Res 13-633RESOLUTION NO. 13-633
A RESOLUTION of the City Council of the City of Federal Way,
Washington, repealing Resolution No. 94-175 and modifying and
adopting the investment policy to govern the investment of public
funds.
WHEREAS, the City Council seeks at all times to maintain the highest fscal integrity
with respect to its administration of public funds; and
WHEREAS, the budget of the City also includes a certain percentage of idle funds which
are intended to be invested in order to balance the City's cash requirements for ongoing
operations with the opportunity for the highest, prudent investment potentials to insure a
reasonable return on idle funds with the highest investment return with maximum security; and
WHEREAS, The City Council of the City of Federal Way hereby adopted the original
Investment Policy on May 17, 1994 by Resolution No. 94-175; and
WHEREAS, amendments to the investment policy are necessary to reflect best practices
and current language.
NOW THEREFORE, THE CITY COUNCIL OF THE CITY OF FEDERAL WAY,
RESOLVES AS FOLLOWS:
Section 1. Repealer. Resolution No. 94-175 with all attachments is hereby repealed
effective Maxch 5, 2013.
Section 2. Investment Policv. The City Council of the City of Federal Way hereby
modifies and adopts the Investment Policy as attached hereto, and hereby incorporated in full by
this reference. .
Resolution No. 13-633 Page 1 of 33
Section 3. Severabilitv. If any section, sentence, clause or phrase of this resolution
should be held to be invalid or unconstitutional by a court of competent jurisdiction, such
invalidity or unconstitutionality shall not affect the validity or constitutionality of any other
section, sentence, clause or phrase of this resolution.
Section 4. Corrections. The City Clerk and the codifiers of this resolution are authorized
to make necessary corrections to this resolution including, but not limited to, the correction of
scrivener/clerical errors, references, resolution numbering, section/subsection numbers and any
referencesthereto.
Section 5. Ratification. Any act consistent with the authority and prior to the effective
date of this resolution is hereby ratified and affirmed.
Section 6. Effective Date. This resolution shall be effective immediately upon passage
by the Federal Way City Council.
Section 7. Savings Clause. Resolution No. 94-175, a portion of which is repealed by this
resolution, shall remain in full force and effect until the effective date of this Resolution and
shall remain in full force and effect in the event this resolution is invalidated in its entirety.
RESOLVED BY THE CITY COUNCIL OF THE CITY OF FEDERAL WAY,
WASHINGTON this Sth day of March, 2013.
CITY OF FEDERAL WAY
MAYOR, KIP PRIEST
ATTEST:
CITY CLERK, CARO MCNEIL Y, CMC
Resolution No. 13-633 Page 2 of 33
APPROVED AS TO FORM:
�'E;/� 7 t/�/��
f �%
CITY ATTORNEY, PATRICIA A. RICHARDSON
FILED WITH THE CITY CLERK:
PASSED BY THE CITY COUNCIL:
RESOLUTION NO.: 13-633
2-26-2013
3-5-2013
Resolution No. 13-633 Page 3 of 33
CITY OF FEDERAL WAY
INVESTMENT POLICY
Lo Policv
It is the policy of the City of Federal Way to invest public funds in a manner which will provide
the highest investment return with the maximum security while meeting the daily cash flow
demands of the entity and conforming to all state and local statutes governing the investment of
public funds as well as this Investment Policy.
2_0 Scope
This Investment Policy applies to all financial assets of the City of Federal Way. 'These funds
are accounted for in the City's Comprehensive Annual Financial Report and include:
Funds
2.1.1 General Fund
2.1.2 Special Revenue Funds
2.1.3 Capital Projects Funds
2.1.4 Debt Service Fund
2.1.5 Enterprise Funds
2.1.6 Internal Service Funds
2.1.7 Any new fund created by the City Council, unless specifically exempted
by the City Council
3_o Prudence
Investments shall be made with judgment and care - under circumstances then prevailing - which
persons of prudence, discretion and intelligence exercise in the management of their own affairs,
not for speculation, but for investment, considering the probable safety of their capital as well as
the probable income to be derived.
3.1 The standard of prudence to be used by investment officials shall be the "prudent
person" standard and shall be applied in the context of managing an overall
portfolio. Investment officials acting in accordance with written procedures and
the Investment Policy and exercising due diligence shall be relieved of personal
responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and
appropriate action is taken to control adverse developments.
Resolution No. 13-633 Page 4 of 33
4.0 Obiective
The primary objectives, in priority order, of the City of Federal Way's investment portfolio shall
be:
Safety
Safety of principal is the foremost objective of the investment program.
Investments of the City shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio.
4.1.1 The City shall ensure the safety of its invested idle funds by limiting credit
and interest rate risks. Credit risk is the risk of loss due to the failure of
the security issuer or backer. Interest rate risk is the risk that the market
value of portfolio securities will fall due to an increase in general interest
rates.
a. Credit risk will be mitigated by:
Limiting investments to the safest types of securities;
2. Prequalifying the financial institutions with which it will do
business;
3. Diversifying the investment portfolio so that the failure of
any one issuer or backer will not place an undue financial
burden on the City;
4. Monitoring all of the City's investments on a daily basis to
anticipate and respond appropriately to a significant
reduction of creditworthiness of any of the depositories.
b. Interest rate risk will be mitigated by:
1. Structuring the City's portfolio so that securities mature to
meet the City's cash requirements for ongoing operations,
thereby avoiding the need to sell securities on the open
market prior to maturity to meet those specific needs;
2. Investing primarily in shorter-term securities, unless it is
anticipatecl that longer-term securities can be held to
maturity without jeopardizing liquidity requirements;
3. Occasionally restructuring the portfolio to minimize the
loss of market value andJor maximize cash flows.
Resolution No. 13-633 Page S of 33
Liquidity
Yield
The physical security or safekeeping of the City's investments is
also an important element of safety. Safekeeping requirements are
defined in Section 11 of this Policy.
The City's investment portfolio must be structured in a manner which will provide
that securities mature at the same time as cash is needed to meet anticipated
demands (static liquidity). Additionally, since all possible cash demands cannot
be anticipated, the portfolio should consist largely of securities with active
secondary or resale markets (dynamic liquidity).
Yield on the City's investment portfolio is of secondary importance compared to
the safety and liquidity objectives described above. Investments are limited to
relatively low-risk securities in anticipation of earning a fair return relative to the
risk being assumed. While it may occasionally be necessary or strategically
prudent for the City to sell a security prior to maturity to either meet unanticipated
cash needs or to restructure the portfolio, this Policy specifically prohibits trading
securities for the sole purpose of speculating or taking an unhedged position on
the future direction of interest rates. Specifically, "when, as, and if issued"
trading and open-ended portfolio restructuring transactions are prohibited.
