Item 4ICITY OF
SOUTH LAKE
MEMORANDUM
August 13, 2012
To: Shana Yelverton, City Manager
From: Sharen Jackson, Director of Finance
Subject: Resolution No. 12 -039, Annual review of investment policy and
investment strategies
Action
Requested: Approval of Resolution No. 12 -039. The City of Southlake
Investment Policy requires that the governing body review its
investment policy and investment strategies annually.
Background
Information: Section 2256 — Public Funds Investment Act ( "Act ") of the
Texas Government Code establishes the requirements for a
local government investment policy. The City of Southlake
last reviewed its investment policy in August 2011. The
City's finance staff and financial advisor have reviewed the
investment policy against recent changes to the Act and
have not identified any necessary changes to the investment
policy.
Financial
Considerations: Approval of the Resolution will have no financial impact.
Investing activity will continue in the same manner as has
been in the past.
Strategic Link: F1 Adhere to financial management principles and budget
F3 Achieve fiscal wellness standards
Citizen Input/
Board Review: None required
Legal Review: The investment policy has been reviewed by our financial
advisors for compliance with the law.
Alternatives: Deny or propose changes to current policy
Supporting
Documents: Resolution No. 12 -039
City of Southlake Investment Policy dated August 2012
Staff
Recommendation: Approval of Resolution No. 12 -039
CITY OF
SOUTH AKE
TEXAS
INVESTMENT POLICY
Amended August 2012
CITY OF SOUTHLAKE, TEXAS
INVESTMENT POLICY
TABLE OF CONTENTS
I. Purpose ........................................................................ ..............................1
A. Formal Adoption
B. Scope
C. Review and Amendment
II. Investment Strategy ...................................................... ..............................1
A. Operating Funds
B. Debt Service Funds
C. Debt Service Reserve Funds
D. Special Projects, Special Purpose, or Construction Funds
III. Responsibility and Control ............................................ ..............................2
A. Delegation of Authority and Training
B. Internal Controls
C. Ethics and Conflict of Interest
D. Prudent Investment Management
IV. Investment Objectives .................................................. ..............................3
A. Safety of Principal
B. Liquidity
C. Yield
D. Public Trust
V. Investment Portfolio ...................................................... ..............................5
A. Eligible Investments
B. Unauthorized Investments
VI. Safekeeping and Custody ............................................. ..............................8
A. Collateral ization
B. Allowable Collateral and Collateral Levels
C. Monitoring Collateral Adequacy and Additional Collateral Securities
D. Collateral Substitution
E. Safekeeping
F. Delivery versus Payment
VII. Selection of Banks and Dealers ................................... .............................11
A. Depository Selection
B. Investment Advisors
C. Selection of Investment Broker /Dealers and Advisors
D. Approved Broker /Dealers and Investment Advisors
VIII. Reporting ..................................................................... .............................12
A. Quarterly Reporting
Appendix „ - Certification .................................................... .............................14
Appendix "B" - Glossary of Common Treasury Terminology .. .............................15
PURPOSE
A. Formal Adoption. The purpose of this document is to set forth specific
investment policy and strategy guidelines for the City of Southlake, Texas in
order to achieve the goals of safety, liquidity, yield, and public trust for all
investment activity. This Investment Policy is authorized by the City Council
in accordance with Chapter 2256, Texas Government Code (the "Public
Funds Investment Act ").
B. Scope. This Investment Policy applies to all the investment activities of the
City, excluding funds governed by Council approved trust agreements and
assets administered for the benefit of the City by outside agencies. In
addition to this Policy, bonds funds (as defined by the Internal Revenue
Service) shall be managed by their governing ordinance and all applicable
State and Federal Law.
C. Review and Amendment. The City Council of the City of Southlake shall
review its investment strategies and policy not less than annually.
II. INVESTMENT STRATEGY
The City of Southlake maintains one portfolio in which all funds under the City's control are
pooled for investment purposes. Within the pooled portfolio are fund components, each
having an investment strategy as described below
A. Investment strategies for operating funds are 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. A dollar weighted- average maturity of 365 days or less will be
calculated using the stated final maturity date of each security.
B. 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 maturity date which exceeds the debt service payment
date.
City of Southlake Investment Policy - amended December 2005
C. 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 medium term
maturities.
