O-416-M
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City of Clermont
ORDINANCE NO. 416-M
AN ORDINANCE OF THE CITY OF CLERMONT, FLORIDA AMENDING AND
RESTATING THE CITY OF CLERMONT OPERATING/CAPITAL FUNDS
INVESTMENT POLICY, AS ADOPTED IN 1996; PROVIDING FOR PURPOSE;
PROVIDING FOR SCOPE; PROVIDING FOR INVESTMENT OBJECTIVES;
PROVIDING FOR DELEGATION OF AUTHORITY; PROVIDING FOR
STANDARDS OF PRUDENCE; PROVIDING FOR ETHICS AND CONFLICTS
OF INTEREST; PROVIDING FOR INTERNAL CONTROLS AND INVESTMENT
PROCEDURES; PROVIDING FOR CONTINUING EDUCATION; PROVIDING
FOR AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS;
PROVIDING FOR MATURITY AND LIQUIDITY REQUIREMENTS; PROVIDING
FOR COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS;
PROVIDING FOR AUTHORIZED INVESTMENTS AND PORTFOLIO
COMPOSITION; PROVIDING FOR DERIVATIVES AND REVERSE
REPURCHASE AGREEMENTS; PROVIDING FOR PERFORMANCE
MEASUREMENTS; PROVIDING FOR REPORTING; PROVIDING FOR
THIRD-PARTY CUSTODIAL AGREEMENTS; PROVIDING FOR INVESTMENT
POLICY ADOPTION; AND PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City of Clermont previously adopted an Operating/Capital Funds
Investment Policy in 1996 and;
WHEREAS, the City of Clermont desires to clarify and restate the provisions
of the Operating/Capital Funds Investment Policy and to incorporate applicable provisions
of Chapter 218, Florida Statutes;
NOW, THEREFORE BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF
CLERMONT, FLORIDA,
SECTION 1: That the City of Clermont Operating/Capital Funds Investment Policy adopted in
1996 is hereby amended and restated as set forth in the document designated City of Clermont
Operating/Capital Funds Investment Policy, attached hereto and made a part hereof.
SECTION 2: All ordinances or parts of ordinances in conflict herewith be and the same are
hereby repealed,
SECTION 3: If any section, subsection, sentence, clause, phrase of this Ordinance, or any
particular application thereof shall be held invalid by any court, administrative agency, or other body
with appropriate jurisdiction, the remaining section, subsection, sentences, clauses, or phrases
under application shall not be affected thereby,
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City of Clermont
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ORDINANCE NO. 416-M
SECTION 4: This ordinance shall be effective immediately upon its Second Reading and
Final Passage.
First reading this 27th day of February 2001
Second reading this 13th day of March 2001
PASSED AND ORDAINED BY THE CITY COUNCIL OF THE CITY OF CLERMONT, LAKE COUNTY,
FLORIDA THIS 13TH DAY OF MARCH, 2001.
ATTEST:
Q Ef ZIL , CITY CLERK
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City of Clermont, Florida
Investment Policy
Operating/Capital Funds
I. PURPOSE
The purpose of this policy is to set forth the investment objectives and parameters for the management of
public funds of the City of Clermont, Florida (hereinafter "City"). These policies are designed to ensure
the prudent management of public funds, the availability of operating and capital funds when needed, and
an investment return competitive with comparable funds and financial market indices.
II. SCOPE
In accordance with Section 218.415, Florida Statues, this investment policy applies to all cash and
investments held or controlled by the City y.rith the exception of Pension Funds and funds related to the
issuance of debt where there are other existing policies or indentures in effect for such funds. Funds held
by state agencies (e.g" Department of Revenue) are not subject to the provisions of this policy.
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INVESTMENT OBJECTIVES
Safety of Principal
The foremost objective of this investment program is the safety of the principal of those funds within the
portfolios. Investment transactions shall seek to keep capital losses at a minimum, whether they are from
securities defaults or erosion of market value. To attain this objective, diversification is required in order
that potential losses on individual securities do not exceed the income generated fTom the remainder of
the portfolio.
Maintenance of Liquidity
The portfolios shall be managed in such a manner that funds are available to meet reasonably anticipated
cash flow requirements in an orderly manner. Periodical cash flow analyses will be completed in 'order
to ensure that the portfolios are positioned to provide sufficient liquidity.
Return on Investment
Investment portfolios shall be designed with the objective of attaining a market rate of return throughout
budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs,
Return on investment is of least importance compared to the safety and liquidity objectives described
above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed.
