Res 20-12RESOLUTION NO. 20-12
A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF
DELRAY BEACH, FLORIDA, ESTABLISHING THE INVESTMENT
POLICY FOR SURPLUS FUNDS PURSUANT TO THE
REQUIREMENTS OF SECTION 218.415, FLORIDA STATUTES, AN
ACT RELATING TO THE INVESTMENT OF PUBLIC FUNDS;
ESTABLISHING THE RESPONSIBILITIES OF THE CITY MANAGER
AND THE DELEGATION OF AUTHORITY; PROVIDING THE CITY
MANAGER WITH THE AUTHORITY TO IMPLEMENT THE
INVESTMENT POLICY; AND PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City Commission of the City of Delray Beach, Florida has concluded that
the establishment of an investment policy is in the interest of the City; and
WHEREAS, the City Commission has determined that the establishment of an investment
policy for operating and surplus funds is prudent; and
WHEREAS, Section 218.415, Florida Statute, an act relating to the investment of public
funds, provides local governments with investment policy requirements; and
WHEREAS, it is the desire of the City Commission to adopt the requirements of Section
218.415, Florida Statute.
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COMMISSION OF
THE CITY OF DELRAY BEACH, FLORIDA:
Section 1. The City Commission hereby establishes an investment policy in accordance with
Section 218.415, Florida Statues, and this investment policy applies to all cash and investments held
or controlled by the City with the exception of Pension Funds, Trust Funds, and funds related to the
issuance of debt where there are other existing policies or indentures in effect for such funds.
Section 2. The City Commission hereby adopts the investment policy attached hereto,
identified as Exhibit A and incorporates the same herein as if fully set forth in this resolution.
Section 3. Authority to manage the investment program is granted to the Director of
Finance by the City Manager through powers given by the City Commission per Article 4, Section
4.04 of the City Charter. The City Manager is responsible for providing oversight and direction in
regard to the management of the investment program; the Director of Finance is responsible for the
investment program transactions as provided in the investment policy.
Section 4. The City Manager 1s hereby authorized to take such steps and to execute on behalf
of the City Commission such documents as may be hereafter required to implement the investment
policy.
PASSED AND ADOPTED in regular session on this pril, 2012.
MAY
ATTEST:
City Clerk
Res No. 20 -12
Coversheet
MEMORANDUM
TO: Mayor and City Commissioners
FROM: REBECCA S. O'CONNOR, TREASURER
DAVID A. BOYD, DIRECTOR OF FINANCE
THROUGH: DAVID T. HARDEN, CITY MANAGER
DATE: March 27, 2012
SUBJECT: AGENDA ITEM 8.I. - REGULAR COMMISSION MEETING OF APRIL 3, 2012
RESOLUTION NO.20- 12/EWESTMENT POLICY
ITEM BEFORE COMMISSION
Page 1 of 1
Approve Resolution No. 20 -12 to implement an investment policy establishing objectives and
parameters for the management of public funds (excluding pension funds, trust funds and funds related
to debt issuance) of the City of Delray Beach, Florida.
BACKGROUND
Public Financial Asset Management (PFM), our investment advisors, conducted a review of our current
policy and provided an updated version. This policy is designed to ensure the prudent management of
public funds and provide the availability of operating and capital funds when needed and an investment
return competitive with comparable funds and financial market indices.
RECOMMENDATION
Recommend Commission approval of Resolution No. 20 -12.
http:// itwebapp/ AgendaIntranet /Bluesheet.aspx ?Item1D =5481 &MeetingID =372 4/9/2012
RESOLUTION NO. 20-12
A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF
DELRAY BEACH, FLORIDA, ESTABLISHING THE INVESTMENT
POLICY FOR SURPLUS FUNDS PURSUANT TO THE
REQUIREMENTS OF SECTION 218.415, FLORIDA STATUTES, AN
ACT RELATING TO THE INVESTMENT OF PUBLIC FUNDS;
ESTABLISHING THE RESPONSIBILITIES OF THE CITY MANAGER
AND THE DELEGATION OF AUTHORITY; PROVIDING THE CITY
MANAGER WITH THE AUTHORITY TO IMPLEMENT THE
INVESTMENT POLICY; AND PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City Commission of the City of Delray Beach, Florida has concluded that
the establishment of an investment policy is in the interest of the City; and
WHEREAS, the City Commission has determined that the establishment of an investment
policy for operating and surplus funds is prudent; and
WHEREAS, Section 218.415, Florida Statute, an act relating to the investment of public
funds, provides local governments with investment policy requirements; and
WHEREAS, it is the desire of the City Commission to adopt the requirements of Section
218.415, Florida Statute.
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COMMISSION OF
THE CITY OF DELRAY BEACH, FLORIDA:
Section 1. The City Commission hereby establishes an investment policy in accordance with
Section 218.415, Florida Statues, and this investment policy applies to all cash and investments held
or controlled by the City with the exception of Pension Funds, Trust Funds, and funds related to the
issuance of debt where there are other existing policies or indentures in effect for such funds.
Section 2. The City Commission hereby adopts the investment policy attached hereto,
identified as Exhibit A and incorporates the same herein as if fully set forth in this resolution.
Section 3. Authority to manage the investment program is granted to the Director of
Finance by the City Manager through powers given by the City Commission per Article 4, Section
4.04 of the City Charter. The City Manager is responsible for providing oversight and direction in
regard to the management of the investment program; the Director of Finance is responsible for the
investment program transactions as provided in the investment policy.
Section 4. The City Manager is hereby authorized to take such steps and to execute on behalf
of the City Commission such documents as may be hereafter required to implement the investment
policy.
PASSED AND ADOPTED in regular session on this Yd day of April, 2012.
MAYOR
ATTEST:
City Clerk
Table of Contents
ATTACHMENT A: Glossary of Cash and Investment Management Terms
ATTACHMENT B: Investment Pool/Fund Questionnaire
City of Delray Beach, Florida Investment Policy Page 2
Page
I.
PURPOSE
3
II.
SCOPE
3
III.
INVESTMENT OBJECTIVES
3
IV.
DELEGATION OF AUTHORITY
3
V.
STANDARDS OF PRUDENCE
4
VI.
ETHICS AND CONFLICTS OF INTEREST
4
VII.
INTERNAL CONTROLS AND INVESTMENT PROCEDURES
4
VIII .
CONTINUING EDUCATION
5
IX.
AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS
5
X.
MATURITY AND LIQUIDITY REQUIREMENTS
5
XI.
COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
6
XII.
AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSTION
6
XIII.
DERIVATIVES AND REVERSE REPURCHASE AGREEMENTS
14
XIV.
PERFORMANCE MEASUREMENTS
14
XV.
REPORTING
15
XVI.
THIRD -PARTY CUSTODIAL AGREEMENTS
15
XVII.
INVESTMENT POLICY ADOPTION
16
ATTACHMENT A: Glossary of Cash and Investment Management Terms
ATTACHMENT B: Investment Pool/Fund Questionnaire
City of Delray Beach, Florida Investment Policy Page 2
Investment Policy
The City of Delray Beach, Florida
I. PURPOSE
The purpose of this policy is to set forth the investment objectives and parameters for the management of
public funds of the City of Delray Beach, Florida (hereinafter "City "). These policies are designed to
ensure the prudent management of public funds, the availability of operating and capital funds when
needed, and an investment return competitive with comparable funds and financial market indices.
H. SCOPE
In accordance with Section 218.415, Florida Statutes, this investment policy applies to all cash and
investments held or controlled by the City with the exception of Pension Funds and funds related to the
issuance of debt where there are other existing policies or indentures in effect for such funds. Funds held
by state agencies (e.g., Department of Revenue) are not subject to the provisions of this policy.
III. INVESTMENT OBJECTIVES
Safety of Principal
The foremost objective of this investment program is the safety of the principal of those funds within the
portfolios. Investment transactions shall seek to keep capital losses at a minimum, whether they are from
securities defaults or erosion of market value. To attain this objective, diversification is required in order
that potential losses on individual securities do not exceed the income generated from the remainder of
the portfolio.
Maintenance of Liquidity
The portfolios shall be managed in such a manner that funds are available to meet reasonably anticipated
cash flow requirements in an orderly manner. Periodical cash flow analyses will be completed in order to
ensure that the portfolios are positioned to provide sufficient liquidity.
