RES-11163 Statement of Investment Policy FY 2019-20RESOLUTION NO. 11163
A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF ORANGE APPROVING AND ADOPTING
A STATEMENT OF INVESTMENT POLICY FOR
FISCAL YEAR 2019-20.
WHEREAS, California Government Code Sections 53600 et seq. set forth detailed
provisions regarding permitted and prohibited investments by cities and accountability therefor;
and
WHEREAS, the City Council adopted Resolution No. 11080 on June 12, 2018 adopting
the City's Statement of Investment Policy for Fiscal Year 2018-19 (herein referred to as the "FY
2018-19 SIP"); and
WHEREAS, the FY 2018-19 SIP requires that the City Council annually review its
Statement of Investment Policy and adopt a policy annually within 120 days following the end of
each fiscal year by a resolution and vote of the City Council at a public meeting; and
WHEREAS, the City's Investment Advisory Committee and Investment Oversight
Committee have reviewed the proposed Statement of Investment Policy for Fiscal Year 2019-20
herein referred to as the "FY 2019-20 SIP") in the form attached to this Resolution, and has
recommended that the City Council adopt the FY 2019-20 SIP.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Orange
that the FY 2019-20 SIP, in the form attached, is the City's Statement of Investment Policy for
Fiscal Year 2019-20 and is duly adopted in accordance with State law and Chapter 2.49 of Title 2
of the Orange Municipal Code.
ADOPTED this l lth day of June 2019.
Mark . Murphy, Mayor, f Orange
ATTEST:
Pamela Coleman, City Clerk, City of Orange
STATE OF CALIFOR1vIA )
COUNTY OF ORANGE )
CITY OF ORANGE
I, PAMELA COLEMAN, City Clerk of the City of Orange, California, do hereby certify
that the foregoing Resolution was duly and regularly adopted by the City Council of the City of
Orange at a regular meeting thereof held on the 1 lth day of June 2019,by the following vote:
AYES:COLTNCILMEMBERS: Alvarez, Murphy,Nichols, Monaco
NOES:COUNCILMEMBERS: None
ABSENT: COUNCILMEMBERS: None
ABSTAIN: COiJNCILMEMBERS: None
Pamela Coleman, City Clerk, City of Orange
Resolution No. 11163 2
CITY OF ORANGE
STATEMENT OF INVESTMENT POLICY
Fiscal Year 2019-20
1.0 INVESTMENT POLICY OVERVIEW
1.1 POLICY
It is the policy of the City of Orange ("City") to invest public funds in a manner which
will provide foremost for the safety of principal while meeting the short- and long-term
cash flow demands of the City and conforming to all statutes governing the investment of
City funds.
Annually, in accordance with California Government Code ("CGC") Section 53646, the
Treasurer will render to the City Council a Statement of Investment Policy for
consideration and approval at a public meeting. Any investment currently held at that
time that does not meet the guidelines of this policy, as changed from time to time by the
City Council, shall be exempt from the requirements of this policy. However, at the
investment's maturity or liquidation, such funds shall be reinvested only as provided by
this policy.
1.2 PURPOSE
This Statement of Investment Policy ("SIP") is set forth by the City for the following
purposes:
a) To establish a clear understanding for the City Council, Investment Committees, City
management, responsible employees, citizens and third parties, of the objectives,
policies and guidelines for the investment of the City's idle and surplus funds.
b) To offer guidance to investment staff, brokers and any external investment advisors
on the investment of City funds.
1.3 INVESTMENT OBJECTIVES
Within the overriding requirement of compliance with all Federal, State and local laws
governing the investment of moneys under the control of the Treasurer, and as specified
in the CGC Section 53600.5, when investing, reinvesting, purchasing, acquiring,
exchanging, selling and managing public funds, the primary objectives, in priority order,
of the investment activities shall be:
a) 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 the
preservation of capital in the overall portfolio.
b) Liquidity: The investment portfolio will remain sufficiently liquid to enable the City
to meet all operating requirements which might be reasonably anticipated.