D. Investment strategies for special projects, special purpose, or construction
fund portfolios will have as their primary objective the assurance 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.
III. RESPONSIBILITY AND CONTROL
A. Delegation of Authority and Training. The Director of Finance and Deputy
Director of Finance Administration are designated as Investment Officer(s) of
the City and are responsible for investment decisions and activities. The
Director of Finance will retain ultimate responsibility for investment decisions.
The Director of Finance, the Assistant Director, and any members of the
Investment Committee must attend an investment training session on the Act
not less than once in a two -year period and receive not less than 10 hours of
instruction relating to investment responsibilities under this subchapter from
an independent source approved by the Southlake City Council.
B. Internal Controls. The Investment Officer is responsible for establishing and
maintaining an internal control structure designed to ensure that the assets of
the City 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
the cost of a control should not exceed the benefits likely to be derived. The
City, in conjunction with its annual financial audit, shall perform a compliance
audit of management controls on investments and adherence to the City's
investment policy and strategy.
C. 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. The Investment Officer who has a
personal business relationship with an entity seeking to sell an investment to
the City shall file a statement disclosing that personal business interest with
the Texas Ethics Commission and the City Council. For purposes of this
City of Southlake Investment Policy- amended December 2005 2
subsection, an investment officer has a personal business relationship with a
business organization if:
The Investment Officer owns 10 percent or more of the voting stock or
shares of the business organization or owns $5,000 or more of the fair
market value of the business organization;
2. funds received by the investment officer from the business
organization exceed 10 percent of the investment officer's gross
income for the previous year; or
3. the investment officer has acquired from the business organization
during the previous year investments with a book value of $2,500 or
more for the personal account of the investment officer.
D. Prudent Investment Management. The designated Investment Officer(s)
shall exercise thejudgment and care, under prevailing circumstances, that a
prudent person would exercise in the management of the person's own
affairs. Unless authorized by law, a person may not deposit, withdraw,
transfer, or manage in any other manner the funds of the City.
Investment Officers, acting in accordance with written procedures and
exercising the proper standard of care, shall be relieved of personal
responsibility for an individual security's credit risk or market price changes,
provided that this Policy and written procedures were followed. In determining
whether an Investment Officer has exercised the proper standard of care, all
investments over which the individual had responsibility will be considered
rather than a single investment.
IV. INVESTMENT OBJECTIVES
The City of Southlake 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.
A. Safety of Principal. The City shall seek to control the risk of loss due to the
failure of a security issuer or grantor. Such risk shall be controlled by
investing only in the safest types of securities as defined in Section V -A of
this Policy, through portfolio diversification by investment type and maturity,
and by collateral ization as required by law.
Diversification by Investment Type. Diversification by investment type
shall be maintained by ensuring an active and efficient secondary
market in portfolio investments and by controlling the market and
City of Southlake Investment Policy- amended December 2005
opportunity risks associated with specific investment types. Bond
proceeds may be invested in a single security or investment which
exceeds the City's maximum percentages if the Investment Officer
determines that such an investment is necessary to comply with
Federal arbitrage restrictions or to facilitate arbitrage record keeping
and calculation. Diversification by investment type shall be
established by the following maximum percentages of investment type
to the total investment portfolio
a.
U.S. Government Securities
100%
b.
Municipal Obligations
50%
C.
Repurchase Agreements
50%
d.
Certificates of Deposit
100%
e.
Bankers Acceptances
20%
f.
Commercial Paper
20%
g.
Money Market Mutual Funds
50%
h.
Eligible Investment Pools
100%
2. Diversification by Investment Maturity. In order to minimize risk of
loss due to interest rate fluctuations, investment maturities will not
exceed the anticipated cash flow requirements of the funds. The City
of Southlake intends to match the holding periods of investment funds
with liquidity needs of the City. The maximum final stated maturity of
any investment shall not exceed five years. Maturity guidelines by
fund are as follows
a. Operating Funds. The weighted average days to maturity for
the operating fund portfolio shall be 365 days or less and the
maximum allowable maturity shall be three years.
b. Debt Service Funds. Debt Service Funds shall be invested to
ensure adequate funding for each consecutive debt service
payment. The Investment Officershall invest in such a manner
as not to exceed an "unfunded" debt service date with the
maturity of any investment. An unfunded debt service date is
defined as a coupon or principal payment date that does not
have cash or investment securities available to satisfy said
payment.