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DELEGATION OF AUTHORITY
In accordance with the Charter of the Clermont, the responsibility for providing oversight and direction
in regard to the management of the investment program resides with the City Manager. The daily
management responsibility fór all City funds in the investment program and investment transactions is
delegated to the Finance Director. The Finance Director shall establish written procedures for the
operation of the investment portfolio and a system of internal accounting and administrative controls to
regulate the activities of employees. The City may employ an Investment Manager to assist in managing
some of the City's portfolios. Such Investment Manager must be registered under the Investment
Advisors Act of 1940.
V.
STANDARDS OF PRUDENCE
The standard of prudence to be used by investment officials shall be the "Prudent Person" standard and
shall be applied in the context of managing the overall investment program. Investment officers acting in
accordance with written procedures and this investment policy and exercising due-diligence shall be
relieved of personal responsibility for an individual security's credit risk or market price changes,
provided deviations from expectation are reported to the City Manager in a timely fashion and the
liquidity and the sale of securities are carried out in accordance with the terms of this policy. The
"Prudent Person" rule states the following:
Investments shall be made with judgment and care, under circumstances then prevailing,
which persons of prudence, discretion and intelligence exercise in the management of
their own affairs, not for speculation, but for investment, considering the probable safety
of their capital as well as the probable income to be derived ITOm the investment. '
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While the standard of prudence to be used by investment officials who are officers or employees is the
"Prudent Person" standard, any person or firm hired or retained to invest, monitor, or advise concerning
these assets shall be held to the higher standard of "Prudent Expert". The standard shall be that in
investing and reinvesting moneys and in acquiring, retaining, managing, and disposing of investments of
these funds, the contractor shall exercise: the judgment, care, skill, prudence, and diligence' under the
circumstances then prevailing, which persons of prudence, discretion, and intelligence, acting in a like
capacity and familiar with such matters would use in the conduct of an enterprise of like character and
with like aims by diversifying the investments of the funds, so as to minimize the risk, considering the
probable income as well as the probable safety of their capital.
VI. ETIDCS AND CONFLICTS OF INTEREST
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, Also, employees involved in the investment process shall disclose to the
City Manager and the Mayor any material financial interests in financial institutions that conduct
business with the City, and they shall further disclose any material personal financial/investment
positions that could be related to the performance of the City's investment program.
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INTERNAL CONTROLS AND INVESTMENT PROCEDURES
The Finance Director shall establish a system of internal controls and operational procedures that are in
, writing and made a part of the City's operational procedures. The internal controls should be designed to
prevent losses of funds, which might arise 'from fraud, employee error, and misrepresentation, by third
parties, or imprudent actions by employees. The written procedures should include reference to
safekeeping, repurchase agreements, separation of transaction authority from accounting and
recordkeeping, wire transfer agreements, banking service contracts and collateraVdepository agreements.
No person may engage in an investment transaction except as authorized under the terms of this policy.
Independent auditors as a normal part of the annual financial audit to the City shall conduct a review of
the system of internal controls to ensure compliance with policies and procedures.
VIII. CONTINUING EDUCATION
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The Finance Director and other appropriate staff shall annually complete 8 hours of continuing education
in subjects or courses of study related to investment practices and products.
AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS
Authorized City staff and Investment Advisors shall only purchase securities from financial institutions,
which are qualified as public depositories by the Treasurer of the State of Florida, institutions designated
as "Primary Securities Dealers" by the Federal Reserve Bank of New York, or from direct issuers of
commercial paper and bankers' acceptances.
Authorized City staff and Investment Advisors shall only enter into repurchase agreements with financial
institutions that are state qualified public depositories and primary securities dealers as designated by the
Federal Reserve Bank of New York.
X. MATURITY AND LIQmDITY REQUIREMENTS
To the extent possible, an attempt will be made to match investment maturities with known cash needs
and anticipated cash flow requirements. Investments of current operating funds shall have maturities of
no longer than twenty-four (24) months. '
Investments of bond reserves, construction funds, and other non-operating funds ("core funds") shall
have a term appropriate to the need for funds and in accordance with debt covenants, but in no event
shall exceed five (5) years.
The maturities of the underlying securities of a repurchase agreement will follow the requirements of the
Master Repurchase Agreement.
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COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
After the Finance Director or the Investment Advisor, has determined the approximate maturity date
based on cash flow needs and market conditions and has analyzed and selected one or more optimal types
of investments, a minimum of three (3) qualified banks and/or approved broker/dealers must be contacted
and asked tò provide bids/offers on securities in questions. Bids will be held in confidence until the bid
deemed to best meet the investment objectives is determined and 'selected.
