The Same . . . only Different

Investment Types under PFIA

Van C. Carter April 22, 2015Senior Vice PresidentPublic Finance Sales ManagerFrost Bank

Full Disclosure

• I am a registered representative of Frost Brokerage Services, Inc. However, I am not speaking on behalf of Frost Brokerage or their products or services in this presentation.

• I do not perform securities transactions• I am not representing, endorsing or selling any

instruments referenced in this discussion• I am not an attorney; I am not giving legal advice

Discussion Topics

• “Act” I: PFIA at 30,000’• Relationship of Deposits, FDIC and Collateral• Rates vs Risk• Approved Investments (definitions)• Questions / Comments

“Act” I: PFIA (at 30,000’)Public Funds Investment Act (Ch. 2256) • Establish Guidelines• Give Direction• Present Options• Prompt Involvement• Increase Awareness• Assign Accountability• Inspire Pro-activity

Relationship of Deposits, FDIC and Collateral

FDIC – Limits and Allowances for government entities

https://www.fdic.gov/deposit/deposits/factsheet.html

Separate Coverage for Political Sub-Divisions*•Authorized by State Law• Functions delegated by State Law• Exclusive Control of Funds for Exclusive Use

* Does not include subordinated or non-autonomous divisions, agencies, or boards within subdivisions

Excess Public Unit deposits MUST BE collateralized

Type of Deposits FDIC Coverage

Time & Savings Deposits $250,000

Demand Deposits $250,000

Rates vs Risk

Investments2256.009 Obligations of, or guaranteed by, Governmental Entities

2256.010 Certificates of Deposit and Share Certificates

2256.011 Repurchase Agreements

2256.0115 Securities Lending Program

2256.012 Bankers Acceptances

2256.013 Commercial Paper

2256.014 Mutual Funds

2256.015 Guaranteed Investment Contracts

2256.016 Investment Pools

Other investment options are permitted in the PFIA, but apply to specific types of Public Entities

Rule of Thumb: If you don’t understand it, DON’T do it

NOTE: Conditions

apply to ALL of these

•2256.009 Obligations of, or Guaranteed by, Government Entities•“Obligation” – A debt (local or national) backed by the credit and taxing power of

the debtor.•“Government Entities” -an agency, instrumentality, or other entity of Federal,

State, or local government (15 U.S. Code § 6602)•Allowed issuers or guarantors of Obligations:

– United States, its Agencies and Instrumentalities (http://www.usa.gov/directory/federal/index.shtml)– Texas, its Agencies and Instrumentalities (https://www.tsl.texas.gov/apps/lrs/agencies/index.html)– FDIC (guarantor or insurer)– Other States, their agencies, Counties, Cities and other Political Subdivisions (rated “A” or higher)– State of Israel

•“Agency” - a business or organization established to provide a particular service, typically one that involves organizing transactions between two other parties

•“Instrumentality” - the fact or function of serving some purpose

Investments

•2256.009 Obligations of, or Guaranteed by, Government Entities

(continued)

Examples of Permitted Instruments•Treasury Bills (4, 13, 26 and 52 weeks); $10,000 minimum, then multiples of $5,000

•Treasury Notes (1 to 10 years); min: $1,000; Max $1 million (competitive) or $5 million

• GNMA (Mortgage Backed Securities, MBS)

• State, County, City issued bonds

Investments

CMO’s

MBS 1 MBS 2 MBS 3 MBS 40%

20%40%60%80%

100%

MBS Issued

Top High Medium Low

CMO 1 CMO 2 CMO 3 CMO 40%

20%40%60%80%

100%

CMO Restructure

Top High Medium Low

http://www.freddiemac.com/mbs/docs/investors_guide_CMOs.pdf

•2256.010 CERTIFICATES OF DEPOSIT AND SHARE CERTIFICATES•Funds to be deposited for a specific period of time in exchange for a guaranteed

rate of interest to be paid

Examples of Permitted Instruments•Bank CD’s (main office or branch in Texas)•CDARS®

•Brokered CD’s (Broker or the depository arranges for placement in federally insured depository institutions)

Investments

•2256.011 REPURCHASE AGREEMENTS•A securities transaction in which the Seller agrees at the time of purchase to buy

back (i.e. repurchase) the securities at a later date

Examples of Permitted Instruments•Overnight Repo’s

NOTE: Underlying securities must conform to 2256.009

Investments

•2256.0115 SECURITIES LENDING PROGRAM•Lending of securities from one party to another•Securities lending is an important means of eliminating "failed" transactions as well

as enabling hedge funds and other investment vehicles to sell shares short (sell high; buy low)

•Borrowers are generally hedge funds and proprietary trading desks of investment banks

Investments

•2256.012 BANKER'S ACCEPTANCES•A promised future payment (time draft) which is accepted and guaranteed by a

bank, and drawn on a deposit at that bank. Works much like a post-dated check•An unconditional liability of that bank•A holder can sell or exchange the draft rather than waiting for stated payment date

•Key factors:–Maturity <270 days–Liquidated in full at maturity–Eligible for collateral (FRB)–Accepted by a bank existing in the United States rated A-1 or P-1 or higher

Investments

•2256.013 COMMERCIAL PAPER•Unsecured promissory note with a fixed maturity of no more than 270 days•Backed is issuing bank’s or company’s promise to pay (no collateral)

•Key factors:–Maturity <270 days–Rated A-1 or P-1 or higher –Secured by an irrevocable letter of credit issued by a bank existing within the United States

Investments

•2256.014 MUTUAL FUNDS•A professionally managed investment program pooling money from many investors

for trading in diversified holdings• aka “investment companies” or “registered investment companies”

•Key factors:–Registered with SEC–Dollar weighed average stated maturity (WAM) of 90 days or less (money market mutual fund)–Dollar weighted average stated maturity (WAM) of <2 years (mutual fund)–Stable Net Asset Value (NAV) of $1 per share (stated in investment objectives)

Investments

•2256.015 GUARANTEED INVESTMENT CONTRACTS• Insurance contracts that guarantee the owner principal payment and a fixed or

floating interest rate for a predetermined period of time•Typically issued by insurance companies •Marketed to institutions offering favorable tax status under federal laws•Useful during bond issuing (taking time to drawn down bond proceeds)

•Key factors:–<5 years from issuance of bonds–Governing body must specifically authorize GIC’s in the bond issuing order, ordinance or resolution–Must receive at least 3 bids – Must purchase highest yielding GIC bid received

Investments

•2256.016 INVESTMENT POOLS•A professionally managed investment program consisting of approved securities• Investors are of the same type (government entities) with larger, institutional,

amount of investment

Examples of Permitted Instruments•TexPool

Investments

Summary

• “Act” I: PFIA (at 30,000’)• Relationship of Deposits, FDIC

and Collateral• Rates vs Risk• Approved Investments

Questions