedures
should include references to: safekeeping, delivery vs. payment, investment
accounting, repurchase agreements, wire transfer agreements, internal controls,
collateral/depository agreements, daily cash flow review, basis for awarding bids,
authorized personnel, and portfolio inventory.
The procedures document is intended to provide guidance for staff and to
provide continuity in the event of an interruption of service of the City Treasurer.
8.0 AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
8.1 Selection Process
A list of financial institutions authorized to provide investment services to
the City of Ames will be maintained. In accordance with the Code of Iowa,
this list will state the maximum authorized deposit amount allowed in each
institution and must be approved by City Council.
In addition, a list of broker/dealers will be maintained. This list may
include both primary and regional dealers. Dealers will be approved by
the City Treasurer and the Director of Finance based on the following:
• Creditworthiness
• License to conduct business in Iowa
• Qualification under Securities and Exchange Commission (SEC)
Rule 15C3-1 (uniform net capital rule)
8.2 Financial Institutions and Broker/Dealers
All financial institutions and broker/dealers who desire to conduct business
with the City of Ames shall supply the City with the following:
• Audited financial statements, provided annually
• Trading resolutions
• Proof of state registration, if applicable
• Completed broker/dealer questionnaire
• Copy of the broker's license for the individuals servicing the
account
• Resume of individual servicing the account
• Any pending legal or regulatory sanctions
• Certification of having read and understood and agreeing to comply
with the City of Ames investment policy
• Evidence of adequate insurance coverage
An annual review of the financial condition and registration of all qualified
financial institutions and broker/dealers will be conducted by the City
Treasurer.
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9.0 SUITABILITY
Suitability, not simply return, is the standard for selecting investments for the
portfolio. The City Treasurer shall review the following when selecting
investments for the City:
• Sufficient liquidity to meet current obligations
• Appropriate level of market risk
• Diversified portfolio
• Legal investments
• Market rate of return
10.0 AUTHORIZED INVESTMENTS (Code of Iowa, Section 12.1310(5))
10.1 Permitted investments
• U.S. Treasury obligations which carry the full faith and credit guarantee
of the United States Government and are considered to be the most
secure instruments available.
• U.S. Government agency and instrumentality obligations that have a
liquid market with a readily determinable market value.
• Certificates of deposit and other evidences of deposit at federally
insured depository institutions approved pursuant to Chapter 12C,
Code of Iowa.
• Certificate of Deposit Account Registry Service (CDARS) deposited
with an authorized financial institution pursuant to Chapter 1213.10 (7),
Code of Iowa.
• Prime bankers' acceptances that mature within two hundred seventy
(270) days and that are eligible for purchase by a federal reserve bank,
provided that at the time of purchase, no more than ten percent of the
investment portfolio shall be in investments authorized by this
paragraph and that at the time of purchase, no more than five percent
of the investment portfolio shall be invested in the securities of a single
issuer.
• Commercial paper or other short-term corporate debt that matures
within 270 days and that is rated within the two highest classifications,
as established by at least one of the standard rating services approved
by the superintendent of banking by rule adopted pursuant to Chapter
17A, Code of Iowa, provided that at the time of purchase, no more than
five percent of all amounts invested in commercial paper and other
short-term corporate debt shall be invested in paper and debt rated in
the second highest classification, and provided further that at the time
of purchase, no more than ten percent of the investment portfolio shall
be in investments authorized by this paragraph, and that at the time of
purchase, no more than five percent of the investment portfolio shall be
invested in the securities of a single issuer.
• Repurchase agreements whose underlying collateral consists of the
investments in obligations of the United States Government, its
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agencies and instrumentalities, if the political subdivision takes delivery
of the collateral either directly or through an authorized custodian.
Repurchase agreements do not include reverse agreements.
• An open-end management investment company registered with the
Federal Securities and Exchange Commission under the Federal
Investment Company Act of 1940, 15 U.S.C. Section 80(a), and
operated in accordance with 17 C.F.R. Section 270.2a-7 (more
commonly referred to as "constant dollar money market funds").