5_0 Delegation of Authoritv
Authority to manage the City's investment program is derived from RCW 35A.40.050 and
Sections 3.45.010 and 3.45.020 of the Federal Way Revised Code. Management responsibility
for the investment program is hereby delegated to the Mayor and his or her designee, who shall
establish written procedures for the operation of the investment program consistent with this
Policy. Such procedures shall include explicit delegation of authority to persons responsible for
investment transactions. No person may engage in an investment transaction except as provided
under the terms of this Policy and the procedures established by the Finance Director. The
Finance Director shall be responsible for all transactions undertaken and shall establish a system
of controls to regulate the activities of subordinate officials.
6.o Ethics and Conflict of Interest
Officers and employees involved in the investment process shall refrain from personal business
activity that could conflict with proper execution of the investment program, or which could
impair their ability to make impartial investment decisions. Employees and investment officials
shall disclose to the Mayor any material financial interests in financial institutions that conduct
business within this jurisdiction, and they shall further disclose any large personal
financial/investment positions that could be related to the performance of the City's portfolio.
Resodution No. 13-633 Page 6 of 33
Employees and officers shall subordinate their personal investment transactions to those of the
City, particularly with regard to the timing of purchases
and sales.
7.0 Authorized Financial Dealers and Institutions
Banks and savings and loan associations seeking to establish eligibility for the City's competitive
certificate of deposit purchase programs shall submit information as required by the Finance
Director. The Finance Director shall regularly report to the City Council its list of eligible banks
and savings and loan associations.
In addition, a list will be maintained of approved security broker/dealers selected by
creditworthiness, who maintain an office in the state of Washington. Securities dealers not
affiliated with a bank shall be required to be classified as reporting dealers affiliated with the
New York Federal Reserve Bank, as primary dealers. Regional dealers may qualify if, in the
determination of the Finance Director, SEC Rule 15C3-1 (uniform net capital rule) has been
satisfied. No public deposit shall be made except in a qualiiied public depository as established
by state law.
Required Documentation
All financial institutions and broker/dealers who desire to become qualified
bidders for investment transactions must supply the Finance Director with certain
documents, including but not limited to: audited financial statements, proof of
Financial Industry Regulatory Authority (FINRA) certification, trading resolution,
proof of state registration, certification of having read the City's Investment
Policy (see Section 10.3 below), and depository contracts.
Each bank, savings and loan, and broker/dealer, otherwise qualified under the
provisions of this Policy, who wishes to do business with the City shall submit a
copy of its latest financial statement to the City, including a balance sheet and
profit and loss statement. Banks shall also provide their most recent Consolidated
Report of Condition ("call report") at the request of the City. If the security dealer
is a private partnership registered with the SEC, the following shall be required in
lieu of a profit and loss statement: 1) disclosure of its excess net capital in the
notes to the statement of financial condition, and 2) a separate letter from its CPA
firm attesting to the fact that Rule 15C3-1 has been complied with and the dealer's
internal systems and controls have no material inadequacies.
Rating Service/Creditworthiness Criteria
The City shall use a commercial rating service (Fitch Ratings or equivalent) to
most efficiently assess creditworthiness and qualification for the City's list of
Resolution No. 13-633 Page 7 of 33
authorized depositories and securities brokers/dealers affiliated with a bank or
savings and loan. If a rating is not available for a particular institution, the
Finance Director may authorize a staff-generated financial statement analysis or
other reliable rating service analysis. Depositories and broker/dealers affiliated
with a bank shall be rated "B/C" or better. Commercial paper shall be rated
A 1/P 1 in accordance with state law.
Required Certification Statement
Before accepting funds or engaging in investment transactions with the City, the
supervising officer at each depository and recognized security broker/dealer shall
submit a certification. The document will certify that the officer has reviewed the
Investment Policy and agrees to disclose potential conflicts or risks to public
funds that might arise out of business between the firm/depository and the City.
All financial institutions shall agree to undertake reasonable efforts to preclude
imprudent transactions involving the City's funds. The supervising officer shall
agree to exercise due diligence in monitoring the activities of other officers and
subordinate staff inembers engaged in transactions with the City. Employees of
any firm of financial institution offering securities or investments to the City shall
be trained in the precautions appropriate to public-sector investments and shall be
required to familiarize themselves with the City's investment objectives, policies,
and constraints.
Required Master Repurchase Agreement
Each bank, savings and loan, and security broker/dealer, otherwise qualified
under the provisions of this Policy, who wishes to enter into repurchase
agreements with the City shall be required to execute, in advance, the City's
Master Repurchase Agreement.
8.0 Authorized and Suitable Investments
The City is empowered by statute to invest in the types of securities listed in Exhibit A. The
following table summarizes categories of investments authorized under this Policy, in general
order of safety and liquidity:
8.1 Local Government Investment Pool
8.2 Repurchase Agreements
8.3 U.S. Treasury Obligations
8.4 U.S. Government Agencies
8.5 U.S. Government-Sponsored Corporations/Instrumentalities
8.6 Bankers' Acceptances: Secondary Market
Resolution No. 13-633 Page 8 of 33
Domestic and Foreign
8.7 Commercial Paper: Secondary Market
8.8 Insured Certificates of Deposit:
Banks and Savings & Loans
8.9 Uninsured/Collateralized Certificates of Deposit:
Banks and Savings & Loans
Not all government agency and instrumentality securities axe widely traded. Some lack broad
and deep markets, and others are inappropriate for cash management purposes by virtue of their
price volatility or technical characteristics. Therefore, the City shall maintain a preference for
the government agency issues listed in E�ibit B.
9.0 Competitive Selection of Investment Instruments
The investment officer shall obtain competitive bids from at least two brokers or financial
institutions on all purchases of instruments purchased on the secondary market.
Collateralization
Collateralization shall be required on two types of investments: certificates of deposit and
repurchase agreements. In order to anticipate market changes and provide a level of security for
all funds, the collateralization level will be at least 100% of market value of principal and
accrued interest.
Certificates of Deposit
For certificates of deposit, any amount exceeding FDIC or FSLIC coverage shall
be collateralized by eligible securities which are prescribed, designated and
segregated in accordance with state law (RCW 39.58.050).
Repurchase Agreements
A repurchase agreement is a transaction in which a counterparty agrees to transfer
to the City securities in exchange for funds, with a simultaneous agreement by the
City to resell the securities to the counterparty at a date certain. In such cases the
transferred securities shall be U.S. Treasury or Government Agency issues whose
market value at the time of transfer is equal to at least 100% of the repurchase
agreement's face value. For other than overnight investments, the securities
transferred shall be marked to market and maintained at an amount equal to at
least 100% of the repurchase agreement's face value. The market value of the
transferred securities may be required to exceed the repurchase agreement's face
value by an amount which is expected to protect against a sudden decrease in the
market value of the transferred securities.
