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Investment Policy (BF-2, Rev. 3)CITY OF DELRAY BEACH ADMINISTRATIVE POLICIES AND PROCEDURES DEPARTMENT: SUBJECT: REVISION: APPROVED BY: PURPOSE Finance Investment Policy POLICY NUMBER: BF-2 Rev 3 SUPERSEDES: BF-2 Rev 2 (April 3, 2018) EFFECTIVE DATE: 10/17/24 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 . POLICY In accordance with Section 218.415 , Florida Statutes, this investment policy applies to all cash and investm ents held or controlled by the City with the exception of Pension Funds and funds related to the issuanc e 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 . A. INVESTMENT OBJECTIVES 1. 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 min imum , 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. 2. 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 . 3. Individual investments , the structure of the investment portfolio and the overall investment program shall be designed based on the City's anticipated liquidity needs . The City may use actively managed and passive investment strategies to achieve this objective. On occasion , anticipated liquidity needs may be deferred or accelerated. In this instance , investments may be sold at current market prices , or deposits may be withdrawn , and proceeds may be utilized for expenditures or Investment Policy BF-2 Page 2 of 37 reinvested w ith the primary objective of safety of principal wh ile also mainta ining appropriate levels of liquidity . 4. Return on Investment Investment portfolios shall be designed with the objective of attaining a marke t rate of return throughout budgetary and economic cycles , taking into account the investment risk constra ints and liquidity needs. Return on investment is of least importance compared to t he safety and liqu idity 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 . Changes in liquidity may occur. In this instance, the Chief Financial Officer (CFO), City Manager or the Investment Adv isor , if given discretion , may sell an investment at current market prices , or transfer funds from overn ight investment vehicles, to provide liquidity or to be reinvested in accordance with the City 's overal l investment objectives . 5. Compliance The City's investment program shall mainta in compliance w ith the City's Investment Policy , t he Ci ty Charter, Florida State Statutes , and any other regulations and laws governing the investmen t of Florida public funds . This investment policy statement shall define authorized investments , establish maximum maturity limitations and minimum rating requirements . No investment sha ll be made that is not compliant with this investment policy statement at the time of purchase un less approved in writing by the City's CFO or City Manager, prior to the transact ion . If an invest men t becomes non-compliant during the holding period , subsequent to the purchase date , the City's CFO or City Manager has authority to establish parameters in which to hold or sell the affected investments and make the decision to hold or dispose of the security at any time . B. DELEGATION OF AUTHORITY Authority to manage the investment program is granted to the CFO 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 CFO who shall carry out establ ished written procedures and internal controls for the operation of the investment program consistent w ith this investment policy. Procedures shall 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 , bank ing services contracts . The City may employ an Investment Advisor to assist in managing some of t he City's portfolios . Such Investment Advisor shall be registered under the Investment Advisors Ac t of 1940 . C. 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 d iligence 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 Investment Policy BF -2 Page 3 of 37 the liquidity and the sale of securities are carried out in accordance with the terms of this pol icy . 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 re investing moneys and in acquiring , retaining , managing , and dispos ing of investments of these funds , the Investment Advisor shall exercise : the judgment, care , skill , prudence , and d ili gence under the circumstances then prevailing , which persons of prudence , d iscretion , 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 minim ize the risk , considering the probable income as well as the probable safety of their cap ital. D. ETHICS AND CONFLICTS OF INTEREST 1. Employees involved in the investment process shall refra in from persona l business act ivity that could conflic t w ith proper execution of the investment program , or which cou ld impair their abil ity 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 financ ial inst itut ions that conduct business w ith the City , and they shall further disclose any material persona l financial/investment posit ions that could be related to the performance of the City's investment program . 