• A joint investment trust organized pursuant to Chapter 2E, Code of
Iowa, prior to and existing in good standing on the effective date of this
act or a joint investment trust organized pursuant to Chapter 28E,
Code of Iowa, after April 28, 1992, provided that the joint investment
trust shall either be rated within the two highest classifications by at
least one of the standard rating services approved by the
Superintendent of Banking by rule adopted pursuant to Chapter 17A,
Code of Iowa, and operated in accordance with 17 C.F.R. Section
270.2A-7, or be registered with the Federal Securities and Exchange
Commission under the Federal Investment Company Act of 1940, 15
U.S.C. Section 80(a), and operated in accordance with 17 C.F.R.
Section 270.2a-7. The manager or investment advisor of the joint
investment trust shall be registered with the Federal Securities and
Exchange Commission under the Investment Advisor Act of 1940, 15
U.S.C. Section 80(b).
• Warrants or improvement certificates of a levee or drainage district.
The City Treasurer is not required to invest in all the investment options
authorized in this policy. Selection will be based on cash flow characteristics,
exposure to market risk, rate of return, the technical ability of the staff
responsible for administering the program, and the availability of time and tools
for staff to engage in conservative, but effective, management.
11.0 PROHIBITED INVESTMENTS AND INVESTMENT PRACTICES
Assets of the City shall not be invested in the following, according to Code of
Iowa 12B.10 (4) and 12B.10 (5):
• Futures and options contracts
• Reverse repurchase agreements
Assets of the City shall not be invested pursuant to the following investment
practices:
• Trading of securities strictly for speculation or the realization of short-term
trading gains.
• A contract providing for the compensation of an agent or fiduciary based
upon the performance of the invested assets.
• If a fiduciary or other third party with custody of public investment
transaction records of the City fails to produce records within a reasonable
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time, when requested by the City, the City shall make no new investments
with or through the fiduciary or third party and shall not renew maturing
investments with or through the fiduciary or third party.
12.0 MASTER REPURCHASE AGREEMENTS
A repurchase agreement is a contractual transaction agreement between an
investor and an issuing financial institution. The investor exchanges cash for
temporary ownership or control of collateral securities with an agreement
between the parties that on a future date, the financial institution will repurchase
the securities. A signed master repurchase agreement shall be on file with the
financial institution with which repurchase transactions are made.
The master repurchase agreement must include the following provisions:
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• The underlying collateral shall be limited to the United States
Government, agency and instrumentalities.
• Collateral shall be marked to market daily by the custodian and shall
be maintained at a value equal to or greater than the cash investment.
• At the time of purchase, the market value of the collateral shall
represent 102% of the cash investment.
• An authorized third party custodian or safekeeping agent shall hold all
securities purchased under a repurchase agreement.
• A seller of repurchase securities shall not be entitled or authorized to
substitute collateral, except as authorized by the City Treasurer.
• Retail repurchase agreements and reverse agreements shall not be
authorized for purchase.
13.0 INVESTMENT POOLS
Government sponsored investment pools are sources for short-term cash
management. A thorough investigation of the pool is required prior to investing,
and on a continual basis. Before investing in these pools, the following issues
must be reviewed:
• The pool must meet the requirements of Code of Iowa 12.B10 (5) (a).
• The pool must provide a written statement of policy and objectives.
• A questionnaire should be developed that will address the following
general topics:
o A description of eligible investment securities, and a written
statement of investment policy and objectives.
o A description of interest calculations and how it is distributed, and
how gains and losses are treated.
o A description of how the securities are safeguarded (including the
settlement processes), and how often the securities are priced and
the program audited.
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o A description of who may invest in the program, how often, what
size deposit and withdrawal are allowed.
o A schedule for receiving statements and portfolio listings.
o A description of how reserves, retained earnings, etc. are utilized
by the pool.
o A model of the fee schedule, and when and how it is assessed.
o A description of eligibility and/or acceptance of bond proceeds.
• The pool must contain only the types of investment allowed by this policy.
14.0 SAFEKEEPING AND CUSTODY
14.1 Delivery vs. Payment
All trades of marketable securities, where applicable, will be executed by
delivery vs. payment (DVP) to ensure that securities are deposited in an
eligible financial institution prior to the release of funds. Securities will be
held by a third party custodian as evidenced by safekeeping receipts.