The types of securities to be accepted as transferred securities in repurchase
Resolution No. 13-633 Page 9 of 33
agreements in which the City is the buyer shall be limited to the types of eligible
U.S. Treasury or Government Agency issues listed in Sections 9.3 and 9.4 above.
The City shall maintain a preference for shorter-term maturities. If it is
determined that the transferred securities have variable degrees of market risk due
to the type of instruments involved and/or their terms to maturity, the City may
require the counterparty to transfer additional securities.
The number of transferred securities for each repurchase agreement shall
ordinarily be limited to three or less. The City may authorize the counterparty to
transfer more than three. Substitutions of transferred securities shall be limited to
U.S. Treasury Bills and may not be made without prior approval by the City.
Substitutions are to be confirmed in accordance with Section 11.0.
Other Investments
Any other investments shall be collateralized by the actual security held in
safekeeping by the City's safekeeping agent.
10.o Safekeening and Custodv
All security transactions, including collateral for repurchase agreements, entered into by the City
shall be conducted on a delivery-versus-payment (DVP) basis. To protect against potential fraud
and embezzlement, the assets of the City shall be secured through third-party safekeeping and
custody procedures. Securities will be held by a third party custodian with which the City has
executed a safekeeping agreement. The delivery of these securities will be evidenced by
safekeeping receipts. Verification of transferred securities will be part of the City's annual
financial audit by the State Auditor's Office.
11.0 Diversification
It is the policy of the City to diversify its investment portfolio. Assets held in the common cash
fund shall be diversified to avoid incurring unreasonable risk of loss resulting from
overconcentration of assets in a specific maturity, a specific issuer, or a specific class of
securities. Diversif cation strategies shall be determined and reviewed periodically by the
Finance Director. As a general rule, which may be amended by the Finance Director upon
1Vlayor's approval as economic cycles change, the following diversiiication limitations may be
imposed on the portfolio:
Maturity
No more than 20% of the portfolio may be invested beyond 12 months, and
average maturity of the portfolio may not exceed two yeaxs. The maximum stated
final maturity of individual securities in the portfolio shall be five years.
Default Risk
No more than 5% of the portfolio may be invested in the securities of a single
issuer, except for the U.S. Treasury, to which no limits apply, and commercial
Resolution No. 13-633 Page 10 of 33
paper, which is limited to 3% of the portfolio in accordance with state law. No
more than 30% of the portfolio may be invested in bankers' acceptances and
certificates of deposit.
Liquidity Risk
At least 10% of the portfolio may be invested in overnight instruments or in
marketable instruments which can be sold to raise cash in one day's notice.
Due to fluctuations in the aggregate surplus funds balance, m�imum percentages for a particular
issuer or investment type may be exceeded at a point in time subsequent to the purchase of a
paxticular issuer or investment type. Securities need not be liquidated to realign the portfolio;
however, consideration should be given to this matter when future purchases are rnade to ensure
that appropriate diversification is maintained.
12.o Internal Controls
The City's internal controls shall be designed to prevent losses of public funds arising from
fraud, employee error, misrepresentation by third parties, or unanticipated changes in financial
markets. Controls which the City deems important include, but are not limited to:
Control of collusion
Separation of functions
Separation of transaction authority from accounting and recordkeeping
Custodial safekeeping
Avoidance of bearer-form securities
Specific limitations regarding securities losses and remedial action
Clear delegation of authority to subordinate staff inembers
Written confirmation of telephone transactions
Supervisory authority of employee actions
Minimize the number of authorized investment officials
Documentation of transactions and strategies
The City will undergo an annual independent review by the State Auditor's Office which will
verify compliance with policies and procedures.
13.o Performance Standards
The investment portfolio will be designed to obtain a market average rate of return during
budgetary and economic cycles, taking into account the City's investment risk constraints and
cash flow needs.
Market Yield (Benchmark)
The City's investment strategy is primarily passive. Given this strategy, the basis
used by the City to determine whether market yields are being achieved shall be
the range between the six-month U.S. Treasury Bill and the Local Government
Resolution No. 13-633 Page I1 of 33
Investment Pool.
14.0 Reportin�
The Finance Director is charged with the responsibility of including a report on investment
activity and returns in the City's monthly financial report. Reports may include, but are not
limited to: market conditions, performance, breakdowns by security type and maturity, and
number of trades.
15.0 Investment Policv Adoption
The City's Investment Policy shall be adopted by resolution of the City Council. The Policy
shall be reviewed annually by the Finance Director to ensure its consistency with respect to the
overall objectives of safety, liquidity and yield, and its relevance to current laws and financial
trends. Proposed amendments to the Policy shall be prepared by the Finance Director, and after
review and approval by the Mayor, shall be forwarded to the City Council for consideration and
approval.
Attachments: Exhibits A, B and C
Resolution No. 13-633 Page 12 of 33
EXHIBIT A
INVESTMENTS AUTHORIZED UNDER STATE LAW
Security RCW
* Certificates, notes, bonds, or other obligations of the United States 43.84.U80; 36.29.020
* Obligations of U.S. agencies or of any corporation wholly owned by 43.84.080; 36.29.020
the government of the United States
* Federal Home Loan Bank notes and bonds
* Federal Land Bank bonds
43.84.080; 36.29.020
43.84.080; 36.29.020
* Federal National Mortgage Association notes, clebentures, and 43.84.080; 36.29:020
guaranteed certificates of participation
* Government National Mortgage Association bonds
43.84.080; 36.29.020
* Obligations of any other government-sponsored corporation whose 43.84.080; 36.29.020
obligations are or may become eligible as collateral for advances to
member banks as determined by the board of governors of the federal
reserve system
'� Bankers' acceptances purchased on the secondary market
* Commercial paper purchased on the secondary market
43.84.080; 36.29.020
43.84.080
* State, county, municipal, or school district bonds or warrants of taxing 43.84.080
districts of the state. Such bonds and warrants shall only be those
found to be within the limit of indebtedness prescribed by law for the
taxing district issuing thern and to be general obligations.
* Motor vehicle fund warrants, when authorized by agreement between 43.84.080
State Treasurer and the Department of Transportation, requiring
repayment of invested funds from any moneys in the motor vehicle
fund available for State highway construction.
* Washington State Treasurer's Investment Pool
43.250.040
* Any investments authorized by law for the Treasurer of the State of 39.59.020
Washington or any local government of the State of Washington other
than a metropolitan municipal corporation, but such investments shall
not include certificates of deposit of banks or bank branches not
located in the State of Washington.