2. Investment Decisions : In accordance with Section 218.415 , Florida Statutes , the governing body or the respective principal officer of the City of Delray Beach will make dec isions based solely on pecuniary factors and may not subordinate the interests of its beneficiaries to other object ives , including sacrificing investment return or undertaking add it ional investment risk to promote any nonpecuniary factor . As per Section 218.415 , Florida Statutes , the term "pecuniary factor" means a factor that is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment object ives and funding policy of the City of Delray Beach . The term does not include the consideration of the furtherance of any social , political , or ideolog ical interests . E. INTERNAL CONTROLS AND INVESTMENT PROCEDURES The CFO shall establish a system of internal controls and operational procedures that are in wr iting and made a part of the City 's operational procedures. The internal controls should be designed to prevent losses of funds , wh ich might arise from fraud , employee error, and misrepresentation by th ird parties , or imprudent actions by employees . The written procedures shall include reference to safekeeping , repurchase agreements, the separation of transaction author ity from account ing and Investment Policy BF -2 Page 4 of 37 recordkeeping , wire transfer agreements , banking service contracts and collateralization . No person may engage in an investment transaction except as authorized under the terms of th is policy . Independent auditors as a normal part of the annual financial audit to the City shall conduct a rev iew of the system of internal controls to ensure compliance with policies and procedures. F. CONTINUING EDUCATION The CFO or designee that acts on behalf of the CFO 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 . G. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS 1. Authorized City staff and Investment Advisors shall only purchase securities from financial institutions, which are qualified as public depositories by the CFO 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. 2. 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: a . Annual financial statement , as well as most recent quarterly statement. b . Regulatory history , through either the Office of the Comptroller of the Currency for dealer banks , or the FINRA for securities firms . c. Statement of any pending lawsuits materially affecting the firm's business . 3. 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. H. MATURITY AND LIQUIDITY REQUIREMENTS 1. The CFO or designee shall determine the approximate amount of funds required to meet the day-to-day expenditure needs of the City estimated from historical cash flows and forecasts based on reasonable expectations of revenues and expenditures. In order to have an available source of funds to meet unexpected cash requirements , a minimum of three months operat ing 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, local government investment pools and intergovernmental pools .. The balance of the City's funds will be available for investment according to the guidelines incorporated within this policy . Investment Policy BF-2 Page 5 of 37 2. The City may establish multiple investment strategies within the investment program that seek to preserve principle , provide liquidity and enhance income through a dynamic approach based on cash flows , established risk parameters and current and market information . The City may employ or restrict one or more of the following duration-based investment portfolios as part of the overall investment program. a. Overnight Investment Portfolio Designed to provide overnight liquidity within investment vehicles that provide daily liquidity for immediate cash flows needs . The aggregate amount invested within this investment strategy shall meet the minimum requirement of three months of operating expenses but may be higher if determined to be optimal. b. Enhanced Cash Portfolio Structured to provide ongoing liquidity during the City's Fiscal Year and to also diversify the City's overall investment program. The Enhanced Cash portfolio will have a maximum maturity of three (3) years and a duration target between 0.75 years and 1.25 years, but not to exceed 1.25 years . c. Core Portfolio Core Portfolios are investments strategies for financial assets designated for longer term investment horizons. Investments within the Core Portfolio(s) follow the same investment objectives and priority of safety first , and have a longer duration than the City's Overnight and Enhanced Cash strategies. Securities within this portfolio follow the maturity and asset allocation limitations established Section XII of this investment policy. Core Portfolio benchmarks shall be similar to the designated duration targets and may include the Bank of America Merrill Lynch 1-5 Year US Corporate & Government Index for total return performance for actively managed portfolios . 3. Investments of bond reserves , construction funds , and other non-operating funds ("core 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 equal to or less than three years . 4. The maturities of the underlying securities of a repurchase agreement will follow the requirements of the Master Repurchase Agreement. I. RISK AND DIVERSIFICATION Assets held shall be diversified to control risks resulting from over concentration of assets in a specific maturity, issuer, instruments, dealer, or bank through which these instruments are bought and sold . The CFO shall determine diversification strategies within the established guidelines . J. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS Investment Policy BF-2 Page 6 of 37 1. After the CFO or designee that acts on behalf of the CFO , 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. 2. 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 . Tradeweb b. IDC {International Data Corporation) c. Bloomberg Information Systems . d. Wall Street Journal or a comparable nationally recognized financial publication providing daily market pricing. 3. Daily market pricing when available will be provided by the City's custodian or their correspondent institutions 4. The CFO or designee that acts on behalf of the CFO 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 CFO or designee that acts on behalf of the CFO, or the Investment Advisor, competitive bidding would inhibit the selection process . 