cmta: essentials of treasury management allowable investments presentation for: california municipal...

CMTA:Essentials of Treasury Management

Allowable Investments

Presentation for:California Municipal Treasurers’ Association

Presented by:Tony Garcia, CFA, Vice President

Pomona, CA

September 28, 2010

In theory, there is no difference between theory and practice. In

practice, there is.- Chuck Reid

Allowable Investments

(a) Local Agency Bonds

(b) U. S. Treasury Issues

(c) State of California issues

(d) Issues by entities outside CA

(e) Issues by other CA entities

(f) Agency Issues (GSEs)

(g) Banker’s Acceptances

(h) Commercial Paper

(i) Negotiable CDs

(j) Repurchase Agreements

(k) Corporate Bonds

(l) Shares of Beneficial Interest

(m) GICs

(n) CDARs et.al.

(o) Mortgage/Asset backed securities

(p) Caltrust et.al.

Section 53601 - Preamble

Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security…that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment.

Maximum Term To Maturity Of Five Years Unless Specifically Authorized To Go Longer

Section 53601 - Preamble

This section shall apply to a local agency that is a city, a district, or other local agency that does not pool money in deposits or investments with other local agencies… However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies.

Counties Are Treated Differently

Section 53635

Section 53601 – Preamble

Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase.

Percentage Limits Apply To Percent On Purchase Date

Municipal Issues

Local Agency (a) Bonds issued by the local agency…

State Of California (c) Registered state warrants or treasury notes or bonds of this state…

Any State Or Local Agency In The U. S. (d) Registered treasury notes or bonds of any of the other 49 United

States in addition to California…

Any California Local Agency (e) Bonds, notes, warrants, or other evidences of indebtedness of any

local agency within this state…

Credit Ratings Ratings Change Direction Purpose Of Proceeds Source Of Repayment Funds Economic Considerations Risks To Tax Exempt Status

Municipal Issues

Government Sponsored Enterprises (GSEs) - Agencies(f) Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.

Chartered By Congress Most created in the Great Depression

Designed To Support Specific Segments Of Economy

Agencies

Federal Farm Credit Bank System (FFCB) Federal Home Loan Banks (FHLB) Fannie Mae (FNMA) Freddie Mac (FHLMC) Tennessee Valley Authority (TVA)

Mandate

Funding

Types Of Issuance Short-term funding

Fixed / Floating

Structured securities

Political Environment – What Does The Future Hold

Should All GSEs Be Treated Equally

How Do You Determine Relative Value Yield / Spread / OAS

Agencies

Medium Term Notes – Corporate Bonds(k) Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Includes all Corporate and Bank Debt less than five yearsPrimary Use

Raise Working Capital funds Raise funds for Capital Assets

Credit Quality What Do the Credit Ratings Mean Other Sources of Information regarding quality Leading Indicators

Capital StructureTypes of Issues – Fixed / FloatingTLGP

U.S. Treasury Securities

(b) United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest.

Full Faith And Credit Of U.S. Government Historically considered a “risk free” asset

Largest, Most Liquid Market In The WorldTraditionally The Lowest Yielding Asset In It’s Sector

U.S. Treasury Securities

Treasury Bills No longer than 1 year Discounted

Treasury Notes 2 year to 10 year Interest bearing

Treasury Bonds Longer than 10 years

Treasury Inflation Protection Securities (TIPS) STRIPS

Bankers’ Acceptances

(g) Bankers' acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank.

Purpose To improve international and domestic trade Non-revocable obligation of all related parties No known failure to pay

Issuers Domestic money center and regional Banks Domestic branches of foreign Banks (Yankees)

Restrictions No longer than 180 days No more than 40% of Surplus Funds No more than 30% in any one Bank

Bankers’ Acceptances

Commercial Paper

(h) Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):

Paragraph (1) – Non Asset Backed CPParagraph (2) – Asset Backed CPUnsecured Promissory Notes – Credit QualityReasons For Issuance

Seasonal cash needs Bridge financing When cheaper than Bank financing

Exempt From Registration With The SEC Under The Securities Act Of 1933

Section 3(a)3 - Working Capital Any note, draft, bill of exchange, or banker’s acceptance

which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is limited.

Issuers General Electric Toyota Motor Credit JP Morgan Chase

Commercial Paper

Section 4(2) 144A – Private Placement transactions by an issuer not involving any public offering

Qualified Institutional Buyers (QIB) $100 Million in investable assets Public Entities can only purchase new issuance

Issuers Johnson & Johnson Sigma Aldrich Hewlett-Packard Mass Mutual Life

Commercial Paper

Qualified Issuers Prime quality and ‘A’ long-term rating by one of the rating

agencies (NRSROs) Organized and operating in U.S. And, total assets in excess of $500MM And, other debt is rated ‘A’ or higher Or, organized in U.S. as Special Purpose Entity (ABCP) And has program-wide credit enhancements and rated ‘A-

1’ or higher Restrictions

No longer than 270 days No more than 10% of Issuer’s outstandings No more than 25% of Surplus Funds

Commercial Paper

Negotiable CDs(i) Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a state-licensed branch of a foreign bank.

Characteristics Not collateralized or FDIC insured Can be bought and sold after issuance Interest bearing Longer than 7 days at issuance

Issuers Money center and regional Banks Yankee Banks

Restrictions No more than 30% of Surplus Funds

Negotiable CDs

Repurchase AgreementsPurchase of securities in conjunction with an agreement by which the seller will repurchase the securities on or before a specific date for a specific amount.

Short-term Financing This is how dealer inventories are financed

Simultaneous Buy And SellNo Longer Than One YearValued At 102% Of Funds BorrowedAdjustments Must Occur At Least Quarterly

Shares Of Beneficial Interest: Money Market Funds(l) (1) Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (j), inclusive, or subdivisions (m) or (n) and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630).

Must Be Invested In Authorized SecuritiesValued At $1Investment Objectives And Constraints

No asset longer than 13 months Average maturity no longer than 60 days

Fund Management Styles Differ

Shares Of Beneficial Interest: Mutual Funds Invested In Authorized Securities Valued At Net Asset Value (NAV) Fund Management Style Differs

Investment objectives Investment style Fund Manager

Prohibited Investment – Section 53601.6 Any Security That Can Result In Zero Interest

Does not apply to shares Of beneficial interest Inverse Floaters Range Notes Mortgage Derived Interest-Only Strips

Doing Nothing Is Very Hard To Do. You Never Know When You’re

Finished.--Leslie Nielson (actor)

29

The opinions expressed in this presentation are general in nature and not intended to provide specific advice or recommendations. Contact your investment representative, attorney, accountant or tax advisor with regard to your specific situation. The opinions of the author do not necessarily reflect those of Wells Fargo Institutional Securities, LLC or any other Wells Fargo entity.

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