However, if obtaining bids/offers are not feasible and appropriate, securities may be purchased utilizing
the comparison to current market price method on an exception basis. Acceptable current market price
providers include, but are not limited to:
A. Telerate Information System
B. Bloomberg Infonnation Systems
C. Wall Street Journal or a comparable nationally recognized financial publication providing daily
market pricing
D. Daily market pricing provided by the City's custodian or their correspondent institutions
The Finance Director or the Investment Advisor shall utilize the competitive bid process to select the
securities to be purchased or sold. Selection by comparison to a current market price, as indicated above,
shall only be utilized when, in judgment of the Finance Director or the Investment Advisor, competitive
bidding would inhibit the selection process.
Examples of when this method may be used include:
A, When time constraints due to unusual circumstances preclude the use of the competitive bidding
process
B. When no active market exists for the issue being traded due to the age or depth of the issue
C. When a security is unique to a single dealer, for example, a private placement
D. When the transaction involves new issues or issues in the "when issued" market
Overnight sweep repurchase agreements will not be bid, but may be placed with the City's depository
bank relating to the demand account for which the repurchase agreement was purchased.
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AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION
Investments should be made subject to the cash flow needs and such cash flows are subject to revisions
as market conditions and the City's needs change. However, when the invested funds are needed in
whole or in part for the purpose originally intended or for more optimal investments, the Finance
Director may sell the investment at thç then-prevailing market price and place the proceeds into the
proper account at the City's custodian.
The following are the investment requirements and allocation limits on security types, issuers, and
maturities as established by the City. The Finance Director shall have the option to further restrict
investment percentages ¡¡-om time to time based on market conditions, risk, and diversification
investment strategies. The percentage allocations requirements for investment types and issuers are
calculated based on the original cost of each investment. Investments not listed in this policy are
prohibited,
A. The Florida Local Government Surplus Funds Trust Fund ("SBA")
1. Investment Authorization
The Finance Director may invest in the SBA.
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Portfolio Composition
A maximum of 100% of available funds may be invested in the SBA.
B. United States Government Securities
1. Purchase Authorization
The Finance Director may invest in negotiable direct obligations, or obligations the
principal and interest of which are unconditionally guaranteed by the United States
Government. Such securities will include, but not be limited to the following:
Cash Management Bills ,
Treasury Securities - State and Local Government Series ("SLGS")
Treasury Bills
Treasury Notes
Treasury Bonds
Treasury Strips
2, Portfolio Composition
A maximum of 100% of available funds may be invested tn the United States
Govemment Securities.
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3.
Maturity Limitations
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The maximum length to maturity of any direct investment in the United States
Government Securities is five (5) years from the date of purchase.
C. United States Government Agencies
1. Purchase Authorization
The Finance Director may invest in bonds, debentures, notes or callables issued or
guaranteed by the United States Governments agencies, provided such obligations are
backed by the full faith and credit of the United States Government. Such securities will
include, but not be limited to the following:
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United States Export - Import Bank
-Direct obligations or fully guaranteed certificates of beneficial
ownership
Fanner Home Administration
-Certificates of beneficial ownership
Federal Financing Bank
-Discount notes, notes and bonds
Federal Housing Administration Debentures
General Services Administration
United States Maritime Administration Guaranteed
-Title XI Financing
New Communities Debentures
-United States Government guaranteed debentures
United States Public Housing Notes and Bonds
-United States Government guaranteed public housing notes and bonds
United States Department of Housing and Urban Development
-Project notes and local authority bonds
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Portfolio Composition
A maximum of 50% of available funds may be invested in United States Government
agencies. '
3, Limits on Individual Issuers
A maximum of 25% of available funds may be invested in individual United States
Government agencies.
4. Maturity Limitations
The maximum length to maturity for an investment in any United States Govemment
agency security is five (5) years from the date of purchase,
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D. Federal Instrumentalities (United States Government sponsored agencies)
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Purchase Authorization
The Finance Director may invest in bonds, debentures, notes or callables issued or
guaranteed by United States Government sponsored agencies (Federal Instrumentalities)
which are non-full faith and credit agencies limited to the following:
Federal Farm Credit Bank (FFCB)
Federal Horne Loan Bank or its district banks (FHLB)
Federal National Mortgage Association (FNMA)
Federal Home Loan Mortgage Corporation (Freddie-Macs) including Federal -
Home Loan Mortgage Corporation participation certificates
Student Loan Marketing Association (Sallie-Mae)
2. Portfolio Composition
A maximum of 80% of available funds may be invested in Federal Instrumentalities.
3, Limits on Individual Issuers
A maximum of 40% of available funds may be invested in anyone issuer.
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Maturity Limitations
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The maximum length to maturity for an investment In any Federal Instrumentality
security is five (5) years from the date of purchase.