5. 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; and, d. When the transaction involves new issues or issues in the "when issued" market Investment Policy BF-2 Page 7 of 37 6 . 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 . K. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION Investments shall 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 or in part for the purpose originally intended or for more optimal investments , the CFO or designee that acts on behalf of the CFO may sell the investment at the then-prevailing market price and place the proceeds into the proper account at the City's custodian . Investment Policy BF-2 Page 8 of 37 Authorized Investment-Sector Type Cash and Cash Equivalents Florida PRIME Fund Florida Trust Day to Day Fund United States Government Securities United States Government ~gencies Federal Instrumentalities (United States Government Sponsored Enterprises "GSE")* Interest Bearing Time Deposit, Certificates of Deposit, or Savings Accounts -Qualified Public Depositories Only Repurchase Agreements** Commercial Paper**** Bankers' Acceptances State and/or Local Government Taxable and/or Tax-Exempt Debt Registered Investment Companies (Mutual Funds) lntergovernment al (Local Government) Investment Pools Florida Trust Short Term Bond Fund Minimum Rating Requirement N/A AAAm AAAm N/A N/A N/A N/A N/A A-lorP-1 A-lorP-1 AA3 or AA- AAAf AAAm AAA Maturity Limits Maximum Individual Allocation Issuer Limit NA 100% N/A NA 25% N/A NA 25% N/A 5 Years 100% N/A 5 Years 80% 50% 5 Years 80% 40% 5 Years 80% 40% 90 Days 25% 10% 270 Days 40% 10% 180Days 25% 10% 3 Years 20% 5% N/A 25% 10% N/A 45% 25% N/A 25% NA Investment Policy BF-2 Page 9 of 37 Corporate Notes* * * * ~sset-Backed Securities (ABS)**** Mortgage Backed Securities 'MBS"* Supranationals (where U.S. is a shareholder and voting member) A3 or A-5 Years 40% 5% Double "A" category 5 Years 20% 5% by any two NRSROs*** N/A 5 Years 20% 5% N/A 5 Years 25% 10% *The combined maximum amount of available funds invested in Federal Instrumentalities and mortgage-backed securities will not exceed eighty percent {80 %). 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. ***National Recognized Statistical Rating Organization (NRSRO). ****The maximum amount of corporate investments w il l not exceed forty percent (40 %). Therefore , the combinat ion of Section (I) Commercial Paper and Section (m) Corporate Notes shall not exceed forty percent (40%). The following are the investment requirements and allocation limits on security types, issuers , and maturities as established by the City . The CFO or designee that acts on behalf of the CFO shall have the option to further restrict investment percentages from time to time based on market conditions , risk, and diversification investment strategies. The percentage allocat ions requirements for investment types and issuers are calculated based on the original cost of each investment. Investments not listed in this policy are prohibited . If an investment that is held in a portfolio is downgraded below the limitations listed below , the investment advisor shall notify the City and provide a recommendation to the City regarding whether to hold or sell the security . The primary motivation for this recommendation will be based on the best interest of the City's financial needs. Should the investment advisor recommend to decide to hold an investment that has been downgraded below the limitations listed below , and with the City's approval, they will report on that investment with a brief explanation of their decision within 45 days of the downgrade. A. The Florida PRIME 1. Investment Authorization Investment Policy BF-2 Page 10 of 37 The CFO 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 11AAAm" by Standard & Poor's or the equivalent by another rating agency . 4 . 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 equ iv alen t documentation , including an Investment Policy , Financial Statements , and Portfolio Holdings must be obtained. B. United States Government Securities 1. Purchase Authorization The CFO may invest in negotiable direct obligations , or obligations the princ ipal and interest of which are unconditionally guaranteed by the United States Governmen t. 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 Treasury Bonds Treasury Strips 2. Portfolio Composition A maximum of 100% of available funds may be invested in the United Stat es Government Securities . 3. Maturity Limitations Investment Policy BF-2 Page 11 of 37 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 CFO 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 80% of available funds may be invested in United States Government agencies . 3. Limits on Individual Issuers A maximum of 50% of available funds may be invested in individual United States Government agencies. 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 . Investment Policy BF-2 Page 12 of 37 D. Federal Instrumentalities (United States Government sponsored agencies) 1. Purchase Authorization The CFO 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 40% 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 1. Purchase Authorization The CFO 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. 2. Portfolio Composition A maximum of 80% of available funds may be invested in non-negotiable interest bearing time certificates of deposit. 3. Limits on Individual Issuers Investment Policy BF-2 Page 13 of 37 A maximum of 40% of available funds may be deposited with any one issuer . 