C. Debt Service Reserve Funds. Market conditions, Bond
Resolution constraints and Arbitrage regulation compliance will
be considered when formulating Reserve Fund strategy.
Maturity limitation shall generally not exceed the call provisions
of the Bond Ordinance and shall not exceed the final maturity
of the bond issue. All Debt Service Reserve Fund investment
maturities shall not exceed five years.
City of Southlake Investment Policy- amended December 2005 4
d. Special Project, Special Purpose, and Construction Funds.
The funds used for construction and capital improvement
programs have reasonable predictable draw down schedules.
Therefore investment maturities shall generally follow the
anticipated cash flow requirements. Investment pools and
money market mutual funds shall provide readily available
funds generally equal to one month's anticipated cash flow
needs, or a competitive yield alternative for short term fixed
maturity investments. A singular repurchase agreement may
be utilized if disbursements are allowed in the amount
necessary to satisfy any expenditure request, this investment
structure is commonly referred to as a flexible repurchase
agreement. All earnings will be segregated and made
available for any necessary payments to the U.S. Treasury.
3. Collateralization. Collateral ization of securities will be made in
compliance with Section VI of this Policy.
B. Liquidity. Liquidity shall be achieved by anticipating cash flow requirements,
by investing in securities with active secondary markets and by investing in
eligible money market mutual funds and local government investment pools.
A security may be liquidated to meet unanticipated cash requirements, to re-
deploy cash into other investments expected to outperform current holdings,
or otherwise to adjust the portfolio.
C. Yield. The City of Southlake's investment portfolio shall be designed with the
objective of attaining a market rate of return throughout budgetary and
economic cycles, taking into account investment risk constraints and cash
flow characteristics of the portfolio.
D. Public Trust. 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 capital as
well as the probable income to be derived.
V. INVESTMENT PORTFOLIO
A. Eligible Investments. Investments described below are authorized by
Chapter 2256, Texas Government Code as eligible securities for the City.
City funds governed by this Policy may be invested in:
1. Obligations of the United States or its agencies and instrumentalities
including FHLB Letters of Credit (LOCs), excluding principal -only and
City of Southlake Investment Policy- amended December 2005 5
interest -only mortgage backed securities, and collateralized mortgage
obligations and real estate mortgage investment conduits.
2. Direct obligations of the State of Texas, or its agencies and
instrumentalities.
3. Other obligations, the principal and interest on which are
unconditionally guaranteed or insured by, or backed by the full faith
and credit of, the State of Texas or the United States or their
respective agencies and instrumentalities, excluding all securities
specifically listed as "Unauthorized Investments" in section V.B. of this
Policy.
4. Obligations of states, agencies, counties, cities, and other political
subdivisions of any State having been rated as to investment quality
by a nationally recognized investment rating firm and having received
a rating of not less than "A" or its equivalent.
5. Fully collateralized repurchase agreements having a defined
termination date, placed through a primary government securities
dealer, as defined by the Federal Reserve, or a financial institution
doing business in this state, and secured by obligations described in
Section V -A 1 above which are eligible investments under the Public
Funds Investment Act, pledged with a third party approved by the City,
and having a market value of not less than the principal amount of the
funds disbursed. The term includes direct security repurchase
agreements and reverse repurchase agreements structured in
compliance with the Texas Government Code. All City repurchase
agreement transactions shall be governed by a signed Master
Repurchase Agreement. The term of any reverse repurchase
agreement shall not exceed 90 days.
6. Certificates of deposit issued by a depository institution with its main
office or a branch office in the State of Texas that is :
a. guaranteed or insured by the Federal Deposit Insurance
Corporation or its successor; or, secured by obligations that
are described by Section V -A 1 through 4 above, which are
intended to include all direct Federal agency or instrumentality
issued mortgage backed securities, but excluding those
mortgage backed securities of the nature described in Section
V -B, that have a market value of not less than the principal
amount of the certificates or in any other manner and amount
provided by law for deposits of the City;
City of Southlake Investment Policy- amended December 2005 6
b. governed by a Depository Contract, as described in Section
VII -A, that complies with Federal and State regulation to
properly secure a pledged security interest; and,
C. solicited for bid orally, in writing, electronically, or any
combination of those methods.
d. In addition, separate CDs issued by depositories wherever
located, bundled together into a single investment with the full
amount of principle and interest of each CD federally insured
may be purchased through a selected depository institution
with its main office or branch office in Texas. This depository
shall act as the custodian for the various certificates on behalf
of the City.