14.2 Bonding
City investment officials shall be bonded to protect loss of public funds
against possible embezzlement and/or malfeasance.
14.3 Internal Controls
The City Treasurer is responsible for establishing and maintaining an
internal control structure designed to ensure that the assets of the City of
Ames are protected from loss, theft, or misuse.
The internal controls shall address the following points:
• Control of collusion
• Separation of transaction authority from accounting and
recordkeeping
• Custodial safekeeping
• Delivery versus payment
• Clear delegation of authority
• Confirmation of transactions for investments and wire transfers
Review of compliance with the internal policy and related procedures shall
be a part of the annual audit process conducted by the City's independent
auditors.
15.0 COLLATERAL/SECURITY FOR DEPOSIT OF PUBLIC FUNDS
15.1 Commercial Banks and Savings and Loans
The City shall make deposits only with commercial banks and savings and
loans that comply with Section 12C of the Code of Iowa, "Deposit of Public
Funds", and Section 12C, Subsection 22 of the Code of Iowa, "Required
Collateral."
15.2 Credit Unions
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Before a deposit of public funds is made with a credit union in excess of
the amount federally insured, the public officer shall obtain security for the
deposit by one or more of the following:
• Surety bond of a surety company approved by the United States
Treasury and authorized to do business in the State of Iowa and
shall be an amount equal to the public funds on deposit at any time.
• Deposit, maintain, pledge, and assign for the benefit of the public
entity. The securities shall be approved by the public officer, the
market value of which is not less than 110% of the total deposits of
the funds on deposit for that public entity in the credit union. These
securities shall be deposited with the Federal Reserve Bank, the
Federal Home Loan Bank of Des Moines, Iowa, or the U. S. Central
Credit Union.
• Irrevocable letter of credit issued by the National Credit Union
Administration naming the City of Ames as beneficiary.
• Withdrawal or exchange of the securities may be done only with the
written approval of the appropriate public officer.
16.0 DIVERSIFICATION
The purpose of diversification is to reduce overall portfolio risk while attaining
market rates of return and to enable the City of Ames to meet all anticipated cash
requirements.
The investments shall be diversified by:
• Limiting investments to avoid over-concentration in securities of a specific
issuer (excluding treasury bills).
• Limiting investment in securities that have higher credit risks.
• Limiting certificates of deposit to the amount approved by City Council for
each financial institution in accordance with the Code of Iowa.
• Investing in securities with varying maturities.
• Investing a minimum of 5% of the total portfolio in highly marketable short-
term treasuries, checking accounts with interest, government pooled
account, or a combination of all three.
17.0 MAXIMUM MATURITIES
To the extent possible, the City of Ames will attempt to match its investments
with anticipated cash flow requirements.
17.1 Operating Funds
Operating funds are those funds that can be reasonably expended during
a current budget year or within fifteen months of receipt. These funds may
only be invested in instruments that mature within three hundred ninety-
seven (397) days or less. Operating funds must be identified and
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distinguished from all other funds available for investment. (Section
12B.10A, Code of Iowa)
17.2 Non-Operating Funds
Reserve funds for debt service, and funds being accumulated for capital
improvements on a pay-as-you-go basis that are not required for
operations may be invested for longer than three hundred ninety-seven
(397) days (Section 12B.10A(3), Code of Iowa). These maturities shall
coincide as nearly as possible with the anticipated need. The City of
Ames will keep these investments for a duration not to exceed seven (7)
years.
18.0 REPORTING
18.1 Methods
The City Treasurer shall prepare an investment report quarterly and
present to the City Council within 45 days of each quarters end. This
report will include the following:
• List of individual securities held at the end of the reporting period
further broken down by issuer, purchase date, maturity date,
coupon rate, par value, market value, book value, and yield to
maturity.
• A report summarizing the portfolio by type, the percentage of the
total portfolio which each type of investment represents, par value,
market value, book value, term, days to maturity, year-to-date
earnings and effective rate of return.
18.2 Performance Standards
The market value is calculated monthly and reported to the City Council
quarterly. The portfolio is benchmarked to the applicable treasuries
constant maturities rate as reported by the Federal Reserve.