* Bonds of the State of Washington and any local government in the 39.59.020
State of Washington which bonds have, at the time of investment, one
of the three highest credit ratings of a nationally recognized rating
agency,
Resolution No. 13-633 Page 13 of 33
* General obligation bonds of a state other than the State of Washington 39.59.020
and general obligation bonds of a local government of a state other
than the State of Washington, which bonds have, at the time of
investment, one of the three highest credit ratings of a nationally
recognized rating agency.
* Bonds or warrants of this State 35.39.030
* General obligation or utility revenue bonds or warrants of any city or 35.39.030
town in this State
* A city's or town's own bonds or warrants of a local improvement 35.39.030
district which are within the protection of the local improvement
guaranty fund law
* Interim financing warrants of a local improvement district which is 35.39.034
within the protection of the local improvement guaranty fund law
* A city's or town's own local improvement installment notes which are 35.45.150
within the protection of the local improvement guaranty fund law
* Bonds or other obligations issued by a metropolitan municipal 35.58.510
corporation pursuant to Chapter 35.58 RCW
* Bonds or other obligations issued by a housing authority pursuant to 35.82.220
the housing authorities law of this State or issued by any public
housing authority or agency in the United States
* Outstanding warrants of the county tax refund fund in the same county 36.33.070
as the government making the investment
* Subject to compliance with RCW 39.56.030, registered warrants of a 39.59.020
local government in the same county as the government making the
investment
* Subject to the arbitrage provisions of Section 148 of the Federal 39.59.030
Internal Revenue Code, or similar provisions concerning the
investment of state and local money and funds, the following mutual
funds and money market funds:
• Shares of mutual funds with portfolios consisting of only United
States government bonds or bonds issued by federal agencies
with average maturities of less than four yea'rs, or bonds
described in RCW 39.59.020 (1) or (2), except that bonds
otherwise described in RCW 39.59.020 (1) or (2) shall have one
of the four highest credit ratings of a nationally recognized rating
agency;
• Shares of money market funds with portfolios consisting or only
bonds of states and local governments, or other issuers authorized
by law for investments by local governments, which bonds have
at the time of investment one of the two highest credit ratings of a
nationally recognized rating agency;
Resolution No. 13-633 Page 14 of 33
• Shares of money market funds with portfolios consisting of
securities otherwise authorized by law for investment by local
governments
* Notes or bonds secured by mortgage which the Federal Housing 39.60.010
Administration has insured or has made a commitment to insure in
obligations or national mortgage associations
* Debentures issued by the Federal Housing Administration
* Bonds of the Home Owner's Loan Corporation
* Notes, bonds or debentures of savings and loan associations, banks,
mutual savings banks, savings and loan service corporations operating
with approval of the federal home loan bank, and corporate mortgage
companies that are rated not less than "A", or are insured or
guaranteed and backed as required
* Farm ownership and soil and water conservation loans fully
guaranteed as to principal and interest under the Bankhead-Jones
Farm-Tenant Act; and the Washington land bank (provided that the
funds to be invested are not under constitutional prohibition)
* Washington State Housing Finance Commission bonds
39.60.010
39.60.010
39.60.050
43.33A.080
43.180.190
* Port district revenue bonds and notes issued under the authority of 53.34.1�0
Chapter 54.34. RCW
* Local utility district bonds issued by a public utility district 54.16.070
Resolution No. 13-633 Page 1 S of 33
EXHIBIT B
MOST COMMONLY TRADED AGENCIES
Farm Credit Consolidatecl System-wide Bonds
The Farm Credit System is a cooperatively owned nationwide system of banks and associations
that provides mortgage loans, short and intermediate-term credit and related services to farmers,
ranchers, producers, or harvesters of aquatic products, rural homeowners, and agricultural and
rural cooperatives. The Farm Credit System is organized geographically into 12 Farm Credit
Districts. In each district, there is a Federal Land Bank, a Federal Intermediate Credit Bank, and
a Bank for Cooperatives. In addition, there is a Central Bank for Cooperatives in Denver,
Colorado, which participates with district banks in laxger loans. Responsibility for supervising
the Farm Credit System in the public's best interest is the Farm Credit Administration, which is
an independent agency of the U.S. Government. Each of the 37 Farm Credit Banks is audited
and examined at least once each year by Farm Credit Administration examiners. Federal Farm
Credit Banks Consolidated System-wide Bonds axe secured joint and several obligations of the
37 Farm Credit Banks. Bonds are issued each month with six and nine-month maturities. Longer-
term bonds are issued approximately eight times a year. They are issued in book-entry form, in
multiples of $1,000 for maturities of over 13 months and of $5,000 for shorter maturities.
System-wide bonds sold to the public are secured by collateral consisting of notes or other
obligations of borrowers, obligations of the United States or any agency thereof, or other readily
marketable securities approved by the Farm Credit Administration, or cash, in an aggregate value
equal to the bonds outstanding. The system also issues discount notes with maturities ranging
from 7 to 270 days.
Federal Home Loan Banks
The Home Loan Bank system was organized under the Federal Home Loan Bank Act, beginning
in 1932. Twelve district banks operate a credit reserve system under the supervision of a federal
board. Membership in the credit system consists of savings and loan associations, cooperative
banks, insurance companies and savings banks.
The banks issue consolidated bonds and discount notes as joint and severable obligations of the
Home Loan Bank System. Although the banks operate under federal charter with government
supervision, the securities are not guaranteed by the U.S. government. However, the banks axe
required to maintain secured advances, guaranteed mortgages, U.S. government securities or
cash in an amount at least equal to the amount of the consolidated bonds and discount notes
outstanding. Therefore, the reserves pledged against this outstanding debt are considerable.
Consolidated notes are issued with original maturities of one year or less, and are available in
denominations of $100,000, $150,000, and $1 million. Maturities range between 30 and 360
days, at the discretion of the buyer. Consolidated bonds are issued only in book entry form for a
minimum of $10,000 with multiples of $5,000 thereafter. Income is exempt from state and local
taxes, which slightly diminishes yields.
Resolution No. 13-633 Page 16 of 33
Federal Home Loan Mortgage Corporntion (Freddie Mac)
Also known as Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC) was
established in 1970 to help maintain the availability of mortgage credit for residential housing.
To accomplish this goal, the FHLMC purchases a large volume of conventional residential
mortgages and participations in mortgages from members of the Home Loan Bank system. The
FHLMC finances these operations by marketing guaxanteed mortgage certificates and mortgage
participation certificates (PCs).
Freddie Mac offers discount notes and bonds under its own name, in contrast to an older practice
of obtaining credit from the Home Loan Bank System. These securities do not carry U.S.
government guarantees.
