RE 2001-08-28.1 A RESOLUTION OF THE CITY OF COPPELL, TEXAS
RESOLUTION NO. 2001-0828.1
A RESOLUTION OF THE CITY OF COPPELL, TEXAS, AMENDING
THE AMENDED WRITTEN INVESTMENT POLICY OF THE CITY OF
COPPELL AS PROVIDED BY THE PUBLIC FUNDS INVESTMENT ACT,
CHAPTER 2256, TEXAS GOVERNMENT CODE; PROVIDING A
REPEALING CLAUSE; PROVIDING A SEVERABILITY CLAUSE; AND
PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City Council has heretofore adopted a written Investment Policy as required
by Chapter 2256 of the Texas Government Code; and
WHEREAS, it is necessary and in the public interest to amend the written policy to coincide
with changes to the Public Funds Investment Act;
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY
OF COPPELL, TEXAS:
SECTION 1. That the written Investment Policy of the City of Coppell, heretofore adopted
as Exhibit "A" to Resolution No. 2001-0509.1, is hereby amended as follows, to wit:
1. amending the Investment Portfolio, Section V, to detail the requirements for
entering into a Master Repurchase Agreement which includes detailing the
eligible collateral, collateralization ratios, standards for collateral custody and
control, collateral valuation, and conditions for agreement termination;
2. amending the Investment Portfolio, Section V, by deleting the term
"investment grade" when referring to AAA rated mutual funds. "Investment
grade" is a lower rating than AAA rated mutual fund;
3. amending the Safekeeping and Custody, Section VII, Insurance or Collateral,
by adding the following:
"The City's Depository Agreement shall specify the acceptable investment
securities for collateral, the substitution or release of investment securities,
ownership of securities, and the method of valuation of securities."
SECTION 2. Republish and adopt subject to the amendments set forth in Exhibit "A" which
is attached hereto and incorporated herein as if set forth in full.
SECTION 3. That all provisions of the resolutions of the City of Coppell, Texas, in
conflict with the provisions of this Resolution, except as noted herein, be, and the same are hereby,
repealed, and all other provisions not in conflict with the provisions of this Resolution shall remain
in full force and effect.
SECTION 4. That should any word, phrase, paragraph, or section of this Resolution be
held to be unconstitutional, illegal or invalid, the same shall not affect the validity of this
Resolution as a whole, or any part or provision thereof other than the part so decided to be
unconstitutional, illegal or invalid, and shall not affect the validity of the Resolution as a whole.
SECTION 5. That this Resolution shall take effect immediately from and after its passage
as the law and charter in such cases provide.
DULY PASSED by the City Council of the City of Coppell, Texas, this the 28th day
of August, 2001.
APPROVED:
CANDY SHEEHAN, MAYOR
ATTEST:
LIBBY BALL, CITY SECRETARY
ROBERT E. HAGER, CITY ATTORNEY
(REH/cdb 08/23/0D {~e
2 42928
INTRODUCTION
The purpose of this document is to set forth specific investment policy and strategy guidelines for the
City of Coppell in order to achieve the goals of safety, liquidity, yield, and public trust for all
investment activity. The City Council of the City of Coppell shall review its investment strategies and
policy not less than annually. This policy serves to satisfy the statutory requirement of Chapter 2256,
Texas Government Code as amended, to define, adopt and review a formal investment strategy and
policy.
INVESTMENT STRATEGY
The City of Coppell maintains portfolios which utilize four specific investment strategy considerations
designed to address the unique characteristics of the fund groups represented in the portfolios:
Investment strategies for operating funds and commingled pools containing operating
funds have as their primary objective to assure that anticipated cash flows are matched
with adequate investment liquidity. The secondary objective is to create a portfolio
structure which will experience minimal volatility during economic cycles. This may be
accomplished by purchasing high quality, short-to-medium-term securities which will
complement each other in a laddered or barbell maturity structure. The dollar weighted
average maturity of 365 days or less will be calculated using the stated final maturity
date of each security.
Investment strategies for debt service funds shall have as the primary objective the
assurance of investment liquidity adequate to cover the debt service obligation on the
required payment date. Securities purchased shall not have a stated final maturity date
which exceeds the debt service payment date.