7. Bankers' acceptances that:
a. have stated maturities of 270 days or fewer,
b. will be liquidated in full at maturity,
C. is eligible for collateral borrowing from a Federal Reserve
Bank; and,
d. is accepted by a bank organized and existing under the laws of
the United States or any state, if the short -term obligations of
the bank, or of the bank holding company of which the bank is
the largest subsidiary, are rated not less than "A -1" or "P -1" or
an equivalent rating by at least one nationally recognized credit
rating agency.
8. Commercial paper with a stated maturity of 270 days or less from the
date of issuance that either:
a. is rated not less than "A -1 ", "P -1 ", or the equivalent by at least
two nationally recognized credit rating agencies; or
b. is rated at least "A -1 ", "P -1 ", or the equivalent by at least one
nationally recognized credit rating agency and is fully secured
by an irrevocable letter of credit issued by a bank organized
and existing under the laws of the United States or any state
thereof.
9. Money market mutual funds regulated by the Securities & Exchange
Commission, with a dollar weighted average portfolio maturity of 60
days or less, that fully invests dollar- for - dollar all City funds without
City of Southlake Investment Policy- amended December 2005 '7
sales commissions or loads; and, whose investment objectives include
seeking to maintain a stable net asset value of $1 per share. The City
may not invest funds under its control in an amount that exceeds 10%
of the total assets of any individual money market mutual fund or
exceeds 80% of its monthly average fund balance, excluding bond
proceeds and reserves and other funds held for debt service in money
market mutual funds. This Securities and Exchange Commission
regulated fund is required to provide the City with a prospectus and
other information required by the Securities Exchange Act of 1934 (15
U.S.C. Section 78a et seq.) or the Investment Company Act of 1940
(15 U.S.C. Section 80a -1 et seq.).
10. Eligible Investment Pools as defined in Section 2256.016 of the Texas
Government Code provided that
a. investment in the particular pool has been authorized by the
City Council
b. the pool shall have furnished the Investment Officer an offering
circular containing the information required by Section
2256.016(b) of the Texas Government Code
C. the pool shall furnish to the Investment Officer investment
transaction confirmations with respect to all investments made
with it
d. the pool shall furnish to the Investment Officer monthly reports
that contain the information required by Section 2256.016(c) of
the Texas Government Code,
e. the pool's investment objectives shall be to maintain a stable
net asset value of one dollar ($1);
whose investment philosophy and strategy are consistent with
this Policy and the City's ongoing investment strategy; and
g. the pool provides evidence of credit rating no lower than "AAA"
or "AAA -m" by at least one nationally recognized credit rating
service.
h. The net asset value (NAV) of the pool shall be maintained
between 99.50 and 100.50.
B. Unauthorized Investments. The following investments are specifically
prohibited by State Law
City of Southlake Investment Policy- amended December 2005 8
1. Obligations whose payment represents the coupon payments on the
outstanding principal balance of the underlying mortgage- backed
security collateral and pays no principal.
2. Obligations whose payment represents the principal stream of cash
flow from the underlying mortgage- backed security collateral and
bears no interest.
3. Collateralized mortgage obligations that have a stated final maturity
date of greater than 10 years.
4. Collateralized mortgage obligations the interest rate of which is
determined by an index that adjusts opposite to the changes in a
market index.
C. Downgrade Provision for Investment Ratings
An Investment that requires a minimum rating does not qualify as an
authorized investment during the period the investment does not have the
minimum rating. The City shall take all prudent measures that are consistent
with its investment policy to liquidate an investment that does not have the
minimum rating.
VI. SAFEKEEPING AND CUSTODY
A. Collateralization. Consistent with the requirements of State Law, the City
requires all bank deposits to be federally insured or collateralized with eligible
securities. Financial institutions serving as City Depositories will be required
to sign a Depository Agreement with the City and City's safekeeping agent.
