Res 94-175
RESOLUTION NO.
94-175
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF FEDERAL WAY, WASHINGTON, ADOPTING AN
INVESTMENT POLICY TO GOVERN THE INVESTMENT OF
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 CITY.
WHEREAS, the City of Federal Way's 1994 Adopted Budget
constituted
administration
of
funds
equalling
$33,422,275.00,
including operating and capital components; and
WHEREAS, the city council of the city of Federal Way has
previously adopted financial policies to govern the administration
of the budget; and
WHEREAS, the City Council seeks at all times to maintain
the highest fiscal 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; NOW, THEREFORE,
THE CITY COUNCIL OF THE CITY OF FEDERAL WAY, WASHINGTON,
DOES HEREBY RESOLVE AS FOLLOWS:
section 1.
policv Adopted.
The city Council of the City
of Federal Way hereby adopts the Investment Policy attached hereto
as Exhibit A and incorporated herewith by this reference as the
Investment Policy for the city of Federal Way.
RES # 94-175
, Page 1
COpy
section 2.
Ratification.
Any act consistent with the
authority and prior to the effective date of this resolution is
hereby ratified and affirmed.
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.
Effective Date.
This resolution shall be
effective immediately upon passage by the Federal Way city council.
RESOLVED BY THE CITY COUNCIL OF THE CITY OF FEDERAL WAY,
WASHINGTON, this ~ day of
May
, 1994.
CITY OF FEDERAL WAY
ATTEST:
~¿¿~
MAYO, Y E. GATES
A. LAKE
FILED WITH THE CITY CLERK: 5/10/94
PASSED BY THE CITY COUNCIL: 5/17/94
RESOLUTION NO. 94-175
RES\INVEST .POL
RES # 94-175
, Page 2
1.0 Policy
City Council Approval:
May 17,1994
CITY OF FEDERAL WAY
INVESTMENT POLICY
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 Scone
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:
2.1
Funds
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
2.1.8
3.0 Prudence
General Fund
Special Revenue Funds
Capital Projects Funds
Debt Service Fund
Enterprise Funds
Internal Service Funds
Trust and Agency Funds (with the exception of the Federal Way Retirement System
Fund)
Any new fund created by the City Council, unless specifically exempted by the City
Council
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.
4.0 Objective
The primary objectives, in priority order, of the City of Federal Way's investment portfolio shall be:
EXHIBIT ('/I If
Page 2
4.1
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:
1. 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 anyone 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 anticipated 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
and/or maximize cash flows.
c. The physical security or safekeeping of the City's investments is also an important
element of safety. Safekeeping requirements are defined in Section II of this
Policy.
4.2
Liquidity
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).
Page 3
4.3
Yield
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 Dele!!ation of Authority
Authority to manage the City's investment program is derived from RCW 35A.40.050 and Sections 7-1
and 7-2 of the Federal Way City Code. Management responsibility for the investment program is hereby
delegated to the City Manager 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 Director of Management Services. The Director of Management Services shall be responsible for
all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate
officials.
6.0 Investment Committee
There is hereby created an Investment Committee, consisting of the City Manager, Management Services
Director, designated investment official, and one other City employee appointed by the City Manager.
Members of the Investment Committee shall meet at least quarterly to determine general strategies and
monitor results. The Investment Committee shall include in its deliberations such topics as: economic
outlook, portfolio diversification and maturity structure, potential risks to the City's funds, authorized
depositories, brokers and dealers, and the target rate of return on the investment portfolio. The
Investment Committee members must disclose any personal financial interest in instruments or brokers
utilized by the City.
Written investment procedures must be approved by the Investment Committee. The Investment
Committee shall provide for immediate release of meeting minutes, which shall be disseminated by the
City Manager to the full City Council. Any two members of the Committee may request a meeting, and
three members shall constitute a quorum. The Committee shall establish its own rules of procedure. The
Committee's authority shall not apply to investment of the Federal Way Retirement System. The
Committee shall perform such other duties as may be assigned to it by this Policy or by motion of the
City Council.