Return on Investment
Investment portfolios shall be designed with the objective of attaining a market rate of return throughout
budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs.
Return on investment is of least importance compared to the safety and liquidity objectives described
above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed.
W. DELEGATION OF AUTHORITY
Authority to manage the investment program is granted to the Director of Finance by the City Manager
through powers given by the City Commission per Article 4, Section 4.04 of the City Charter.
Responsibility for the operation of the investment program is hereby delegated to the Director of Finance
who shall carry out established written procedures and internal controls for the operation of the
City of Delray Beach, Florida Investment Policy Page 3
investment program consistent with this investment policy. Procedures should include reference to:
procedures for the operation of the investment portfolio, a system of internal accounting and
administrative controls to regulate the activities of employees, safekeeping, delivery versus payments,
collateral /depository agreements, banking services contracts. The City may employ an Investment
Advisor to assist in managing some of the City's portfolios. Such Investment Advisor must be registered
under the Investment Advisors Act of 1940.
V. STANDARDS OF 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 the overall investment program. 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 expectation are reported to the City Manager 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" rule states the following:
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 from the investment.
While the standard of prudence to be used by investment officials who are officers or employees is the
"Prudent Person" standard, any person or firm hired or retained to invest, monitor, or advise concerning
these assets shall be held to the higher standard of "Prudent Expert". The standard shall be that in
investing and reinvesting moneys and in acquiring, retaining, managing, and disposing of investments of
these funds, the Investment Advisor shall exercise: the judgment, care, skill, prudence, and diligence
under the circumstances then prevailing, which persons of prudence, discretion, and intelligence, acting in
a like capacity and familiar with such matters would use in the conduct of an enterprise of like character
and with like aims by diversifying the investments of the funds, so as to minimize the risk, considering
the probable income as well as the probable safety of their capital.
VI. ETHICS AND CONFLICTS OF INTEREST
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 decisions. Also, employees involved in the investment process shall disclose to the
City Manager and the Mayor any material financial interests in financial institutions that conduct business
with the City, and they shall further disclose any material personal financial /investment positions that
could be related to the performance of the City's investment program.
VII. INTERNAL CONTROLS AND INVESTMENT PROCEDURES
The Director of Finance shall establish a system of internal controls and operational procedures that are in
writing and made a part of the City's operational procedures. The internal controls should be designed to
prevent losses of funds, which might arise from fraud, employee error, and misrepresentation by third
parties, or imprudent actions by employees. The written procedures should include reference to
safekeeping, repurchase agreements, the separation of transaction authority from accounting and
City of Delray Beach, Florida Investment Policy Page 4
recordkeeping, wire transfer agreements, banking service contracts and collateralization. No person may
engage in an investment transaction except as authorized under the terms of this policy.
Independent auditors as a normal part of the annual financial audit to the City shall conduct a review of
the system of internal controls to ensure compliance with policies and procedures.
VIII. CONTINUING EDUCATION
The Director of Finance or designee that acts on behalf of the Director of Finance, and other appropriate
staff shall annually complete 8 hours of continuing education in subjects or courses of study related to
investment practices and products in accordance with Florida Statute 218.415.
IX. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS
Authorized City staff and Investment Advisors shall only purchase securities from financial institutions,
which are qualified as public depositories by the Chief Financial Officer of the State of Florida;
institutions designated as "Primary Securities Dealers" by the Federal Reserve Bank of New York, direct
issuers of commercial paper and bankers' acceptances or approved non - primary securities dealers.
The Investment Advisor shall utilize and maintain its own list of approved non - primary securities dealers.
For authorized City staff, all approved non - primary securities dealers that qualify under Securities and
Exchange Commission Rule 15C3 -1 (uniform net capital rule) must provide the following information
prior to executing investment trades with the City:
1. Annual financial statement, as well as most recent quarterly statement.
2. Regulatory history, through either the Office of the Comptroller of the Currency for dealer banks, or
the FINRA for securities firms.
3. Statement of any pending lawsuits materially affecting the firm's business.
Authorized City staff and Investment Advisors shall only enter into repurchase agreements with financial
institutions that are state qualified public depositories and primary securities dealers as designated by the
Federal Reserve Bank of New York.
X. MATURITY AND LIQUIDITY REQUIREMENTS
The Director of Finance or designee shall determine the approximate amount of funds required to meet the
day -to -day expenditure needs of the City. In order to have an available source of funds to meet
unexpected cash requirements, a minimum of two months operating expenses will be invested in
appropriate short term securities, i.e. fully - collateralized repurchase agreements, interest in time deposits,
savings accounts or money market funds. The balance of the City's funds will be available for investment
according to the guidelines incorporated within this policy.
Investments of bond reserves, construction funds, and other non - operating funds (`bore funds ") shall have
a term appropriate to the need for funds and in accordance with debt covenants, but in no event shall
exceed five (5) years, and the weighted average maturity will be limited to a period of less than three
years.
City of Delray Beach, Florida Investment Policy Page 5
The maturities of the underlying securities of a repurchase agreement will follow the requirements of the
Master Repurchase Agreement.
XI. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
After the Director of Finance or designee that acts on behalf of the Director of Finance, and/or the
Investment Advisor, has determined the approximate maturity date based on cash flow needs and market
conditions and has analyzed and selected one or more optimal types of investments, a minimum of three
(3) qualified banks and/or approved broker /dealers must be contacted and asked to provide bids /offers on
securities. Bids will be held in confidence until the bid best deemed to meet the investment objectives is
determined and selected.
However, if obtaining bids /offers are not feasible and appropriate, securities may be purchased utilizing
the comparison to current market price method on an exception basis. Acceptable current market price
providers include, but are not limited to:
A. Telerate Information System
B. Bloomberg Information Systems.
C. Wall Street Journal or a comparable nationally recognized financial publication providing daily
market pricing
D. Daily market pricing provided by the City's custodian or their correspondent institutions
The Director of Finance or designee that acts on behalf of the Director of Finance, or the Investment
Advisor shall utilize the competitive bid process to select the securities to be purchased or sold. Selection
by comparison to a current market price, as indicated above, shall only be utilized when, in judgment of
the Director of Finance or designee that acts on behalf of the Director of Finance, or the Investment
Advisor, competitive bidding would inhibit the selection process.
Examples of when this method may be used include:
A. When time constraints due to unusual circumstances preclude the use of the competitive bidding
process
B. When no active market exists for the issue being traded due to the age or depth of the issue
C. When a security is unique to a single dealer, for example, a private placement
D. When the transaction involves new issues or issues in the "when issued" market
Overnight sweep repurchase agreements will not be bid, but may be placed with the City's depository
bank relating to the demand account for which the repurchase agreement was purchased.
XII. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION
Investments should be made subject to the cash flow needs and such cash flows are subject to revisions as
market conditions and the City's needs change. However, when the invested funds are needed in whole
City of Delray Beach, Florida Investment Policy Page 6
or in part for the purpose originally intended or for more optimal investments, the Director of Finance or
designee that acts on behalf of the Director of Finance may sell the investment at the then - prevailing
market price and place the proceeds into the proper account at the City's custodian.
The following are the investment requirements and allocation limits on security types, issuers, and
maturities as established by the City. The Director of Finance or designee that acts on behalf of the
Director of Finance shall have the option to further restrict investment percentages from time to time
based on market conditions, risk, and diversification investment strategies. The percentage allocations
requirements for investment types and issuers are calculated based on the original cost of each
investment. Investments not listed in this policy are prohibited.
A. The Florida PRIME
1. Investment Authorization
The Director of Finance may invest in the Florida PRIME. Any investment with the
Florida PRIME will be evaluated with the same criteria as Money Market Mutual Funds,
detailed in section J.
2. Portfolio Composition
A maximum of twenty five (25 %) of available funds may be invested in the Florida
PRIME.
3. Rating Requirements
The Florida PRIME shall be rated "AAAm by Standard & Poor's or the equivalent by
another rating agency.
Due Diligence Requirements
A thorough investigation of the Florida PRIME is required prior to investing, and on a
continual basis. There shall be a questionnaire developed by the Investment Advisor that
will contain a list of due diligence considerations that deal with the major aspects of any
investment pool /fund. A current prospectus or equivalent documentation, including an
Investment Policy, Financial Statements, and Portfolio Holdings must be obtained.