4. Maturity Limitations The maximum maturity on any certificate shall be no greater than five (5) years from the date of purchase. F. Repurchase Agreements 1. Purchase Authorization a . The CFO 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 CFO 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 (S) 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 CFO. 2. Portfolio Composition A maximum of 25% of available funds may be invested in repurchase agreements exclud ing one (1) business day agreements and overnight sweep agreements . 3 . 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 1. Purchase Authorization Investment Policy BF-2 Page 14 of 37 The CFO 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 40% of available funds may be directly invested in prime commercial paper . 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 prime commercial paper shall be 270 days from the date of purchase. H Bankers' Acceptances 1. Purchase Authorization The CFO 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 Investment Policy BF-2 Page 15 of 37 1. Purchase Authorization The CFO 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 (without regard to gradation), 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 max imum 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 Obl igations 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. J. Registered Investment Companies (Mutual Funds) 1. Investment Authorization The CFO 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 CFO 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 Investment Policy BF-2 Page 16 of 37 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 "AAAf 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 CFO that will contain a list of questions that covers the major aspects of any investment pool/fu nd . K. Intergovernmental Investment Pools 1. Investment Authorization The CFO may invest in intergovernmental (local government) investment pools that are authorized pursuant to the Florida Inter-local Cooperation Act, as prov ided in Section 163.01 , Florida Statutes and prov ided that said funds contain no derivatives . A thorough investigation of any intergovernmental investment pool is required prior to investing, and on an annual basis . Attachment Bis a questionnaire that contains a list of questions , to be answered prior to investing , that cover the major aspects of any investment pool/fund . A current prospectus shall be obtained . 2. Portfolio Composition A maximum of 45% 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 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 CFO that will contain a list of questions that covers the major aspects of any investment pool /fund. L. Corporate Notes Investment Policy BF-2 Page 17 of 37 1. Purchase Authorization The CFO 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 "A3" category by Moody's and a minimum long term debt rating of "A" category by Standard & Poor's (without regard to gradation). 2 . Portfolio Composition A maximum of 40% 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 5 years from the date of purchase . M. Asset-Backed Securities (ABS) 1. Purchase Authorization The Financial Services Director may invest in asset-backed securities (ABS) which are bonds or notes backed by financial assets . 2 . Portfolio Composition A maximum of 20% of available funds may be invested in ABS . 3. Limits of Individual Issuers A maximum of 5% of available funds may be invested with any one ABS . 4. Maturity Limitations A maximum length to maturity for an investment in any ABS is five (5) years from the date of purchase. The maturity of asset-backed securities shall be considered the date corresponding to its average life. This date reflects the point at which an investor will have received Investment Policy BF-2 Page 18 of 37 back half of the original principal (face) amount. The average life may be different from the stated legal maturity included in a security's description . 5. Rating Requirements ABS shall be Double-A (AA) rated or better by Standard & Poor's , or the equivalent by another rating agency. N. Mortgage-Backed Securities (MBS) 1. Purchase Authorization The CFO may invest in mortgage-backed securities (MBS) which are based on mortgages that are guaranteed by a government agency or GSE for paymen t 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 . 4. 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 correspond ing 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 . 0. Supra nationals 1. Purchase Authorization The CFO may invest in U.S. dollar denominated debt obligations of Supranationals which are multilateral organizations of governments where U.S. is a shareholder and voting member that have a long term debt rating of' AAA" category , or a short term debt rating of A-1 or higher, by any two NRSROs at the time of purchase. Such supranational securities will include , but not be limited to : International Bank for Reconstruction and Development Investment Policy BF-2 Page 19 of 37 International Finance Corporation Inter-American Development Bank 2. Portfolio Composition A maximum of 25% of available funds may be invested in supranational organization securities . 3. Limits on Individual Issuers A maximum of 10% of available funds may be invested in any one supranational organization. 