19.0 POLICY CONSIDERATION
19.1 Exemption
Any investment currently held that does not meet the guidelines of this
policy shall be exempted from the requirements of this policy as long as it
was in compliance with State of Iowa law and the City's investment policy
in effect at the time of purchase. At maturity or liquidation, such monies
shall be reinvested only as provided by this policy.
19.2 Amendments
This policy shall be reviewed annually to ensure consistency to overall
objectives of safety, liquidity, yield, compliance to current law, and
economic trends.
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19.3 This investment policy is required by Code of Iowa, Section 12B.10B and
approved by City Council.
APPENDIX
ACCRUED INTEREST: The accumulated interest payable on a security since the last
interest payment made by the issuer.
AGENCY: A debt security issued by a federal or federally sponsored agency. Federal
agencies are backed by the full faith and credit of the U. S. Government. Federally
sponsored agencies (FSAs) are backed by each particular agency with a market
perception that there is an implicit government guarantee. An example of a federal
agency is the Government National Mortgage Association (GNMA). An example of an
FSA is the Federal National Mortgage Association (FNMA).
AMORTIZATION: The systematic reduction of the amount owed on a debt issue
through periodic payments of principal.
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or
trust company. The accepting institution guarantees payment of the bill, as well as the
issuer.
BASIS POINT: A unit of measurement used in the valuation of fixed-income securities
equal to 1/100 of 1 percent of yield, e.g., 1/4" of 1 percent is equal to 25 basis points.
BENCHMARK: A comparative base for measuring the performance or risk tolerance of
the investment portfolio. A benchmark should represent a close correlation to the level
of risk and the average duration of the portfolio's investment.
BID: The price offered by a buyer of securities. (When you are selling securities, you
ask for a bid.) See Offer.
BOOK ENTRY: An electronic system of accountability, custody, transfer, and
settlement of securities. Book-entry systems allow rapid and accurate transfers of
securities with simultaneous cash settlement.
BOOK VALUE: The value at which a security is carried on the inventory lists or other
financial records of an investor. The book value may differ significantly from the
security's current value in the market.
BROKER: A broker brings buyers and sellers together for a commission.
CALLABLE BOND: A bond issue in which all or part of its outstanding principal
amount may be redeemed before maturity by the issuer under specified conditions.
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CALL PRICE: The price at which an issuer may redeem a bond prior to maturity. The
price is usually at a slight premium to the bond's original issue price to compensate the
holder for loss of income and ownership.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced
by a certificate. Large-denomination CDs are typically negotiable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SERVICE (CDARS): A program
with an approved depository that removes the need for collateral by providing full FDIC
insurance for certificates of deposit.
COLLATERAL: Securities, evidence of deposit or other property which a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COLLATERLIZED MORTGAGE OBLIGATION (CMO): Mortgage backed bond that
separates mortgage pools into different maturity classes called traunches. CMO's are
issued by Federal National Mortgage Corp. and Federal National Mortgage Association
and are usually backed with a government guarantee and have an AAA bond rating.
Planned Amortization Class CMOs (PAC) have stable prepayment schedules that do
not react unfavorably in wide market swings.
COMMERCIAL PAPER: An unsecured short-term promissory note issued by
corporations, with maturities ranging from 2 to 270 days.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the entity. It includes five combined statements for each individual fund and
account group prepared in conformity with GAAP. It also includes supporting schedules
necessary to demonstrate compliance with finance-related legal and contractual
provisions, extensive introductory material, and a detailed Statistical Section.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the
bondholder on the bond's face value. (b) A certificate attached to a bond evidencing
interest due on a payment date.
CREDIT QUALITY: The measurement of the financial strength of a bond issuer. This
measurement helps an investor to understand an issuer's ability to make timely interest
payments and repay the loan principal upon maturity. Generally, the higher the credit
quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of
default is lower. Credit quality ratings are provided by nationally recognized rating
agencies.
CREDIT RISK: The risk to an investor that an issuer will default in the payment of
interest and/or principal on a security.
CURRENT YIELD (CURRENT RETURN): A yield calculation determined by dividing
the annual interest received on a security by the current market price of that security.