Student Loan Marketing Association (Sallie Mae)
In 1972, Congress amended the Higher Education Act of 1965 and established a private, not-for-
profit corporation called the Student Loan Marketing Association {SLMA). Sallie Mae, as the
corporation is also known, provides for financing the federal Guaranteed Student Loan Program.
Through Sallie Mae financing operations, student loans are guaranteed, encouraging lending by
various financial institutions. To serve lenders' liquidity needs, the SLMA warehouses
advances through a revolving line-of-credit arrangement, until loan cash flow begins. These
advances in turn are insured by the U.S. Commissioner of Education.
Sallie Mae regularly enters the credit markets with short-term and non-guaranteed discount notes
with maturities under one year, accompanied by an extensive program of floating-rate notes with
various maturities. The rate is adjusted periodically at a premium above the 91-day T-bill rate.
These securities can offer useful hedges against future periods of rapid interest rate increases.
Federal National Mortgage Association (FNMA or Fannie Mae)
The Federal National Mortgage Association was the first modern federally chartered corporation
owned entirely by stockholders. The agency was chartered in 1938, and its operations were
partitioned into two corporations in 1968. Its sister organization, the Government National
Mortgage Association, represents a spin-off of former FNMA operations.
FNMA purchases of conventional mortgages are financed by the sale of corporate obligations
(debentures and short-term notes) to private investors. The debentures are issued in book entry
form only in denominations starting at $10,000, with $5,000 increments thereafter. Secondary
market operations are iinanced in part through issuance of short-term notes that resemble
commercial paper. The maturities on these notes range up to 360 days, with rates occasionally
brought in line with rates available in the money market for Treasury bills, commercial paper and
similar discount instruments. A minimum order for these notes is $50,000. The notes are issued
through dealers.
FNMA securities enjoy a strong secondary market in the short-term sector, with yield premiums
Resolution No. 13-633 Page 17 of 33
of one-fourth percent (over T-bills) now common in the six-month to one-year maturity range.
FNMA debt interest is not exempt from state and local taxation, enhancing yield potential for
public investors.
Government National Mortgage Association (GNMA or Ginnie Mae)
The 1968 partition of the Federal National Mortgage Association. Ginnie Mae is a wholly
government-owned corporation within the Department of Housing and Urban Development. It
took over the special assistance and the management and liquidating functions that had formerly
been lodgecl in FNMA. These functions involve activities that could not be profitably carried out
by a private firm. Ginnie Mae's mission is also to make real estate investment more attractive to
institutional investors which it has done by designing and issuing, partly in conjunction with
private financial institutions, mortgage-backed securities for which an active secondary market
has developed. Under the pass-through approach, private mortgage lenders assemble pools of
mortgages acquired through Ginnie Mae auctions or from other sources and then sell certificates
backed by these mortgages to investors. These securities are referred to as pass-through
securities because payment of interest and principal on mortgages in the pool is passed on to the
certificate holders after deduction of fees for servicing and guarantee. Pass-through certificates
have stated maturities equal to those of the underlying mortgages. However, actual maturities
tend to be much shorter because of prepayments, the average life on single mortgages being
approximately 12 years. On pass-through securities, principal and interest are paid monthly to
the investor. Because payments are made monthly and because the passed through varies from
month to month due to mortgage payments, pass-throughs are issued in registered form only.
They have minimum denominations of $25,000. They carry Ginnie Mae's guarantee of timely
payment of both principal and interest and, in addition are backed by the full faith and credit of
the U.S. Government.
Resolution No. 13-633 Page 18 of 33
accretion (of a discount)
EXHIBIT C
GLOSSARY
In portfolio accounting, a straight-line accumulation of capital
gains on discount bonds in anticipation of receipt of par at
maturity.
accrued interest Interest due from issue or from the last coupon date to the present
on an interest-bearing security. The buyer of the security pays the
quoted dollar price plus accrued interest.
active
ad�l on rate
A market in which there is much trading.
A specific rate of interest to be paid. Stands in contrast to the rate
on a discount security, such as a Treasury bill, that pays no
interest.
agency A debt security issued by a federal or federally sponsored agency.
Federal agencies are backed by the full faith and credit of the U.S.
Government. Federally sponsored agencies (FSAs) are backed by
each particular agency with a market perception that there is an
implicit government guarantee. An example of a federal agency is
the Government National Mortgage Association (GNMA) . An
example of a FSA is the Federal National Mortgage Association
(FNMA).
amortize In portfolio accounting, periodic charges made against interest
income on premium bonds in anticipation of receipt of the call
price at call or of par value at maturity.
arbitrage Strictly defined, buying something where it is cheap and selling it
where it is dear; for example, a bank buys 3-month CD money in
the U.S. market and sells 3-month money at a higher rate in the
Eurodollar market. In the money market, often refers: (1) to a
situation in which a trader buys one security and sells a similar
security in the expectation that the spread in yields between the
two instruments will narrow or widen his profit, (2) to a swap
between two similar issues based on an anticipated change in yield
spreads, and (3) to situations in which a higher return (or lower
cost) can be achieved in the money market for one currency by
utilizing another currency and swapping it on a fully-hedged basis
through the foreign-exchange market.
Resolution No. 13-633 Page 19 of 33
asked
The price at which securities are offered.
back discount rate Yield basis on which short-term, non-interest-bearing money
market securities are quoted. A rate quoted on a discount basis
understates bond equivalent yield. That must be calculated when
comparing return against coupon securities.
back up (1) When yields rise and prices fa11, the market is said to back up.
(2) When an investor swaps out of one security and into another of
shorter current maturity (e.g. out of a 2-year note into an 18- month
note), s/he is said to back up.
bankers' acceptance (BA) A draft or bill of exchange accepted by a bank or trust company.
The accepting institution guarantees payment of the bill.
basis (1) Number of days in the coupon period. (2) In commodities
jargon, basis the spread between a futures price and some other
price. A money market participant would talk about spread rather
than basis.
basis point
basis price
bear market
bearer security
G�%I
block
1/100th of 1%.
Price expressed in terms of yield to maturity or annual rate of
return.
A declining market or a period of pessimism when declines in the
market are anticipated.
A security the owner of which is not registered on the books of the
issuer. A bearer security is payable to the holder.
The price offered for securities.
A large amount of securities, normally much more than what
constitutes a round lot in the market in question.
book-entry securities The Treasury and federal agencies are moving to a book-entry
system in which securities are not represented by engraved pieces
of paper but are maintained in computerized records at the Fed in
the names of inember banks, which, in turn, keep records of the
securities they own as well as those they are holding for customers.
In the case of other securities for which there is a book-entry
system, engraved securities do exist somewhere in quite a few
cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.