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c) Return on Investments: The investment portfolio shall be designed and managed
with the objective of attaining a market rate of return throughout budgetary and
economic cycles, taking into account the investment objectives, authorized
investments and the cash flow needs of the City. The Treasurer's monthly reports
shall include benchmark reporting to define "a market rate of return"; which shall be
one of the indices published in a financial journal of wide circulation that are most
comparable to the Treasurer's portfolio. The benchmark shall be used solely as a
reference tool. The Treasurer shall not add additional risk to the portfolio in order to
attain or exceed the benchmark.
1.4 PRUDENCE
Investments shall be made with judgment and care, under circumstances then prevailing,
which persons of prudence, discretion and intelligence exercise in the management of
their own affairs; not for speculation, but for investment, considering the probable safety
of their capital as well as the probable income to be derived. The standard of prudence to
be used by investment officials shall be the "prudent investor" standard (CGC Section
53600.3) and shall be applied in the context of managing an overall portfolio. The
Treasurer and other investment employees, acting within the intent and scope of the SIP
and other written procedures, and exercising due diligence, shall be relieved of personal
responsibility for an individual security's credit risk or market price changes, provided
deviations from expectations are reported in the immediately following Treasurer's
Report and appropriate action is taken to control adverse developments. When a
deviation poses a significant risk to the City's financial position, the City Council shall be
notified immediately.
1.5 ETHICS
Elected officials, City officers and employees and any other individuals involved in the
investment operations are prohibited from personal business activity that could conflict
with the proper execution of the investment program, or which could impair their ability
to make impartial investment decisions, or which could give the appearance thereof.
Furthermore, these same individuals are prohibited from undertaking personal investment
transactions with any individual with whom business is conducted on behalf of the City.
2.0 OPERATIONS AND PROCEDURES
2.1 SCOPE
a) This SIP applies to all financial assets of the City. These funds are accounted for.
in the Comprehensive Annual Financial Report (CAFR) and include: General
Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds,
Enterprise Funds, and Internal Service Funds.
b) This SIP specifically exempts and does not apply to the following financial assets
and investment activities of the City:
1) The City's Deferred Compensation Plan is excluded because it is managed
by a third party administrator and invested by individual plan participants.
2) Proceeds of City or other debt issues in possession of a trustee or fiscal
agent are not considered to be part of the financial assets covered by this
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policy. These bond proceeds shall be invested in accordance with the
requirements and restrictions outlined in the bond documents.
2.2 DELEGATION OF AUTHORITY
a) The City Council's authority to manage the investment program is derived from CGC
Sections 53600 et seq.
b) In accordance with the City of Orange Municipal Code Chapter 2.26, management
responsibility for the investment program is hereby delegated to the Treasurer, who
shall establish written procedures for the operation of the investment program
consistent with this SIP. Under the provision of CGC Section 53600.3, the Treasurer
is a trustee and a fiduciary subject to the prudent investor standard.
c) The Treasurer may delegate all, or a portion of, his/her investment authority to a
Deputy City Treasurer. Prior to the delegation of the investment authority to a Deputy
City Treasurer, the City Treasurer shall notify the City Council and request
confirmation of the delegation. Delegation of investment authority will not remove or
abridge the Treasurer's investment responsibility.
d) The City Council may engage the services of one or more external investment
managers to assist in the management of the City's investment portfolio in a manner
consistent with the City's objectives and in accordance with this SIP. Such external
managers may provide advice and effectuate trades upon specific authorization for
each transaction. Such managers must be registered under the Investment Advisors
Act of 1940 and must have not less than five years' experience investing. in the
securities and obligations authorized by the CGC Section 53601, and with assets
under management in excess of five hundred million dollars ($500,000,000). The
Treasurer shall review Form ADV of any investment advisor prior to engagement by
the City Council. This Section does not preclude the Treasurer from retaining
portfolio consultants within existing authority.
2.3 INVESTMENT OVERSIGHT COMMITTEE
a) Chapter 2.50 of, the Orange Municipal Code establishes an Investment Oversight
Committee (IOC). The terms and provisions of said Chapter 2.50 are incorporated into
this SIP by reference as though fully set forth herein. The IOC consists of the Treasurer,
the City Manager or designee, and the Director of Finance. The Treasurer is required to
act as Chair of the IOC, with the City Manager as Vice Chair. The IOC is required to act
by majority vote.
b) The IOC shall, at least annually and more often if directed by the City Council or agreed
by a majority of the IOC, review the City Council's adopted SIP and report to the City
Council its recommendations for any changes, additions or deletions to the SIP.
c) The IOC shall monitor the implementation of the City Council's adopted SIP and
annually submit a compliance report to the City Council.