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DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt. Delivery versus payment is
delivery of securities with an exchange of money for the securities. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the securities.
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).
DISCOUNT: The difference between the cost price of a security and its maturity when
quoted at lower than face value. A security selling below original offering price shortly
after sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are
issued at a discount and redeemed at maturity for full face value, e.g., U. S. Treasury
Bills.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
DURATION: A measure of the timing of the cash flows, such as the interest payments
and the principal repayment, to be received from a given fixed-income security. This
calculation is based on three variables; term to maturity, coupon rate, and yield to
maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates.
FAIR VALUE: The amount at which an investment could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply
credit to various classes of institutions and individuals, e.g., S&Ls, small business firms,
students, farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS (Fed Funds): Funds placed in Federal Reserve banks by
depository institutions in excess of current reserve requirements. These depository
institutions may lend fed funds to each other overnight or on a longer basis. They may
also transfer funds among each other on a same-day basis through the Federal
Reserve banking system. Fed funds are considered to be immediately available funds.
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FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate
is currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks
(currently 12 regional banks) which lend funds and provide correspondent banking
services to member commercial banks, thrift institutions, credit unions and insurance
companies. The mission of the FHLBS is to liquefy the housing related assets of its
members who must purchase stock in their district bank.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Established to help
maintain the availability of mortgage credit for residential housing. Participation is in the
conventional loan market.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA,
was chartered under the Federal National Mortgage Association Act in 1938. FNMA is
a federal corporation working under the auspices of the Department of Housing and
Urban Development (HUD). It is the largest single provider of residential mortgage
funds in the United States. Fannie Mae, as the corporation is called, is a private
stockholder-owned corporation. The corporation's purchases include a variety of
adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's
securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the
Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The
President of the New York Federal Reserve Bank is a permanent member, while the
other Presidents serve on a rotating basis. The Committee periodically meets to set
Federal Reserve guidelines regarding purchases and sales of Government Securities in
the open market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by
Congress and consisting of a seven member Board of Governors in Washington, D. C.,
12 regional banks and about 5,700 commercial banks that are members of the system.
FIDUCIARY: Person, company, or association holding assets in trust of a beneficiary.
FUTURES CONTRACT: Agreement to buy or sell a specific amount of a commodity or
financial instrument at a particular price on a stipulated future date.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR GINNIE MAE):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by
mortgage bankers, commercial banks, savings and loan associations, and other
institutions. Security holder is protected by full faith and credit of the U. S. Government.
Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term
"pass-through" is often used to describe Ginnie Maes.
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INVERTED YIELD CURVE: A chart formation that illustrates long-term securities
having lower yields than short-term securities. This configuration usually occurs during
periods of high inflation coupled with low levels of confidence in the economy and a
restrictive monetary policy.
INVESTMENT-GRADE OBLIGATIONS: An investment instrument suitable for
purchase by institutional investors under the prudent person rule. Investment-grade is
restricted to those obligations rated BBB or higher by a rating agency.
INVESTMENT POLICY: A concise and clear statement of the objectives and
parameters formulated by an investor or investment manager for a portfolio of
investment securities.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread between bid and asked prices is narrow and reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from
political subdivisions that are placed in the custody of the State Treasurer for investment
and reinvestment.
MARK-TO-MARKET: The process whereby the book value or collateral value of a
security is adjusted to reflect its current market value.
MARKET RISK: The risk that the value of a security will rise or decline as a result of
changes in market conditions.
MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase---reverse repurchase agreements that
establishes each party's rights in the transactions. A master agreement will often
specify, among other things, the right of the buyer-lender to liquidate the underlying
securities in the event of default by the seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial
paper, bankers' acceptances, etc.) are issued and traded.
OFFER: The price asked by a seller of securities. (When you are buying securities,
you ask for an offer.) See Asked and Bid.
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OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of money and credit in the economy. Purchases
inject reserves into the bank system and stimulate growth of money and credit, sales
have the opposite effect. Open market operations are the Federal Reserve's most
important and most flexible monetary policy tool.