E. Interest Bearing Time Dep~sit or Saving Accounts
1. Purchase Authorization
The Finance Director may invest in non-negotiable interest bearing time certificates of
deposit or savings accounts in banks organized under the laws of this state and/or in
national banks organized under the laws of the United States and doing business and
situated in the State of Florida, provided that any 'such deposits are secured by the
Florida Security for Public Deposits Act, Chapter 280, Florida Statutes, Additionally,
the bank shall not be listed with any recognized credit watch infonnation service,
2, Portfolio Composition
A maximum of 50% of available funds may be invested In non-negotiable interest
bearing time certificates of deposit
3. Limits on Individual Issuers
A maximum of 25% of available funds may be deposited with anyone issuer.
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The maximum maturity on any certificate shall be no greater than one (I) year !Tom the
date of purchase.
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F, Repurchase Agreements
I, Purchase Authorization
a. The Finance Director may invest in repurchase agreements composed of only
those investments based on the requirements set forth by the City's Master
Repurchase Agreement. All firms are required to sign the Master Repurchase
Agreement prior to the execution of a repurchase agreement transaction.
b. A third party custodian with whom the City has a current custodial agreement
shall hold the collateral for all repurchase agreements with a tenn longer than
one (I) business day. A clearly marked receipt that shows evidence of
ownership must be supplied to the Finance Director and retaiñed.
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c. Securities authorized for collateral are negotiable direct obligations of the United
States Government, Government Agencies, and Federal Instrumentalities with
maturities under five (5) years and must have a market value for the principal
and accrued interest of 102 percent of the value and for the term of the
repurchase agreement excluding one (1) business day agreements and overnight
sweep agreements. Immaterial short-tenn deviations !Torn 102 percent
requirement are pennissible only upon the approval of the Finance Director.
2,
Portfolio Composition
A maximum of 50% of available funds may be invested in repurchase agreements
excluding one (I) business day agreements and overnight sweep agreements.
3, Limits on Individual Issuers
A maximum of 25% of available funds may be invested with anyone institution.
4, Limits on Maturities
The maximum length to maturity of any repurchase agreement is 90 days !Tom the date
of purchase,
G, Commercial Paper
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Purchase Authorization
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The Finance Director may invest in commercial paper of any United States company that
is rated, at the time or purchase, "Prime-I" by Moody's and "A-I" by Standard & Poor's
(prime commercial paper), If the commercial paper is backed by a letter of credit
("LOC"), the long-tenn debt of the LOC provider must be rated "A" or better by at least
two nationally recognized rating agencies.
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Portfolio Composition
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A maximum of 20% of available funds may be directly invested in prime commercial
paper.
3.
Limits on Individual Issuers
A maximum of 10% of available funds may be invested with anyone issuer.
4. Maturity Limitations
The maximum length to maturity for prime commercial paper shall be 180 days from the
date of purchase.
H Bankers' Acceptances
1. Purchase Authorization
The Finance Director may invest in Bankers' acceptances issued by a domestic bank or a
federally chartered domestic office of a foreign bank, which are eligible for purchase by
the Federal Reserve System, at the time or purchase, the short-tenn paper is rated, at a
minimum, "P-l" by Moody's Investors Services and "A-I" Standard & Poor's.
2.
Portfolio Composition
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A maximum of 20% of available funds may be directly invested in Bankers' acceptances
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A maximum of 10% of available funds may be invested with anyone issuer.
4. Maturity Limitations
The maximum length to maturity for Bankers' acceptances shall be 180 days from the
date of purchase.
1. State and/or Local Government Taxable and/or Tax-Exempt Debt
1. Purchase Authorization
The Finance Director may invest in state and/or local government taxable and/or tax-
exempt debt, general obligation and/or revenue bonds, rated at least "Aa" by Moody's
and "AA" by Standard & Poor's for long-tenn debt, or rated at least "MIG-2" by
Moody's and "SP-2" by Standard & Poor's for short-term debt.
2, Portfolio Composition
A maximum of 20% of available funds may be invested in taxable and tax-exempt debts,
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3.
Maturity Limitations
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A maximum length to maturity for an investment in any state or local government debt
security is three (3) years from the date of purchase.
J. Registered Investment Companies (Mutual Funds)
I, Investment Authorization
The Finance Director may invest in shares in open-end and no-load money market funds
provided such funds are registered under the Federal Investment Company Act of 1940
and operated in accordance with 17 C.F.R. § 270.2a-7. In addition, the Finance Director
may investment in other types of mutual funds provided such funds are registered under
the Federal Investment Company Act of 1940, invest exclusively in the securities
specifically permitted under this investment policy, and are similarly djversified,
2. Portfolio Composition
A maximum of 50% of available funds may be invested in mutual funds.