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d) The IOC shall review reports to the City Council from the Investment Advisory
Committee and prepare responses as required.
e) The IOC shall meet and report quarterly to the City Council summarizing the IOC
meetings and the recommendations of the Investment Advisory Committee. Such report
shall contain an unedited copy of the Investment Advisory Committee's
recommendations.
2.4 AUTHORIZED FINANCIAL INSTITUTIONS AND DEALERS
a) Institutions eligible to transact investment business with the City shall include
only the following:
1) Primary government dealers as designated by the Federal Reserve Bank;
2) Nationally or state-chartered banks;
3) The Federal Reserve Bank; and
4) Direct issuers of securities eligible for purchase by the City.
b) Selection of financial institutions and broker/dealers authorized to engage in
transactions with the City shall be at the sole discretion of the City Treasurer. The
Treasurer will maintain a list of financial institutions authorized to provide
investment services to the City.
c) The City Treasurer shall obtain information from qualified financial institutions to
determine if the institution makes markets in securities appropriate for the City's
needs, can assign qualified sales representatives and can provide written
agreements to abide by the conditions set forth in the City of Orange SIP.
Investment accounts with all financial institutions shall be standard non-
discretionary accounts and may not be margin accounts.
d) All financial institutions which desire to become qualified bidders for investment
transactions must supply the Treasurer with the following:
1) Audited financial statements for the institution's three most recent fiscal
years;
2) At least three references from California local agencies whose portfolio
size, investment objectives and risk preferences are similar to the City's;
3) A statement certifying that the institution has reviewed the CGC Sections
53600 et seq. and the City's SIP, and that all securities offered to the City
shall comply fully and in every instance with all provisions of the Code.
and with this SIP; and,
4) Completed Broker/Dealer Questionnaire.
e) The Treasurer shall conduct an annual review of the financial condition of
qualified institutions. In addition, a current financial statement is required to be
on file for each qualified institution.
Public deposits shall be made only in qualified public depositories within the
State of California as established by State law. Deposits shall be insured by the
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Federal Deposit Insurance Corporation (FDIC) or, to the extent the amount
exceeds the insured maximum, shall be collateralized with securities in
accordance with State law.
2.5 COLLATERAL REQUIREMENTS
CGC Sections 53652 and 53667 require depositories to post certain types and levels of
collateral for public funds on deposit above the FDIC insurance amounts. The collateral
requirements apply to bank deposits, both active (checking and savings accounts) and
inactive (non-negotiable time certificates of deposit).
2.6 SAFEKEEPING AND DELIVERY
a) To protect against fraud, embezzlement, or losses caused by collapse of individual
securities dealers, all securities owned by the City shall be held in safekeeping by
the City's custodial bank, a third party bank trust department, acting as agent for the
City under the terms of a custody agreement, and shall be evidenced by safekeeping
receipts.
b) All security transactions entered into by the City shall be conducted on a standard
delivery-versus-payment (DVP) basis, which ensures that securities are deposited
with the third party custodian prior to the release of funds. All securities purchased
or acquired shall be delivered to the City by book entry, physical delivery or by third
party custodial agreement as required by CGC Section 53601. Investments in the
State Pool or money market mutual funds are undeliverable, and are not subject to
delivery or third party safekeeping requirements.
c) On a daily basis, investment trades shall be verified against the bank transactions
and broker confirmation tickets to ensure accuracy. On a monthly basis, the
custodial asset statement is reconciled with the month end portfolio holdings. On
an annual basis,the external auditor confirms investment holdings.
3.0 PERMITTED INVESTMENTS AND RISK MANAGEMENT
3.1 INVESTMENTS AUTHORIZED
The City, as empowered by CGC Sections 53601 et seq. and 16429.1, hereby authorizes the
City Treasurer to select investments from among the following:
1) United States Treasury notes, bonds, bills or certificates of indebtedness, or those
for which the faith and credit of the United States are pledged for the payment of
principal and interest. (Limits: Maximum maturity at purchase 5 years; no other
limits.)
