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HomeMy WebLinkAbout2019 Investment PolicyCIT Y O F WES T UNIVERSITY PLACE , TEXAS INVESTMEN T POLICY A ugust 26 , 201 9 City of West University Place Investment Policy Table of Contents I. Policy 1 II. Purpose 1 III. Scope 1 IV. General Objecti v es A. Safety 2 B. Liquidity 2 -3 C. Publi c Trust 3 D. Yield 3 V. Standards of Care A. Prudence 3 B. Ethic s an d Conflict s o f Interest 4 C. Delegation of Authority 4 D. Training 4 -5 E. Inter n al Co n trols 5 VI. Safekeepin g an d Custody A. Authorize d Financia l Dealers and Institutions 5 -6 B. Co m petitive Bids 6 C. Delivery vs. Pay m ent 6 VII. Suitabl e an d Authorize d Invest m e nts A. Eligible Invest m ents 6 -7 B. Collate ra liz a tion 7 C. Existing Invest m ents 8 VIII. Invest m ent Para m eters A. Diversification 8 B. Maxi m u m Maturities 8 IX. Invest m ent Strategies 8 -9 X. Reporting A. Methods 9 B. Perfo r manc e Standards 9 C. Marking to Market 9 EXHIBITS A – Authorized Inve stmen t Officials 10 B – State m e nt of Ethics and Conflicts of Interest 11 C – Approved Brokers/Dealers, Financial Institutions and Invest m ent Pools 12 D – Certificatio n b y Busines s Organization 13 E – Invest m ent Strategies 14 -18 Glossary 19 -27 City of W est University Place Invest m ent Policy 1 I. Policy It is the policy of the City of W est University Place (t h e “City”) to a dm inister and invest its funds in a m anner tha t wil l preserv e th e princi pal, m aintain liquidity, and opti m ize interest e a rni n gs while m eeting the daily cash flow require m ents of the City. Th e Cit y wil l confor m t o al l federal , stat e and local s tatute s , rules and regulations governin g th e invest m e n t o f th e City’s fund s. This Policy sets forth the invest m ent program of t he City and t h e guidelines to be followed i n achievin g it s objectives. The City’s p olicy is to h old inv e stments to m aturit y ; howev e r, sec u rities m ay be sold in order to m in i m ize the pote n ti a l loss of pri n cipal on a s ec u rity whose credit quality has declined; or to m eet unanticipa t ed liquidity needs of the City. No t les s tha n annually , Cit y Counci l shal l adop t a writte n instru m e n t b y resolution stating t h at it has reviewed the Invest m ent Policy and inv e st m ent strategies and that the written instru m ent so adopted shall r e cord any changes m ade to the Invest m ent Policy or invest m ent strategies. II. Purpose The purpose of this policy is to co m ply with Chapter 2256 of the Texas G overn m ent Code (“Public Funds Invest m ent Act” or “PFIA ” o r “Act”), w h ich requires each entity to adopt a written invest m ent policy regarding the invest m ent of its funds and funds under its control. The invest m ent po l icy addresses the m ethods, procedures and practices that m ust be exerci s ed to e n sure effective and judicious fiscal m anage m ent of the entity’s funds. III. Scope This invest m ent policy applies to all funds and invest m ents of the City. These funds are accounted for in the City 's Comprehensive Annual Financial Report and include all funds m anaged by the City, including but not li m ited to tax revenues, charges for services, b o nd proceeds, interest inco m e, loans and funds received by the Cit y wher e th e Cit y perfo r m s a custodia l function . However , thi s polic y doe s not apply to the assets ad m inistered for the benefit of the City by outside agencies under deferred compensation progra m s or other retire m ent progra m s. The City will co n soli d ate cash balances from all funds to m ax i m ize invest m ent earnings, (except as otherwise required by covenants in bond ordinances , credit agree m ents as defined in V.T.C.A., Gov ern m e n t Cod e § 1371.00 1 o r othe r applicable regulation s ). Invest m ent inco m e will be a ll o cated to the various funds based on their respective participation and in accordance w ith generally accepted accounting principles. City of W est University Place Invest m ent Policy 2 IV. General O b jec t ives The pri m ary objectives, in priority order, of t h e City’s inve s t m ent acti v ities sh a ll be safety , liquidity , an d yield: A. Safety – Safety of the princip a l is t h e pri m ary objective of the invest m ent progra m . Invest m ents shall be underta k en in a m anner that seeks to ensure the p reser v ation of capital for the overall portfolio. The objective will be to m i ni m ize credit risk and i n terest r a te r i s k. i. Credit Risk and Concentration of Credit Risk – The City will m ini m ize credit r isk, w h ich is the r i s k of loss due to the f ailure of the sec u rity issuer o r backer, a nd concentration of credit risk, the risk of lo s s attributed to the m a gnitude of invest m ent in a single issuer , by:  Li m iting i n vest m ents to the type s liste d i n Sectio n VII (“Suitable and Authorized Inv e st m ents”) of this Policy,  Pre -quali f ying the fi nanci a l i n stit u tio n s, broker/d eal e rs, inter m ediaries, and a d visers with which the City will do business in accorda n ce to Section VI.A (“Authorized Fi n ancial Dealers and Institutions”), and;  Diversifying the investment port f olio so that pot e nti a l losses on individual securities will be m in i m ized. ii. Intere s t Rate Risk – The City will m ini m ize intere s t r a te risk, which is the risk th a t the m arket val u e of secu r ities in the po r t f olio will f all d u e to changes in ma rket i n terest r a tes, b y:  Struct u ring the invest m ent port f olio so that sec u r ities m ature to m eet cash require m ents for ongoing operations, thereby avoidin g th e nee d t o sel l securit i es o n the open m arket prior to m aturity,  Investing o p erating funds pri m arily in shorter -term securities, money m arket funds that seek a stable $1.00 price per share or stable $1.00 net asset value (NAV) t o avoi d potentia l liquidity fees or rede m ption gates, or si m ilar local govern m ent invest m ent pools, li m iting the weighted average m aturity of the portfolio in accorda n ce with Section IX (“Inve s tme n t Strategies”), and;  Diversify maturities and stagger purchase dates to m ini m ize the i m pact of m arket m o v e m ents over ti m e in accordance with Sectio n VII I (“Inves t m ent P ara m ete r s”). B. Liquidity – The inve st m ent port f olio s h all r e m ain suf f iciently liq u id to m eet all operating req u ire m ents that m ay be reasonably anticipated. This is acco m plished by structuring the port f olio s o th a t s e c u rities m ature concurrent with cash n eeds to m eet anticipated de m ands. Further m ore, City of W est University Place Invest m ent Policy 3 sinc e al l possibl e cas h de m a nd s canno t b e anticipated , a portio n o f the portfolio will be invested in m oney m arket funds that seek a stable $1.00 NAV or local govern m ent invest m e nt pools tha t offe r sa m e -da y liquidity for short -term funds. Additio n ally, a portion of the p o rtfolio will consist of securities with active secondary or resale m arkets. C . Publi c Trus t – All p a rticipants in t h e Cit y ’s in v est m ent pr o cess s h all s e ek to act resp o nsibly as c u stodians of t h e public trust. Invest m ent Officers shall at all ti m es be c o gnizant of t h e stan d ard of care a n d inve s t m ent objectives and shall avoid any tra n saction that m ight impair public con f idence in the Cit y ’s ability to g o vern e ff ecti v ely. D. Yield – The invest m ent portfolio shall b e de s i g ned with t h e objective of attaining a m arket rate of ret u rn, throughout budgetary and econo m i c cycles , takin g int o accoun t