3. Limits of Individual Issuers
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A maximum of 25% of available funds may be invested with anyone non-SEC Rule 2a-7
investment mutual fund.
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Rating Requirements
The mutual funds shall be rated "AAm" or "AAm-G" or better by Standard & Poor's, or
the equivalent by another rating agency.
5, Due Diligence Requirements
A thorough review of any investment mutual fund is required prior to investing, and on a
continual basis. There shall be a questionnaire developed by the Finance Director that
will contain a list of questions that covers the major aspects of any investment pool/fund.
K. Intergovernmental Investment Pool
I, Investment Authorization
The Finance Director may invest in intergovemmental investment pools that are
authorized pursuant to the Florida Interlocal Cooperation Act, as provided in Section
163,01, Florida Statutes and provided that said funds contain no derivatives,
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2.
Portfolio Composition
A maximum of 25% of available funds may be invested in intergovernmental investment
pools.
3,
Due Diligence Requirements
A thorough review of any investment pool/fund is required prior to investing, and on a
continual basis. There shall be a questionnaire developed by the Finance Director that
will contain a list of questions that covers the major aspects of any investment pool/fund,
XIII. DERIVATIVES AND REVERSE REPURCHASE AGREEMENTS
XIV.
Investment in any derivative products or the use of reverse repurchase agreements are specifically
prohibited by this investment policy. A "derivative" is defined as a financial instrument the value of
which depends on, or is derived from, the value of one or more underlying assets õr indices or asset
values.
PERFORMANCE MEASUREMENTS
In order to assist in the evaluation of the portfolio's performance, the City will use performance
benchmarks for short-term and long-term portfolios. The use of benchmarks will allow the City to
measure its returns against other investors in the same markets.
A. The State Board of Administration's Local Government Surplus Funds Trost Fund ("SBA Pool")
will be used as a benchmark as compared to the portfolios' net book value rate of return for current
operating funds.
B. Investment performance of funds designated as core funds and other non-operating funds that have a
longer-term investment horizon will be compared to an index comprised of U. S. Treasury or
Government securities. The appropriate index will have a duration and asset mix that approximates
the portfolios and will be utilized as a benchmark to be compared to the portfolio's total rate of
return,
C. Investment advisors will report performance on both book value 'and total rate of return basis and
compare results to the above-stated benchmarks.
XV. REPORTING
The Finance Director shall provide the City Manager with quarterly investment reports. Schedules in the
quarterly report should include the following:
A, A listing of individual securities held at the end of the reporting period
B. Percentage of available funds represented by each investment type
c.
Coupon, discount or earning rate
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Average life or duration and final maturity of all investments
E. Par value and market value
On an annual basis, the Finance Director shall prepare and submit to the City Council a written report on
all invested funds. The annual report shall provide all, but not limited to, the following: a complete list
of all invested funds, name or type of security in which the funds are invested, the amount invested, the
maturity date, earned income, the book value, the market value and the yield on each investment.
The annual report will show performance on both a book value and total rate of return basis and will
compare the results to the above-stated performance benchmarks. All investments shall be reported at
fair value per GASB standards. Investment reports shall be available to the public.
THIRD-PARTY CUSTODIAL AGREEMENTS
Securities, With the exception of certificates of deposits, shall be held with a third party custodian; and all
securities purchased by, and all collateral obtained by, the City should be properly designated as an asset
of the City, The securities must be held in an account separate and apart from the assets of the financial
institution. A third party custodian is defined as any bank depository chartered by the Federal
Government, the State of Florida, or any other state or territory of the United States which has a branch
or principal place of business in the State of Florida as defined in Section 658.12, Florida Statutes, or by
a national association organized and existing under the laws of the United States which is authorized to
accept and execute trusts and which is doing business in the State of Florida. Certificates of deposits will
be placed in the provider's safekeeping department for the term of the deposit.
The custodian shall accept transaction instructions only from those persons who have been duly
authorized by the Finance Director and which authorization has been provided, in writing, to the
custodian. No withdrawal of securities, in whole or in part, shall be made from safekeeping, shall be
permitted unless by such a duly authorized person.
The custodian shall provide the Finance Director with safekeeping receipts that provide detail
information on the securities held by the custodian. Security transactions between a broker/dealer and
the custodian involving the purchase or sale of securities by transfer of money or securities must be made
on a "delivery vs, payment" basis, if applicable, to ensure that the custodian will have the security or
money, as appropriate, in hand at the conclusion of the transaction. Securities held as collateral shall be
held free and clear of any liens,
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XVII. INVESTMENT POLICY ADOPTION
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The investment policy shall be adopted by a City ordinance. The Finance Director shall review the
policy annually and the City Council shall approve any modification made thereto.