Resolution No. 13-633 Page 20 of 33
book value The value at which a debt security is shown on the holder's balance
sheet. Book value is often acquisition cost +/- amortization or
accretion, which may differ markedly from market value. It can be
further defined as "tax book", "accreted book", or "amortized
book" value.
�,
Market abbreviation for basis points. Thus, 1 bp means 1 basis
point, 10 bp means 10 basis points.
broker A broker brings buyers and sellers together for a commission paid
by the initiator of the transaction or by both sides; s/he does not
position. In the money market, brokers are active in markets in
which banks buy and sell money and in interdealer markets.
bull market
bullet (doan or security)
buy-back
callable bond
A period of optimism when increases in market prices are
anticipated.
All principal is due at maturity.
Another term for a repurchase agreement.
A bond that the issuer has the right to redeern prior to maturity by
paying some specified call price.
call price The price at which an issuer may redeem a bond prior to maturity.
The price is usually at a slight premium to the bond's original issue
price to compensate the holder for loss of income and ownership.
call risk
The risk to a bondholder that a bond may be redeemed prior to
maturity.
cash management bill Very-short-maturity bills that the Treasury occasionally sells
because its cash balances are down and it needs money for a few
days.
cash market Traditionally, this term has been used to denote the market in
which commodities were traded, for immediate delivery, against
cash. Since the inception of futures maxkets for T bills and other
debt securities, a distinction has been made between the cash
markets in which these securities trade for immediate delivery and
the futures markets in which they trade for future delivery.
cash price
Price quotation in the cash market.
cash settlement In the money market, a transaction is said to be made for cash
settlement if the securities purchased are delivered against payment
Resolution No. 13-633 Page 21 of 33
certificate of deposit
clear
in Fed funds on the same day the trade is made.
A time deposit with a specific maturity evidenced by a certificate.
Large-denomination CDs are typically negotiable.
A trade carried out by the seller delivering securities and the buyer
delivering funds in proper form. A trade that does not clear is said
to fail.
collateral Securities, evidence of deposit or other property which a borrower
pledges to secure repayment of a loan. Also refers to securities
pledged by a bank to secure deposits of public monies.
commercial paper An unsecured short-term promissory note with a fixed maturity of
no more than 270 days. Commercial paper is normally sold at a
discount from face value.
Comprehensive Annual The official annual financial report for the City of Federal Way.
Financial Report (CAFR)It includes five combined statements and
basic financial statements for each individual fund and account
group prepaxed in conformity with GAAP. It also includes
supporting schedules necessary to demonstrate compliance with
finance-related legal and contractual provisions, extensive
introductory material, and a detailed Statistical Section..
confirmation
A memorandum to the other side of a trade describing all relevant
data.
coupon (1) The annual rate of interest on the bond's face value that a
bond's issuer promises to pay the bondholder. (2) A certificate
attached to a bond evidencing interest due on a payment date.
credit enhancement
credit risk
The backing of paper with collateral, a bank LOC, or some other
device to achieve a higher rating for the paper.
The risk that an issuer of debt securities or a borrower may default
on his obligations, or that payment may not be made on sale of a
negotiable instrument. (See overnight delivery risk.)
current coupon A bond selling at or close to par; that is, a bond with a coupon
close to the yield currently offered on new bonds of similax
maturity and credit risk.
current issue
In Treasury bills and notes, the most recently auctioned issue.
Trading is more active in current issues than in off-the-run issues.
Resolution No. 13-633 Page 22 of 33
current maturiry Current time to maturity on an outstanding note, bond, or other
money market instrument; for example, a 5-year note one year
after issue has a current maturity of four years.
current yield Coupon payments on a security as a percentage of the security's
market price. In many instances the price should be gross of
accrued interest, particularly on instruments where no coupon is
left to be paid until maturity.
dealer
debenture
debt securities
A dealer, as opposed to a broker, acts as a principal in all
transactions, buying and selling for her/his own account.
A bond secured only by the general credit of the issuer.
IOUs created through loan-type transactions - commercial paper,
bank CDs, bills, bonds, and other instruments.
default Failure to make timely payment of interest or principal on a debt
security or to otherwise comply with the provisions of a bond
indenture.
delivery versus payment There are two methods of delivery of securities: delivery verses
payment and delivery versus receipt (also called free). Delivery
versus payment is delivery of securities with an exchange of
money for securities. Delivery versus receipt is delivery of
securities with an exchange of a signed receipt for the securities.
discount rate
The rate of interest charged by the Fed to member banks that
borrow at the discount window. The discount rate is an add-on
rate.
discount securities Non-interest-bearing money market instruments that are issued at a
discount and redeemed at maturity for full face value; for example,
U.S. Treasury bills.
discount window
divers f cat�on
dollar price of a bond
Facility provided by the Fed enabling member banks to borrow
reserves against collateral in the form of governments or other
acceptable paper.
Dividing investment funds among a variety of securities offering
independent returns.
Percentage of face value at which a bond is quoted.
equivalent bond yield Annual yield on a short-term, non-interest-beaxing security
calculated so as to be comparable to yields quoted on coupon
Resolution No. 13-633 Page 23 of 33
securities.
fail A trade is said to fail if on the settlement date either the seller fails
to deliver securities in proper form or the buyer fails to deliver
funds in proper form.
federal credit agencies Agencies of the federal government set up to supply credit to
various classes of institutions and individuals; for example, S&
Ls, small business firms, students, farmers, farm cooperatives, and
exporters.
Federal Deposit Insurance A federal institution that insures bank deposits, currently up to
Insurance (FDIC) $250,000 per deposit.
federalfunds (1) Non-interest-bearing deposits held by member banks at the
Federal Reserve. (2) Used to denote "immediately available" funds
in the clearing sense.
federal funds rate
The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open market
operations.
Federal Home Loan Banks The institutions that regulate and lend to savings and loan. The
(FHLB) Federal Home Loan Banks play a role analogous to that played by
the Federal Reserve Banks vis-a-vis member commercial banks.
Federal National A publicly owned, government-sponsored corporation chartered in
MortgageAssociation 1938 to purchase mortgages from lenders and resell them to
(FNMA or Fannie Mae) investors. Known by the nickname F'annie Mae, it packages
mortgages backed by the Federal Housing Administration, but also
selis some nongovernment-backed mortgages.
Federal Open Market Consists of seven members of the Federal Reserve Board and five
Committee (FOMC) of the twelve Federal Reserve Bank Presidents. The President of
the New York Federal Reserve Bank is a permanent member while
the other Presidents serve on a rotating basis. The Committee
periodically meets to set Federal Reserve guidelines regarding the
sales and purchases of Government Securities in the open market
as a means of influencing the volume of bank credit and money.