The safekeeping portion of the Agreement shall define the City's rights to the
collateral in case of default, bankruptcy, or closing and shall establish a
perfected security interest in compliance with Federal and State regulations,
including:
1. the Agreement must be in writing;
2. the Agreement has to be executed by the Depository and the City
contemporaneously with the acquisition of the asset;
3. the Agreement must be approved by the Depository's Board of
Directors or loan committee, and a copy of the meeting minutes must
delivered to the City; and,
4. the Agreement must be part of the Depository's "official record"
continuously since its execution.
City of Southlake Investment Policy- amended December 2005 (�
Repurchase agreements must also be secured in accordance with State Law. Each
counter party to a repurchase transaction is required to sign a copy of the Security
Industry and Financial Markets Association Master Repurchase Agreement. An
executed copy of the Agreement must be on file before the City will enter into any
transactions with a counter party.
B. Allowable Collateral and Collateral Levels.
Certificates of Deposit. Eligible securities for collateral ization of
deposits are defined by the Public Funds Collateral Act, as amended,
and meet the constraints of this Policy. The market value of the
principal portion of collateral pledged for certificates of deposit must at
all times be equal to or greater than the par value of the certificate of
deposit plus accrued interest, less the applicable level of FDIC
insurance.
2. Repurchase Agreements. Securities underlying repurchase
agreements are limited to U.S. Government, Agencies and
Instrumentalities obligations, which are eligible for wire transfer (i.e.
book entry) to the City's designated safekeeping agent through the
Federal Reserve System and meet the constraints of this Policy. A
repurchase agreement's security value shall be the par value plus
accrued interest, and the security's market value must be maintained
at the following minimum levels:
Agreement Maturities Greater Than One Business Day
U.S. Treasury Securities 102%
U.S. Agency and Instrumentalities 103%
Mortgage Backed Securities 105%
Agreement Maturities of One Business Day
All Securities 100%
C. Monitoring Collateral Adequacy and Additional Collateral Securities.
Certificates of Deposit. The City shall require monthly reports with
market values of pledged securities from all financial institutions with
which the City has certificates of deposit. The Investment Officer will
monitor adequacy of collateral ization levels to verify market values
and total collateral positions. If the collateral pledged for a certificate
of deposit falls below the par value of the deposit, plus accrued
interest less FDIC or other insurance, the institution issuing the
certificate of deposit(s) will be notified by the Investment Officer and
will be required to pledge additional securities no later than the end of
the next succeeding business day.
City of Southlake Investment Policy- amended December 2005 10
2. Repurchase Agreements. Weekly monitoring by the Investment
Officer of market values of all underlying securities purchased for City
repurchase transactions is required. More frequent monitoring may
be necessary during periods of market volatility. If the value of the
securities underlying a repurchase agreement falls below the margin
maintenance levels specified above, the Investment Officer will
request additional securities. If the repurchase agreement is
scheduled to mature within five business days and the amount is
deemed to be immaterial, then the request is not necessary.
D. Collateral Substitution. Collateralized certificates of deposit and repurchase
agreements often require substitution of collateral. Any broker, dealer or
financial institution requesting substitution must contact the Investment
Officer for approval and settlement. The substituted security's value will be
calculated and substitution approved if its value is equal to or greater than
the required security level. The Investment Officer, or designees, must
provide written notification of the decision to the bank or the safekeeping
agent holding the security prior to any security release. Substitution is
allowable for all transactions, but should be limited, if possible, to minimize
potential administrative problems and transfer expense. The Investment
Officer may limit substitution and assess appropriate fees if substitution
becomes excessive or abusive.
E. Safekeeping. The City shall contract with a bank or banks for the
safekeeping of securities either owned by the City as part of its investment
portfolio or as part of its depository and repurchase agreements. All
collateral securing bank deposits must be held by a third -party banking
institution acceptable to and under contract with the City, or by the Federal
Reserve Bank. The securities purchased under a repurchase agreement
must be delivered to a third -party custodian with which the City has
established a safekeeping agreement.
F. Delivery versus Payment. The purchase of individual securities shall be
executed "delivery versus payment" (DVP) through the City's Safekeeping
Agent. By so doing, City funds are not released until the City has received,
through the Safekeeping Agent, the securities purchased. The security shall
be held in the name of the City or held on behalf of the City. The
Safekeeping Agent'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. SELECTION OF BANKS AND DEALERS.