B. United States Government Securities
Purchase Authorization
The Director of Finance may invest in negotiable direct obligations, or obligations the
principal and interest of which are unconditionally guaranteed by the United States
Government. Such securities will include, but not be limited to the following:
Cash Management Bills
Treasury Securities — State and Local Government Series ( "SLGS ")
Treasury Bills
Treasury Notes
City of Delray Beach, Florida Investment Policy Page 7
Treasury Bonds
Treasury Strips
2. Portfolio Composition
A maximum of 100% of available funds may be invested in the United States
Government Securities.
3. Maturity Limitations
The maximum length to maturity of any direct investment in the United States
Government Securities is five (5) years from the date of purchase.
C. United States Government Agencies
1. Purchase Authorization
The Director of Finance may invest in bonds, debentures, notes or callables issued or
guaranteed by United States Government agencies, provided such obligations are backed
by the full faith and credit of the United States Government. Such securities will include,
but not be limited to the following:
Government National Mortgage Association
Direct obligations and mortgage pass through securities
United States Export — Import Bank
- Direct obligations or fully guaranteed certificates of beneficial
ownership
Farmer Home Administration
- Certificates of beneficial ownership
Federal Financing Bank
- Discount notes, notes and bonds
Federal Housing Administration Debentures
General Services Administration
United States Maritime Administration Guaranteed
-Title XI Financing
New Communities Debentures
- United States Government guaranteed debentures
United States Public Housing Notes and Bonds
- United States Government guaranteed public housing notes and bonds
United States Department of Housing and Urban Development
- Project notes and local authority bonds
2. Portfolio Composition
A maximum of 50% of available funds may be invested in United States Government
agencies.
3. Limits on Individual Issuers
A maximum of 25% of available funds may be invested in individual United States
Government agencies.
City of Delray Beach, Florida Investment Policy Page 8
4. Maturity Limitations
The maximum length to maturity for an investment in any United States Government
agency security is five (5) years from the date of purchase.
D. Federal Instrumentalities (United States Government sponsored agencies)
Purchase Authorization
The Director of Finance may invest in bonds, debentures, notes or callables issued or
guaranteed by United States Government sponsored agencies (Federal Instrumentalities)
which are non -full faith and credit agencies limited to the following:
Federal Farm Credit Bank (FFCB)
Federal Home Loan Bank or its district banks (FHLB)
Federal National Mortgage Association (FNMA)
Federal Home Loan Mortgage Corporation (Freddie -Macs) including Federal -
Home Loan Mortgage Corporation participation certificates
2. Portfolio Composition
A maximum of 80% of available funds may be invested in Federal Instrumentalities.
3. Limits on Individual Issuers
A maximum of 25% of available funds may be invested in any one issuer.
4. Maturity Limitations
The maximum length to maturity for an investment in any Federal Instrumentality
security is five (5) years from the date of purchase.
E. Interest Bearing Time Deposit or Saving Accounts
Purchase Authorization
The Director of Finance may invest in non - negotiable interest bearing time certificates of
deposit or savings accounts in banks organized under the laws of this state and /or in
national banks organized under the laws of the United States and doing business and
situated in the State of Florida, provided that any such deposits are secured by the Florida
Security for Public Deposits Act, Chapter 280, Florida Statutes. Additionally, the bank
shall not be listed with any recognized credit watch information service.
Portfolio Composition
A maximum of 10% of available funds may be invested in non - negotiable interest
bearing time certificates of deposit.
Limits on Individual Issuers
A maximum of 5% of available funds may be deposited with any one issuer.
4. Maturity Limitations
The maximum maturity on any certificate shall be no greater than one (1) year from the
date of purchase.
City of Delray Beach, Florida Investment Policy Page 9
F. Repurchase Agreements
Purchase Authorization
a. The Director of Finance may invest in repurchase agreements composed of only
those investments based on the requirements set forth by the City's Master
Repurchase Agreement. All firms are required to sign the Master Repurchase
Agreement prior to the execution of a repurchase agreement transaction.
b. A third party custodian with whom the City has a current custodial agreement
shall hold the collateral for all repurchase agreements with a term longer than one
(1) business day. A clearly marked receipt that shows evidence of ownership
must be supplied to the Director of Finance and retained.
C. Securities authorized for collateral are negotiable direct obligations of the United
States Government, Government Agencies, and Federal Instrumentalities with
maturities under five (5) years and must have a market value for the principal and
accrued interest of 102 percent of the value and for the term of the repurchase
agreement. Immaterial short-term deviations from 102 percent requirement are
permissible only upon the approval of the Director of Finance.
2. Portfolio Composition
A maximum of 25% of available funds may be invested in repurchase agreements
excluding one (1) business day agreements and overnight sweep agreements.
Limits on Individual Issuers
A maximum of 10% of available funds may be invested with any one institution.
4. Limits on Maturities
The maximum length to maturity of any repurchase agreement is 90 days from the date of
purchase.
G. Commercial Paper
Purchase Authorization
The Director of Finance may invest in commercial paper of any United States company
that is rated, at the time of purchase, "Prime -1" by Moody's and "A -1" by Standard &
Poor's (prime commercial paper). If the commercial paper is backed by a letter of credit
( "LOC "), the long -term debt of the LOC provider must be rated "A" or better by at least
two nationally recognized rating agencies.
2. Portfolio Composition
A maximum of 25% of available funds may be directly invested in prime commercial
paper.
Limits on Individual Issuers
A maximum of 10% of available funds may be invested with any one issuer.
4. Maturity Limitations
City of Delray Beach, Florida Investment Policy Page 10
The maximum length to maturity for prime commercial paper shall be 180 days from the
date of purchase.
H Bankers' Acceptances
1. Purchase Authorization
The Director of Finance may invest in Bankers' Acceptances issued by a domestic bank
or a federally chartered domestic office of a foreign bank, which is eligible for purchase
by the Federal Reserve System, at the time of purchase, the short-term paper is rated, at a
minimum, "P -1" by Moody's Investors Services and "A -1" Standard & Poor's.
2. Portfolio Composition
A maximum of 25% of available funds may be directly invested in Bankers' Acceptances
3. Limits on Individual Issuers
A maximum of 10% of available funds may be invested with any one issuer.
4. Maturity Limitations
The maximum length to maturity for Bankers' Acceptances shall be 180 days from the
date of purchase.
I. State and/or Local Government Taxable and/or Tax- Exempt Debt
1. Purchase Authorization
The Director of Finance may invest in state and/or local government taxable and/or tax -
exempt debt, general obligation and /or revenue bonds, rated at least a minimum "Aa"
category by Moody's and a minimum long term debt rating of "AA" category by
Standard & Poor's for long -term debt, or rated at least "VMIG2" by Moody's or "A -2"
by Standard & Poor's for short-term debt.
2. Portfolio Composition
A maximum of 20% of available funds may be invested in taxable and tax- exempt debts.
3. Limits on Individual Issuers
A maximum of 5% of available funds may be invested with any one issuer.
4. Maturity Limitations for Fixed Income Securities
A maximum length to maturity for an investment in any state or local government debt
security is three (3) years from the date of purchase.
5. Maturity Limitations for Variable Rate Demand Obligations
A maximum length to maturity for an investment in any state or local government debt
security is the shorter of put or tender date, where the put or tender does not expire for the
life of the security, or final maturity.
City of Delray Beach, Florida Investment Policy Page 11
Registered Investment Companies (Mutual Funds)
Investment Authorization
The Director of Finance may invest in shares in open -end, no -load provided such funds
are registered under the Federal Investment Company Act of 1940 and operated in
accordance with 17 C.F.R. § 270.2a -7. In addition, the Director of Finance may invest in
other types of mutual funds provided such funds are registered under the Federal
Investment Company Act of 1940, invested exclusively in the securities specifically
permitted under this investment policy, and are similarly diversified.
2. Portfolio Composition
A maximum of 25% of available funds may be invested in mutual funds.
3. Limits of Individual Issuers
A maximum of 10% of available funds may be invested with any one non -SEC Rule 2a -7
investment mutual fund.
4. Rating Requirements
The mutual funds shall be rated "AAAm" by Standard & Poor's or the equivalent by
another rating agency.
5. Due Diligence Requirements
A thorough review of any investment mutual fund is required prior to investing, and on a
continual basis. There shall be a questionnaire developed by the Director of Finance that
will contain a list of questions that covers the major aspects of any investment pool /fund.