Federal Reserve System The central bank of the United States created by Congress and
consisting of a seven member Board of Governors in Washington,
D.C., 12 Regional Banks and about 5,700 commercial banks that
are members of the system.
Finaneial Industry A regulatory body created after the merger of the National
Resolution No. 13-633 Page 24 of 33
Regulatory Authority Association Securities Dealers and the New York Stock
Exchange's
(FINRA) regulation committee. The FINRA is responsible for governing
business between brokers, dealers and the investing public. By
consolidating these two regulators, FINRA aims to eliminate
regulatory overlap and cost inefficiencies.
, float The difference between the credits given by the Fed to banks'
reserve accounts on checks being cleared through the Fed and the
debits made to banks' reserve accounts on the same checks. Float
is always positive, because in the clearing of a check, the credit
sometimes precedes the debit. Float adds to the money supply.
general obligation bonds
Glas�-Steagall Act
good funds
Municipal securities secured by the issuer's pledge of its full faith,
credit and taxing power.
A 1933 act in which Congress forbade commercial banks to own,
underwrite, or deal in corporate stock and corporate bonds.
A rnarket expression for immediately available money, that is, Fed
funds.
Government National Securities guaranteed by GNMA and issued bv mort�a�e bankers,
Mortgage Association commercial banks, savings and loan associations and other
(GNMA or Ginnie Mae) institutions. Security holder is protected by full faith and credit of
the U.S. Government. Ginnie Mae securities are backed by FHA,
VA or FMHM mortgages. The term pass-through is often used to
describe Ginnie Maes.
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 Bill, Notes and Bonds."
haircut Margin in a repo transaction; that is, the difference between the
actual market value measured at the bid side of the market and the
value used in a repo agreement.
handle The whole-dollar price of a bid or offer is referred to as the handle.
For example, if a security is quoted 101-10 bid and 101-11 offered,
101 is the handle. Traders are assumed to know the handle, so a
trader would quote that market to another by saying she was at 10-
11. (The 10 and 11 refer to 32nds.)
internal controls
Resolution No. 13-633
An internal control structure designed to ensure that the assets of
the entity are protected from loss, theft, or misuse. The internal
Page 25 of 33
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 made 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 again loss or destruction. The
potential for fraud and loss increases with
physically delivered securities.
5. Clear delegation of authority to subordinate staff
members — Subordinance staff inembers must have
a clear understanding of their authority and
responsibilities to avoid improper transactions.
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 hy 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
thelead bank and third-party custodian — The
designated official should ensure that an agreement
Resolution No. 13-633 Page 26 of 33
will be entered into and will address the following
points: controls; security provisions, and
responsibilities of each party making and receiving
wire transfers.
inverted yield curve A chart formation that illustrates long-term securities having lower
yields than short-term securities. This configuration usually occurs
during periods of high inflation coupled with low levels of
confidence in the economy and restrictive monetary policy.
liquidity A liquid asset is one that can be converted easily and rapidly into
cash without a substantial loss of value. In the money market, as
security is said to be liquid if the spread between bid and asked
prices is narrow and reasonable size can be done at those quotes.
liquidity diversification Investing in a variety of maturities to reduce the price risk to which
holding long bonds exposes the investor.
liquidity risk In banking, risk that monies needed to fund assets may not be
available in sufficient quantities at some future date. Implies an
imbalance in committed maturities of assets and liabilities.
Local Government
Investment Pool (LGIP)
long bonds
margin
market value
marketabiliry
An investment by local governments in which their money is
pooled
as a method for managing local funds.
Bonds with a long current maturity.
In a repo or reverse repurchase transaction, the amount by which
the market value of the securities collateralizing the transaction
exceeds the amount lent.
The price at which a security could presumably be purchased or
sold.
A negotiable security is said to have good marketability if there is
an active secondary market in which it can easily be resold.
master repurchase A written contract covering all future transactions between the
parties
agreement to purchase -reverse repurchase agreements that establishes each
party's rights in the transactions. A master agreement will often
specify, among other things, the right of the buyer-lender to
liquidate the underlying securities in the event of default by the
seller-borrower.
Resolution No. 13-633 Page 27 of 33
maturity
money market
The date upon which the principal or stated value of an investment
becomes due and payable.
The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and
traded.
money market (center) A bank that is one the nation's largest and consequently play an
bank active and important role in every sector of the money market.
money supply definitions M-1: Currency in the hands of the public, travelers checks of
nonbank issuers, net demand deposits plus other checkable
deposits including NOW accounts. Excludes deposits due to
domestic banks, the U.S. government, and foreign banks and
official institutions.
mortgage bond
negotiable certificates
of deposit
M-2: M-1 plus money market deposit accounts plus overnight
repos and money market funds and savings and small (less than
$100,000) time deposits held at all depository institutions plus
overnight repos at banks plus overnight Euros held by nonbank
U.S. depositors in the Caribbean branches of U.S. banks plus
balances at money funds (excluding institutions-only funds).
M-3: M-2 plus large (over $100,000) time deposits at all
depository institutions, term repos at banks and S&Ls plus
balances at institutions-only money funds.
L: M-3 plus other liquid assets such as term Eurodollars held by
nonbank U.S. residents, bankers' acceptances, commercial paper,
Treasury bills and other liquid governments, and U.S. savings
bonds.
Bond secured by a lien on property, equipment, or other real assets.
A large-denomination (generally $1 million) CD that can be sold
but cannot be cashed in before maturity.
nominal yield The stated rate of interest that a bond pays its current owner, based
on par value of the security. It is also known as the "coupon",
"coupon rate", or "interest rate".
note Coupon issues with a relatively short original maturity are often
called notes. Treasury notes are coupon securities that have an
original maturity of up to 10 years.
odd lot Less than a round lot.
Resolution No. 13-633 Page 28 of 33
open market operations Purchases and sales of government and certain other securities in
the open market by the New York Federal Reserve Bank as
directed by the FOMC in order to influence the volume of money
and credit in the economy. Purchases inject reserves into the bank
system and stimulate growth of money and credit; sales have the
opposite effect. Open market operations are the Federal Reserve's
most important and most flexible monetary tool.
opportunity cost The cost of pursuing one course of action measured in terms of
foregone return offered by the most attractive alternative.
original maturity Maturity at issue. For example, a 5-year note has an original
maturity at issue of five years; one year later, it has a current
maturity of four years.
paper
paper gairc (loss)
Money market instruments, commercial paper, and other.