A. Depository Selection. A qualified depository shall be selected through the
City's banking services procurement process, which shall include a formal
City of Southlake Investment Policy- amended December 2005 11
request for proposal (RFP). The City shall permit consideration of
applications for a depository contract from banks, credit unions, or saving
associations that are doing business in Southlake, and from banks, credit
unions, and saving associations that are doing business in the cities
contiguous to Southlake. The centralization of depository services is
designed to maximize investment capabilities while minimizing service costs.
The selection of a depository shall be based on the financial institution
offering the most favorable terms and conditions at the least cost, while
adhering to the guidelines and provisions within the request for proposal. In
selecting a depository, the City shall give consideration to the financial
institution's credit characteristics, financial history, service capabilities, and
costs for required services. The City's depository contract shall be for three
years with an option to extend for an additional two years upon mutual
agreement of the depository and the City. Specialized services may be
contracted for by the City with another financial institution or company if the
depository cannot provide such service or charges more for the same service
with little or no appreciable benefit.
B. Investment Advisors. The City may contract with an investment advisor, who
shall adhere to the spirit, philosophy and specific term of this Policy and shall
invest within the same "Standard of Care ". The investment advisor must be
registered with the Securities and Exchange Commission (SEC) under the
Investment Advisor's Act of 1940 as well as with the Texas State Securities
Board. Advisors may assist the City with the management of its funds and
other responsibilities including but not limited to, broker compliance,
competitive bidding, reporting and security documentation. If the City uses
an investment advisor, the advisor shall be responsible for performing due
diligence and providing its detailed list of qualified broker /dealers to the city
not less than annually.
An appointed Investment Advisor shall act solely in an advisory and
administrative capacity, within the guidelines of this Investment Policy. At no
time shall the advisor take possession of securities or funds or otherwise be
granted discretionary authority to transact business on behalf of the City.
C. Selection of Investment Broker /Dealers and Advisors. Selection will be
performed by the Investment Officer, with ratification and approval by the City
Council. Selected Investment Advisors and Broker /Dealers shall provide
timely transaction confirmations and monthly portfolio reports. Prospective
Broker /Dealers shall provide financial and other information as requested by
the Investment Officer sufficient to evaluate their fiscal condition and ability to
service the City. The Investment Officer will establish criteria to evaluate
Investment Advisors and Broker /Dealers, including
1. Adherence to the City's policies and strategies,
City of Southlake Investment Policy- amended December 2005 12
2. Investment performance and transaction pricing within accepted risk
constraints,
3. Responsiveness to the City's request for services, information and
open communication,
4. Understanding of the inherent fiduciary responsibility of investing
public funds, and
5. Similarity in philosophy and strategy with the City's objectives.
D. Approved Broker /Dealers and Investment Advisors. Broker /Dealers and
Investment Advisors eligible to transact investment business with the City
shall be presented a written copy of this Investment Policy. Additionally, the
registered principal of the business organization seeking to transact
investment business shall execute a Certification as shown in Appendix "A ",
or a Certification similar in form, to the effect that the registered principal has
received and thoroughly reviewed this Investment Policy, and
2. acknowledged that their organization has implemented reasonable
procedures and controls in an effort to preclude imprudent investment
activities with the City except to the extent that this authorization is
dependent on an analysis of the makeup of the City's entire portfolio
or requires an interpretation of subjective investment standards.
The City shall not enter into an investment transaction with a business organization
prior to receiving this written acknowledgement. The City Council or designated
investment committee shall review, revise and approve a list of qualified brokers not
less than annually.
VIII. REPORTING
A. Quarterly Reporting. The Investment Officer shall submit a signed quarterly
investment report that describes in detail the investment position of the City
for the period. The report will include the following
For each pooled fund group a beginning book and market value; book
and market value additions and changes; and ending book and
market value, including fully accrued interest for the reporting period.
2. The book value and market value of each investment at the beginning
and end of the period by type of asset and fund type invested.
3. The maturity date of each investment.
City of Southlake Investment Policy- amended December 2005 13
4. Fully accrued interest for the reporting period.
5. Statement of compliance of the portfolio as it relates to the investment
strategy, City investment policy and the Texas Public Funds
Investment Act.
6. If the City invests in other than money market mutual funds,
investment pools or accounts offered by its depository bank in the
form of certificates of deposit, or money market accounts or similar
accounts, the reports prepared by the investment officers shall be
formally reviewed at least annually by an independent auditor, and the
result of the review shall be reported to the City Council by that
auditor.