K. Intergovernmental Investment Pools
Investment Authorization
The Director of Finance may invest in intergovernmental investment pools that are
authorized pursuant to the Florida Inter -local Cooperation Act, as provided in Section
163.01, Florida Statutes and provided that said funds contain no derivatives.
2. Portfolio Composition
A maximum of 25% of available funds may be invested in intergovernmental investment
pools.
3. Rating Requirements
The investment pool shall be rated "AAAm" by Standard & Poor's or the equivalent by
another rating agency
4. Due Diligence Requirements
City of Delray Beach, Florida Investment Policy Page 12
A thorough review of any investment pool /fund is required prior to investing, and on a
continual basis. There shall be a questionnaire developed by the Director of Finance that
will contain a list of questions that covers the major aspects of any investment pool/fund.
L. Corporate Notes
Purchase Authorization
The Director of Finance may invest in corporate notes issued by corporations organized
and operating within the United States or by depository institutions licensed by the
United States that have a long term debt rating, at the time of purchase, at a minimum
"A" category by Moody's and a minimum long term debt rating of "A" category by
Standard & Poor's.
2. Portfolio Composition
A maximum of 25% of available funds may be directly invested in corporate notes.
3. Limits on Individual Issuers
A maximum of 5% of available funds may be invested with any one issuer.
4. Maturity Limitations
The maximum length to maturity for corporate notes shall be 3 years from the date of
purchase.
M. Corporate Obligations
1. Purchase Authorization
The Director of Finance may invest in corporate obligations issued by financial
institutions that participate in the FDIC's Temporary Liquidity Guarantee Program and
are fully insured by the FDIC and are guaranteed by the full faith and credit of the United
States Government.
2. Portfolio Composition
A maximum of 50% of available funds may be directly invested in corporate obligations.
Limits on Individual Issuers
A maximum of 25% of available funds may be invested with any one issuer.
4. Maturity Limitations
The maximum length to maturity for corporate obligations shall be 3 years from the date
of purchase.
City of Delray Beach, Florida Investment Policy Page 13
N. Mortgage- Backed Securities (MBS)
Purchase Authorization
The Director of Finance may invest in mortgage- backed securities (MBS) which are
based on mortgages that are guaranteed by a government agency or GSE for payment of
principal and a guarantee of timely payment.
2. Portfolio Composition
A maximum of 20% of available funds may be invested in MBS.
3. Limits of Individual Issuers
A maximum of 5% of available funds may be invested with any one MBS.
5. Maturity Limitations
A maximum length to maturity for an investment in any MBS is five (5) years from the
date of purchase.
The maturity of mortgage securities shall be considered the date corresponding to its
average life. This date reflects the average number of years that each dollar of unpaid
principal due on the MBS remains outstanding. The average life may be different from
the stated legal maturity included in a security's description.
XIII. DERIVATIVES AND REVERSE REPURCHASE AGREEMENTS
Investments in any derivative products or the use of reverse repurchase agreements are not permissible.
A "derivative" is defined as a financial instrument the value of which depends on, or is derived from, the
value of one or more underlying assets or indices or asset values.
XIV. PERFORMANCE MEASUREMENTS
In order to assist in the evaluation of the portfolio's performance, the City will use performance
benchmarks for short-term and long -term portfolios. The use of benchmarks will allow the City to
measure its returns against other investors in the same markets.
A. For the short-term portfolio (less than 12 months maturity), the S &P Rated GIP Index will be used as
a benchmark as compared to the portfolios' net book value rate of return for current operating funds.
B. Investment performance of funds designated as core funds and other non - operating funds that have a
long -term (greater than 12 months maturity) investment horizon will be compared to an index
comprised of U. S. Treasury or Government securities. The appropriate index will have a duration
and asset mix that approximates the portfolios and will be utilized as a benchmark to be compared to
the portfolio's total rate of return. The City will utilize the Merrill Lynch 1 -3 Year U.S. Treasury
Index or an Index that is similar to the composition and duration of the portfolio.
City of Delray Beach, Florida Investment Policy Page 14
C. Investment advisors will report performance on both book value and total rate of return basis and
compare results to the above - stated benchmarks.
XV. REPORTING
The Director of Finance shall provide the City Manager with quarterly investment reports. Schedules in
the quarterly report should include the following:
A. A listing of individual securities held at the end of the reporting period
B. Percentage of available funds represented by each investment type
C. Coupon, discount or earning rate
D. Average life or duration and final maturity of all investments
E. Par value and market value
On an annual basis, the Director of Finance shall provide to the City Manager a written report on all
invested funds. The annual report shall provide all, but not limited to, the following: a complete list of all
invested funds, name or type of security in which the funds are invested, the amount invested, the
maturity date, income earned, the book value, the market value and the yield on each investment.
The annual report will show performance on both a book value and total rate of return basis and will
compare the results to the above - stated performance benchmarks. All investments shall be reported at fair
value per GASB standards. Investment reports shall be available to the public.
XVI. THIRD -PARTY CUSTODIAL AGREEMENTS
Securities, with the exception of certificates of deposits, shall be held with a third party custodian; and all
securities purchased by, and all collateral obtained by; the City should be properly designated as an asset
of the City. The securities must be held in an account separate and apart from the assets of the financial
institution. A third party custodian is defined as any bank depository chartered by the Federal
Government, the State of Florida, or any other state or territory of the United States which has a branch or
principal place of business in the State of Florida as defined in Section 658.12, Florida Statutes, or by a
national association organized and existing under the laws of the United States which is authorized to
accept and execute trusts and which is doing business in the State of Florida. Certificates of deposits will
be placed in the provider's safekeeping department for the term of the deposit.
The custodian shall accept transaction instructions only from those persons who have been duly
authorized by the Director of Finance and which authorization has been provided, in writing, to the
custodian. Only a duly authorized person shall be permitted to in whole or in part withdraw securities
from the custodian.
The custodian shall provide the Director of Finance with safekeeping receipts that provide detailed
information on the securities held by the custodian. Security transactions between a broker /dealer and the
custodian involving the purchase or sale of securities by transfer of money or securities must be made on
a "delivery vs. payment" basis, if applicable, to ensure that the custodian will have the security or money,
as appropriate, in hand at the conclusion of the transaction. Securities held as collateral shall be held free
and clear of any liens.
City of Delray Beach, Florida Investment Policy Page 15
XVII. INVESTMENT POLICY ADOPTION
The investment policy shall be adopted by a City ordinance. The Director of Finance shall review the
policy annually and the City Commission shall approve any modification made thereto.
APPROVED AND ADOPTED BY THE CITY COMMISSION OF DELRAY BEACH
ON
City of Delray Beach, Florida Investment Policy Page 16
Attachment A
Glossary of Cash and Investment Management Terms
Accrued Interest. Interest earned but which has not yet been paid or received.
Agency. See "Federal Agency Securities."
Ask Price. Price at which a broker /dealer offers to sell a security to an investor, also known as "offered price."
Asset Backed Securities (ABS). A fixed- income security backed by notes or receivables against assets other
than real estate. Generally issued by special purpose companies that "own" the assets and issue the ABS.
Examples include securities backed by auto loans, credit card receivables, home equity loans, manufactured
housing loans, farm equipment loans and aircraft leases.
Average Life. The average length of time that an issue of serial bonds and/or term bonds with a mandatory
sinking fund feature is expected to be outstanding.
Bankers' Acceptance (BA's). A draft or bill of exchange drawn upon and accepted by a bank. Frequently used
to finance shipping of international goods. Used as a short-term credit instrument, bankers' acceptances are traded
at a discount from face value as a money market instrument in the secondary market on the basis of the credit
quality of the guaranteeing bank.
Basis Point. One hundredth of one percent, or 0.01 %. Thus 1% equals 100 basis points.
Bearer Security. A security whose ownership is determined by the holder of the physical security. Typically,
there is no registration on the issuer's books. Title to bearer securities is transferred by delivery of the physical
security or certificate. Also known as "physical securities."
Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills program, a short-term debt
securities issuance program to supplement its existing discount note program. The program includes a schedule of
larger, weekly issues in three- and six -month maturities and biweekly issues in one -year for Benchmark Bills.