4. Maturity Lim itations The max imum length to maturity for an investment in any supranational organization security is five (S) years from the date of purchase . L. DERIVATIVES AND REVERSE REPURCHASE AGREEMENTS Investments in any derivat ive products or the use of reverse repurchase agreements are not permissible. A "derivat ive" 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 . M. PERFORMANCE MEASUREMENTS 1. In order to assist in the evaluation of the portfolio's performance , the C ity will use performance benchmarks for short-term and long-term portfolios . The use of benchmarks will allow the City to measure its returns aga inst other investors in the same markets . 2. For the short-term portfolio (less than 12 months maturity), consistent with the City's circumstances and risk tolerances , the investment performance objective shall be to earn a total rate of return approximately equal to the City's chosen benchmark index . The City will ut ilize the S&P Rated GIP Index or an index that is similar. 3. 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 portfol io. Investment Policy BF-2 Page 20 of 37 4. Investment advisors will report performance on both book value and total rate of return basis and compare results to the above-stated benchmarks . N. REPORTING The CFO shall provide the City Manager with quarterly investment reports. Schedules in the quarterly report shall include the following: 1. A listing of individual securities held at the end of the reporting period 2. Percentage of available funds represented by each investment type 3. Coupon , discount or earning rate 4 . Average life or duration and final maturity of all investments 5. Par value, amortized book value and market value On an annual basis, the CFO 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 . 0. THIRD-PARTY CUSTODIAL AGREEMENTS 1. 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 shall 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. 2. The custodian shall accept transaction instructions only from those persons who have been duly authorized by the CFO 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 . Investment Policy BF-2 Page 21 of 37 3. The custodian shall provide the CFO 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 . P. INVESTMENT POLICY ADOPTION The investment policy shall be adopted by a City ordinance. The CFO shall review the policy annually and the City Commission shall approve any modification made thereto . APPROVED BY THE CITY COMMISSION OF DELRAY BEACH ON MAY 5, 2024. Investment Policy BF -2 Page 22 of 37 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-competitiv e 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 stand ing 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 Investment Policy BF-2 Page 23 of 37 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. 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 , OTC 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 Investment Policy BF-2 Page 24 of 37 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 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 Investment Policy BF-2 Page 25 of 37 does not accurately reflect a bond's true yield level. Custody. Safekeep ing 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 OTC , are done DVP as a protection for both the buyer and seller of securities Depository Trust Company (OTC). 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 OTC. 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 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 Investment Policy BF-2 Page 26 of 37 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 ½, 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 th e purpose of acting as a financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the economy considered to otherwise have restricted access to credit markets . The largest Federal Agencies are GNMA , FNMA, FHLMC , FHLB , FFCB, SLMA , and TVA. Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commerci al 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 sponso red Investment Policy BF-2 Page 27 of 37 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 {FIILB). 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 Federa l 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 . Investment Pol icy BF-2 Page 28 of 37 Federal Reserve System (the Fed). The independent central bank system of the United States that establishes and conducts the nation's monetary policy. This is accomplished in three major ways: (1) raising or lowering bank reserve requirements, (2) raising or lowering the target Fed Funds Rate and Discount Rate , and (3) in open market operations by buying and selling government securities. The Federal Reserve System is made up of twelve Federal Reserve District Banks, their branches , and many national and state banks throughout the nation . It is headed by the seven member Board of Governors known as the "Federal Reserve Board" and headed by its Chairman. Financial Industry Regulatory Authority, Inc (FINRA). is a private corporation that acts as a se lf- regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers , Inc . (NASO). 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 accord ing 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 ." Investment Policy BF-2 Page 29 of 37 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 securit ies 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 . Gradation. A modification to the credit ratings with additions of either a"+/-" by Standard & Poor's or a number 1-3 by Moody's . Index . A compilation of statistical data that tracks changes in the economy or in financial markets. Interest-Only (10) STRIP. A security based solely on the interest payments from the bond . After the principal has been repaid , interest payments stop and the value of the security falls to nothing . Therefore , IOs are considered risky investments . Usually associated with mortgage-backed securities. Internal Controls. An internal control structure ensures that the assets of the entity are protected from loss , theft , or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points : 1. Control of collusion -Collusion is a situation where two or more employees are working in conjunction to defraud their employer . 