7.0 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 City
Manager 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
Page 4
be related to the performance of the City's portfolio. Employees and officers shall subordinate their
personal investment transactions to those of the City, particularly with regard to the timing of purchases
and sales.
8,0 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 Investment
Committee. The Investment Committee 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 Investment Committee, SEC
Rule 15C3-1 (uniform net capital rule) has been satisfied. No public deposit shall be made except in a
qualified public depository as established by state law.
8.1
Required Documentation
All financial institutions and broker/dealers who desire to become qualified bidders for
investment transactions must supply the Investment Committee with certain documents,
including but not limited to: audited financial statements, proof of National Association of
Securities Dealers certification, trading resolution, proof of state registration, certification of
having read the City's Investment Policy (see Section 8.3 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.
8.2
Rating Service/Creditworthiness Criteria
The City shall use a commercial rating service (Thomson Bankwatch or equivalent) to most
efficiently assess creditworthiness and qualification for the City's list of 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 Investment Committee 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 AllPl in accordance with state law.
Page 5
8.4
8.3
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 members 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.
9.0 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:
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
State Investment Pool
Repurchase Agreements
U.S. Treasury Obligations
U.S. Government Agencies
U.S. Government-Sponsored Corporations/Instrumentalities
Bankers' Acceptances: Secondary Market
Domestic and Foreign
Commercial Paper: Secondary Market
Insured Certificates of Deposit:
Banks and Savings & Loans
Uninsured/Collateralized Certificates of Deposit:
Banks and Savings & Loans
With respect to Sections 9.4 and 9.5 above, conventional Agency and Instrumentality securities include
those provided below. Not all government agency and instrumentality securities are widely traded.
Page 6
Some lack broad and deep markets, and others are inappropriate for cash management purposes by
virtue of their price volalility or technical characteristics. Therefore, the City shall maintain a
preference for the government agency issues listed below (see Exhibit B for details):
Discount securities
Farm Credit Consolidated System-wide discount notes
Federal Home Loan Banks discount notes
Federal Home Loan Mortgage Corporation (Freddie Mac) discount notes
Variable-rate securities
Student Loan Marketing Association (Sallie Mae)
CoUDon securities
Federal National Mortgage Association (Fannie Mae)
Federal Farm Credit Bank
Federal Home Loan Bank
Federal Land Bank
10.0 Competitive Selection of Investment Instruments
Before the City invests any surplus funds, a competitive "bid" process shall be conducted. If a specific
maturity date is required, either for cash flow purposes or for conformance to maturity guidelines, bids
will be requested for instruments which meet the maturity requirement. If no specific maturity is
required, a market trend (yield curve) analysis will be conducted to determine which maturities would
be most advantageous.
11.0 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.
11.1
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).
11.2
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
Page 7
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 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.
11.3
Other Investments
Any other investments shall be collateralized by the actual security held in safekeeping by the
City's safekeeping agent.
12.0 SafekeeDinl! 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.
13.0 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. Diversification strategies shall
be determined and reviewed periodically by the Investment Committee. As a general rule, which may
be amended by the Investment Committee as economic cycles change, the following diversification
limitations may be imposed on the portfolio:
13.1
Maturity
No more than 20% of the portfolio may be invested beyond 12 months, and average maturity
of the portfolio may not exceed two years.
Page 8
13.2
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 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.
13.3
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.
14.0 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 members
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.
15.0 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.
15.1
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 State Investment Pool.
Page 9
16.0 Reportim!
The Director of Management Services 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.
17.0
Investment Policv Adootion
The City's Investment Policy shall be adopted by resolution of the City Council. The Policy shall be
reviewed annually by the Investment Committee 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 Director of Management Services on behalf of the
Investment Committee, and after review and approval by the City Manager, shall be forwarded to the
City Council for consideration and approval.