APPROVED AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF CLERMONT
ON MARCH 13, 2001.
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Attachment
Glossarv of Cash and Investment Manaç¡ement Terms
Accrued Interest - The accumulated interest due on a bond as of the last interest payment made by the issuer.
Agency - A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full
faith and credit of the U.S. Government Federally sponsored agencies (FSAs) are backed by each particular agency
with a market perception that there is an implicit government guarantee. An example of federal agency is the
Government National Mortgage Association (GNMA). An example of a FSA is the Federal National Mortgage
Association (FNMA).
Amortization - The systematic reduction of the amount owed on a debt issue through periodic payments of
principal.
Average Life - The average length of time that an issue of serial bonds andlor term bonds with a mandatory sinking
fund feature i~ expected to be outstanding.
Bankers' Acceptance (BA) ,A draft, bill or exchange accepted by a bank or trust company.
The accepting institution guarantees payment of the bill, as well as the issuer.
Basis Point - A unit of measurement used in the -valuation of fIxed-income securities equal to 1/100 of I percent of
yield, e.g., "1/4" of t percent is equal to 25 basis points.
Bid - The indicated price at which a buyer is willing to purchase a security or commodity,
Book Value - The value at which a security is carried on the inventory lists or other financial records of an investor.
· The book value may differ signifIcantly from the security's current value in the market
Callable Bond - A bond issue in which all or part of its outstanding principal amount may be redeemed before
maturity by the issuer under specified conditions,
Call Price - The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight
premium to the bond's original issue price to compensate the holder for loss of income and ownership.
Call Risk - The risk to a bondholder that a bond may be redeemed prior to maturity.
Cash Sale/Purchase - A transaction, which calls for delivery and payment of securities on the same day that the
transaction is initiated.
Collateralization - Process by which a borrower pledges securities, property, or other deposits for securing the
repayment of a loan andlor security,
Commercial Paper - An unsecured short-term promissory note issued by corporations, with maturities ranging
from 2 to 270 days,
Convexity. A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater
sensitivity of a bond's price to interest rate changes.
Coupon Rate - The annual rate of interest received by an investor from the issuer of certain types of fIxed-income
securities. Also known as the "interest rate",
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Attachment
Glossary of Cash and Investment Manaqement Terms
Credit Quality - The measurement of the financial strength of a bond issuer. This measurement helps an investor to
understand an issuer's ability to make timely interest payments and repay the loan principal upon maturity.
Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk
of default is lower. Credit quality ratings are provided by nationally recognized rating agencies.
Credit Risk - The risk to an investor that an issuer will default in the payment of interest and/or principal on a
security.
Current Yield (Current Return) - A yield calculation determined by dividing the annual interest received on a
security by the current market price of that security.
Delivery Versus Payment (OVP) - A type of securities transaction in which the purchaser pays for the securities
when they are delivered either to the purchaser or hislher custodian,
Derivative Security - Financial instrument created ftom, or whose value depends upon, one or more underlying
assets or indexes of asset values. -
Discount - The amount by which the par' value of a security exceeds the price paid for the security.
Diversification - A process of investing assets among a range of security types by sector, maturity, and quality
rating.
Duration - A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to
be received ftom a given fIXed-income security. This calculation is based on three variables: term to maturity,
coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates.
Fair Value - The amount, at which an investment could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
Federal Funds (Fed Funds) - Funds placed in Federal Reserve banks by depository institutions in excess of current
reserve requirements, These depository institutions may lend fed funds to each other overnight or on a longer basis,
They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system.
Fed funds are considered immediately available funds,
Federal Funds Rate - Interest rate charged by one institution lending federal funds to the other,
Government Securities - An obligation of the U.S. government, backed by the full faith and credit of the
government, These securities are regarded as the highest quality of investment securities available in the U.S.
securities market. See "Treasury Bills. Notes, and Bonds."
Interest Rate - See "Coupon Rate".
Interest Rate Risk - The risk associated with declines or rises in interest rates which cause an investment in a fixed-
income security to increase or decrease in value.
Internal Controls - An internal control structure designed to ensure that the assets of the entity are protected from
loss, theft, or misuse, The internal control structure is designed to provide reasonable assurance that these objectives
are met. The concept of reasonable assurance recognizes that I) the cost of a control should not exceed the benefits
likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management
Internal controls should address the following points:
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Attachment
Glossary of Cash and Investment Manaqement Terms
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Control of collusion - Collusion is a situation where two or more employees are working in conjunction to
defraud their employer.
2.