th e invest m e n t ris k constraint s an d liquidity needs of t h e port f olio. Return o n inve s t m e nt is of le a st i m porta n ce co m pared to the sa f ety a nd liqui d ity objectives d escri b ed ab o ve. The core of invest m ents is li m ited to r el a tiv e ly low r isk s ecuriti e s in anti c ipation of earning a f air ret u rn r e lative to t h e ri s k being ass um ed. Securities s h all no t be sold p r ior to m aturity with the f ollowing exce p tions:  A security with decli n ing credit m ay be sold early to m inimize loss of principal  Liquidity needs of the portfolio req u ire that the s ecurity be s o ld V. Standards of Care A. Prudenc e - The standard of prudence to b e use d b y investin g officer s or designate d investin g off i cials shall be the "pruden t perso n " rule. This rule states that “Invest m ents shall be m ade with judg m ent and care, under circu m stances then prevailing, which persons of prudence, discretion and int e lli g ence exerci s e in the m anage m ent of their own a f fairs, not f or speculation, but for invest m ent, consi d erin g th e probabl e safet y o f their capital as w ell as the p r obable inc om e to be derived.” The deter m ination of whether an investing official has exercised p r udence with respect to an invest m ent decision shall be applied in the context of m anaging an overall port f olio r a ther than a consider a t i on as to the prudence of a single invest m ent. Invest m ent Officers acting in accor d ance with written procedures and t h e invest m ent policy and exercising due diligence shall be relieved of personal responsibility for an individu a l security 's credit risk or m arket price changes, provided that deviations from expectations are reported in a ti m ely fashion and appropriate action i s take n t o contro l unfavorable develop m ents. City of W est University Place Invest m ent Policy 4 B. Ethics and Conflicts of Interest Invest m ent Officer(s) and e m ployees involved in the invest m e nt process agree to refrain from personal business acti v ity that could con f lict with p rope r executio n an d m a n a ge m e n t o f t h e invest m ent progra m , or that could i m pair their ability to m ake i m partial invest m ent decisions. Invest m ent Of ficer(s ) an d Investmen t Official(s) shall agree to disclose to th e Cit y Counci l wit h sai d disclosur e hel d o n file within the Finance Depart m ent any conflict s o f interest s o r personal business relationship with financial i n stitutions that conduct business with the City. They shall f u rther d is c lo s e any pers o nal f inanci a l/in v est m ent positio n s t h at could be rel a ted to the per f o r m ance of the invest m ent portfolio. (See Exhibit B.) A state m ent required under this subsec t ion m ust be f iled with t h e Tex a s Ethics Com m ission and the City Co u ncil i f : a. The Invest m ent Officer or Invest m ent Off i cial has a personal business relationship wit h a busines s organization o ff ering to engage in a n inve s t m ent trans a ction with t h e City; or b. An Investment Officer or I nvest m ent Official who is related within the second degree by a f finity or consanguinity, as deter m ined under Chapter 573 of the Texa s Govern m e n t Code , t o an individual seeking to transact invest m ent bu s iness with t h e. C. Delegation of Authority - Authority to m an a ge the City 's invest m ent program is granted to the Finance D i rect o r, h erei n after r e ferred to as Invest m ent Officer, and d e rived f r o m the f ollowing: City Charter A r ticle VII , Sectio n 7.01c . Responsibilit y f o r the operation of the invest m ent program is hereby delegated to the Invest m ent Officer, who shall act in accorda n ce with e s tablished procedures and internal co n t rols for the operation of the invest m ent program consistent with this invest m ent policy. This policy in c ludes ex p li c it d e legation of authority to persons responsible for invest m ent transacti o ns. (See Exhibit A) No person m ay engage in an invest m ent transaction except as provided under the ter m s of this policy and the procedures established by the Invest m ent Officer. The Invest m ent Officer shall be responsibl e fo r al l transaction s undertake n and shal l establis h a syste m o f control s t o regulat e activitie s o f subordinate Invest m ent Officials (Treasurer and Fiscal Services Officer). D. Training - Invest m e n t Officer(s ) an d person s authorize d t o execute invest m ent transactions m ust co m p l e te at least 10 hours of invest m e nt training within 12 m onths of taking office or assu m ing du t ies, and shall attend an invest m ent training session no t les s tha n onc e i n a tw o year period and receive n o t less than ei g ht (8 ) ho u rs of training after the initial 1 0 hour s o f instructio n relatin g t o inv e st m ent controls, security risks, City of W est University Place Invest m ent Policy 5 strategy ris k s, m arket risks, diversi f ication of invest m e nt portfolio, and co m pliance with t h e A c t. The City shall p r o vide the tr a ining thro u gh courses and se m inars offered by professional organizations and associ a tio n s in order to insure the quality and capability of the City ’s invest m ent personnel are in co m p liance with PFIA. Professional organizations and associations that m ay provide invest m ent training including the Govern m ent Treasure r ’s Organization of Texas, the Universit y o f Nort h Texas , th e Gov ern m ent Finance Officers Associati o n o f Texas , Treasur y Manage m e n t Ass ociation, or the Texas Municipal League. E. Internal C o ntrols - Th e Financ e Directo r i s responsibl e fo r establishing and m aintaining an internal control structure designed to ensure that public fund s o f th e entit y ar e protecte d fro m loss, theft, or m is use . Th e internal control structure s h all be designed to provide reasona b le assuran c e t h at thes e objective s ar e m e t . Th e concep t of reasonable assuranc e recognizes that (a) the cost of a control sho u ld not exceed the benefits likely to be derived and (b) the valu a tion of costs and benefits requires esti m ates and judg m ents by m anag e m ent. Therefor e , th e Financ e Directo r shall establish a process for annual independent review by an e xternal auditor during the annual audit to assure com p liance with policies and procedures. VI. Safekeepin g an d Cust o d y A. Author i z ed Financial De aler s an d Institution s –The Invest m ent Officer or Invest m ent Of f icial(s ) will m aintain a li s t of f inancial instit u tio n s and security br o ker/dealers authorized to provide invest m ent services (Exhibit C) to the City. This list shall be r e viewed, revised as necessary and adopted at lea s t an n ually. In v e st m ent Off i cers o r Invest m e n t O ff i c i al(s ) sha ll not conduct business with any firm not a pprove d b y Cit y Council . N o public deposi t shal l b e m a d e excep t i n a qu ali f ied public depo s itory as esta b lis h ed by state la w s. Thos e firm s tha t reques t t o bec o m e qualifie d bidder s fo r securities trans a ctions will be requi r ed to provide 1) in f or m ation reg a r d ing creditwort h i ness, experience, references and reputation, and 2) a certification stating t h e firm has r eceived, read and understood the City’s invest m ent policy and agree to co m ply with the policy. Authorized fir m s m ay include pri m ary dealers or r e gional dealers that qualify under Securities & Exchan g e Com m ission Rule 15C3 -1 (Uni f orm Net Capit a l Rule), and qualified depositories. A ll invest m ent