Investment strategies for debt service reserve funds shall have as the primary objective
the ability to generate a dependable revenue stream to the appropriate debt service fund
from securities with a low degree of volatility. Securities should be of high quality and,
except as may be required by the bond ordinance specific to an individual issue, of
short to intermediate-term maturities. Volatility shall be further controlled through
maturity and quality range, without paying premium, if at all possible. Such securities
will tend to hold their value during economic cycles.
Investment strategies for special projects or special purpose fund portfolios will have as
their primary objective to assure that anticipated cash flows are matched with adequate
investment liquidity. These portfolios should include at least 10% in highly liquid
securities to allow for flexibility and unanticipated project outlays. The stated final
maturity dates of securities held should not exceed the estimated project completion
date.
INVESTMENT POLICY
I. SCOPE
This investment policy applies to all financial assets of the City of Coppell. These funds are accounted
for in the City's Comprehensive Annual Financial Report (CAFR) and include:
General Fund
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Proprietary Funds
Trust and Agency Funds
H. OBJECTIVES
The City of Coppell shall manage and invest its cash with four objectives, listed in order of priority:
Safety, Liquidity, Yield, and Public Trust. The safety of the principal invested always remains the
primary objective. All investments shall be designed and managed in a manner responsive to the public
trust and consistent with State and Local law.
The City shall maintain a comprehensive cash management program which includes collection of
accounts receivable, vendor payment in accordance with invoice terms, and prudent investment of
available cash. Cash management is defined as the process of managing monies in order to insure
maximum cash availability and maximum yield on short-term investment of pooled idle cash.
Safety
The primary objective of the City's investment activity is the preservation of capital in the overall
portfolio. Each investment transaction shall be conducted in a manner to avoid capital losses, whether
they be from securities default or erosion of market value.
Liquidity
The City's investment portfolio shall be structured such that the City is able to meet all obligations in a
timely manner. This shall be achieved by matching investment maturities with forecasted cash flow
requirements and by investing in securities with active secondary markets.
Yield
The City's cash management portfolio shall be designed with the objective of regularly exceeding the
average rate of return on three-month U.S. Treasury Bills. The investment program shall seek to
augment returns above this threshold consistent with risk limitations identified herein and prudent
investment polices.
Public Trust
All participants in the City's investment process shall seek to act responsibly as custodians of the public
trust. Investment officials shall avoid any transaction which might impair public confidence in the City's
ability to govern effectively.
HI. RESPONSIBILITY AND CONTROL
Investment Committee
An Investment Committee, consisting of the City Manager, Deputy City Manager, the Director of
Finance, and Assistant Director of Finance, shall meet at least quarterly to determine operational
strategies and to monitor results. The Investment Committee shall include in its deliberation such
topics as: performance reports, economic outlook, portfolio diversification, maturity structure,
potential risk to the City's funds, authorized brokers and dealers, and the target rate of return on the
investment portfolio.
Delegation of Authority and Training
Authority to manage the City's investment program is derived from a resolution of the City Council.
The Director of Finance, the Assistant Finance Director and the Chief Accountant are designated as the
investment officers of the City and are responsible for investment decisions and activities. The Director
of Finance shall establish written procedures for the operation of the investment program, consistent
with this investment policy. The investment officers shall attend at least one ten (10) hour training
session from an independent source approved by the governing body relating to the officer's
responsibility under the Act within 12 months after assuming duties.
Additionally, once every two years, ten (10) hours of instruction must be obtained from an independent
source. Sources of authorized independent training are those sponsored by:
· Government Finance Officers Association (G.F.O.A.)
· Government Finance Officers Association of Texas (G.F.O.A.T.)
· Government Treasurers Organization of Texas (G.T.O.T.)
· University of North Texas - Center for Public Management
· Texas Tech - Center for Professional Development
Internal Controls
The Director of Finance is responsible for establishing and maintaining an internal control structure
designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal
control structure shall be 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 costs and benefits requires estimates and judgements by
management.
Accordingly, the Director of Finance shall establish a process for annual independent review by an
external auditor to assure compliance with policies and procedures. The internal controls shall address
the following points:
B.
C.
D.
E.
F.
Control of collusion.
Separation of transaction authority from accounting and record keeping.
Custodial safekeeping.
Avoidance of physical delivery securities.
Clear delegation of authority to subordinate staff members.