Separation of transaction authority from accounting and record keeping - By separating the person
who authorizes or perfollYlS the transaction from the people who record or otherwise account for the
transaction, a separation of duties is achieved.
3,
Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as
defmed by state law) shall be placed with an independent third party for custodial safekeeping,
4.
Avoidance of physical delivery securities - Book-entry securities are much easier to transfer and account
for since actual delivery of a document never takes place. Delivered securities must be properly
safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered
securities.
5,
Clear delegation of authority to subordinate staff members - Subordinate staff members must have a
clear understanding of their authority and responsibilities to avoid improper actions, Clear delegation of
authority also preserves the internal control structure that is contingent on the various staff positions and
their respective responsibilities.
6. Written confirmation of transactions for investments and wire transfers - Due to the potential for error
and improprieties arising from telephone and electronic transactions, all transactions should be supported
by written communications and approved by the appropriate person. Written communications may be via
fax if on letterhead and if the safekeeping institution has a list of authorized signatures.
7, Development of a wire transfer agreement with the lead bank and third-party custodian - The
designated official should ensure that an agreement will be entered into and will address the following
points: controls. security provisions, and responsibilities of each party making and receiving wire transfers.
Inverted Yield Curve - A chart formation that illustrates long-tenn securities having lower yields than short-tenn
securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence
in the economy and a restrictive monetary policy.
Investment Company Act of 1940- Federal legislation which sets the standards by which investment companies,
such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and
securities valuations.
Investment Policy - A concise and clear statement of the objectives and parameters fonnulated by an investor or
investment manager for a portfolio of investment securities.
Investment-grade Obligations - An investment instrument suitable for purchase by institutional investors under the
prudent person rule, Investment-grade is restricted to those obligations rated BBB or higher by a rating agency,
Liquidity - An asset that can be converted easily and quickly into cash,
Local Government Investment Pool (LGIP) - An investment by local govenunents in which their money is pooled
as a method for managing local funds, (i.e" Florida State Board of Administration "SBA"),
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Attachment
Glossary of Cash and Investment Manaqement Terms
Mark-to-market - The process whereby the book value or collateral value of a security is adjusted to reflect its
current market value.
Market Risk - The risk that the value of a security will rise or decline as a result of changes in market conditions.
Market Value - Current market price of a security,
Maturity - The date on which payment of a rmancial obligation is due. The ftnal stated maturity is the date on
which the issuer must retire a bond and pay the face value to the bondholder. See "Weighted Average Maturity".
Money Market Mutual Fund - Mutual funds that invest solely in money market instruments (short-tenn debt
instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds),
Mutual Fund - An investment company that pools money and can invest in a variety of securities, including rtXed-
income securities and money market instruments. Mutual funds are regulated by the Investment ComPany Act of
1940 and must abide by the following Securities and Exchange Commission (SEe) disclosure guidelines:
I, Report standardized performance calculations.
2. Disseminate timely and accurate information regarding the fund's holdings, performance, management aod
general investment policy.
3. Have the fund's investment policies and activities supervised by a board of trustees, which are independent
of the adviser, administrator or other vendor of the fund.
4. Maintain the daily liquidity of the fund's shares.
5. Value their portfolios on a daily basis.
6. Have all individuals who sell SEC-registered products licensed with a self-regulating organization (SRO)
such as the National Association of Securities Dealers (NASD),
7. Have an investment policy governed by a prospectus which is updated and med by the SEC annually.
Mutual Fund Statistical Services - Companies that track and rate mutual funds, e.g" IBClDonoghue, Lipper
Analytical Services, and Morningstar,
National Association of Securities Dealers (NASD) - A self-regulatory organization (SRO) of brokers and dealers
in the over-the-counter securities business. Its regulatory mandate includes authority over f1ITl1S that distribute
mutual fund shares as well as other securities.
Net Asset Value - The market value of one share of an investment company, such as a mutual fund, This ftgure is
calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this from
the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based
on the closing price for each security in the fund's portfolio, (See below.)
[(Total assets) - (Liabilities)]/(Number of shares outstanding)
No Load Fund - A mutual fund which does not levy a sales charge on the purchase of its shares,
Nominal Yield - The stated rate of interest that a bond pays its current owner, based on par value of the security, It
is also known as the "coupon", "coupon rate", or "interest rate",
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Attachment
Glossary of Cash and Investment Manallement Terms
Offer - An indicated price at which market participants are willing to sell a security or commodity. Also referred to
as the "Ask price".
Par - Face value or principal value ofa bond, typically $1,000 per bond.
Positive Yield Curve - A chart formation that illustrates short-term securities having lower yields than long-term
securities.