Each issue is brought to market via a Dutch (single price) auction. FNMA conducts a weekly auction for each
Benchmark Bill maturity and accepts both competitive and non - competitive bids through a web based auction
system. This program is in addition to the variety of other discount note maturities, with rates posted on a daily
basis, which FNMA offers. FNMA's Benchmark Bills are unsecured general obligations that are issued in book -
entry form through the Federal Reserve Banks. There are no periodic payments of interest on Benchmark Bills,
which are sold at a discount from the principal amount and payable at par at maturity. Issues under the
Benchmark program constitute the same credit standing as other FNMA discount notes; they simply add
organization and liquidity to the short-term Agency discount note market.
Benchmark Notes/Bonds: Benchmark Notes and Bonds are a series of FNMA "bullet" maturities (non - callable)
issued according to a pre - announced calendar. Under its Benchmark Notes/Bonds program, 2, 3, 5, 10 and 30-
year maturities are issued each quarter. Each Benchmark Notes new issue has a minimum size of $4 billion, 30-
year new issues having a minimum size of $1 billion, with re- openings based on investor demand to further
enhance liquidity. The amount of non - callable issuance has allowed FNMA to build a yield curve in Benchmark
Notes and Bonds in maturities ranging from 2 to 30 years. The liquidity emanating from these large size issues
has facilitated favorable financing opportunities through the development of a liquid overnight and term repo
market. Issues under the Benchmark program constitute the same credit standing as other FNMA issues; they
simply add organization and liquidity to the intermediate- and long -term Agency market.
Benchmark. A market index used as a comparative basis for measuring the performance of an investment
portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance
and duration of the actual portfolio's investments.
City of Delray Beach, Florida Investment Policy Page 17
Bid Price. Price at which a broker /dealer offers to purchase a security from an investor.
Bond Market Association (BMA). The bond market trade association representing the largest securities markets
in the world. In addition to publishing a Master Repurchase Agreement, widely accepted as the industry standard
document for Repurchase Agreements, the BMA also recommends bond market closures and early closes due to
holidays.
Bond. Financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the
bond) a specified stream of future cash flows, including periodic interest payments and a principal repayment.
Book Entry Securities. Securities that are recorded in a customer's account electronically through one of the
financial markets electronic delivery and custody systems, such as the Fed Securities wire, DTC and PTC
(as opposed to bearer or physical securities). The trend is toward a certificate -free society in order to cut down on
paperwork and to diminish investors' concerns about the certificates themselves. The vast majority of securities
are now book entry securities.
Book Value. The value at which a debt security is reflected on the holder's records at any point in time. Book
value is also called "amortized cost" as it represents the original cost of an investment adjusted for amortization of
premium or accretion of discount. Also called "carrying value." Book value can vary over time as an investment
approaches maturity and differs from "market value" in that it is not affected by changes in market interest rates.
Broker/Dealer. A person or firm transacting securities business with customers. A "broker" acts as an agent
between buyers and sellers, and receives a commission for these services. A "dealer" buys and sells financial
assets from its own portfolio. A dealer takes risk by owning inventory of securities, whereas a broker merely
matches up buyers and sellers. See also "Primary Dealer."
Bullet Notes/Bonds. Notes or bonds that have a single maturity date and are non - callable.
Call Date. Date at which a call option may be or is exercised.
Call Option. The right, but not the obligation, of an issuer of a security to redeem a security at a specified value
and at a specified date or dates prior to its stated maturity date. Most fixed- income calls are a par, but can be at
any previously established price. Securities issued with a call provision typically carry a higher yield than similar
securities issued without a call feature. There are three primary types of call options (1) European - one -time
calls, (2) Bermudan - periodically on a predetermined schedule (quarterly, semi - annual, annual), and (3)
American - continuously callable at any time on or after the call date. There is usually a notice period of at least 5
business days prior to a call date.
Callable Bonds/Notes. Securities, which contain an imbedded call option giving the issuer, the right to redeem
the securities prior to maturity at a predetermined price and time.
Certificate of Deposit (CD). Bank obligation issued by a financial institution generally offering a fixed rate of
return (coupon) for a specified period of time (maturity). Can be as long as 10 years to maturity, but most CDs
purchased by public agencies are one year and under.
Collateral. Investment securities or other property that a borrower pledges to secure repayment of a loan, secure
deposits of public monies, or provide security for a repurchase agreement.
Collateralization. Process by which a borrower pledges securities, property, or other deposits for securing the
repayment of a loan and/or security.
Collateralized Mortgage Obligation (CMO). A security that pools together mortgages and separates them into
short, medium, and long -term positions (called tranches). Tranches are set up to pay different rates of interest
City of Delray Beach, Florida Investment Policy Page 18
depending upon their maturity. Interest payments are usually paid monthly. In "plain vanilla" CMOs, principal is
not paid on a tranche until all shorter tranches have been paid off. This system provides interest and principal in a
more predictable manner. A single pool of mortgages can be carved up into numerous tranches each with its own
payment and risk characteristics.
Commercial Paper. Short term unsecured promissory note issued by a company or financial institution. Issued
at a discount and matures for par or face value. Usually a maximum maturity of 270 days, and given a short-term
debt rating by one or more NRSROs.
Convexity. A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater
sensitivity of a bond's price to interest rate changes.
Corporate Note. A debt instrument issued by a corporation with a maturity of greater than one year and less than
ten years.
Counterparty. The other party in a two party financial transaction. "Counterparty risk" refers to the risk that the
other party, to a transaction, will fail in its related obligations. For example, the bank or broker /dealer in a
repurchase agreement.
Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond's face value.
Current Yield. Annual rate of return on a bond based on its price. Calculated as (coupon rate / price), but does
not accurately reflect a bond's true yield level.
Custody. Safekeeping services offered by a bank, financial institution or trust company, referred to as the
"custodian." Service normally includes the holding and reporting of the customer's securities, the collection and
disbursement of income, securities settlement and market values.
Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own
account.
Delivery Versus Payment (DVP). Settlement procedure in which securities are delivered versus payment of
cash, but only after cash has been received. Most security transactions, including those through the Fed Securities
Wire system and DTC, are done DVP as a protection for both the buyer and seller of securities.
Depository Trust Company (DTC). A firm through which members can use a computer to arrange for
securities to be delivered to other members without physical delivery of certificates. A member of the Federal
Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust Company uses
computerized debit and credit entries. Most corporate securities, commercial paper, CDs and BAs clear through
DTC.
Derivatives. For hedging purposes, common derivatives are options, futures, swaps and swaptions. All
Collateralized Mortgage Obligations ( "CMOs ") are 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).
Derivative Security. Financial instrument created from, or whose value depends upon, one or more underlying
assets or indexes of asset values.
Designated Bond. FFCB's regularly issued, liquid, non - callable securities that generally have a 2 or 3 year
original maturity. New issues of Designated Bonds are $1 billion or larger. Re- openings of existing Designated
Bond issues are generally a minimum of $100 million. Designated Bonds are offered through a syndicate of two
City of Delray Beach, Florida Investment Policy Page 19
to six dealers. Twice each month the Funding Corporation announces its intention to issue a new Designated
Bond, reopen an existing issue, or to not issue or reopen a Designated Bond. Issues under the Designated Bond
program constitute the same credit standing as other FFCB issues; they simply add organization and liquidity to
the intermediate- and long -term Agency market.
Discount Notes. Unsecured general obligations issued by Federal Agencies at a discount. Discount notes mature
at par and can range in maturity from overnight to one year. Very large primary (new issue) and secondary
markets.
Discount Rate. Rate charged by the system of Federal Reserve Banks on overnight loans to member banks.
Changes to this rate are administered by the Federal Reserve and closely mirror changes to the "fed funds rate."
Discount Securities. Non - interest bearing money market instruments that are issued at discount and redeemed at
maturity for full face value. Examples include: U.S. Treasury Bills, Federal Agency Discount Notes, Bankers'
Acceptances and Commercial Paper.
Discount. The amount by which a bond or other financial instrument sells below its face value. See also
"Premium."
Diversification. Dividing investment funds among a variety of security types, maturities, industries and issuers
offering potentially independent returns.
Dollar Price. A bond's cost expressed as a percentage of its face value. For example, a bond quoted at a dollar
price of 95 '' /s, would have a principal cost of $955 per $1,000 of face value.
Duff & Phelps. One of several NRSROs that provide credit ratings on corporate and bank debt issues.
