For the purpose of this chapter, the following definitions apply.
ACCRUED INTEREST. Interest earned but not yet paid on a security since the later of the security’s issue date or last record date.
AGENCIES. An informal name that refers to securities issued by the United States government and U.S. government-sponsored instrumentalities.
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 yield that are expressed in percentages. (One hundred basis points equal 1%.)
BENCHMARK. A comparative base for measuring the performance or risk tolerance of the investment portfolio. A BENCHMARK should represent a close correlation to the level of risk and the average duration of the portfolio’s investments.
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 banker’s acceptances, with yields available from coupon securities.
BROKER. A party that brings buyers and sellers together. BROKERS do not take ownership of the property being traded. They are compensated by commission. 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.
BROKERED AND NEGOTIABLE CERTIFICATES OF DEPOSIT. Short-term (two to 52 weeks), large denominations ($100,000 minimum). Certificates of deposit issued at a discount on their par value, or at a fixed interest rate payable at maturity, and are freely traded in secondary markets.
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 non-negotiable form, and may be issued in either physical or book-entry form.
COLLATERAL. Securities, evidence of deposit or other property that a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.
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 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.
CONFIRMATION. A document used to state and supplement, in writing, the terms of a transaction that has previously been agreed to verbally.
COUPON.
(1) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value; and
(2) A certificate attached to a bond, evidencing interest due on a payment date.
DEALER. A firm or individual that 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 (e.g., S&Ls, small business firms, students, farmers, farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC). A federal agency that insures bank deposits, currently up to $250,000 per deposit.
FEDERAL FUNDS RATE. The rate of interest at which federal funds are traded.
FEDERAL HOME LOAN BANKS (FHLBs). 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 Bank vis-a-vis member commercial banks.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or FANNIE MAE). FNMA, like GNMA, 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 rotating basis. The COMMITTEE periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM. The central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system.
GOVERNMENT 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 are 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 the FHA, VA or FMHM mortgages. The term “passthroughs” is often used to describe GINNIE MAES.
GOVERNMENT SECURITIES. Any debt obligations issued by the U.S. Government, its agencies or instrumentalities. Certain securities (such as treasury bonds and Ginnie Maes) are backed by the government as to both principal and interest payments. Other securities, (such as those issued by the Federal Home Loan Mortgage Corporation or Freddie Mac) are backed by the issuing agency.
INTEREST. Compensation paid or to be paid for the use of money. INTEREST is generally expressed as an annual percentage rate.
INTEREST RATE. The face coupon rate of a security.
ISSUE DATE. The date on which a security is issued or originated.
ISSUER. An entity that issues and is obligated to pay amounts due on securities.
INTERNAL CONTROLS. INTERNAL CONTROLS must be designed to ensure 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 cost and benefits requires estimates and judgements 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, when available;
(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 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 converted to cash through sale in an active secondary market.
LOCAL GOVERNMENT INVESTMENT POOLS (LGIPs). Pools through which governmental entities may invest short-term cash. Examples of LGIPs are the Illinois Funds, administered by the Illinois State Treasurer, and the Illinois Metropolitan Investment Fund.
MARK TO MARKET. The process of restating the carrying value of an asset or liability to equal its current market value.
MARKET VALUE. The price at which a security is trading and could presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT. A written contract covering all future transactions between the parties. The agreement establishes each party’s right in the transaction. REPURCHASE AGREEMENTS (REPOs) are a form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and then buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future), it is a REPO; for the party on the other end of the transaction (buying the security and agreeing to sell in the future), it is a REVERSE REPURCHASE AGREEMENT. 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 by the seller-borrower.
MATURITY. The date upon which the principal or stated value of an investment becomes due and payable.
MC&CF. The city’s Municipal Civic and Cultural Fund, a reserve fund as created by the City Council in Chapter 36 of this code of ordinances.
MONEY MARKET. The aggregation of buyers and sellers actively trading money market instruments.
OFFER OR 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.
PAR. The face amount of a security.
PORTFOLIO. A 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 who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. PRIMARY DEALERS include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks and a few unregulated firms.
PRINCIPAL. The face amount of a bond, exclusive of the accrued interest and payment at security.
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 custody state, the so-called legal list. In other states, the trustee may invest in a security if it is one that would be bought by a prudent person of discretion and intelligence, who is seeking a reasonable income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORY. A financial institution that does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of the 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, 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). See MASTER REPURCHASE AGREEMENT.
RESERVE FUND. The depositing of funds on a regular basis to accrue interest and increase the fund value. These funds are not part of the general operation funds
SAFEKEEPING. A service to customers 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. A market made for the purchase and sale of any previously issued financial instrument.
SECURITIES AND EXCHANGE COMMISSION. 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.
STRUCTURED NOTES. Notes issued by the government-sponsored enterprises (FHLB, FNMA, SLMA and the like) and corporations, which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options, and shifts in the shape of the yield curve.
TREASURY BILLS. A short-term obligation 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 BONDS (T-BONDS). Long-term obligations issued by the U.S. Treasury with initial maturities of more than ten years.
TREASURY NOTES (T-NOES). Medium-term obligations issued by the U.S. Treasury with initial maturities of from one to ten years.
UNIFORM NET CAPITAL RULE. A Securities and Exchange Commission requirement that member firms, as well as nonmember broker-dealers in securities, maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called NET CAPITAL RULE and NET CAPITAL RATIO. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. LIQUID CAPITAL includes cash and assets easily converted into cash.
YIELD. The rate of annual income 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.
(1994 Code, § 40.01) (Ord. 99-03, passed 3-22-1999; Ord. 2017-07, passed 12-26-2017)