7. The City will seek a third party independent pricing source to
determine the value of the City's investment portfolio.
8. The City's independent auditor will review the quarterly investment
report for compliance with the Public Funds Investment Act and report
findings annually to the City Council.
City of Southlake Investment Policy- amended December 2005 14
APPENDIX "A"
CERTIFICATION
I hereby certify that I have personally read and understand the investment policy and
master repurchase agreement, (if applicable), conditions of the City of Southlake, Texas,
and have implemented reasonable procedures and controls designed to fulfill those
objectives and conditions. Transactions between this firm and the City of Southlake will be
directed towards precluding imprudent investment activities and protecting the City from
credit or market risk.
All sales personnel of this firm dealing with the City of Southlake's account(s) have been
informed and will be routinely informed of the City's investment horizons, limitations,
strategy and risk constraints, whenever we are so informed by the City.
This firm pledges due diligence in informing the city of foreseeable risks associated with
financial transactions connected to this firm.
FIRM
REGISTERED PRINCIPAL OF FIRM
PRIMARY REPRESENTATIVE: NAME /TITLE
(please print)
PRIMARY REPRESENTATIVE SIGNATURE
DATE
City of Southlake Investment Policy- amended December 2005 15
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GLOSSARY OF
COMMON TREASURY TERMINOLOGY
Agencies. Federal agency securities
Asked. The price at which securities are
offered.
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 contrast to a "principal" or a
"dealer ", he does not own or take a
position in the security. In the money
market, brokers are active in markets in
which banks buy and sell money and in
inter - dealer markets.
Certificate of Deposit (CD). A time
deposit with a specific maturity evidenced
by a certificate.
Collateral. Securities, evidence of deposit
or other property which a borrower
pledges to secure repayment of a loan.
Also refers to securities pledged by a
bank to secure deposits of public monies.
Commercial Paper. Short -term,
unsecured promissory notes issued by
corporations to finance short -term credit
needs. Commercial paper is usually sold
on a discount basis and has a maturity at
the time of issuance not exceeding nine
months.
on the bond's face value. Also, a
certificate attached to a bond evidencing
interest due on a payment date.
CUSIP. A unique security identification
number assigned to securities maintained
and transferred on the Federal Reserve
book -entry system.
Dealer. A dealer, as opposed to a broker,
acts as a principal in all transactions,
buying and selling for his own account.
Debenture. A bond secured only by the
general credit of the issuer.
Delivery versus Payment. Delivery of
securities with an exchange of money for
the securities.
Depository. The bank selected by the
City to provide depository services.
Discount. The difference between the
cost price of a security and its value at
maturity when quoted a lower than face
value. A security selling below original
offering price shortly after sale also is
considered to be at a discount.
Discount Securities. Non - interest bearing
money market instruments that are issued
at a discount and redeemed at maturity
for full face value, e.g., U.S. Treasury
Bills.
Coupon. The annual rate of interest that
a bond's issuer promises to pay the
bondholder
Diversification. Dividing investment funds
among a variety of securities offering
independent returns.
City of Southlake Investment Policy- amended December 2005 16
Federal Credit Agencies. Agencies of the
Federal government set up to supply
credit to various classes of institutions
and individuals, e.g., savings and loans,
small business firms, students, and
farmers.
Federal Deposit Insurance Corporation
(FDIC). A federal agency that insures
bank deposits, currently $250,000 per
deposit.
Federal Funds Rate. The rate of interest
at which Federal funds are traded. This
rate is currently set by the Federal
Reserve through open- market operations.
Federal Home Loan Banks (FHLB).
Created in 1932, this system consists of
12 regional banks, which are owned by
private member institutions and regulated
by the Federal Housing Finance Board.
Functioning as a credit reserve system, it
facilitates extension of credit through its
owner - members in order to provide
access to housing and to improve the
quality of communities. Federal Home
Loan Bank issues are joint and several
obligations of the 12 Federal Home Loan
Banks.
Federal Home Loan Mortgage
Corporation (FHLMC or Freddie Mac). A
stockholder -owned corporation that
provides a continuous flow of funds to
mortgage lenders, primarily through
developing and maintaining an active
nationwide secondary market in
conventional residential mortgages.