providers, including financial i n stit u tio n s, banks, m on e y m arket funds, and local gover nm ent invest m ent pools, must sign a cer tificatio n acknowledgin g tha t the organizatio n ha s receive d an d reviewe d the City’s inve st m ent policy and that reaso n able pr o cedures and co n trols have been i m pl e m ented to preclude City of W est University Place Invest m ent Policy 6 invest m ent transactions that are not a u thorized by the City’s policy. (See Exhibit D) Should an approved institution m erge with o r b e acquire d b y anothe r while on the City’s approved list, the new ins t itution must agree to m eet the s a m e coll a te r aliz a tion and ce r ti f ication re q uire m ents or will be removed f rom the approved list. B. Competi t i v e Bids – The City’s p o licy req u ir e s that at least th r ee co m petitive bids or offers m ust be solicited for all indi v id u al sec u rity purchases and sales exce p t for a) transactions w ith m oney m arket funds and local govern m ent invest m ent pools (which are dee m ed to be m ade at prevailing m arket rat es ) and b ) treasury and agency sec u rities purcha s ed at iss u a n ce through an approved broker/dealer or financial institution c ) f ully insu r ed certificates of deposit placed in acc o rdance with t h e con d iti o ns pre s crib e d in Section 2256.010(b) of t h e Act . I n situation s w here the exact security being offered is not offered by oth e r dealers, offers on the closest co m parable invest m ent m ay be used to establish a fair m arket price for t h e security. C. Deliver y vs . Paymen t – All trades with the e x ception of invest m ent pools and m oney m arket f unds will be e x ecuted by d eliv e ry vs. pay m ent (DVP) to ensure t h at sec u rities are deposited in an eligible f inan c ial i n stituti o n prior to t h e rel e ase of f u nds. Securities and collate r al will b e held in t h e City’s na m e by a third -party custodian as evidenced by safekeeping rec e ipts of the instit u ti o n with whi c h the sec u rities a r e dep o sited. VII. Suitable and Author i z e d Investments A. Eligible I n vestme n ts – Funds of the City m ay be invested in the following instru m ents described below. All of these invest m ents are authorized by the Public Funds Inves t m ent Act. Only those instru m ents listed in this section are authorized. 1. Direct Obligations of the United States of America, its a g encies a n d instru m entalities, the principal and interest of which are unconditionally guaranteed o r insure d by , o r backe d b y the full faith and credit of the United States or its respective agencies and instru m entalities . 2. Other Obligations of the United States of America, its agencies and instrumentalities that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States. 3. Certi f ic a tes of Deposit issued by a deposit o ry instit u tion t h at has City of W est University Place Invest m ent Policy 7 its m ain office or a b ranch in Texas. T he certificat e o f deposi t m u s t be guarantee d o r insure d b y th e Feder a l Deposi t Insuranc e Corporatio n or its successor or t h e National Cre d it Unio n Shar e Insuranc e F un d o r its successor and secured by obligati o n s i n a m a nne r an d amoun t as provided by law. In addition, certi f icate s o f deposi t obtained through a deposit o ry instit u tion that are fully collateralized under a pledge agree m ent approved by the City , are authorized invest m ent s . 4. No -load Money Market Funds that 1) are registered and regulated by the Securities and Exchange Commission, 2) have a dollar weighted average stated m aturity of 90 days or le s s, 3) se e k to m aintain a sta b le net asset value of $1.00 per share a n d 4) are rated no lower than AAA or an equivalent rating by at l east one nationally recognized rating service. 5. Local Govern m ent Invest m ent P ools, authorized by a separate resolution, which m eet the requir e m ents of Chapter 2256.016 of the Public Funds Invest m ent Act and are rated no lower than A AA or an equivalent rating by at least one n a tionally recognized rating service. To beco m e eligible, invest m ent pools m ust be approved by City Council action. In v est m ents will be m ade in a local g overn m ent invest m ent pool only after a thorough investigati o n o f th e pool , which shall at least annually be r eviewed , revise d an d adopted. 6. Interest bearing checking accounts that ar e full y collateralize d a t 102% of the ledger balance. B. Collater a li z ation – Collateralizati o n wil l b e require d for al l fund s on deposit with a depository bank, other than invest m ents in accordance with the require m ents of this Policy a n d Chapte r 2257 , Govern m e nta l Code (Public F u nds Collateral Act”) and Financial Institution Re f or m , Recovery, and Enforce m ent Act of 1989 (F IRREA). I n orde r t o anticipate m arket changes and provide a lev e l of security for all funds, the collateralization level will b e one hundred and two percent (102%) of m arket val u e of pri n ci p al and ac cr ued i n ter e st on t h e de p osits, le s s a n a m ount insured by the F D IC. Securities p ledged a s c oll a ter a l will be h e ld in the C i ty’s na m e by a n independen t thir d part y wit h who m the City has a c u rrent c u stodial agree m ent. The Finance Direct o r is respo n sible for entering into coll a te r aliz a tion ag r eements with t h ird party custodians in co m pliance with this P o licy. The collateralization a g ree m ents are to specify the acceptable invest m ent securities f o r collateral, inclu d ing provisions related to possessio n o f the coll a te r al, t h e substit u ti o n or r e le a se of invest m ent secur i ties, ownership of securities, and the m ethod of valuat i on of securities. A clearly m arked evidence of ownership (safekeeping rec e ipt) m ust be sup p li e d to t h e City and r e taine d . City of W est University Place Invest m ent Policy 8 Coll a ter a l shall be re v ie w ed at l ea st qua r t e rly to ass u re th a t the m arket value of the p l e dged securities is ade q uate. Eligible collater a l include s a) di re ct o b lig a ti o ns of the United States or othe r obligation s o f th e Unite d State s o r othe r obligations , th e principal and interest of which are uncondition a lly guaranteed or insured by, or backed by the full faith and c r edit of the United States, b ) direc t debt obligations of an agency or instru m entality of the United Stat e s, c) direct deb t obligation s o f sta t es, agencies, counties, c ities , an d othe r political subdivisions of any state rate as to invest m ent quality by a nationally recognized invest m ent rating firm not less than A or its equivalent. The City’s Invest m ent Officer or Invest m ent Official(s ) reser v e (s) the rig h t to accept or reject any form of collat e ral or enhance m ent at their s ole discretion. C. Existing I n vestme n ts – Any invest m ent currently held that does not m eet the guidelines of this policy, but was an authorized investment at the time of purchase, is not requir e d to be liquidated; however, the City shall t a ke all p rude n t m easures consiste n t with t h is Invest m ent Poli c y to liquidate an invest m ent that does not or no longer qualifies as an authorized invest m ent. VIII. Investme n t Paramet e rs A. Diversi f ic a t ion – Th e invest m e nt s shal l b e d i v ersi f ied by security ty p e and institution. W ith the except i on of U.S. Treasury securities, Govern m en t -sponsored enterprises (G SE’s), interest -bearing checking account s tha t ar e full y collateraliz ed , and authorized local govern