OPTION: Right to buy or sell property that is granted in exchange for an agreed upon
sum. If the right is not exercised after a specified period, the option expires and the
option buyer forfeits the money.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the Federal
Reserve Bank of New York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission (SEC)-registered securities broker-
dealers, banks, and a few unregulated firms.
PRUDENT PERSON RULE: An investment standard. In some states the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected
by the custody state---the so-called legal list. In other states the trustee may invest in a
security if it is one which would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes
under the laws of this state, which has segregated for the benefit of the commission
eligible collateral having a value of not less than its maximum liability and which has
been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity.
REINVESTMENT RISK: The risk that a fixed-income investor will be unable to reinvest
income proceeds from a security holding at the same rate of return currently generated
by that holding.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price on a
fixed date. The security "buyer" in effect lends the "seller" money for the period of the
agreement, and the terms of the agreement are structured to compensate him for this.
Dealers use RP extensively to finance their positions. Exception: When the Fed is said
to be doing RP, it is lending money that is, increasing bank reserves.
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SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
SECONDARY MARKET: A market made for the purchase and sale of outstanding
issues following the initial distribution.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
SPECULATION: Assumption of risk in anticipation of gain but recognizing a higher
than average possibility of loss.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB,
FNMA, etc.) and corporations which have imbedded options (e.g., call features, step-up
coupons, floating rate coupons, derivative-based returns) into their debt structure. Their
market performance is impacted by the fluctuation of interest rates, the volatility of the
imbedded options and shifts in the shape of the yield curve.
SWAP: Trading one asset for another.
TOTAL RETURN: The sum of all investment income plus changes in the capital value
of the portfolio. For mutual funds, return on an investment is composed of share price
appreciation plus any realized dividends or capital gains. This is calculated by taking
the following components during a certain time period.
(Price Appreciation) + (Dividends Paid) + (Capital Gains) = Total Return
TREASURY BILLS: A non-interest bearing discount security issued by the U. S.
Treasury to finance the national debt. Most bills are issued to mature in three months,
six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U. S. Treasury securities issued as
direct obligations of the U. S. Government and having initial maturities of more than ten
years.
TREASURY NOTES: Medium-term coupon-bearing U. S. Treasury securities issued as
direct obligations of the U. S. Government and having initial maturities from two to ten
years.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement
that member firms as well as nonmember broker-dealers in securities maintain a
maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule
and net capital ratio. Indebtedness covers all money owed to a firm, including margin
loans and commitments to purchase securities, one reason new public issues are
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spread among members of underwriting syndicates. Liquid capital includes cash and
assets easily converted into cash.
VOLATILITY: A degree of fluctuation in the price and valuation of securities.
WEIGHTED AVERAGE MATURITY (WAM): The average maturity of all the securities
that comprise a portfolio. According to SEC rule 2a-7, the WAM for SEC registered
money market mutual funds may not exceed 90 days and no one security may have a
maturity that exceeds 397 days.
WHEN ISSUED (WI): A conditional transaction in which an authorized new security has
not been issued. All "when issued" transactions are settled when the actual security is
issued.
YIELD: The rate of annual income return on an investment, expressed as a
percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the
current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the
current income yield minus any premium above par or plus any discount from par in
purchase price, with the adjustment spread over the period from the date of purchase to
the date of maturity of the bond.
YIELD CURVE: A graphic representation that depicts the relationship at a given point
in time between yields and maturity for bonds that are identical in every way except
maturity. A normal yield curve may be alternatively referred to as a positive yield curve.
YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming
the bond is redeemed (called) prior to its nominal maturity date.
YIELD-TO-MATURITY: The rate of return yielded by a debt security held to maturity
when both interest payments and the investor's potential capital gain or loss are
included in the calculation of return.
ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no
periodic interest payments. The rate of return consists of a gradual accretion of the
principal of the security and is payable at par upon maturity.
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BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION
1. Name of Firm
2. Local Address National Headquarters
3. Local Telephone Number(s), Toll-Free Number(s)
4. Primary Representative/Manager/Partner-in-Charge
Name Name
Title Title
5. Is the firm a primary or regional dealer in U. S. Government Securities, as
designated by the Federal Reserve of New York, qualifying under S.E.C. Uniform
Net Capital Rule 15c3-1?