2) Obligations issued by banks for cooperatives, federal land banks, federal
intermediate credit banks, the Federal Home Loan Bank, the Tennessee Valley
Authority; the Federal National Mortgage Association, or other instruments of, or
issued by, a federal agency or a United States government-sponsored enterprise. In
every case, any issue purchased must be fully guaranteed as to principal and interest
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by the full faith and credit of the United States, or the issuing federal agency.
Limits: Maximum maturity at purchase 5 years; maximum concentration 75% of
portfolio at time of purchase with no more than 35% of total portfolio in any single
agency and excluding completely Government National Mortgage Association
bonds; i.e., GNMA's.)
3) Shares of beneficial interest issued by diversified management companies that are
Money Market Mutual Funds, registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 investing in the securities
and obligations authorized by CGC Sections 53601(b) and (e) only (i.e., U.S.
Government issues only). Such Funds must either carry the highest rating of at least
two of the three largest national rating agencies, or such funds must have retained
an investment adviser registered with the Securities and Exchange Commission
with not less than five year's experience managing money market mutual funds with
assets under management in excess of five hundred million dollars ($500,000,000).
Limits: maximum 90 days Weighted Average Maturity; maximum concentration
15 million, or 20%, of portfolio, whichever is less.)
4) State of California Local Agency Investment Fund (LAIF) is permitted, with the
knowledge that the fund may invest in some vehicles allowed by statute but not
otherwise authorized by the City Council in this SIP. The Treasurer shall obtain
from the State Treasurer, no less than quarterly, reports providing sufficient detail to
adequately judge the risk inherent in the LAIF portfolio, and shall inform the City
Council immediately of any risks noted that may warrant reconsideration of this
investment vehicle. (Limits: Ma cimum concentration 35% of total portfolio for all
accounts. This maximum limit is increased to 40% of total portfolio when there is
an influx of large deposits resulting from called bonds. The 40% limit is allowed
for the next 30 days after the bonds are called so that the City can purchase other
investments to bring the allowable percentage back to the 35%.)
5) Investment in new Government sponsored pools will be subject to due diligence. A
thorough investigation of the pool is required prior to investing, and on a continual
basis.
6) Funds held under the terms of a Trust Indenture or other contract or debt issuance
agreement may be invested according to the provisions of those indentures or
agreements.
7) Certificates of Deposit approved by the California AB 2011 axe permitted. (Limits:.
The bill allows investment up to January 1, 2021; a maximum concentration 30% of
total portfolio.)
8) Commercial Paper of prime quality having the highest ranking or the highest letter
and number rating provided by a national rating agency issued by a domestic
corporation having assets in excess of $500,000,000 and having an "A" or better
rating on its debt other than commercial paper as provided by a national rating
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agency. (Limits: Ma cimum maturity of 270 days or less; maximum concentration
20% of portfolio and no more than 5% of the book value of the portfolio funds to a
single issuer at time of purchase.)
9) Medium-term notes issued by corporations organized and operating within the
United States or by depository institutions licensed by the United States or any state
and operating within the United States. (Limits: Maximum maturity at purchase 5
years; must be rated "A" or better by a nationally recognized rating agency;
maximum concentration 20% of portfolio and no more than 5% of the book value of
the portfolio funds to a single issuer at time of purchase.)
3.2 PROHIBITED INVESTMENT VEHICLES AND PRACTICES
The City Treasurer is prohibited from the following:
a) Borrowing for investment purposes ("Leverage") is prohibited.
b) Buying or selling securities "on Margin" is prohibited.
c) Investing in any instrument, which is commonly known as a "derivative"
instrument (options, futures, swaps, caps, floors, collars, U.S. Treasury zero
coupon bonds, U.S. Treasury strips, interest only bonds, interest-only strips
derived from mortgage pools), or any investment that may result in a zero interest
accrual, even if held to maturity, is prohibited.
d) Under the provisions of CGC Sections 53601.6 and 53631.5, the City shall not
invest any funds covered by this SIP in instruments known as Structured Notes
e.g. inverse floaters, leverage floaters, structured CD's, range notes, equity-linked
securities). Any such investments are prohibited.
e) Trading securities for the sole purpose of speculating on the future direction of
interest rates is prohibited.
State law notwithstanding, any investments not specifically described herein under
Subsections 3.1 a)through 3.1 c) are prohibited.