m ent pools , th e Cit y wil l dive rsify the entire portfolio to c o m p l y wit h the invest m ent strategy . I n no case shall any single invest m ent trans a ction be m ore th a n twenty f iv e -pe r cent (2 5%) of the enti r e port f olio at the ti m e of purchase o f the security. B. Maximum Maturities – To the extent possi b le, the City s h all a tte m pt to m atch its i n vest m ents with antici p at e d cas h flo w require m e nts . Un l e ss m atched to a speci f ic cash f low, the City will not d i r ectly inve s t in securities maturing m o r e than three (3) years from the date of purchase. The co m posite po r t f olio will have a weighted average m aturity of 365 days or l e s s . This dollar weig h ted ave r age m atu r ity will be c a lculat e d using the s tated final m aturity d ate(s) of each sec u rity. IX. Investme n t Strategies The City m aintains separate portfolios f o r individua l fund s o r group s o f funds that are m anaged accor d ing to the ter m s of this Policy and the corresp o nding invest m ent strategies listed in Exhibit E. The invest m ent strategy for portfolios established after the annual Invest m ent Policy review and adoption will be m anaged in ac c ordance with the ter m s of this Poli c y and applicable City of W est University Place Invest m ent Policy 9 agree m ents until the next annual review , when a specific strategy will be adopted. The City m a intains a pooled fund group that is an aggregati o n of the m a j ority o f Cit y fund s includin g ta x receipts , enterpris e fun d revenues , fin e an d fee revenues, as well as so m e, but not a l l , bon d proceeds , an d grants . This port f olio is m aintain e d to m eet a n ticip a ted daily ca s h needs f or City operations, capital projects and debt ser v ice. T he obje c tiv e s of this p o r t f olio are to ens u re safety of principal; ens u re a d eq u ate inve s tment liqui d it y ; li m it m arket and credit risk through diversifi c ation; and attain a m arket rate of return in accordance with the objectives and restrictions set for in this Policy. X. Reporting A. Methods – The Invest m ent Officer shall prepare an invest m ent report at least quarterly, including a m anag e m ent summary that provides an analy s is of the stat u s of the current invest m ent portfolio and transactions m ade over the last qua rt er. This m anage m ent sum m ary will be prepar e d in a m anner consistent w ith the r e quire m ents of Section 2256.023 (Internal Manage m ent Reports) of the PF I A, and that will allow the City to ascertain w hether inve s t m ent activ i ties during the reporting period have confo r m ed to the invest m ent policy. The report will be provided to the City Council. An indepe n dent au d itor shall f or m ally review the reports p repared un d er this se c tion at lea s t ann u ally, and th a t au d itor sh a ll repo r t instances of no n - co m pliance to City Council in t h e annual audit m anag e m ent letter. B. Performance Standards – The invest m ent portfolio shall be m anaged in accorda n ce with the o b jecti v es specified in t h is policy (safety, liquidity, and yield). The portfolio should obtain a m arket average rate of return during a market/econo m ic environ m ent of stable i n te re st rates. The Invest m ent Officer shall deter m ine whether m arket yields are b ei n g achieved by co m paring the portfolio m arket yield to the th r ee (3) m onth U.S. Treasury Bill, the six (6) m onth U.S. Treasury Bill a n d the two (2) yea r U.S . Treasur y Note. C. Markin g t o Marke t – The m a r ket value of the port f olio shall be calc u lated at lea s t m onthly and a s tate m ent of the m arket value of the port f olio s h all b e iss u e d at lea s t monthly. The m arket value of each invest m ent shall be obtained from a source such as the W all Str e et Journal, or a reputable brokerage firm , or security pricing service , a n d reported on the invest m e nt reports. City of W est University Place Invest m ent Policy 10 EXHIBIT A Cit y o f Wes t Universit y Place Author i z ed Investme n t Officer and Investme n t Offici a ls Finance Director – Invest m ent Officer T reasurer – Invest m ent Official Fiscal Services Officer – Investment Official City of W est University Place Invest m ent Policy 11 EXHIBI T B Cit y o f Wes t Universit y Place Stateme n t o f Ethics and Conflicts o f Interest Inves t m e nt O fficer(s) and designated Inves t m e nt Off i cial(s) for the City of West University Place shall refrain f rom personal business re l ationships with business organizations that could conflict with the proper execution of the investment prog r a m , or which could i m pair their abili t y t o make partial investment decisi o ns. This would on l y apply to personal business r e lationships with business organizations that have been app r oved by Ci t y Council to conduct investment transactions with the City of West University Place. An Inves t ment Official or Investment Officer is considered to have a pers o nal business r e lationship with a business organization if: (1) The Investment Official or Investment Officer owns 10 percent or m ore of the vot i ng st oc k or shares of the business organization , or owns $5,000 or m ore of the fair m a r ket value of the business. (2) Funds received by t he Inves t ment Official or Investment Officer fr o m the b usiness organization exceed 10 percent of the Investment Official ’s gross inco m e for the previous y ear. (3) The Inves t m ent Official or Investment Officer has acquired f r om the business organiz a tion during t h e previous y ear invest m e nts with a b o ok value of $2,5 00 or m ore for the personal account of t h e Invest m e nt Official.  I do here b y certify that I d o not have a personal business relationship with any business organization approved to conduct inv e st m e nt tra n sactions with the City of W est University Place, nor am I rela t e d within the second degree by affinity or consanguin it y , as dete r m ined under Chap te r 573 of the Texas Government Code , t o a n ind i vidual seeking to s e ll an investment to the City of West University Place as of the date of this state m ent.  I do hereby certify that I do have a personal business relationship with a business organization approved to conduct inv e st m e nt tra n sactions with the City of W est University Place, and/or I am re l a ted within the se c ond degree by affin i ty or consanguini t y, as dete r m ined under Chapter 573 of the Texas Government Code , to an i ndividual seeking t o sell an invest m e nt to the Ci t y of West University Place as o f the date of this statement, and willfully re m ove m y self fr o m any activities or areas of professional conduct that would cause a perception of e t hical conflict and acknowledge that I am required to disclose said relation to t he City C o u n cil and Texas Ethics C o mmission. City of West University Place Inves t m e nt Officer/Off i cia l (s) Finance Director/Officer Date Treasurer /Of f i cia l Date Fiscal Services Officer /Official Date City of W est University Place Invest m ent Policy 12 EXHIBI T C Cit y o f Wes t Universit y Place Approved Broker/Dealers, Financial I n stitution s an d In v e stmen t Pools Broker/Dealers Cantor Fitzgerald & Company FTN Financial (for m erly “Coastal Securities”) Hilltop S e c u rities (f or m e rly “First S o uthwest Company”) Multi - Bank Securities W ells Fargo Securities L L C Public Dep o sito r ies JP Morgan Chase, NA (Pri m ary) Local Govern m ent Invest m ent Pools TexPool City of W est University Place Invest m ent Policy 13 EXHIBI T D Cit y o f Wes t Universit