Primary Yes No Regional Yes No
If yes, how long has the firm been a primary dealer? years
If yes, how long has the firm been a regional dealer? years
6. Is the firm a commercial bank or an NASD member affiliate of a bank chartered
under the laws of one of the United States?
Yes Chartered under laws of the state of
No
If yes, are the bank customers' deposits insured by the Federal Deposit Insurance
Corporation? ,
Yes No
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7. Place an "X" by each regulatory agency that your firm is examined by and/or
subject to its rules and regulations.
FDIC SEC NYSE Comptroller of Currency
Federal Reserve System
Other (Example: State Regulatory Agency) Multistate firms please note: It
is not necessary to include regulatory agencies which do not have jurisdiction over
your firm's activities in Local Government Jurisdiction.
8. Is the firm licensed to sell securities in the state of Iowa?
Yes No
9. Is/Are the person(s) designated to service the City's account licensed to sell
securities in the state of Iowa?
Yes No
10. Is the firm a member of the Federal Reserve System? Yes No
11 . What was the firm's approximate total retail volume in U. S. Treasury and Agency
securities last year?
Firm wide $ # of Transactions
Local Office $ # of Transactions
12. Identify personnel who will be trading with or quoting prices of securities to our
government.
Name Title
Name Title
13. Fully disclose the method in which you would be compensated for your services.
14. Please identify the firm's most directly comparable public sector clients in our
geographical area.
Entity Contact Person
Telephone # Client since
Entity Contact Person
Telephone # Client since
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15. Place an "X" in the block next to each of the instruments set forth below in which
you make an active market (both buy and sell).
T-Bills T Notes/Bonds
BA Commercial Paper
Bank CDs S & L CDs
GNMAs FHLMCs
Other Federal Agencies (Please Specify)
Instrumentalities (Please Specify)
16. Does your firm specialize in any of the instruments listed above? If so, please
specify which ones.
17. Have any of your public sector clients ever reported to the firm its officers or
employees, that they sustained a loss (in a single year) exceeding ten percent of
original purchase price on any individual security purchased through the firm?
Explain
18. Has the firm ever been subject to a regulatory or state/federal agency investigation
ation
for alleged improper, fraudulent, disreputable, or unfair activities related to the sale
of securities?
Explain
19. Who audits the fiduciary systems of the firm's custody and delivery processes?
20. Has the firm consistently complied with the Federal Reserve's Capital Adequacy
Standard? Yes No
21 . By what factor (1.5x, 2x, etc.) does the firm presently exceed the Capital Adequacy
Standard's measure of risk?
22. Has the firm's capital position ever fallen short of the Capital Adequacy Standard?
Yes No
23. What portfolio information do you require from your clients?
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24. What reports, confirmations, documents and audit trail will we receive?
25. Approximately how many and what percentage of the firm's transactions failed last
month?
# transactions %
Last year?
# transactions %
26. Describe the precautions taken by the firm to protect the interest of the public when
dealing with governmental agencies as investors.
27. Please supply the following:
A. The firm's most recent audited annual financial report and most recent quarterly
report.
B. Proof of the firm's designation by the Federal Reserve Bank of New York as a
"primary securities dealer" OR Proof of FDIC coverage.
C. Proof of individual's (assigned to service the City's account) State of Iowa
securities sales license.
D. Proof of the firm's State of Iowa securities sales license.
CERTIFICATION
I hereby certify that sales personnel assigned to the City of Ames, Iowa account have
received and read a copy of the City's Investment Policy. For each transaction, we
pledge to exercise due diligence in disclosing all information necessary for each party to
agree to the details of the transaction. When recommending a transaction, we will have
reasonable grounds for believing the transaction is suitable based upon information
available from the issuer and based upon the facts disclosed by the City of Ames, Iowa,
or otherwise known about such customer. We have implemented investment
procedures and a system of controls designed to preclude imprudent investment
activities arising out of transactions conducted between our firm and the City of Ames,
Iowa. I attest to the accuracy of our responses to the questionnaire.
Signed Date
Title
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