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 . Investment Policy BF-2 Page 30 of 37 6. Written confirmation of transactions for investments and wire transfers -Due to the potential for error and improprieties arising from telephone and electronic transactions , all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures . 7. Development of a wire transfer agreement with the lead bank and third-party custodian -The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers. Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction of interest rates. Considered risky as their value moves in the opposite direction of normal fixed-income investments and whose interest rate can fall to zero. Investment Advisor. A company that provides professional advice managing portfolios, investment recommendations and/or research in exchange for a management fee. Investment Adviser Act of 1940. Federal legislation that sets the standards by which investment companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and securities valuations. Investment Grade. Bonds considered suitable for preservation of invested capital; 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 Poo l (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 Investment Policy BF-2 Page 31 of 37 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 ofMBS 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. 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 issu ed 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 Investment Policy BF-2 Page 32 of 37 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 includ es any premium or discount. Prudent Investor Standard . Standard that requires that when investing, reinvesting , purchas ing, acquiring , exchanging , selling, or managing public funds, a trustee shall act with care , skill , prudence , and diligence under the circumstances then prevailing , including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. More stringent than the "prudent Investment Policy BF-2 Page 33 of 37 person" standard as it implies a level of knowledge commensurate with the responsibility at hand. Qualified Publ ic 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 stat e 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 No t e . 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 outs ide 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. Real ized Gai ns (L osses). 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)." Referen ce Bill s : 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. Re fe re nce Not es: 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. Investment Policy BF-2 Page 34 of 37 The notes are high-quality bullet structures securities that pay interest semiannually . Issues under the Reference program constitute the same credit standing as other FHLMC notes ; they simply add organization and liquidity to the intermediate-and long-term Agency market. Repurchase Agreement (Repo). A short-term investment vehicle where an investor agrees to buy securities from a counterparty and simultaneously agrees to resell the securities back to the counterparty at an agreed upon time and for an agreed upon price . The difference between the purchase price and the sale price represents interest earned on the agreement. In effect, it represents a collateralized loan to the investor, where the securities are the collateral. Can be DVP, where securities are delivered to the investor's custodial bank, or "tri-party" where the securities are delivered to a third party intermediary . Any type of security can be used as "collateral," but only some types provide the investor with special bankruptcy protection under the law. Repos should be undertaken only when an appropriate 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 borrow ing 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 Investment Policy BF-2 Page 35 of 37 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 . 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 TV A'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 author ization , 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. Collect ive 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 compa red (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 often 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 Investment Policy BF-2 Page 36 of 37 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 15C3-1 that outlines the minimum net capital ratio (ratio of indebtedness to net liquid capital) of member firms and non-member broker/dealers . Unrealized Gains (Losses). The difference between the market value of an investment and its book value. Gains/losses are "realized" when the security is actually sold , as compared to "unrealized" ga ins /l osses 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 securit ies 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 securiti es with call provisions . Yield Curve . A graphic depiction of yields on like securities in relation to remaining maturities spread over a timeline . 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 convent ions 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." Investment Policy BF-2 Page 37 of 37 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 rece iving 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?