y Place Certi f ica t i o n by Business Organi z ation (date) City of West University Place, Texas (Attn: Designated Investment Official) 3800 University Blvd. West University Place, TX 77005 Dear Mr/s. (I nvestment Of f icial): This certification is executed on behalf of the City of West Unive r sity Place, Texas (the Investor) and (the Business Organization), pursuant to t he Public Funds Investment Act, Chapter 2256, Te x as Gover n ment Code, (the Act) in connection with investment transactions c onduc te d between the Investor and the Business Organization. The undersigned Registered Principal or authorized representative of the Business Organiza t ion hereby certifies on behalf of the Business Organizati o n that: 1. The undersi g ned is a Registered Principal or aut h orized represent a tive of t he Business Organization offering to enter an invest m e nt transaction with the Investor (N ote: as such ter m s are used in the P u b l ic Funds I nv estment Act, chapter 2256, Texas Local Govern m e nt Code) and; 2. The Registe r ed Principal or authorized rep r esentative of the Business O rganization has received and reviewed the Inves t m e nt Policy furnish e d by the Inv e stor and; 3. The Registe r ed Principal or authorized rep r esentative of the Business O rganization has i m ple m ented reasonable procedures and contr o ls in an effort to preclude investme n t transactions conducted between the Business Organization and the Investor that are not authorized by the Investor’s inves t m e nt poli c y , except to the extent that this authorization is dependent on an anal y s is of the m a ke u p of the i n vestor’s entire portfolio or r e quires and interpretation of the subjective investment standards. Registered P r incipal or Broker Assigned to the Account authori z ed represent a tive Signed B y : Printed Na m e Title Date City of W est University Place Invest m ent Policy 14 EXHIBIT E I NVE S T M EN T S T RA TE GI E S The City of W est University’s in v e st m ent port f olio will be designed a nd m anaged to ensure th a t it will m eet a ll the requi r e m ents est a blished by the City of W est Univ e rsit y ’s invest m ent policy and the Public Funds Inves tm ent Act. The overall invest m ent strategy outli n ed in the inve s tment policy h as been fu rther re f ined in this inv e st m ent strategy state m ent by the following fund types. Operating Funds: Operating F unds generally have greater cash flow needs than other funds types. The operating fund portfolio m ay consist of any approved invest m ent type with the understanding that the financial require m ents of the operating funds will dict a te the m aturity dates of the inv e st m ent. Of u t most i m portance is the preservatio n an d safet y o f the invest m ent principal. Addition a lly , each inve st m ent will be viewed for its liq u idity and m arket a bility of the in v est m ent if the n e ed a r ises to liqui d ate the inve s t m ent be f ore m aturity. The final determining factors for the invest m ent str a tegy will be the di v er s i f ication of the invest m ent portfolio and the yield of the invest m ent. To achieve short -term needs of one (1 ) to one hundred and eighty (180) days, funds will be invested in approved i n vest m e nt pools. For lo n ger -term needs of six (6) m onths to three (3) y ears, funds will b e invested in ap p r oved invest m ents with objectives p rioritized as follows: 1) understanding the suita bilit y o f th e investmen t t o th e financial require m ents of the City of W est Univer s ity Place; 2) preservatio n an d safet y o f principal; 3) liqui d it y ; 4) m arketability of the i n vest m ent if the n eed aris e s to liquidate the invest m ent before m aturity; 5) diversification of the invest m ent portfolio; and 6) yield. City of W est University Place Invest m ent Policy 15 INVESTMEN T STRATEGIE S (Continued) Debt Service Funds: The debt service require m ents are usually se m i -annual, thus allowing the invest m ent strategy to m irror debt obligation pay m ent dates. The strategy for deb t servic e fund s allow s greater flexibility since the actual require m ents are known into the future. Invest m ents will still m eet the adopted policies; however, planning matu r ity dat e s to m atch debt req u ir e m ent dates will be t h e pri m ary objective. The invest m ent instru m ents will be invested pri m arily in approved invest m ent types with m aturities at six (6) or twelve (12) m onths estab l ished to m atch debt requirement dates. Shorter -term invest m ent m ay be used to m eet these objectives and l o nger -term invest m ents m ay be used when fund balance reser v es e x ceed one y ear’s d ebt service req u ire m ents. To achieve this st r at e gy the f ollowing objectiv e s are prio r itized to evaluate invest m ent opportunities: 1) understanding the suita bilit y o f th e investmen t t o th e financial require m ents of the City of W est Univer s ity Place; 2) preservatio n an d safet y o f principal; 3) yield; 4) m arketability of the i n vest m ent if the n eed aris e s to liquidate the invest m ent before m aturity; 5) diversification of the invest m ent portfolio; and 6) liqui d ity. City of W est University Place Invest m ent Policy 16 INVESTMEN T STRATEGIE S (Continued) Capital Improvement Funds: Bond proceeds can be invested over the life of the project; however, the exact disburse m ent of the funds is not always known. The invest m ent objective of the capital i m prove m ent funds is to schedu l e m aturiti e s to m axi m ize invest m ent earnings while preserving principle. The k e y to an e ff ective strategy is to be aware of the project needs and m atch m at u rities to the period funds are needed. The invest m ent objective for capital proje c ts funds is still to m atch invest m ent m aturities with fundi n g needs. A s short -term needs are recognized , invest m ent m aturities will b e m o ved i n to a p proved invest m ent pools to m eet financial require m ents. Longer -term needs will b e invested with t h e following objectives as prioritized for ca p ital i m prov e m ent funds: 1) understanding the suita bilit y o f th e investmen t t o th e financial require m ents of the City of W est Univer s ity Place; 2) preservatio n an d safet y o f principal; 3) diversification of the invest m ent portfolio; 4) yield; 5) liqui d it y ; a n d 6) m arketability of the i n vest m ent if the n eed aris e s to liquidate the invest m ent before m aturity. City of W est University Place Invest m ent Policy 17 INVESTMEN T STRATEGIES(Continued) Reserve Funds: Certai n reserv e fund s hav e bee n esta b lishe d a s require d b y bon d covenants . The invest m ent objective is to invest reserve funds to the extent that m aturities are established to the li m it of the inves t m e n t polic y o r t o th e en d o f th e bond require m ents whichever is shorter. The overall invest m ent strategy for res e rve funds will n o t rely on i n vest m ent pools; however, the use of pools is not prohibited. Longer -term invest m ent objectives are prioritized as follows: 1) understanding the suita bilit y o f th e investmen t t o th e financial require m ents of the City of W est Univer s ity Place; 2) diversification of the invest m ent portfolio; 3) preservatio n an d safet y o f principal; 4) yield; 5) liqui d it y ; a n d 6) m arketability of the i n vest m ent if the n eed aris e s to liquidate the invest m ent before m aturity. City of W est University Place Invest m ent Policy 18 INVESTMEN T STRATEGIE S (Continued) Investme n t Pool: The City’s Invest m ent Pool is an aggrega t ion of the m ajority of City funds , which includ e s tax rec e ipts, e n terp r ise f u n d revenues, fine and fee r evenues , an d grants. This port f olio is m aint a ined to m eet a n ticip a ted daily c ash needs f or t h e City operations, capital projects and debt service. 