Written confirmation for telephone (voice) transactions for investments and wire
transfers.
Development of a wire transfer agreement with the depository bank or third party
custodian.
Prudence
The standard of prudence to be applied by the investment officer shall be the "prudent investor" rule,
which states: "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." In determining whether an investment officer has exercised prudence
with respect to an investment decision, the determination shall be made taking into consideration:
The investment of all funds, or funds under the City's control, over which the officer
had responsibility rather than a consideration as to the prudence of a single investment.
Whether the investment decision was consistent with the written investment policy of
the City.
The investment officer, acting in accordance with written procedures and exercising due diligence, shall
not be held personally responsible for a specific security's credit risk or market price changes, providing
that these deviations are reported immediately and that appropriate action is taken to control adverse
developments.
Ethics and Conflicts of Interest
City staff 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 the ability to make
impartial investment decisions. City staff shall disclose to the City Manager any material financial
interests in financial institutions that conduct business with the City and they shall further disclose
positions that could be related to the performance of the City's portfolio. City staff shall subordinate
their personal financial transactions to those of the City, particularly with regard to timing of purchases
and sales.
An investment officer of the City who has a personal business relationship with an organization seeking
to sell an investment to the City shall file a statement disclosing that personal business interest. An
investment officer who is related within the second degree by affinity or consanguinity to an individual
seeking to sell an investment to the City shall file a statement disclosing that relationship. A statement
required under this subsection must be filed with the Texas Ethics Commission and the governing body
of the entity.
IV. REPORTING
Quarterly Reporting
The Director of Finance shall submit a signed quarterly investment report that summarizes current
market conditions, economic developments and anticipated investment conditions. The report shall
summarize investment strategies employed in the most recent quarter, and describe the portfolio in
terms of investment securities, maturities, risk characteristics, and shall explain the total investment
return for the quarter.
Annual Report
Within 90 days of the end of the fiscal year, the Director of Finance shall present an annual report on
the investment program and investment activity. This report may be presented along with the
Comprehensive Annual Financial Report to the City Manager and City Council.
Methods
The quarterly investment report shall include a succinct management summary that provides a clear
picture of the status of the current investment portfolio and transactions made over the last quarter.
This management summary will be prepared in a manner which will allow the City to ascertain whether
investment activities during the reporting period have conformed to the investment policy. The reports
shall be formally reviewed at least annually by an independent auditor if investments are other than
those offered by the City's depository. The portfolio shall be marked to market monthly. The market
value of the securities is to be provided by the City's depository.
The report will be provided to the City Manager and City Council. The report will include the
following:
A listing of individual securities (investment position) held at the end of the reporting
period.
Unrealized gains or losses resulting from appreciation or depreciation by listing the
beginning and ending book and market value of securities for the period.
Additions and changes to the market value during the period.
Average weighted yield to maturity of portfolio on entity investments as compared to
applicable benchmark.
Listing of investment by maturity date.
The percentage of the total portfolio which each type of investment represents.
Statement of compliance of the City's investment portfolio with State Law and the
investment strategy and policy approved by the City Council.
Prepared and signed by the investment officers.
Fully accrued interest for the period.
States account or fund for each investment.
V. INVESTMENT PORTFOLIO
The City shall pursue an active versus a passive portfolio management philosophy. That is, securities
may be sold before they mature if market conditions present an opportunity for the City to benefit from
the trade. The investment officer will routinely monitor the contents of the portfolio, the available
markets, and the relative value of competing instruments, and will adjust the portfolio accordingly.
Investments
Assets of the City of Coppell may be invested in the following instruments; provided, however, that at
no time shall assets of the City be invested in any instrument or security not authorized for investment
under the Act, as the Act may from time to time be amended.
I. Authorized
Obligations of the United States of America, its agencies and instrumentalities.
Direct obligations of the State of Texas or its agencies and instrumentalities.
Other obligations, the principal of and interest on which are unconditionally
guaranteed by the State of Texas or United States of America.
Obligations of the State, agencies thereof, Counties, Cities, and other political
subdivisions of any state having been rated as investment quality by a nationally
recognized investment rating firm, and having received a rating of not less than
"A" or its equivalent.