Duration. The weighted average maturity of a security's or portfolio's cash flows, where the present values of
the cash flows serve as the weights. The greater the duration of a security /portfolio, the greater its percentage
price volatility with respect to changes in interest rates. Used as a measure of risk and a key tool for managing a
portfolio versus a benchmark and for hedging risk. There are also different kinds of duration used for different
purposes (e.g. MacAuley Duration, Modified Duration).
Fannie Mae. See "Federal National Mortgage Association."
Fed Money Wire. A computerized communications system that connects the Federal Reserve System with its
member banks, certain U. S. Treasury offices, and the Washington D.C. office of the Commodity Credit
Corporation. The Fed Money Wire is the book entry system used to transfer cash balances between banks for
themselves and for customer accounts.
Fed Securities Wire. A computerized communications system that facilitates book entry transfer of securities
between banks, brokers and customer accounts, used primarily for settlement of U.S. Treasury and Federal
Agency securities.
Fed. See "Federal Reserve System."
Federal Agency Security. A debt instrument issued by one of the Federal Agencies. Federal Agencies are
considered second in credit quality and liquidity only to U.S. Treasuries.
Federal Agency. Government sponsored/owned entity created by the U.S. Congress, generally for the purpose of
acting as a financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the
economy considered to otherwise have restricted access to credit markets. The largest Federal Agencies are
GNMA, FNMA, FHLMC, FHLB, FFCB, SLMA, and TVA.
City of Delray Beach, Florida Investment Policy Page 20
Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commercial banks,
currently to a limit of $250,000 per depositor per bank.
Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A government sponsored enterprise
(GSE) system that is a network of cooperatively -owned lending institutions that provides credit services to
farmers, agricultural cooperatives and rural utilities. The FFCBs act as financial intermediaries that borrow
money in the capital markets and use the proceeds to make loans and provide other assistance to farmers and
farm - affiliated businesses. Consists of the consolidated operations of the Banks for Cooperatives, Federal
Intermediate Credit Banks, and Federal Land Banks. Frequent issuer of discount notes, agency notes and callable
agency securities. FFCB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is
considered to have minimal credit risk due to its importance to the U.S. financial system and agricultural industry.
Also issues notes under its "designated note" program.
Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by depository institutions in excess of
current reserve requirements, and frequently loaned or borrowed on an overnight basis between depository
institutions.
Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository institution lending Federal
Funds to another depository institution. The Federal Reserve influences this rate by establishing a "target" Fed
Funds rate associated with the Fed's management of monetary policy.
Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A government sponsored
enterprise (GSE) system, consisting of wholesale banks (currently twelve district banks) owned by their member
banks, which provides correspondent banking services and credit to various financial institutions, financed by the
issuance of securities. The principal purpose of the FHLB is to add liquidity to the mortgage markets. Although
FHLB does not directly fund mortgages, it provides a stable supply of credit to thrift institutions that make new
mortgage loans. FHLB debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is
considered to have minimal credit risk due to its importance to the U.S. financial system and housing market.
Frequent issuer of discount notes, agency notes and callable agency securities. Also issues notes under its "global
note" and "TAP" programs.
Federal Home Loan Mortgage Corporation ( FHLMC or "Freddie Mac "). One of the large Federal
Agencies. A government sponsored public corporation (GSE) that provides stability and assistance to the
secondary market for home mortgages by purchasing first mortgages and participation interests financed by the
sale of debt and guaranteed mortgage backed securities. FHLMC debt is not an obligation of, nor is it guaranteed
by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S.
financial system and housing market. Frequent issuer of discount notes, agency notes, callable agency securities
and MBS. Also issues notes under its "reference note" program.
Federal National Mortgage Association (FNMA or "Fannie Mae "). One of the large Federal Agencies. A
government sponsored public corporation (GSE) that provides liquidity to the residential mortgage market by
purchasing mortgage loans from lenders, financed by the issuance of debt securities and MBS (pools of mortgages
packaged together as a security). FNMA debt is not an obligation of, nor is it guaranteed by the U.S. government,
although it is considered to have minimal credit risk due to its importance to the U.S. financial system and
housing market. Frequent issuer of discount notes, agency notes, callable agency securities and MBS. Also
issues notes under its "benchmark note" program.
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System.
Federal Reserve System (the Fed). The independent central bank system of the United States that establishes
and conducts the nation's monetary policy. This is accomplished in three major ways: (1) raising or lowering
bank reserve requirements, (2) raising or lowering the target Fed Funds Rate and Discount Rate, and (3) in open
City of Delray Beach, Florida Investment Policy Page 21
market operations by buying and selling government securities. The Federal Reserve System is made up of
twelve Federal Reserve District Banks, their branches, and many national and state banks throughout the nation.
It is headed by the seven member Board of Governors known as the "Federal Reserve Board" and headed by its
Chairman.
Financial Industry Regulatory Authority, Inc (FINRA). is a private corporation that acts as a self - regulatory
organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD).
Though sometimes mistaken for a government agency, it is a non - governmental organization that performs
financial regulation of member brokerage firms and exchange markets. The government also has a regulatory arm
for investments, the Securities and Exchange Commission.
Fiscal Agent/Paying Agent. A bank or trust company that acts, under a trust agreement with a corporation or
municipality, in the capacity of general treasurer. The agent performs such duties as making coupon payments,
paying rents, redeeming bonds, and handling taxes relating to the issuance of bonds.
Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on corporate and municipal
debt issues.
Floating Rate Security (FRN or "floater "). A bond with an interest rate that is adjusted according to changes in
an interest rate or index. Differs from variable -rate debt in that the changes to the rate take place immediately
when the index changes, rather than on a predetermined schedule. See also "Variable Rate Security."
Freddie Mac. See "Federal Home Loan Mortgage Corporation ".
Ginnie Mae. See "Government National Mortgage Association ".
Global Notes: Notes designed to qualify for immediate trading in both the domestic U.S. capital market and in
foreign markets around the globe. Usually large issues that are sold to investors worldwide and therefore have
excellent liquidity. Despite their global sales, global notes sold in the U.S. are typically denominated in U.S.
dollars.
Government National Mortgage Association (GNMA or "Ginnie Mae "). One of the large Federal Agencies.
Government -owned Federal Agency that acquires, packages, and resells mortgages and mortgage purchase
commitments in the form of mortgage- backed securities. Largest issuer of mortgage pass - through securities.
GNMA debt is guaranteed by the full faith and credit of the U.S. government (one of the few agencies that are
actually full faith and credit of the U.S.).
Government Securities. An obligation of the U.S. government, backed by the full faith and credit of the
government. These securities are regarded as the highest quality of investment securities available in the U.S.
securities market. See "Treasury Bills, Notes, Bonds, and SLGS."
Government Sponsored Enterprise (GSE). Privately owned entity subject to federal regulation and
supervision, created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the
economy such as students, farmers, and homeowners. GSEs carry the implicit backing of the U.S. Government,
but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield
premium over U.S. Treasuries. Some consider GSEs to be stealth recipients of corporate welfare. Examples of
GSEs include: FHLB, FHLMC, FNMA and SLMA.
Government Sponsored Enterprise Security. A security issued by a Government Sponsored Enterprise.
Considered Federal Agency Securities.
Index. A compilation of statistical data that tracks changes in the economy or in financial markets.
City of Delray Beach, Florida Investment Policy Page 22
Interest -Only (IO) STRIP. A security based solely on the interest payments from the bond. After the principal
has been repaid, interest payments stop and the value of the security falls to nothing. Therefore, IOs are
considered risky investments. Usually associated with mortgage- backed securities.
Internal Controls. An internal control structure ensures that the assets of the entity are protected from loss, theft,
or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met.
The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely
to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal
controls should address the following points:
1. Control of collusion - Collusion is a situation where two or more employees are working in conjunction
to defraud their employer.
2. Separation of transaction authority from accounting and record keeping - By separating the person
who authorizes or performs the transaction from the people who record or otherwise account for the
transaction, a separation of duties is achieved.
3. Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as
defined by state law) shall be placed with an independent third party for custodial safekeeping.
4. Avoidance of physical delivery securities - Book -entry securities are much easier to transfer and
account for since actual delivery of a document never takes place. Delivered securities must be properly
safeguarded against loss or destruction. The potential for fraud and loss increases with physically
delivered securities.