1) understanding the suita bilit y o f th e investmen t t o th e financial require m ents of the City of W est Univer s ity Place; 2) diversification of the invest m ent portfolio; 3) preservatio n an d safet y o f principal; 4) yield; 5) liqui d it y ; a n d 6) m arketability of the i n vest m ent if the n eed aris e s to liquidate the invest m ent before m aturity. City of W est University Place Invest m ent Policy 19 GLOSSARY ACCRET I O N O F DISCOUNT : Periodic straight -line i n creases in the book or carrying value of a security so the a m ount of t he pu r chase price discount below face value is co m pletely eli m inated by the ti m e the bond m atures or by the call date, if applicable. ACCRUE D INTERE S T : The int e rest a ccu m ulated on a s e curity from i ts issue date or since the last pay m ent of interest up to but not including the purchase date. The purchaser of the security pays to t h e seller t h e m a rket price p l us accr u ed intere s t. AMORT I ZATIO N O F PREMIUM : Periodic straight -li n e decreases in the book or carrying value of a security so the pre m ium paid for a bond above its face value or call price is co m plet e ly eli m inated. ASK: The price at which securities are offered by sellers. BARBEL L MATUR I T Y STRATEGY : A m aturity p attern within a p o r t f olio in which m aturities of the assets in the portfolio are c once n trated in b o th the short and long ends of the m aturity spectru m . BASI S PO I NT : One one -hundredth (1/100) of one percent; 0.0001 in deci m al fo r m . BENCHMARK : A comparative base for perfor m ance evaluation. A bench m ark can be a broad -based bond index, a custo m ized bond index, or a specific objective. BID : The price offered for securities by purcha s ers. (W hen selling securities, one asks for a bid.) BON D E Q UIVALEN T YIELD : Used to compare yields available from discounted securities t h at pay i n te re st at m aturity with yields available f rom securities that pay interest se m i -annually. BOO K ENTR Y SECURITIES : Stocks , bonds , othe r secur ities, and so m e certificates of deposit that are purchased, s o ld, and held as electronic computer entries on the records of a central holder. These securities are not available for purchase in physical for m ; buyers get a receipt or confir m a tion as evidence of ownership. BOO K VALUE : The origi n al co s t of the security as adjusted for a m ortization of any pre m ium paid or accretion of dis c ount since the date of purchase. BROKER : A part y wh o bring s buyer s an d selle r s together. Brokers do not take ownershi p o f th e propert y bein g traded . Th ey are co m pensated by comm issions. They are not the s a m e as dealers; however, the sa m e fir m s that act as brokers in so m e transactions m ay act as dea le rs in o t h er t r ansa c ti o ns. City of W est University Place Invest m ent Policy 20 CA L LA BLE BOND : A bond that the issuer has the right to redeem prior to m aturity at a specified p rice. So m e callable bo n ds m ay be redee m ed on one call date while others m ay have multi p le c a ll d ates. So m e callable bo n ds m ay be redee m ed at par while o t h ers can be redee m ed only at a pre m iu m . So m e callable bonds are step -up bonds that pay an initial coupon rate f o r the first period, a nd then the coupon rate increases f o r the following periods if the bonds a r e not called by the issuer. CERTIFICATE OF DEPOSIT (CD): A ti m e deposit with a speci f ic m atu r ity evidenced by a certificate. Large -deno m ination (over $100,000) CD’s are typically negotiable. CODE : The Internal R evenue Code of 1986, as a m ended. COLLATERAL : Securities, evidence of deposit or other property which a borrower pledges to secure repay m ent of a loan. Also refers to s ecurities pledged by a bank to secure deposits of public m onies. COLLAT E RAL I Z ED MORTGAG E OBLIGATION (CMO): A type of m ortgage - backed sec u rity created by dividing the rig h ts to receive the princip a l and intere s t cash flows from a n underlying pool of m ortg a ges in separate cl asse s o r tiers. COMMERCIA L P A P ER : Short -term unsecured pro m issory notes issued by corporations for a m aturity s p ecified by the buyer. It is used pri m arily by corporations f or short -te r m f inancing needs at a r a te which is g ener a lly lo w er than the p ri m e rate. CONFIR M ATION : The docu m ent used to state in wr i ting the t e r m s of the trade w h ich ha d previousl y bee n agree d t o verbally. COUPO N RA T E : The stated annual rate of interest payable on a coupon bond expressed as a perce n ta g e of the bo nd’s face val u e. CR E DI T RISK : The ri sk that (1) t h e issu e r is d o wngraded to a lower quality category and/or (2) the issuer fails to m ake time l y pay m ents of interest or principal. CUSI P NUMBER : A nine -digit nu m ber established by the Com m ittee on Unifo r m Securities I d enti f ic a tion Procedures that is u s ed to identify publicly traded securities. Each publicly traded s ecurity receives a unique C U SIP nu m b er when the security is issued. CUSTODY: Th e servic e o f a n organization , usu ally a financial institution, of holding (and rep o rting) a cust om er’s securities for safekeeping. T h e financial instit u tion is known as the custodian. DEALER : A fi r m whi c h buys and sells for its o w n account. Dealers h a v e ownership, even if only for an insta n t, between a purchase from one party and a sale to another party. City of W est University Place Invest m ent Policy 21 They are c o mpensated b y the spread between the price they p ay and the p rice they receive. Dealers are n o t the sa m e as broker s ; h o wever, the s a m e f ir m s which a c t as dealers in s om e transactions m ay act as brokers in other transactions. DELIVER Y V E RSU S PAYM ENT (DVP): The safest m ethod of settling a trade involving a book entry s ecurity. In a DVP settle m ent, the funds are wired from the buyer’s acc o unt and the security is d e livered from the seller’s account in simultaneous, int e rdepen d ent wires. DEPOSI TO R Y TRUS T COM P AN Y (DTC): An organization that holds physical certificates for stocks and bonds and issues receipts to ow ners . Securitie s hel d b y DTC are im m obilized so that they can be traded on a book entry basis. DER I VAT I VE : A security that derives its val u e from an underlying asset, group of assets, reference rate, or an index value. So m e derivatives can be highly volatile and result in a l o ss of princi p al in c h anging int e rest r ate en v iro nm ents. DISCOUNT : The a m ount by which the price p aid for a se c urity is less than its face value. DISCOUN T SECUR I TIES : Securities that do not pay p e riodic interest. Investors earn the di ff eren c e between t h e discou n t i s sue pri c e a n d the f ull f a c e value p a id at m aturity. DIV E RSI F ICATION : Dividing invest m ent funds a m ong a variety of securities offering independent returns, to reduce risk i n herent in pa r tic u lar s ecu r ities. DURATION : A sophisticated m easure of the weighted average m aturity of a bond’s cash flow strea m , where the pre s ent v alues of the cash flows serve as the weights. ECONOMI C CYCL E (BUSINES S CYCLE): As the econo m y m oves through the busines s cycle , interes t r ates tend to follow the levels o f production , output , and consu m ption - rising as the econo m y