Certificates of Deposit of state and national banks domiciled in Texas,
guaranteed or insured by the Federal Deposit Insurance or its successor or
secured by obligations described in A through D above, which are intended to
include all direct agency or instrumentality issued mortgage backed securities
rated AAA by a nationally recognized rating agency and that have a market
value of not less than the principal amount of the certificates.
Fully collateralized direct repurchase agreements with a defined termination
date secured by obligations of the United States or its agencies and
instrumentalities. These shall be pledged to the City of Coppell, held in the
City's name, and deposited at the time the investment is made with the City or
with a third party selected and approved by the City. Repurchase agreements
must be purchased through a primary government securities dealer, as defined
by the Federal Reserve, or a bank domiciled in Texas. A Master Repurchase
Agreement must be signed by the bank\dealer prior to investment in a
repurchase agreement. All repurchase agreement transactions will be on a
delivery versus payment basis. Securities received for repurchase agreements
must have a market value greater than or equal to 105 percent at the time funds
are disbursed.
Investment pools that have been authorized by the governing body by rule,
ordinance, or resolution. The investment fund must maintain a rating no lower
than AAA or AAA-M by at least one nationally recognized rating service.
Investment in such pools shall be limited to 15% of the City's entire portfolio.
No-load money market mutual funds that are registered and regulated by the
Securities and Exchange Commission, that has a dollar weighted average stated
maturity of 90 days or fewer and includes in its investment objectives the
maintenance of a stable net asset value of $1 for each share.
No-load mutual funds that are registered with the Securities and Exchange
Commission, having an average weighted maturity of less than two years and is
invested or secured in obligations described in A through D above. The fund
must maintain a rating of AAA, or its equivalent by at least one nationally
recognized rating firm. The fund must conform to the requirements relating to
the eligibility of investment pools.
Investments in mutual funds shall be limited to 10% of the City's monthly fund balance,
excluding bond proceeds and reserves and other funds held for debt service.
II. Not Authorized
The City's authorized investments options are more restrictive than those allowed by State law. State
law specifically prohibits investment in the following investment securities.
Obligations whose payment represents the coupon payments on the
outstanding principal balance of the underlying mortgage backed security
collateral and pays no principal.
Obligations whose payment represents the principal stream of cash flow from
the underlying mortgage-backed security collateral and bears no interest.
Collateralized mortgage obligations that have a stated final maturity date of
greater than 10 years.
Collateralized mortgage obligations the interest rate of which is determined by
an index that adjusts opposite to the changes in a market index.
Holding Period
The City of Coppell intends to match the holding periods of investment funds with liquidity needs of
the City. In no case will the average maturity of investments of the City's operating funds exceed one
year. The maximum final stated maturity of any investment shall not exceed five years.
Investments in all funds shall be managed in such a way that the market price losses resulting from
interest rate volatility would be offset by coupon income and current income received from the volume
of the portfolio during a twelve month period.
Risk and Diversification
The City of Coppell recognizes that investment risks can result from issuer defaults, market price
changes or various technical complications leading to temporary illiquidity. Risk is controlled through
portfolio diversification which shall be achieved by the following general guidelines;
Risk of issuer default is controlled by limiting investments to those instruments
allowed by the Act, which are described herein.
Risk of market price changes shall be controlled by avoiding over-
concentration of assets in a specific maturity sector, limitation of average
maturity of operating funds investments to one year, and avoidance of over-
concentration of assets in specific instruments other than U.S. Treasury
Securities and insured or Collateralized Certificates of Deposits.
Risk of illiquidity due to technical complications shall be controlled by the
selection of securities dealers as described herein.
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VI. SELECTION OF BANKS AND DEALERS
Depository_
At least every five (5) years a Depository shall be selected through the City's banking services
procurement process, which shall include a formal request for proposal (RFP). In selecting a
depository, the credit worthiness of institutions shall be considered, and the Director of Finance shall
conduct a comprehensive review of prospective depositories credit characteristics and financial history.
Certificates of Deposit
Banks seeking to establish eligibility for the City's competitive certificate of deposit purchase program
shall submit for review annual financial statements, evidence of federal insurance and other information
as required by the Director of Finance.
Authorized Representatives
Investment officials shall not knowingly conduct business with any firm with whom public entities have
sustained losses on investments. All authorized representatives shall provide the City with references
from Public entities which they are currently serving.