Attachments: Exhibits A, Band C
Page 1
EXIDBIT A
INVESTMENTS AUTHORIZED UNDER STATE LAW
Security
*
Certificates, notes, bonds, or other obligations of the United States
Obligations of U.S. agencies or of any corporation wholly owned by
the government of the United States
*
*
Federal Home Loan Bank notes and bonds
Federal Land Bank bonds
*
Federal National Mortgage Association notes, debentures, and
guaranteed certificates of participation
Obligations of any other government-sponsored corporation whose
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
*
*
State, county, municipal, or school district bonds or warrants of
taxing 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 them and to be general obligations.
Motor vehicle fund warrants, when authorized by agreement between
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
Any investments authorized by law for the Treasurer of the State of
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
State of Washington which bonds have, at the time of investment,
one of the three highest credit ratings of a nationally recognized
rating agency.
General obligation bonds of a state other than the State of
Washington 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.
*
RCW
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080; 36.29.020
43.84.080
43.84.080
43.84.080
43.250.040
39.59.020
39.59.020
39.59.020
Page 2
Security
Bonds or warrants of this State
*
General obligation or utility revenue bonds or warrants of any city or
town in this State
A city's or town's own bonds or warrants of a local improvement
district which are within the protection of the local improvement
guaranty fund law
*
*
Interim financing warrants of a local improvement district which is
within the protection of the local improvement guaranty fund law
A city's or town's own local improvement installment notes which
are within the protection of the local improvement guaranty fund law
*
*
Bonds or other obligations issued by a metropolitan municipal
corporation pursuant to Chapter 35.58 RCW
Bonds or other obligations issued by a housing authority pursuant to
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 as the government making the investment
Subject to compliance with RCW 39.56.030, registered warrants of a
local government in the same county as the government making the
investment
*
*
Subject to the arbitrage provisions of Section 148 of the Federal
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 years, or bonds
described in RCW 39.59.020 (I) or (2), except that bonds
otherwise described in RCW 39.59.020 (I) 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;
Shares of money market funds with portfolios consisting of
securities otherwise authorized by law for investment by local
governments
..
..
RCW
35.39.030
35.39.030
35.39.030
35.39.034
35.45.150
35.58.510
35.82.220
36.33.070
39.59.010
39.59.030
Page 3
Security
*
Notes or bonds secured by mortgage which the Federal Housing
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
Port district revenue bonds and notes issued under the authority of
Chapter 54.34. RCW
*
*
Local utility district bonds issued by a public utility district
RCW
39.60.010
39.60.010
39.60.010
39.60.050
43.33A.080
43.180.190
53.34.150
54.16.070
Page 1
EXIllBIT B
PREFERRED/MOST COMMONLY USED GOVERNMENT AGENCY ISSUES
Discount Note Issuers
Fann Credit System
Much of the instrumentality debt has been issued by financial institutions providing a variety of credit
services to the American agricultural community. The cooperative Farm Credit System provides credit
and financial services to a variety of producers, homeowners and farm-related businesses. To accomplish
these purposes, Congress has created the Federal Land Banks and Federal Loan Associations, the Federal
Intermediate Credit (PIC) Banks and the Banks for Co-operatives.
The 37 Farm Credit Banks maintain a fiscal agency in New York City, through which public offerings
of their securities are administered. A nationwide syndicate of about 170 dealers manages these securities
in the United States and abroad.
Fann Credü ConsolidiUed System-wide discount notes
The 37 Farm Credit Banks collectively issue consolidated system-wide discount notes. These are the joint
and severable obligations of the banks, with maturities ranging between five and 270 days. Discount
notes are also used to complement borrowing from commercial banks to meet routine cash management
requirements. Also, they provide for interim financing between bond sales. The notes generally are
issued through subscription sales and have a wide institutional following. Cash managers sometimes buy
the "discos" with specific maturity dates to match payroll or other planned disbursements.
The Federal Farm Credit Banks Funding Corporation also issue consolidated bonds with six-month and
nine-month maturities offered monthly. Intermittently throughout the year, bonds are issued with longer
maturities in denominations of $1,000 or more.
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 are 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.
Page 2
Federal Home Loan Morlgage Corporation (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 guaranteed 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.