expands an d m ove s ou t o f recessio n an d declining after the ec o no m y peaks, contracts, and heads o n ce again into reces s ion. EFFECTIV E MATUR I TY : The average m aturity of a bond, given the potential for early call. For a non -callable bond, the final m aturity date serves as the effective m aturity. For a callable bond, the effective m a turity is bounded by the first call date and the final m aturity date; the po s ition within this continuum is a function of the call price, the current m arket price, and the reinvest m ent rate assu m ed. FAC E VA L UE : The principal a m ount due and pay a ble to a bondholder at m aturity; par value. Also, the a m ount on which coupon interest is co m puted. City of W est University Place Invest m ent Policy 22 FAIL: The event of a securities p u rchase or sale transaction not settling as intended by the pa r ti e s. FAI R VALUE : The amount at which a financial ins t ru m ent could be exchanged in a curre n t tran s action b etw e en willing p arties, ot h er than in a forced o r liquidatio n sale. FED E RA L DEPOSI T I NSURANC E CORP O RATIO N (FDIC): A federal age n cy that insures bank deposits. FED E RA L FAR M CREDI T B ANK S (FFCB): A govern m ent -sponsored corporation that was created in 1916 and is a nationwide system of banks and associations providing mortgage loans, credit, a nd related services to far m ers, rural ho m eowners, and agric u lt u ral and rur a l c o operat ives . Th e bank s an d associa t ions are cooperatively o w ned, directly or indirectly, by t h eir res p e c tive b o rrow e rs. The Fe d eral F a rm Credit System is supervised by the Farm Credit Ad m inistration, an independent agency of the U.S. govern m ent. (See Govern m ent Sponsored Enterprise) FED E RA L FUNDS : Monies within the Federal Reserve System representing a m e mber bank’s surplus reserve funds. Banks with e x cess funds m ay s ell the i r surplus to other banks whose funds are below required reser v e levels. Normally, Federal funds are e m ployed in settling all govern m e nt securities transactions. T he Federal Funds Rate is the rate of interest at which Fed funds are traded. This rate is currently pegged by the Fede ral Reserve through open -m arket operations. FED E RA L HOM E LOA N B AN K S (FHLB): Govern m en t -sponsored wholesale banks (currently twelve regional banks) w hich l e n d fund s an d provid e corresponden t banking services to m e mber commercial bank, thrift in s tit u tions, credit unions and insurance co m panies. The m ission of the FHLBs is to liquefy the housing r e lated assets of its m e mbers who m u st purchase stock in their district Bank. (See Govern m e nt Sponsored Enterprises) FED E RA L HOM E LOA N MOR T GAG E COR P ORAT I ON (FHLM C o r “Freddie Mac”): A govern m ent -sponsored corporation t h at was created in July 1970, by the enact m ent of Title III of the E m ergency Ho m e Finance Act of 1970. Freddie Mac was established to help m aintain the availability o f mortgag e credi t f or residentia l housing, pri m arily through developing and m a intaining an active, nationwide secondary m arket in conventional residential mortgages. (S ee Govern m ent Spon s ored Enterprises) FED E RA L NATIONA L MORTGAG E ASS O C I ATIO N (FNM A o r F a nni e Mae): FNMA, like GNMA was chartered u nder the Fe d eral N a tion a l Mort g age Association Act in 1938. FNMA is a federal corporation work i ng under the auspices of the Depart m ent of Housing and Urban Develop m ent (HUD). It is the largest single pro v ider of residential mortgage funds in the U nited States. Fannie Mae is a private stockholder -owned corporation. FNMA securities are highly liq u id an d ar e widel y accepted . FNMA assu m es and guarantees that all sec u rity hold e rs will rec e ive ti m ely pay m ent of princi p al an d interest . (Se e Govern m e n t Sponsore d Enterprises) City of W est University Place Invest m ent Policy 23 FEDERA L OPE N MARKE T C O MMITTEE (FOMC): Consists of seven m e m b e rs of the Federal Reserve Board and five of t h e twelve Federal Reser v e Bank presidents. The presi d e nt of the New York Federal Re s erve Bank is a p er m anent me m ber while the other presidents serve on a rotating basis. The Com m ittee perio d ically m eets to set Federal Reserve guidelines regarding purchases and sales of govern m ent securities in the open m arket as a m eans of influencing the volu m e of bank credit and money. FED E RA L RES E RV E SYS T EM : The central bank of the United States created by Congress and consisting of a seven me m ber Board of Governors in W ashington, D.C., twelve regional banks and about 5700 commer c ial banks that are m e m bers of the syste m . FIXED -INCOM E S E CUR I TY : A financial instru m ent pro m ising a fixed a m ount of periodic inco m e over a specified future ti m e span. GOVERNMENT -S P ONSORED ENTER P RISES (GSE’s): Pay m ent of principal and int e rest on s ecuriti e s is s ued by these corpor a ti o ns is not guaranteed explicitly by the U.S. govern m ent, however, most investors consider these securities to carry an implicit U.S. govern m ent guarantee. The debt is f ully guaranteed by the issuing corporations. GSE’s include: Farm Credit Syste m , Federal Ho m e Loan Bank Syste m , Federal Ho m e Loan Mortgage C orporation, and Federal National Mortgage Association. INSTRUMEN T ALIT I ES : See Govern m ent -Sponsored Enterprises INTERES T RAT E RI SK: The r isk that the ge n eral lev e l of int e rest rates will chan g e , causing unexpected p rice appre c iation s o r depreciations. LADDERE D MATURIT Y STRATEGY : A m aturity p attern within a port f olio in which m aturities of the a ssets in the port foli o ar e equall y spaced . Ove r ti m e , the shortening of the re m aining lives of the ass e ts provides a steady source of liquidity or cash f low. Given a no r m al yield curve with a p ositi v e slo p e this pa s sive str a tegy provides the benefit of being able to take advantage of the higher, longer -term yields without sacrificing safety or liquidity. LIQUIDITY: An entity’s cap a city to m eet f uture m onetary outflows (whether they are required or optional) from available resources. Liquidity is often obtained from reductions of cash or by converting assets into cash. LIQUIDITY RISK: The risk that an inve s t m e nt will b e di ff icult to s e ll at a f air m arket price in a ti m ely fashion. MARKE T RISK : The risk t h at the value of a s e curity will rise or de c line as a res u lt o f changes in m arket conditions. It is that part of a security’s risk that is c o mmon to all securities of the sa m e gener a l class (stocks and bonds) and thus cannot be eli m inated by diversification; also known as syste m atic risk. City of W est University Place Invest m ent Policy 24 MARKE T VA L UE : The pri c e at which a se c urity is trading and could presu m ably be purchased o r sold. MARKING -TO -MARKET : The practice of valuing a sec u rity or portfolio according to its m arket value, rather than its cost or book value. MAST ER REPURC H AS E AGR E EMENT : A written c o ntra c t cov e ring all f utu r e transactions between the par t ies to repurchase agree m ents that esta b lishes each party’s rights in t h e transactions. A m aster agree m ent will often specify, a m ong other things, the right of the buyer to liquidate the underlying securities in the event of default by the seller. MATUR I TY DATE : The date on which the principal or face value of an invest m ent beco m es due and payable. MONE Y MARKE T INSTRU M ENT : Generally , a short -ter m de bt instru m ent that is purchased from a broker, dealer, or bank. So