For the purpose of this chapter, the following definitions shall apply unless the context clearly indicates or requires a different meaning.
AGENCIES. Informal name that refers to securities issued by the United States government and U.S. government-sponsored agencies.
ASKED. The trading price proposed by the prospective seller of securities. Also called the offer or offered price.
BANKER’S ACCEPTANCE (BA). A short-term financial instrument that is the unconditional obligation of the accepting bank.
BASIS POINT (BP). A unit of measurement for interest rates or yields that are expressed in percentages. (One hundred basis points equal 1%.)
BID. The trading price acceptable to a prospective buyer of securities.
BOND EQUIVALENT YIELD (BEY). An annual yield, expressed as a percentage, describing the return provided to bond holders. The BEY is a way to compare yields available from discount securities such as treasury bills and BAs with yields available from coupon securities.
BROKER. A party who brings buyers and sellers together. BROKERS do not take ownership of the property being traded. They are compensated by commissions. They are not the same as dealers; however, the same individuals and firms that act as brokers in some transactions may act as dealers in other transactions.
CERTIFICATE OF DEPOSIT (CD). A deposit of funds, in a bank or savings and loan association, for a specific term that earns interest at a specified rate or rate formula. CDs may be secured or unsecured, may be in negotiable or nonnegotiable form and may be issued in either physical or book entry form.
COLLATERAL. Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.
COMMERCIAL PAPER (CP). Unsecured, short-term promissory notes issued by corporations for specific amounts and with specific maturity dates.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR). The official annual report for the city. It includes five combined statements and basic financial statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material and a detailed statistical section.
COUPON.
(1) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value.
(2) A certificate attached to a bond evidencing interest due on a payment date.
DEALER. A firm or individual who buys and sells for their own account. Dealers have ownership between a purchase from one party and a sale to another party. Dealers are compensated by the spread between the price they pay and the price they receive.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT (DVP). The simultaneous exchange of securities and cash. The safest method of settling either the purchase or sale of a security. In a DVP settlement, the funds are wired from the buyer’s account and the security is delivered from the seller’s account in simultaneous independent wires.
DISCOUNT. The amount by which the price for a security is less than its par.
DISCOUNT SECURITIES. Securities that do not pay periodic interest. Investors earn the difference between the discount issue price and the full face value paid at maturity. Treasury bills, banker’s acceptances and zero coupon bonds are DISCOUNT SECURITIES.
DIVERSIFICATION. Dividing investment funds among a variety of securities offering independent returns.
FEDERAL CREDIT AGENCIES. Agencies of the federal government set up to supply credit to various classes of institutions and individuals, such as, S & L’s, small business firms, students, farmers, farm cooperatives and exporters.
FEDERAL DEPOSIT OF INSURANCE CORPORATION (FDIC). A federal agency that insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE. The rate for which overnight federal funds are traded.
FEDERAL HOME LOAN BANKS (FHLB). The institutions that regulate and lend to savings and loan associations. The federal home loan banks play a role analogous to that played by the federal reserve banks vis-a-vis member commercial banks.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or FANNIE MAE). FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development, HUD. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder- owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC). Consists of seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents. The President of the New York Federal Reserve Bank is a permanent member while the other presidents serve on a rotation basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM. The central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or GINNIE MAE). GNMA, like FNMA, was chartered under the Federal National Mortgage Association Act of 1938. Securities guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations and other institutions. Security holder is protected by full faith and credit of the U.S. government. Ginnie Mae securities are backed by FHA, VA or FMHM mortgages. The term passthroughs is often used to describe Ginnie Maes.
INTERNAL CONTROLS. Must be designed to ensure that the assets of the city are protected from loss, theft or misuse. The internal control structure should be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived and the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points.
(1) 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 performs 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 defined 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 confirmations or telephone transactions for investments and wire transactions. Due to the potential for error and improprieties arising from telephone transactions, all telephone 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 or 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.
LIQUIDITY. A liquid asset is one that can be readily converted to cash through sale in an active secondary market.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP). Pools through which governmental entities may invest short term cash. Examples of LGIP’s are the Illinois Funds, administered by the Illinois State Treasurer and the Illinois Metropolitan Investment Fund.
MARKET VALUE. The price at which a security could presumably be purchased or sold.
MARK TO MARKET. The process of restating the carrying value of an asset or liability to equal its current market value.
MASTER REPURCHASE AGREEMENT. A written contract covering all future transactions between the parties to repurchase - reverse repurchase agreements that establishes each party’s rights in the transactions. A MASTER AGREEMENT will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default of the seller-borrower.
MATURITY. The date upon which the principal or stated value of an investment becomes due and payable.
MONEY MARKET. The aggregation of buyers and sellers actively trading money market instruments.
OFFER OF OFFERED PRICE. The trading price proposed by the prospective seller of securities (also called the asked or asking price).
OPEN MARKET OPERATIONS. Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. OPEN MARKET OPERATIONS are the Federal Reserve’s most important and most flexible monetary policy tool.
PORTFOLIO. Collection of financial assets belonging to a single owner.
PREMIUM. The amount by which the price for a security is greater than its par amount.
PRIMARY DEALER. A group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks and a few unrelated firms.
PRUDENT PERSON RULE. An investment standard. In some states, the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state - the so-called legal list. In other states, the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES. A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN. The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return.
REINVESTMENT RISK. The risk that all or part of the principal may be received when interest rates are lower than when the security was originally purchased, so that the principal must be reinvested at a lower rate than the rate originally received by the investor.
REPURCHASE AGREEMENT (RP or REPO). A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate him or her for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves.
SAFEKEEPING. A service rendered by banks whereby securities and valuables of all types and descriptions are held by the bank.
SEC RULE 15C3-1. See UNIFORM NET CAPITAL RULE.
SECONDARY MARKET. Markets for the purchase and sale of any previously issued financial instrument.
SECURITIES AND EXCHANGE COMMISSION (SEC). The federal agency with responsibility for regulating financial exchanges for cash instruments.
SPREAD OVER TREASURIES. The difference between the bond equivalent yield for any investment and the bond equivalent yield for a treasury investment with the same maturity.
TREASURY BILLS (T-BILLS). Short-term obligations issued by the U.S. Treasury for maturities of one year or less. They do not pay interest but are issued on a discount basis instead.
TREASURY BOND (T-BONDS). Long-term obligations issued by the U.S. Treasury with initial maturities of more than ten years.
TREASURY NOTES (T-NOTES). Medium-term obligations issued by the U.S. Treasury with initial maturities of from one to ten years.
UNIFORM NET CAPITAL RULE. Securities and Exchange Commission requirement that member firms as well as non-member broker dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicate. Liquid capital includes cash and assets easily converted to cash.
YIELD. Loosely refers to the annual return on an investment expressed as a percentage on an annual basis. For interest-bearing securities, the yield is a function of the rate, the purchase price, the income that can be earned from the reinvestment of income received prior to maturity, call or sale. Different formulas or methods are used to calculate YIELDS.
(Prior Code, § 38.03) (Ord. 99-286, passed 12-14-1999)