Ail financial institutions and authorized representatives who desire to become qualified bidders for
investment transactions must supply the following as appropriate:
audited financial statements
proof of National Association of Securities Dealers (NASD) certification
proof of state registration
completed broker/dealer questionnaire
certification of having read the City's investment policy signed by an
authorized representative of the organization
Acknowledgement that the organization has implemented reasonable
procedures and controls in an effort to preclude imprudent investment
activities arising out of investment transactions conducted between the City
and the organization
The investment officers are precluded from purchasing an investment from a representative who has
not delivered the written certification
An annual review of the financial condition and registration of qualified bidders will be conducted by
the Director of Finance.
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VII. SAFEKEEPING AND CUSTODY
Insurance or Collateral
All deposits and investments of City funds other than direct purchases of U.S. Treasuries or Agencies
shall be secured by pledged collateral. In order to anticipate market changes and provide a level of
security for all funds, the collateralization level will be 105% of market value of principal and accrued
interest on the deposits or investments less an amount insured by the FDIC or FSLIC. Evidence of the
pledged collateral shall be maintained by the Director of Finance or a third party financial institution.
The City's Depository Agreement shall specify the acceptable investment securities for collateral, the
substitution or release of investment securities, ownership of securities, and the method of valuation of
securities. Repurchase agreements shall be documented by a specific agreement noting the collateral
pledge in each agreement. Collateral shall be reviewed monthly to assure that the market value of the
pledged securities is adequate.
Safekeeping Agreement
Collateral pledged to secure deposits of the City shall be held by a safekeeping institution in accordance
with a Safekeeping Agreement which clearly defines the procedural steps for gaining access to the
collateral should the City of Coppell determine that the City's funds are in jeopardy. The safekeeping
institution, or Trustee, shall be the Federal Reserve Bank or an institution not affiliated with the firm
pledging the collateral. The safekeeping agreement shall include the signatures of authorized
representatives of the City of Coppell, the firm pledging the collateral, and the Trustee.
Collateral Defined
The City of Coppell shall accept only the following securities as collateral:
FDIC and FSLIC insurance coverage.
A bond, certificate of indebtedness, or Treasury Note of the United States, or
other evidence of indebtedness of the United States that is guaranteed as to
principal and interest by the United States.
Obligations, the principal and interest on which, are unconditionally guaranteed
or insured by the State of Texas.
A bond of the State of Texas or of a county, city or other political subdivision
of the State of Texas having been rated as investment grade (investment rating
no less than "A" or its equivalent) by a nationally recognized rating agency with
a remaining maturity of five (5) years or less.
Subject to Audit
Ail collateral shall be subject to inspection and audit by the Director of Finance or the City's
independent auditors.
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Delivery_ vs. Payment
Treasury Bills, Notes, Bonds and Government Agencies' securities shall be purchased using the
delivery vs. payment method. That is, funds shall not be wired or paid until verification has been made
that the correct security was received by the Trustee. The security shall be held in the name of the City
or held on behalf of the City. The Trustee's records shall assure the notation of the City's ownership of
or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the
City.
VII. INVESTMENT POLICY ADOPTION
The City of Coppell investment policy shall be adopted by resolution of the City Council. The policy
shall be reviewed for effectiveness on an annual basis by the Investment Committee and any
modifications will be recommended for approval to the City Council.
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GLOSSARY
of
COMMON TREASURY TERMINOLOGY
Agencies: Federal agency securities. Dealer: A dealer, as opposed to a broker, acts
as a principal in all transactions, buying and
Ask: The price at which securities are offered, selling for his own account.
Bid: The price offered for securities.
Broker: A broker brings buyers and sellers
together for a commission paid by the initiator
of the transaction or by both sides. In the
money market, brokers are active in markets, in
which banks buy and sell money, and in
interdealer markets.
Certificate of Deposit (CD): A time deposit
with a specific maturity evidenced by a
certificate. Large-denomination CD's are
typically negotiable.
Collateral: Securities, evidence of deposit or
other property that a borrower pledges to
secure repayment of loan. Also refers to
securities pledged by a bank to secure deposits
of public monies.
Comprehensive Annual Financial Report
(CAFR): The official annual report for the
City of Coppell. It includes 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.
Debenture: A bond secured only by the
general credit of the issuer.