5. Clear delegation of authority to subordinate staff members - Subordinate staff members must have a
clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of
authority also preserves the internal control structure that is contingent on the various staff positions and
their respective responsibilities.
6. Written confirmation of transactions for investments and wire transfers - Due to the potential for
error and improprieties arising from telephone and electronic transactions, all transactions should be
supported by written communications and approved by the appropriate person. Written communications
may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and third -party custodian - The
designated official should ensure that an agreement will be entered into and will address the following
points: controls, security provisions, and responsibilities of each party making and receiving wire
transfers.
Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction of
interest rates. Considered risky as their value moves in the opposite direction of normal fixed - income investments
and whose interest rate can fall to zero.
Investment Advisor. A company that provides professional advice managing portfolios, investment
recommendations and/or research in exchange for a management fee.
Investment Adviser Act of 1940. Federal legislation that sets the standards by which investment companies, such
as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and
securities valuations.
City of Delray Beach, Florida Investment Policy Page 23
Investment Grade. Bonds considered suitable for preservation of invested capital; bonds rated a minimum of
Baa3 by Moody's, BBB- by Standard & Poor's, or BBB- by Fitch. Although "BBB" rated bonds are considered
investment grade, most public agencies cannot invest in securities rated below "A."
Liquidity. Relative ease of converting an asset into cash without significant loss of value. Also, a relative
measure of cash and near -cash items in a portfolio of assets. Also, a term describing the marketability of a
money market security correlating to the narrowness of the spread between the bids and ask prices.
Local Government Investment Pool (LGIP). An investment by local governments in which their money is
pooled as a method for managing local funds, (i.e., Florida State Board of Administration's Florida Prime Fund).
Long -Term Core Investment Program. Funds that are not needed within a one year period.
Market Value. The fair market value of a security or commodity. The price at which a willing buyer and seller
would pay for a security.
Mark -to- market. Adjusting the value of an asset to its market value, reflecting in the process unrealized gains or
losses.
Master Repurchase Agreement. A widely accepted standard agreement form published by the Bond Market
Association (BMA) that is used to govern and document Repurchase Agreements and protect the interest of
parties in a repo transaction.
Maturity Date. Date on which principal payment of a financial obligation is to be paid.
Medium Term Notes (MTN's). Used frequently to refer to corporate notes of medium maturity (5 -years and
under). Technically, any debt security issued by a corporate or depository institution with a maturity from 1 to 10
years and issued under an MTN shelf registration. Usually issued in smaller issues with varying coupons and
maturities, and underwritten by a variety of broker /dealers (as opposed to large corporate deals issued and
underwritten all at once in large size and with a fixed coupon and maturity).
Money Market. The market in which short-term debt instruments (bills, commercial paper, bankers' acceptance,
etc.) are issued and traded.
Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in money market instruments,
such as: U.S. Treasury bills, commercial paper, bankers' acceptances, and repurchase agreements. Money market
mutual funds are registered with the SEC under the Investment Company Act of 1940 and are subject "rule 2a -7"
which significantly limits average maturity and credit quality of holdings. MMF's are managed to maintain a
stable net asset value (NAV) of $1.00. Many MMFs carry ratings by a NRSRO.
Moody's Investors Service. One of several NRSROs that provide credit ratings on corporate and municipal debt
issues.
Mortgage Backed Securities (MBS). Mortgage- backed securities represent an ownership interest in a pool of
mortgage loans made by financial institutions, such as savings and loans, commercial banks, or mortgage
companies, to finance the borrower's purchase of a home or other real estate. The majority of MBS are issued
and /or guaranteed by GNMA, FNMA and FHLMC. There are a variety of MBS structures, some of which can be
very risky and complicated. All MBS have reinvestment risk as actual principal and interest payments are
dependent on the payment of the underlying mortgages which can be prepaid by mortgage holders to refinance
and lower rates or simply because the underlying property was sold.
Mortgage Pass - Through Securities. A pool of residential mortgage loans with the monthly interest and
principal distributed to investors on a pro -rata basis. Largest issuer is GNMA.
City of Delray Beach, Florida Investment Policy Page 24
Municipal Note/Bond. A debt instrument issued by a state or local government unit or public agency. The vast
majority of municipals are exempt from state and federal income tax, although some non - qualified issues are
taxable.
Mutual Fund. Portfolio of securities professionally managed by a registered investment company that issues
shares to investors. Many different types of mutual funds exist (bond, equity, money fund); all except money
market funds operate on a variable net asset value (NAV).
Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs ($100,000 and larger) that are
issued in bearer form and can be traded in the secondary market.
Net Asset Value. The market value of one share of an investment company, such as a mutual fund. This figure is
calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this
from the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a
day based on the closing price for each security in the fund's portfolio. (See below.)
[(Total assets) - (Liabilities)] /(Number of shares outstanding)
NRSRO. A "Nationally Recognized Statistical Rating Organization." A designated rating organization that the
SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank
debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody's,
S &P, Fitch and Duff & Phelps.
Offered Price. See also "Ask Price."
Open Market Operations. Federal Reserve monetary policy tactic entailing the purchase or sale of government
securities in the open market by the Federal Reserve System from and to primary dealers in order to influence the
money supply, credit conditions, and interest rates.
Par Value. Face value, stated value or maturity value of a security.
Physical Delivery. Delivery of readily available underlying assets at contract maturity.
Portfolio. Collection of securities and investments held by an investor.
Premium. The amount by which a bond or other financial instrument sells above its face value. See also
"Discount."
Primary Dealer. Any of a group of designated government securities dealers designated by to the Federal
Reserve Bank of New York. Primary dealers can buy and sell government securities directly with the Fed.
Primary dealers also submit daily reports of market activity and security positions held to the Fed and are subject
to its informal oversight. Primary dealers are considered the largest players in the U.S. Treasury securities
market.
Prime Paper. Commercial paper of high quality. Highest rated paper is A- 1 + /A -1 by S &P and P -1 by Moody's.
Principal. Face value of a financial instrument on which interest accrues. May be less than par value if some
principal has been repaid or retired. For a transaction, principal is par value times price and includes any
premium or discount.
Prudent Investor Standard. Standard that requires that when investing, reinvesting, purchasing, acquiring,
exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under
the circumstances then prevailing, including, but not limited to, the general economic conditions and the
City of Delray Beach, Florida Investment Policy Page 25
anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters
would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain
the liquidity needs of the agency. More stringent than the "prudent person" standard as it implies a level of
knowledge commensurate with the responsibility at hand.
Qualified Public Depository - Per Florida Statute 280, means any bank, saving bank or savings association that:
1. Is organized and exists under the laws of the United States, the laws of this state or any other state or
territory of the United States;
2. Has its principal place of business in this state or has a branch office in this state which is authorized
under the laws of this state or of the United States to receive deposits in this state.
3. Has deposit insurance under the provision of the Federal Deposit Insurance Act, as amended, 12 U.S.C.
ss.1811 seq.
4. Meets all requirements of F.S. 280
5. Has been designed by the Treasurer as a qualified public depository.
Range Note. A type of structured note that accrues interest daily at a set coupon rate that is tied to an index.
Most range notes have two coupon levels; a higher accrual rate for the period the index is within a designated
range, the lower accrual rate for the period that the index falls outside the designated range. This lower rate may
be zero and may result in zero earnings.
Rate of Return. Amount of income received from an investment, expressed as a percentage of the amount
invested.
Realized Gains (Losses). The difference between the sale price of an investment and its book value.
Gains /losses are "realized" when the security is actually sold, as compared to "unrealized" gains /losses which are
based on current market value. See "Unrealized Gains (Losses)."
Reference Bills: FHLMC's short -term debt program created to supplement its existing discount note program by
offering issues from one month through one year, auctioned on a weekly or on an alternating four -week basis
(depending upon maturity) offered in sizeable volumes ($1 billion and up) on a cycle of regular, standardized
issuance. Globally sponsored and distributed, Reference Bill issues are intended to encourage active trading and
market - making and facilitate the development of a term repo market. The program was designed to offer
predictable supply, pricing transparency and liquidity, thereby providing alternatives to U.S. Treasury bills.
FHLMC's Reference Bills are unsecured general corporate obligations. This program supplements the
corporation's existing discount note program. Issues under the Reference program constitute the same credit
standing as other FHLMC discount notes; they simply add organization and liquidity to the short-term Agency
discount note market.