Unrealized capital gain (loss) on securities held in portfolio, based
on a comparison of current market price and original cost.
par (1) Price of 100%. (2) The principal amount at which the issuer of
a debt security contracts to redeem that security at maturity, face
value.
par bond
A bond selling at par.
pass-through A mortgage-backed security on which payment of interest and
principal on the underlying mortgages are passed through to the
security holder by an agent.
pay-up (1) The loss of cash resulting from a swap into higher-price bonds.
(2) The need (or willingness) of a bank or other borrower to pay a
higher rate to get funds.
plus Dealers in governments normally quote bids and offers in 32nds.
To quote a bicl or offer in 64ths, they use pluses; for example, a
dealer who bids 4+ is bidding the handle plus 4/32 + 1/64, which
equals the handle plus 9/64.
point (1) 100 bp = 1%. (2) One percent of the face value of a note or
bond. (3) In the foreign-exchange market, the lowest level at which
the currency is priced. Example: "One point" is the difference
between sterling prices of $1.8080 and $1.8081.
portfolio Collection of securities held by an investor.
Resolution No. 13-633 Page 29 of 33
positive yield curve A chart formation that illustrates short-term securities having lower
yields than long-term securities.
premium (1) The amount by which the price at which an issue is trading
exceeds the issue's par value. (2) The amount that must be paid in
excess of par to call or refund an issue before maturity. (3) In
money market parlance, the fact that a bank's CDs trade at a rate
higher than others of its class, or that a bank has had to pay up to
acquire funds.
premium bond
present value (of a
future payment)
price risk
Bond selling above par.
The value today of a future payment discounted at an appropriate
rate of interest.
The risk that a debt security's price may change due to a rise or fall
in the going level of interest rates.
primary dealer A group of government securities dealers that submit daily reports
of market activity and positions and monthly financial statements
to the Federal Reserve Bank of New York and are subject to its
informal oversight. Primary dealers include Securities and
Exchange Commission (SEC) registered securities broker-dealers,
banks, and a few unregulated firms.
prime rate The rate at which banks lend to their best (prime) customers. 'The
all-in cost of a bank loan to a prime credit equals the prime rate
plus the cost of holding compensating balances.
principal
(1) The face amount or par value of a debt security. (2) One who
acts as a dealer buying and selling for his own account.
qualified public A financial institution which does not claim exemption from the
depositories payment of any sales or ad valorem taxes under the laws of this
state, which has segregated for the benefit of a commission eligible
collateral having a value of not less than its maximum liability and
which has been approved by the Public Deposit Protection
Commission to hold public deposits.
rate of return The yield obtainable on a security based on its purchase price or its
current market price. This may be the amortized yield to maturity
on a bond or the current income return.
�atings
Resolution No. 13-633
An evaluation given by Moody's, Standard & Poor's, Fitch, or
other rating services of a security's creditworthiness.
Page 30 of 33
relative value The attractiveness - measured in terms of risk, liquidity, and return
- of one instrument relative to another, or for a given instrument, of
one maturity relative to another.
repurchase agreement Legally, a repurchase agreement is a secured transaction. It differs
from other money market instruments because it is not simply the
outright purchase of an investment security that will mature on a
specific day, like a U.S. Treasury bill or a bank CD. Instead, the
repo is a contractual transaction between an investor and an issuing
financial institution (bank or securities dealer). The investor
exchanges cash for temporary ownership of collateral securities,
with an agreement between the parties that on a future date, the
financial institution will repurchase the securities. Customarily,
the investor receives interest during the term of the repurchase
agreement, as agreed at the time of the investment tr�nsaction.
risk
Degree of uncertainty of return on an asset.
round lot In the money market, round lot refers to the minimum amount for
which dealers' quotes are good. This may range from $100,000 to
$5 million, depending on the size and liquidity of the issue traded.
safekeep For a fee, banks will safekeep (i.e. hold in their vault, clip coupons
on, and present for payment at maturity) bonds and money market
instruments.
savings ar�d loan Federal- or state-chartered institution that accepts savings deposits
association and invests the bulk of the funds thus received in mortgages.
scale A bank that offers to pay different rates of interest on CDs of
varying maturities is said to "post a scale". Commercial paper
issuers also post scales.
secondary market
sector
SEC Rule 15C3-1
Securities and Exchange
Commission (SEC)
settlement clate
Resolution No. 13-633
The market in which previously issued securities are traded.
Refers to a group of securities that are similar with respect to
maturity, type, rating, and/or coupon.
See uniform net capital rule.
Agency created by Congress to protect investors in securities
transactions by administering securities legislation.
The date on which a trade is cleared by delivery of securities
against funds. The settlement date may be the trade date or a later
Page 31 of 33
date.
spread (1) Difference between bid and asked prices on a security. (2)
Difference between yields on or prices of two securities of
differing sorts or differing maturities. (3) In underwriting,
difference between price realized by the issuer and price paid by
the investor. (4) Difference between two prices or two rates. What
a commodities trader would refer to as the basis.
technicals
(1) Demand and supply factors influencing the cash market.
(2) Value or shape of technical indicators.
thin market A market in which trading volume is low and in which
consequently bid and asked quotes are wide and the liquidity of the
traded instrument is low.
tight market
trade date
A tight market is one is which volume is large, trading is active
and highly competitive, and spreads between bid and asked prices
are narrow.
The date on which a transaction is initiated. The settlement date
may be the trade date or a later date.
treasury bill A non-interest-bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to
mature in three months, six months, or one year.
treasury note
Intermediate U.S. government debt securities with maturities of
one to 10 years.
uniform net capital rule Securities and Exchange Commission requirement that member
firms as well as nonmember broker-dealers in securities maintain a
maximum ratio of indebtedness to liquid capital of 15 to l; also
called net capital rule and net capital ratio. Indebtedness covers all
money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among
members of underwriting syndicates. Liquid capital includes cash
and assets easily converted into cash.
volatility
when-issued trades
yield
Resodution No. 13-633
A degree of fluctuation in the price and valuation of securities.
Typically there is a lag time between the time a new bond is
announced and sold and the time it is actually issued. During this
interval, the security trades, wi, "when, as, and if issued."
The rate of annual income return on an investment, expressed as a
Page 32 of 33
percentage. (1) income yield is obtained by dividing the current
dollar income by the current market price for the security. (2) net
yield or yield to maturity is the current income yield minus any
premium above par or plus any discount from par in purchase
price, with the adjustment spread over the period from the date of
purchase to the date of maturity of the bond.
yield curve A graph showing, for securities that all expose the investor to the
same credit risk, the relationship at a given point in time between
yield and current maturity. Yield curves are typically drawn using
yields on governments of various maturities.
zero-coupon securities Security that is issued at a discount and makes no periodic interest
payments. The rate of return consists of a gradual accretion of the
principal of the security and is payable at par upon maturity.
Resolution No. 13-633 Page 33 of 33