Variable Note Issuers
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.;jay T-biIl rate. These securities
can offer useful hedges against future periods of rapid interest rate increases.
Counon Securities Issuers
Federal National Morlgage Association (Fannie Mae)
The Federal National Mortgage Association (FNMA or Fannie Mae) 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
financed 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 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.
Page 3
Federal Farm Credit Bank
See discussion under discount notes.
Federal Home Loan Banks (FHLB)
See discussion under discount notes.
Federal Land Banks
Organized in 1917 pursuant to the Federal Loan Act, the Federal Land Banks make loans secured by first
mortgages on rural real estate for various agricultural purposes. Each borrower is required to purchase
stock in the association in an amount equal to 5 percent of the loan. This stock then is pledged with the
association as collateral security for loan repayment. About $25 billion is bonds issued by the Federal
Land Banks are outstanding; they are no longer issued.
Page I
accretion (of a disco un/)
accrued in/erest
active
add-on raJe
agencies
amomze
arbitrage
asked
back discoun/ raJe
back up
bankers' acceptance (BA)
EXHIBIT C
GWSSARY
In portfolio accounting, a straight-line accumulation of capital gains on
discount bonds in anticipation of receipt of par at maturity.
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.
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.
Federal agency securities.
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.
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.
The price at which securities are offered.
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.
(1) When yields rise and prices fall, 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 l8-month note), s/he
is said to back up. '
A draft or bill of exchange accepted by a bank or trust company. The
accepting institution guarantees payment of the bill.
Page 2
basis
(I) 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 poinJ
1/100th of 1%.
basis price
Price expressed in terms of yield to maturity or annual rate of return.
bear market
A declining market or a period of pessimism when declines in the
market are anticipated.
bearer security
A security the owner of which is not registered on the books of the
issuer. A bearer security is payable to the holder.
bid
The price offered for securities.
block
A large amount of securities, normally much more than what constitutes
a round lot in the market in question.
book-enJry 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
member 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 sýstem, 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.
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.
bp
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; slhe 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
A period of optimism when increases in market prices are anticipated.
bullet (loan or security)
All principal is due at maturity.
buy-back
Another term for a repurchase agreement.
Page 3
callable bond
cash management bill
cash market
cash price
cash settlement
cerlificate of deposit
clear
collateral
commercial paper
Comprehensive Annual
confirmation
coupon
credit enhancement
A bond that the issuer has the right to redeem prior to maturity by
paying some specified call price.
Very-short-maturity bills that the Treasury occasionally sells because its
cash balances are down and it needs money for a few days.
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 markets 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.
Price quotation in the cash market.
In the money market, a transaction is said to be made for cash settlement
if the securities purchased are delivered against payment 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.
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.
An unsecured promissory note with a fixed maturity of no more than
270 days. Commercial paper is normally sold at a discount from face
value.
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 prepared
in conformity with GAAP. It also includes supporting schedules
necessary to demonstrate compliance with finance-related legal and
contractual provisions, extensive introductory material, and a detailed
Statistical Section.
A memorandum to the other side of a trade describing all relevant data.
(I) 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.
The backing of paper with collateral, a bank LOC, or some other device
Page 4
credit risk
currenJ coupon
currenJ issue
currenJ maiurity
currenJ yield
dealer
debenJure
debt securities
default
delivery versus paymenJ
discounJ rate
discounJ securities
discounJ window
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.)
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 similar maturity and credit
risk.
In Treasury bills and notes, the most recently auctioned issue. Trading
is more active in current issues than in off-the-run issues.
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.
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.
A dealer, as opposed to a broker, acts as a principal in all transactions,
buying and selling for herlhis 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.
Failure to make timely payment of interest or principal on a debt
security or to otherwise comply with the provisions of a bond indenture.
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.
The rate of interest charged by the Fed to member banks that borrow at
the discount window. The discount rate is an add-<m rate.
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.
Facility provided by the Fed enabling member banks to borrow reserves
against collateral in the form of governments or other acceptable paper.