Freddie Mac purchases a large volume of
conventional residential mortgages and
uses them to collateralize mortgage -
backed securities.
Federal National Mortgage Association
(FNMA or Fannie Mae). FNMA, a federal
corporation, is the largest single provider
of residential mortgage funds in the
United States. It 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
about 5,700 commercial banks that are
members of the system.
Government Agency Issues. Debt
securities issued by government -
sponsored enterprises, federal agencies,
and international institutions. Such
securities are not direct obligations of the
Treasury and involve government
sponsorship or guarantees.
City of Southlake Investment Policy- amended December 2005 17
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 or VA mortgages.
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 difference between bid and
asked prices is narrow and reasonable
size can be done at those quotes.
Local Government Investment Pool
(LGIP). The aggregate of all funds from
political subdivisions that are placed in the
custody of the state managed pool, or
other qualifying pool(s) that meet state
statute criteria, for investment and
reinvestment.
Market Value. The price at which a
security is trading and could presumable
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 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.
Money Market. The market in which
short -term debt instruments (bills,
commercial paper, bankers' acceptances,
etc.) are issued and traded.
Mutual Funds. Mutual fund providers are
investment companies that sell shares to
investors, offering investors diversification
and professional portfolio management.
Prices fluctuate with the performance of
the fund. Money market mutual funds
invest in short -term securities such as
treasury bills, bank CD's and commercial
paper.
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.
Par. The value of a security as expressed
on its face (face value) without
consideration of a discount or premium.
Portfolio. Collection of securities held by
an investor.
Positive Yield Curve. A condition where
interest rates are higher on long -term debt
City of Southlake Investment Policy- amended December 2005 18
securities than on short -term debt
securities of the same quality.
Premium. The price that a security
demands over its par value. This is the
difference between the price of an
instrument and its value at maturity (par
value) when the price is higher than the
maturity.
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.
Qualified Public Depositories. A financial
institution which does not claim exemption
from the payment of any sales or
compensating use or ad valorem taxes
under the laws of this state, which has
segregated for the benefit of the
commission eligible collateral having a
value of not less than its maximum liability
and which has been approved by the
Public Deposit Protection Commission to
hold public deposits.
Rate of Return. The yield obtainable on a
security based on its purchase price or its
current market price. This may be the
amortized yield to maturity on a bond or
the current income return.
Rating. A formal opinion by an outside
professional service on the credit
reputation of an issuer and the investment
quality of its securities. This opinion is
expressed in letter values (e.g., AAA,
Baal).
Repurchase Agreement (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 the terms of the
agreement are structured to compensate
him for this. Dealers use REPO's
extensively to finance their positions.
Safekeeping. A service to customers
rendered by banks for a fee whereby
securities and valuables of all types and
descriptions are held in the bank's vaults
for protection.
SEC Rule 15C3 -1. See uniform net
capital rule.
Secondary Market. A market made for
the purchase and sale of outstanding
issues following the initial distribution.
Securities and Exchange Commission
(SEC). Agency created by Congress to
protect investors in securities transactions
by administering securities legislation.
Treasury Bills. 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.
City of Southlake Investment Policy- amended December 2005 19
Treasury Bond. Long -term U.S. Treasury
securities having initial maturities of more
than ten years.
Treasury Notes. Intermediate term
coupon bearing U.S. Treasury securities
having initial maturities from one to ten
years.
U.S. Government Securities. Various
types of marketable securities issued by
the U.S. Treasury, including bills, notes,
and bonds. Such securities are direct
obligations of the U.S. Government and
differ mainly in the length of their maturity.
Weighted- Average Life. The weighted -
average life refers to the average amount
of time that will elapse from the date of a
security's issuance until each dollar of
principal is repaid to the investor.
Yield. The rate of annual income return
on an investment, expressed as a
percentage. (a) Income Yield is obtained
by dividing the current dollar income by
the current market price of the security.
(b) 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.
Uniform Net Capital Rule. Securities and
Exchange Commission requirement that
member firms as well as nonmember
broker - dealers in securities maintain a
maximum ratio of indebtedness to liquid
capital of 15 to 1; 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.
Zero - Coupon Security. A security that
makes no periodic interest payments but
instead is sold at a deep discount from its
face value.
City of Southlake Investment Policy- amended December 2005 20