Delivery versus Payment: There are two
methods of delivery of securities: delivery
versus payment and delivery versus receipt
Delivery versus payment is delivery of
securities with an exchange of money for the
securities. Delivery versus receipt is delivery of
securities with an exchange of a signed receipt
for the securities.
Discount Securities: Non-interest bearing
money market instruments that are issued at a
discount and redeemed at maturity for full face
value, such as U.S. Treasury bills.
Diversification: Dividing investment funds
among a variety of securities offering
independent returns.
Federal Credit Agencies: Agencies of the
Federal government set up to supply credit to
various classes of institutions and individuals,
such as Savings and Loans, small business
firms, students, farmers, farm cooperatives, and
exporters.
Federal Deposit Insurance Corporation
(FDIC): A federal agency that insures bank
deposits, currently up to $100,000 per deposit.
Coupon: The annual rate of interest that a
bond's issuer promises to pay the bondholder
on the bond's face value
Federal Funds Rate: The rate of interest at
which Fed funds are traded. This rate is
currently set by the Federal Reserve through
open-market operations.
Federal Home Loan Banks (FHLB): The
institutions that regulate and lend to savings
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and loan associations. The Federal Home Loan
Banks play a role analogous to that played by
the Federal Reserve Banks vis-a-vis member
commercial banks.
Federal National Mortgage Association
(FNMA): FNMA, like GNMA, was chartered
under the Federal National Mortgage
Association Act in 1938. FNMA is a federal
corporation working under the auspices of the
Department of Housing and Urban
Development, H.U.D. It is the largest single
provider of residential mortgage funds in the
United States. Fannie Mae, as the corporation
is called, is a private stockholder-owned
corporation. The corporation's purchases
include a variety of adjustable mortgages and
second loans in addition to fixed-rate
mortgages. FNMA's securities are also highly
liquid and are widely accepted. FNMA
assumes and guarantees that all security holders
will receive timely payment of principal and
interest.
Federal Open Market Committee (FOMC):
Consists of seven members of the Federal
Reserve Board and five of the twelve Federal
Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a
permanent member while the other Presidents
serve on a rotating basis. The Committee
periodically meets to set Federal Reserve
guidelines regarding purchases and sales of
Government Securities in the open-market as a
means of influencing the volume of bank credit
and money.
Federal Reserve System: The central bank of
the United States created by Congress and
consisting of a seven member Board of
Governors in Washington, D.C., 12 regional
banks and commercial banks that are members
of the system.
Government National Mortgage
Association (GNMA or Ginnie Mae):
Securities guaranteed by GNMA and issued by
mortgage bankers, commercial banks, savings
and loan associations, and other institutions.
Security holder is protected by full faith and
credit of the U.S. Government. Ginnie Mae
securities are backed by FHA, VA or FMHM
mortgages. The term pass-throughs is often
used to describe Ginnie Maes.
Liquidity: A liquid asset is one that can be
converted easily and rapidly into cash without a
substantial loss of value. In the money market,
a security is said to be liquid if the spread
between bid and asked prices is narrow and
reasonable size can be done at those quotes.
Market Value: The price at which a security
is trading and could presumably be purchased
or sold.
Master Repurchase Agreement: To protect
investors, many public investors will request
that repurchase agreements be preceded by a
master repurchase agreement between the
investor and the financial institution or dealer.
The master agreement should define the nature
of the transaction, identify the relationship
between the parties, establish normal practices
regarding ownership and custody of the
collateral securities during the term of the
investment, provide remedies in the case of
default by either party and clarify issues of
ownership. The master repurchase agreement
protects the investor by eliminating the
uncertainty of ownership and hence, allowing
investors to liquidate collateral if a bank or
dealer defaults during the term of the
agreement.
Maturity: The date upon which the principal
or stated value of an investment becomes due
and payable.
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Money Market: The market in which short-
term debt instruments (bills, commercial paper,
bankers' acceptances) are issued and traded.
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 policy tool.
Portfolio: Collection of securities held by an
investor.
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.
Prudent Person Rule: An investment
standard. 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.
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.
Repurchase Agreement (RP of REPO): A
holder of securities sells these securities to an
investor with an agreement to repurchase them
at a fixed price on a fixed date. The security
"buyer" in effect lends the "seller" money for
the period of the agreement, and their terms of
the agreement are structured to compensate
him for this.
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