Page 5
diversification
dollar price of a bond
equivalent bond yield
fail
federal credii agencies
Federal Deposit Insurance
Corporation (FDIC)
Federal funds
Federal funds rate
Federal Home Loan Banks
(FHLB)
Federal Open Market
Committee (FOMC)
Federal Reserve System
float
Dividing investment funds among a variety of securities offering
independent returns.
Percentage of face value at which a bond is quoted.
Annual yield on a short-term, non-interest-bearing security calculated so
as to be comparable to yields quoted on coupon securities.
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.
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.
A federal institution that insures bank deposits, currently up to $100,000
per deposit.
(I) Non-interest-bearing deposits held by member banks at the Federal
Reserve. (2) Used to denote "immediately available" funds in the
clearing sense.
The rate of interest at which Fed funds are traded. This rate is currently
pegged by the Federal Reserve through open market operations.
The institutions that regulate and lend to savings and loan associations.
The Federal Home Loan Banks playa role analogous to that played by
the Federal Reserve Banks vis-a-vis member commercial banks.
Consists of seven members of the Federal Reserve Board and five of the
twelve Federal Reserve Bank Presidents. The President of the New
York Federal Reserve Bank is a permanent member while the other
Presidents serve on a rotating basis. The Committee periodically meets
to set Federal Reserve guidelines regarding the sales and purchases of
Government Securities in the open market as a means of influencing the
volume of bank credit and money.
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.
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.
Page 6
general obligation bonds
Glass-Steagall Act
good funds
governments
haircut
Iwndle
liquidity
liquidity diversification
liquidity risk
long bonds
margin
market value
marketability
master repurchase
agreement
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 market expression for immediately available money, that is, Fed
funds.
Negotiable U.S. Treasury securities.
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.
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.)
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.
Investing in a variety of maturities to reduce the price risk to which
holding long bonds exposes the investor.
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.
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.
A written contract covering all future transactions between the parties to
repurchase-reverse repurchase agreements that establishes each party's
rights in the transactions. A master agreement will often specify, among
other things, the right of the buyer-lender to liquidate the underlying
securities in the event of default by the seller-borrower.
Page 7
money market
money market (center) bank
money supply definmons
mortgage bond
negotiable certificates
of deposit
note
odd lot
open market operations
opportunity cost
original maturity
paper
The market in which short-term debt instruments (bills, commercial
paper, bankers' acceptances, etc.) are issued and traded.
A bank that is one the nation's largest and consequently play an active
and important role in every sector of the money market.
M-l: 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.
M-2: M-l 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.
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.
Less than a round lot.
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.
The cost of pursuing one course of action measured in terms of foregone
return offered by the most attractive alternative.
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.
Money market instruments, commercial paper, and other.
Page 8
paper gain (loss)
par
Unrealized capital gain (loss) on securities held in portfolio, based on a
comparison of current market price and original cost.
(I) 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
(I) 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 bid 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.
porifolio
Collection of securities held by an investor.
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
Bond selling above par.
present value (of a
fuJure payment)
The value today of a future payment discounted at an appropriate rate
of interest.
price risk
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.
Page 9
prime role
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
deposiJories
A financial institution which does not claim exemption from the 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.
role 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.
ratings
An evaluation given by Moody's, Standard & Poor's, Fitch, or other
rating services of a security's creditworthiness.
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.
repurchnse 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 transaction.
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 (Le. hold in their vault, clip coupons on,
and present for payment at maturity) bonds and money market
instruments.
savings and loan
association
Federal- or state-chartered institution that accepts savings deposits and
invests the bulk of the funds thus received in mortgages.
Page 10
scale
secondary 1TIllrket
sector
SEC Rule 15C3-1
Securities and Exchange
Commission (SEC)
settlement dale
spread
technicals
thin 1TIllrket
tight 1TIllrket
trade dale
Treasury bill
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.
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 date.
(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.
(1) Demand and supply factors influencing the cash market. (2) Value
or shape of technical indicators.
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.
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.
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.
Page 11
unifonn net capital rule
when-issued trades
yield
yield curve
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 I; 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.
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
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.
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.