Reference Notes: FHLMC's intermediate -term debt program with issuances of 2, 3, 5, 10 and 30 -year
maturities. Initial issuances range from $2 - $6 billion with re- openings ranging $1 - $4 billion.
The notes are high - quality bullet structures securities that pay interest semiannually. Issues under the Reference
program constitute the same credit standing as other FHLMC notes; they simply add organization and liquidity to
the intermediate- and long -term Agency market.
Repurchase Agreement (Repo). A short-term investment vehicle where an investor agrees to buy securities
from a counterparty and simultaneously agrees to resell the securities back to the counterparty at an agreed upon
City of Delray Beach, Florida Investment Policy Page 26
time and for an agreed upon price. The difference between the purchase price and the sale price represents
interest earned on the agreement. In effect, it represents a collateralized loan to the investor, where the securities
are the collateral. Can be DVP, where securities are delivered to the investor's custodial bank, or "tri- party"
where the securities are delivered to a third party intermediary. Any type of security can be used as "collateral,"
but only some types provide the investor with special bankruptcy protection under the law. Repos should be
undertaken only when an appropriate BMA approved master repurchase agreement is in place.
Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view of the original seller of
securities. Used by dealers to finance their inventory of securities by essentially borrowing at short-term rates.
Can also be used to leverage a portfolio and in this sense, can be considered risky if used improperly.
Safekeeping. Service offered for a fee, usually by financial institutions, for the holding of securities and other
valuables. Safekeeping is a component of custody services.
Secondary Market. Markets for the purchase and sale of any previously issued financial instrument.
Securities Lending. An arrangement between and investor and a custody bank that allows the custody bank to
"loan" the investors investment holdings, reinvest the proceeds in permitted investments, and shares any profits
with the investor. Should be governed by a securities lending agreement. Can increase the risk of a portfolio in
that the investor takes on the default risk on the reinvestment at the discretion of the custodian.
Sinking Fund. A separate accumulation of cash or investments (including earnings on investments) in a fund in
accordance with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other
entity responsible for debt service), for the purpose of assuring timely availability of moneys for payment of debt
service. Usually used in connection with term bonds.
Spread. The difference between the price of a security and similar maturity U.S. Treasury investments,
expressed in percentage terms or basis points. A spread can also be the absolute difference in yield between two
securities. The securities can be in different markets or within the same securities market between different
credits, sectors, or other relevant factors.
Standard & Poor's. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
STRIPS (Separate Trading of Registered Interest and Principal of Securities). Acronym applied to U.S.
Treasury securities that have had their coupons and principal repayments separated into individual zero- coupon
Treasury securities. The same technique and "strips" description can be applied to non - Treasury securities (e.g.
FNMA strips).
Structured Notes. Notes that have imbedded into their structure options such as step -up coupons or derivative -
based returns.
Swap. Trading one asset for another.
TAP Notes: Federal Agency notes issued under the FHLB TAP program. Launched in 6/99 as a refinement to
the FHLB bullet bond auction process. In a break from the FHLB's traditional practice of bringing numerous
small issues to market with similar maturities, the TAP Issue Program uses the four most common maturities and
reopens them up regularly through a competitive auction. These maturities (2, 3, 5 and 10 year) will remain open
for the calendar quarter, after which they will be closed and a new series of TAP issues will be opened to replace
them. This reduces the number of separate bullet bonds issued, but generates enhanced awareness and liquidity in
the marketplace through increased issue size and secondary market volume.
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Tennessee Valley Authority (TVA). One of the large Federal Agencies. A wholly owned corporation of the
United States government that was established in 1933 to develop the resources of the Tennessee Valley region in
order to strengthen the regional and national economy and the national defense. Power operations are separated
from non -power operations. TVA securities represent obligations of TVA, payable solely from TVA's net power
proceeds, and are neither obligations of nor guaranteed by the United States. TVA is currently authorized to issue
debt up to $30 billion. Under this authorization, TVA may also obtain advances from the U.S. Treasury of up to
$150 million. Frequent issuer of discount notes, agency notes and callable agency securities.
Total Return. Investment performance measured over a period of time that includes coupon interest, interest on
interest, and both realized and unrealized gains or losses. Total return includes, therefore, any market value
appreciation/depreciation on investments held at period end.
Treasuries. Collective term used to describe debt instruments backed by the U.S. Government and issued
through the U.S. Department of the Treasury. Includes Treasury bills, Treasury notes, and Treasury bonds. Also
a benchmark term used as a basis by which the yields of non - Treasury securities are compared (e.g., "trading at 50
basis points over Treasuries ").
Treasury Bills (T- Bills). Short-term direct obligations of the United States Government issued with an original
term of one year or less. Treasury bills are sold at a discount from face value and do not pay interest before
maturity. The difference between the purchase price of the bill and the maturity value is the interest earned on the
bill. Currently, the U.S. Treasury issues 4 -week, 13 -week and 26 -week T -Bills
Treasury Bonds. Long -term interest - bearing debt securities backed by the U.S. Government and issued with
maturities of ten years and longer by the U.S. Department of the Treasury. The Treasury stopped issuing
Treasury Bonds in August 2001.
Treasury Notes. Intermediate interest - bearing debt securities backed by the U.S. Government and issued with
maturities ranging from one to ten years by the U.S. Department of the Treasury. The Treasury currently issues
2 -year, 5 -year and 10 -year Treasury Notes.
Trustee. A bank designated by an issuer of securities as the custodian of funds and official representative of
bondholders. Trustees are appointed to insure compliance with the bond documents and to represent bondholders
in enforcing their contract with the issuer.
Uniform Net Capital Rule. SEC regulation 150-1 that outlines the minimum net capital ratio (ratio of
indebtedness to net liquid capital) of member firms and non - member broker /dealers.
Unrealized Gains (Losses). The difference between the market value of an investment and its book value.
Gains /losses are "realized" when the security is actually sold, as compared to "unrealized" gains/losses which are
based on current market value. See also "Realized Gains (Losses)."
Variable -Rate Security. A bond that bears interest at a rate that varies over time based on a specified schedule
of adjustment (e.g., daily, weekly, monthly, semi - annually or annually). See also "Floating Rate Note."
Weighted Average Maturity (or just "Average Maturity"). The average maturity of all securities and
investments of a portfolio, determined by multiplying the par or principal value of each security or investment by
its maturity (days or years), summing the products, and dividing the sum by the total principal value of the
portfolio. A simple measure of risk of a fixed- income portfolio.
Weighted Average Maturity to Call. The average maturity of all securities and investments of a portfolio,
adjusted to substitute the first call date per security for maturity date for those securities with call provisions.
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Yield Curve. A graphic depiction of yields on like securities in relation to remaining maturities spread over a
time line. The traditional yield curve depicts yields on U.S. Treasuries, although yield curves exist for Federal
Agencies and various credit quality corporates as well. Yield curves can be positively sloped (normal) where
longer -term investments have higher yields, or "inverted" (uncommon) where longer -term investments have
lower yields than shorter ones.
Yield to Call (YTC). Same as "Yield to Maturity," except the return is measured to the first call date rather than
the maturity date. Yield to call can be significantly higher or lower than a security's yield to maturity.
Yield to Maturity (YTM). Calculated return on an investment, assuming all cash flows from the security are
reinvested at the same original yield. Can be higher or lower than the coupon rate depending on market rates and
whether the security was purchased at a premium or discount. There are different conventions for calculating
YTM for various types of securities.
Yield. There are numerous methods of yield determination. In this glossary, see also "Current Yield," "Yield
Curve," "Yield to Call" and "Yield to Maturity."
City of Delray Beach, Florida Investment Policy Page 29
Attachment B
Investment Pool /Fund Questionnaire
1. A description of eligible investment securities, and a written statement of investment policy and
objectives.
2. A description of interest calculations and how it is distributed, and how gains and losses are treated.
3. A description of how the securities are safeguarded (including the settlement processes), and how often
the securities are priced and the program audited.
4. A description of who may invest in the program, how often, what size deposit and withdrawal are
allowed.
5. A schedule for receiving statements and portfolio listings.
6. Are reserves, retained earnings, etc. utilized by the pool /fund?
7. A fee schedule, and when and how is it assessed.
8. Is the pool /fund eligible for bond proceeds and /or will it accept such proceeds?
City of Delray Beach, Florida Investment Policy Page 30