m eti m es the term “m oney m arket” with “short -ter m ”, defines an instru m ent with no m ore than 12 m onths re m aining from the purchase date until the m aturity date. So m e ti m es the term “m oney m arket” is used m ore restrictively to m ean only those instru m e nts that have active secondary m arkets. MORTGAGE -BACKED SECURITIES (MBS): Securitie s co m pos e d of , or collateralized by, loans that are the m selves collateralized by lie n s on real property. OFFER : The price asked by a seller of securiti e s. (W hen purchasing securities, one asks for an o ffer.) OPE N MARKE T OPERATIONS : Purchases and sales of govern m ent and certain other securities in the open m arket by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volu m e of money and credit in the econo m y. Purchases i n ject res e rves into t h e ba n k system and sti m ulate growth of money and cr e dit; sales have the opposite effect. Open m arket operations are the F e deral Reserve’s m ost i m portant and m ost flexible m onetary policy tool. OPPORTUNIT Y COST : The cost of pursuing one course of action m easured in ter m s of the foregone return that could have been e a rned on an alternative course of action that wa s no t undertaken. PAR : See Face Value PFI A O R ACT : The Public Funds Invest m ent Act, Chapter 2256, Texas Govern m ent Code, as amended. POOLE D F UN D GR O UP : An internally created fund of a n investing entity in which one or m ore institutional accounts of the inv e sting entity are inves te d (a s define d b y the Publi c Fund s Invest m e n t Act). City of W est University Place Invest m ent Policy 25 PREMIU M : The a m ount by which the price paid f o r a security exceeds its face val u e. PRIMAR Y DEALER : A group of govern m ent securities dealers that sub m it daily reports of market activity and positions and m onthly financial state m ents to the Federal Reserve Bank of New York and are subject to its infor m al oversight. Pri m ary dealers include S ec urities and E xchange Commission (SEC)-regi s t er ed securities broker -d ealers, banks, and a few unregulated fir m s. PRINCI P A L : The face or par value of an instr u m ent, exclusive of accr u ed intere s t. PRUDEN T PERSO N RULE : An i nvest m ent standard. In s o m e states the law req u ires that a fiduciary, such as a trustee, m ay invest m oney only in a list of securities selected by the state. In other s tates t h e trustee m ay invest in a secu r ity if it is one which would be bought by a prudent person of discretion and i n telligence who is seeking a reasonable inco m e and preservation of capital. QUALIFI ED RE P RE S EN T ATIVE : A person who holds a position with - and is authorized to act on behalf of - a business organization (as defin e d by the Public Funds Invest m ent Act). RA TE O F RE T URN : The a m ount of inco m e r e ceived from an invest m e nt, expressed as a percentage. A m arket rate of ret u rn is the y ield that an inve sto r ca n expec t t o receiv e in the current intere s t -rate environ m ent utili z ing a buy -and -hold to m aturity invest m ent strategy. REINVE ST MEN T RATE : The interest rate earned on the reinvest m ent of coupon pay m ents. REINVE ST MEN T RAT E RISK : The risk that the a c tual r einve s t m ent rate f alls sh o rt of the expected or assumed reinvest m ent rate. REPURC H AS E AGR E EMEN T (R P o r REPO): An agree m ent of one party to sell securities at a specified price to a second party and a si m ultaneous agreement of the first party to rep u rchase the securities at a specified price on de m and or at a specified later date. The difference between the selling p r ice a n d the rep u rchase price provides the int e rest inc om e to the party t h at pro v ided the fu n ds. Every transaction where a s ecurity is sold under an agree m ent to be repurchased is a repo from the selle r/borrower’s poin t of view and a reverse repo from t h e buyer/lender’s point of view. REVER SE REPURC H AS E AGR E EMENT : (S ee Repurc h ase Agree m ent) S A FEKEEPI N G: A procedure where securities are held by a third party acting as custodian for a fee. City of W est University Place Invest m ent Policy 26 SECONDAR Y MAR K ET : A m a r ket m ade for the purc h a s e and sale of outstanding issues following the initial distribution. SECURIT I E S AN D E XCHAN G E COMMISSION (SEC): Agency created by Congress to protect investors in securities transactions by ad m inistering securities legislation. SECURIT I E S L E ND I NG : Th e temporar y transfe r o f securities by one party, the lender , t o another , th e borrower . Th e s ecurities borrower is required to provide acceptable assets as collateral to the secur i ties lender in the form of cash or other securities. If the borrower provi d es s ecurities as coll a te r al to the len d er, it pays a f ee to borrow the lent securities. If it pro v ides cash as coll a te r al, t h e lend e r pa y s int e re s t to the borrower a n d reinve s ts the cash at a higher rate. SEC RULE 15C3 -1: See Uni f orm Net Capit a l Rule STRUC T URE D NO T ES : Debt obligations w hose principal or interest pay m ents are deter m ined by an index or for m ula. SEPARATEL Y INVESTE D AS S ET : An account or fund of a state agency or local govern m ent that is not invested in a poo l ed fund group (as defined by the P ublic Funds Invest m ent Act). SPR E AD : Most commonly used when referring to the difference bet w een the bid and asked prices in a quote. Additionall y , it m ay also refer to ad d itio n al ba s is points t h at a non -Treasury security earns over and above a Treasury with a co m parable m aturity date. STRIPS : Separation of the principal and interest cash flows due from any interest - bearing securities into different financial instruments. E ach coupon payment is separated from the underlying invest m ent to create a sep a rate security. Each individual cash flow is sold at a d iscount. T h e a m ount of the di sc ount and the ti m e until the ca s h flow is paid deter m ine t h e inve s tor’s return. SWAP : The trading of one asset for another. So m et i m es used in active portfolio m anag e m ent to increase invest m ent retur n s by “swapping” one type of security for another. TOTA L RETURN : Intere s t i n c om e plus capital gains (or m inus losses) on an invest m ent. TREASURY BILLS: A non -interest bearing discount s ecurit y issue d b y th e U.S. Treasury, generally having initial m aturiti e s o f 3 months , 6 months , o r 1 year. TREASUR Y BONDS : Long -ter m , coupon bearing U.S. Treasury securities having initial m atu r ities of m ore than 10 ye a rs. City of W est University Place Invest m ent Policy 27 TREASUR Y NOTES : Inter m ediate -ter m , coupon bea r ing U.S. Treasury securities having i n iti a l m aturiti e s of 2 - 10 years. UNIFOR M NE T CAP I TA L RU LE: Securities and Excha n ge Com m ission require m ent that m e m ber fir m s as w e ll as non m ember broker -d e alers in securities m aintain a m ax i m u m ratio of indebtedness to liquid capital of 15 to 1; also called net capit a l rule an d net ca p i tal rati o . Indebtedness covers a l l m o ney owed to a fir m , inclu d ing margin loans a nd com m itments to purcha s e securities , on e reaso n ne w public issues are spread a m ong m e mbers of underwr i ting syndicates. Liquid capital includes cash and as s ets ea s ily c o nverted into cash. YIEL D T O MATURIT Y (YT M ): The pr om ised retu r n assu m ing all i n te r est and principal pay m ents are m ade and r einvested at the sa m e rate taking into account price appreciatio n (i f price d belo w par ) o r depreciatio n (i f p r ice d abov e par).