Premium - The amount by which the price paid for a security exceeds the security's par value.
Prime Rate - A preferred interest rate charged by commercial banks to their most creditworthy customers. Many
interest rates are keyed to this rate.
Principal - The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a
given security. -
Prospectus - A legal document that must be provided to any prospective purchaser of new securities offering
registered with the SEC. This can include information on the issuer, the issuer's business, the proposed use of
proceeds, and the experience of the issuer's management, and certain certified fmancial statements.
Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of public funds investors
relating to investment practices.
Regular Way Delivery - Securities settlement that calls for delivery and payment on the third business day
following the trade date (T +3); payment on a T + I basis is currently under consideration. Mutual funds are settled
on a same day basis; government securities are settled on the next business day.
Reinvestment Risk - The risk that a fixed-income investor will be unable to reinvest income proceeds from a
security holding at the same rate of return currently generated by that holding.
Repurchase Agreement (repo or RP) - An agreement of one party to sell securities at a specified price to a second
party and a simultaneous agreement of the ftrst party to repurchase the securities at a specified price or at a specified
later date.
Reverse Repurchase Agreement (Reverse Repo) - An agreement of one party to purchase securities at a specified
price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price
to the second party on demand or at a specified date.
Rule 2a-7 of the Investment Company Act - Applies to all money market mutual funds and mandates such funds
to maintain certain standards, including a 13- month maturity limit and a 90-day average maturity on investments, to
help maintain a constant net asset value of one dollar ($1.00),
Safekeeping - Holding of assets (e,g" securities) by a financial institution,
Serial Bond - A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals
until the entire issue is retired,
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Attachment
Glossary of Cash and Investment Manaqement Terms
. Sinking Fund - Money accumulated on a regular basis in a separate custodial account that is used to redeem debt
securities or preferred stock issues.
Swap - Trading one asset for another,
Term Bond - Bonds comprising a large part or all of a particular issue which come due in a single maturity. The
issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of tenn bonds before
maturity.
Total Return - The sum of all investment income plus changes in the capital value of the portfolio. For mutual
funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains.
This is calculated by taking the following components during a certain time period. (Price Appreciation) +
(Dividends paid) + (Capital gains) = Total Return
Treasury Bills - Short-tenn U.S, government non-interest bearing debt securities with maturities of no longer than
one year and issued in minimum denominations of $ t 0,000. Auctions of three- and six-month bills -are weekly,
while auctions of one-year bills are monthly. The yields on these bills are'monitored closely in the money markets
for signs of interest rate trends.
Treasury Notes - Intennediate U.s. government debt securities with maturities of one to to years and issued in
denominations ranging from $1,000 to $1 million or more.
Treasury Bonds - Long-tenn U.s. government debt securities with maturities of ten years or longer and issued in
minimum denominations ofSl,OOO. Currently, the longest outstanding maturity for such securities is 30 years.
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Uniform Net Capital Rule - SEC Rule 15C3-l outlining capital requirements for broker/dealers.
Volatility - A degree of fluctuation in the price and valuation of securities.
"Volatility Risk" Rating - A rating system to clearly indicate the level of volatility and other non-credit risks
associated with securities and certain bond funds, The ratings for bond funds range from those that have extremely
low sensitivity to changing market conditions and offer the greatest stability of the returns ("AAA" by S&P; "V-I"
by Fiche) to those that are highly sensitive with currently identifiable market volatility risk ("eee-" by S&P, "V_lO"
by Fitch).
Weighted Average Maturity (W AM) - The average maturity of all the securities that comprise a portfolio.
According to SEC rule 2a-7, the WAM for SEC registered money market mutual funds may not exceed 90 days and
no one security may have a maturity that exceeds 397 days,
When Issued (WI) - A conditional transaction in which an authorized new security has not been issued, All "when
issued" transactions are settled when the actual secwity is issued.
Yield . The current rate of return on an investment security generally expressed as a percentage of the security's
current price,
Yield-to-call (YTC) - The rate ofreturn an investor earns from a bond assuming the bond is redeemed (called) prior
to its nominal maturity date, Yield Curve - A graphic representation that depicts the relationship at a given point in
time between yields and maturity for bonds that are identical in every way except maturity, A normal yield curve
may be alternatively referred to as a positive yield curve,
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Attachment
Glossarv of Cash and Investment Manallement Terms
Yield-tò-maturity - The rate of return yielded by a debt security held to maturity when both interest payments and
the investor's potential capital gain or loss are included in the calculation of return,
Zero-coupon Securities - Security that is issued at a discount and makes no periodic interest payments. The rate of
return consists ofa gradual accretion of the principal of the security and is payable at par upon maturity.
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