3.3 MITIGATING RISK IN THE PORTFOLIO
a) Credit Risk:
1) The City will diversify its investments in accordance with the limits set
forth in Subsection 3.1 of this SIP to diminish the credit risk resulting
from concentrations.
2) The City, on occasion, may sell a security prior to its maturity (recording a
gain or loss) in order to improve the risk structure, liquidity and yield of
the portfolio in response to market conditions.
3) If securities owned by the City that are rated by a major national rating
agency are downgraded by either Moody's, S&P or Fitch, it shall be the
City's policy to review immediately the credit situation and make a
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determination as to whether to sell or retain such securities in the portfolio.
If a decision is made to retain a downgraded security in the portfolio, its
presence in the portfolio will be reported to the IOC and the City Council
and be monitored on a continuous basis.
b) Market Risk: While the City recognizes that longer term portfolios achieve
higher returns, longer term portfolios have higher volatility of total return. The
City will limit market risk by limiting the concentrations, volume and duration of
its longer term investments, as well as limiting them to funds which are not
needed for current year cash flow purposes.
1) Maturities selected shall provide for stability of income and liquidity, and
shall not exceed 5 years from the date of purchase. The City shall
structure its investment portfolio as a maturity ladder. Funds not required
for purposes of ineeting cash flow needs shall be invested in permitted
securities so that selected percentages of the portfo.io mature each year to
a maximum of five years.
2) Portfolio maturities shall be managed to avoid undue concentration at time
of purchase in any specific maturity sector with at least 15% of the
portfolio must be invested from one to 365 days and no more than 50% in
this maturity sector, no more than 50% of the portfolio be invested from
366 days to 730 days, no more than 35% of the portfolio be invested from
731 days to 1095 days, no more than 30% of the portfolio be invested from
1096 days to 1460 days, and no more than 30% of the portfolio be invested
from 1461 days to 1825 days.
3) The City may, on occasion, sell a security prior to its maturity (recording a
gain or loss) in order to diminish the portfolio's exposure to market risk.
4.0 REPORTING,REVIEW AND AUDITS
4.1 MONTHLY REPORTS
a) The Treasurer shall submit three monthly investment reports to the City Council,
and they shall be submitted within 45 days following the end of the quarter. The
monthly reports shall include a complete description of the portfolio, the type of
investments, the issuers, maturity dates, par and dollar amounts invested on all
securities, the current market values of each component of the portfolio, the
source of the portfolio valuation, investments and moneys held by the City, and
shall additionally include a description of any of the City's funds, investments, or
programs, that are under the management of contracted parties, including lending
programs.
b) The report shall also include performance measures as recommended by the
Association foN Investment Management and Research (AIMR). These shall
include a presentation of Total Return using accrual accounting, and a Time-
weighted Rate of Return using a monthly valuation and one of the AIMR
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approved methods of calculation. The report shall also include a presentation of
Yield to Maturiiy.
c) The report shall also include the performance of the benchmark described in
Subsection 1.3 c) of this SIP as a basis of comparison for the City's portfolio.
d) The report shall also include the following certifications:
1) All investment actions executed since the last report have been made in
full compliance with the SIP.
2) The City will meet its expenditure obligations for the next six months is
required by CGC Sections 53646(b)(2) and(3).
4.2 INTERNAL CONTROLS
The Treasurer is responsible for establishing and maintaining an internal control structure
designed to ensure that the assets of the City axe protected from loss,theft or misuse. The
internal control structure shall be designed to provide reasonable assurance that these
objectives are met. Internal controls shall be in writing and shall address the following
points: separation of transaction authority from accounting and record keeping,
safekeeping of assets and written confirmation of telephone transactions for investments
and wire transfers.
4.3 ANNUAL AUDIT
The Treasurer shall insure that the City's annual process of independent review by an
external auditor will include an appropriate investment review to assure compliance with
this policy and acceptable internal controls. The audit shall be presented to the City
Council upon its completion.
4.4 SPECIAL AUDITS
The City Council may at any time order an audit of the investment portfolio and/or the
Treasurer's investment practices.
5.0 INVESTMENT POLICY ADOPTION
The SIP shall be reviewed annually by the City Council for consistency with the City's
overall investment objectives regarding preservation of principal, liquidity, return,
relevance to current law as well as to current financial and economic trends. Any
modifications necessary must be approved separately by the City Council. The SIP shall
then be adopted in its entirety, as amended, within 120 days of the fiscal year end by
resolution and vote of the City Council at a public meeting.
5.1 INVESTMENT POLICY CERTIFICATION
The 1999-2000 version of this investment policy was certified by the Municipal
Treasurer's Association of the United States and Canada, in June 2000. Recommended
changes have been incorporated. In the event of any significant changes in legislation
that will require significant changes to the SIP, the City will resubmit the new policy for
re-certification.
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GLOSSARY
AGENCIES: Federal agency securities
ASKED: The price at which securities.are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BENCHMARK: A segment of the securities market with characteristics similar to the subject
portfolio. It is used to compare portfolio performance to the performance of the appropriate
segment of the market. (e.g. 1-Year T-Bill rate)
BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a
bid.) See Offer.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
certificate. Large-denomination CD's are typically negotiable.
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 moneys.
COMMERCIAL PAPER: Short-term, negotiable unsecured promissory notes of corporations.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report
for the City of Orange. 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.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and
selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery
versus payment and delivery versus receipt. Delivery versus payment is delivery of securities
with an exchange of money for the securities. Delivery versus receipt is delivery of securities
with an exchange of a signed receipt for the securities.
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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.
DISCOIJNT SECURITIES: Non-interest bearing money market instruments that are issued a
discount and redeemed at maturity for full face value; e.g., US Treasury Bills.
DIVERSIFICATION: Dividing investment funds among a varieiy of securities offering
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit
to various classes of institutions and individuals; e.g., S&L's, small business firms, students,
farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal agency that
insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Federal funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings
and loan associations. The Federal Home Loan banks play a role analogous to that played by the
Federal Reserve Banks vis-a-vis member commercial banks.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA, was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing and Urban Development
HUD). It is the largest single provider of residential mortgage funds in the United States.
Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The
corporations' 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, DC, 12 regional banks
and about 5,700 commercial banks that are members of the system.
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GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage
banks, 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 FMHM mortgages. The term "pass-throughs" is often used to describe Ginnie
Maes.
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 AGENCY INVESTMENT FUND (LAIF): A pooled investment vehicle for local
agencies in California sponsored by the State of California and administered by the State
Treasurer.
M 1I tI F,T CYCLE: A market cycle is defined as a period of time which includes a minimum
of two consecutive quarters of falling interest rates followed by a minimum of two consecutive
quarters of rising interest rates.
MARKET VALUE: The price at which a security is traded and could presumably be purchased
or sold.
MATURITY: The date upon which the principal or states 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.
NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate of deposit
which can be sold in the open market prior to maturity.
OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for
an offer.) See Asked and Bid.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: 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 INVESTOR STANDARD: Governing bodies of local agencies or persons
authorized to make investment decisions on behalf of those local agencies investing public funds
pursuant to CGC Sections 53600 et seq. are trustees and therefore fiduciaries subject to the
prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging,
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selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence
under the circumstances then prevailing, 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. Within the
limitations of the CGC Sections 53600 et seq. and considering individual investments as part to
an overall strategy, a trustee is authorized to acquire investments as authorized by law.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sale or compensating use or ad valorem taxes under the laws
of this state, which has aggregated 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.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank's vaults for protection.
SECONDARY MA KFT: 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.
TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit which cannot
be sold prior to maturity.
TOTAL RATE OF RETURN: Represents growth (or decline) in the value of a portfolio,
including both capital appreciation and income, as a proportion of the starting market value.
TIME-WEIGHTED RATE OF RETURN: A modified measurement of Total rate of Return
which eliminates the effect of the timing of funds flows to and/or from a security or portfolio.
TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to mature in three months, six months, or one
year.
TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than
10 years.
TREASURY NOTES: A non-interest bearing discount security issued by the US Treasury to
finance the national debt. Most bills are issued to mature in one, two,three, five or ten yeaxs.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
YIELD TO MATURITY is the calculated rate of return based upon the present value of the
cash flow from each interest payment, plus the present value of the cash flow from the
investment's redemption value at maturity vs. the purchase price.
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