housekeeping - naco · group legally ... fdic may void an otherwise perfected security interest and...
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Housekeeping
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Workshop Evaluations
Workshop evaluations forms can be found in the NACo conference app and online at
www.naco.org/workshopevals.
Please visit iTunes or Google Play to download the 2015 NACo Annual Conference App!
Speakers Sofia Anastopoulos, CFA Public Funds Consulting, LLC Principal (312) 519-1637 [email protected] www.pfundsconsulting.com Dawn Cragon, MBA Ashtabula County, OH Treasurer (440) 576-3727 [email protected] http://oh-ashtabulacounty.civicplus.com/ Cheryl Duke, CFA Mecklenburg County, NC Investment Officer (704) 336-2787 [email protected] www.charmeck.org/mecklenburg/county/Pages/Home.aspx
Focus
Elected Officials Guide: Investing
GFOA EOG
GFOA Best Practices, Advisories, Resources
Treasury and Investment Management
Fiduciary Duty
What Is a Fiduciary?
An individual or institution
Special relationship of trust with another person or
group
Legally responsible for their assets
Fiduciary Decisions and Actions
Make decisions in the best interest of the beneficiary
Act prudently
Always put the beneficiaries’ interests before their own
By law a fiduciary must:
Examples of Fiduciaries
Treasurers
Finance directors
Investment personnel
Oversight boards
Investment advisers
Brokers historically were NOT ****
Compliance with Fiduciary Duty
Test of compliance is one of conduct, not performance
Measures for evaluating compliance
Establishment of formalized investment policy
Compliance with policy
Prudent investment decisions
Best price trade executions
Diversification of risk
Strict avoidance of conflicts of interest
Investment Policy
Governance of Public Funds
State statutes specify:
Investment types
Maximum maturity
Collateralization
Potential partners
Credit criteria
Reporting
Safekeeping
Your investment policy
Bond Indentures
Stay aware of / involved with legislative, lobbying process
Policy Components
Scope
Standards of Care
Objectives
Delegation of authority
Risk tolerance
Investments
Institutions
Safekeeping and custody
Internal control
Reporting
Performance evaluation
Investment Policy?
1. Examine state statutes
2. Examine collateral statutes
3. Review sample investment policies
4. Draft investment policy
5. Have right parties review
6. Adopt by formal action of governing body
7. Establish written investment procedures
8. Review annually
Share with your broker-dealers, investment advisers, financial institutions
Why an Investment Policy?
improves the quality of decisions
demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield.
signals to rating agencies, the capital markets and the public that a government entity is well managed and is earning interest income suitable to its situation and economic environment.
GFOA Best Practice (2010)
A written investment policy is the single most important element in a
public funds investment program.
Policy Components
Objectives
Safety
Liquidity
cash flow forecasts
Return
(related to risk)
– Comfort level of board/oversight committee
– Internal expertise
– Access to information/tools
– Size of portfolio
Policy Components
Safekeeping / Custody
Selection of Financial Institutions
Collateralization
Authorized Investments
Safekeeping
Using Safekeeping & Third Party Custody
GFOA Best Practice (2010)
In a third-party safekeeping agreement - a firm other than the party that
sold the investment provides transfer and safekeeping of the securities.
Financial firms should not serve as both broker-dealer and custodian.
Safekeeping represents a financial institution’s obligation to act on
behalf of the owner under the owner’s control.
Investments should be settled in a delivery-versus-payment (DVP)
basis.
Using Safekeeping & Third Party Custody
GFOA recommends:
Competitive selection
evidence their safekeeping or custodial relationship with a
signed, written security agreement that is reviewed by
counsel and establishes the firm as its agent
execute all investment transactions on D-V-P basis
designate a specific DDA (demand deposit account) clearing
account in conjunction with the safekeeping or custodial
account
Selection of Providers
Banks, Brokers, Advisers, Others
Selection of Financial Service Providers GFOA Best Practice
Competitively procure providers – including those of financial
services – in a timely manner and with a defined process.
“timely” can be mandated by government’s own procurement
rules or 3-5 years
Competition promotes “fairness”
Vendors more likely to participate, support government
Citizens and interested parties appreciate government’s
care of their monies
Promotes government’s knowledge of its options – both
technical and pricing
Selection of Financial Service Providers
Use defined internal process to select, qualify, renew,
or terminate
Determine scope of services required, salient
points to consider
Determine scoring methodology
• Characteristics and weights
Use a questionnaire, conduct interviews, check
references
Research and identify experienced, active
providers to invite
Score
Make decision
Procurement of Banking Services
GFOA Best Practice
Governments use a wide variety of banking services for the deposits,
disbursement, and safekeeping of public funds.
Prudent procurement practices require the reevaluation of
banking services on a periodic basis.
Continual technology changes, treasury management
practices, and banking industry structure offer public funds
managers opportunities to reevaluate banking services/costs
Recommendation:
Establish procurement process, assure periodic reviews of banking
services. Consider :
1. Periodic competitive procurement; use RFP; use independent
bank evaluation services to verify creditworthiness of firms prior to
award
Procurement of Banking Services
Recommendation (cont’d):
2. Have contracts
3. Identify primary relationship manager
4. Evaluate relative benefits and costs of paying for
services through direct fees, compensating balances, or
blended
5. Evaluate the government’s needs and do cost/benefit
analysis
6. A treasury management review and comprehensive
evaluation should be performed prior to the issuance of
an RFP
Broker-Dealers
Recommendation:
Due diligence on broker/dealers should include :
dealer’s experience and knowledge of public funds
investing;
all contact information for primary contact, backup
and operations staff;
manager and supervisor;
the financial strength of the firm;
areas of expertise and trading activity;
registration with FINRA and any citations;
References
Don’t select more than you can use
Competition
Electronic trading platforms, such as Bloomberg, MarketAxess,
Tradeweb, and eConnectDirect provide alternative for
competitive pricing. These platforms can provide improved
transparency over competitive bids and should be considered if
cost effective
eConnectDirect – collaboration of NACo & Multi Bank
Securities (MBS)
Promotes efficiency, transparency, competition
• fixed-income offerings from 100s of brokers
• Asset classes - CDs, agencies, Treasurys, corporate and
muni bonds
Dashboard
28
• Portfolio
Summary and
Maturity
Distribution
Graphic
• Track account activities and see action items
Investment Advisers
Exercise caution and prudence in their selection of investment
advisers. Because fiduciary responsibility for the safety and
liquidity of government funds cannot be delegated.
Define and control the procurement process and assure periodic
reviews of investment advisory services.
Defined due diligence and proper controls help achieve
objectives, protect funds and reduce reputational risk
and frequency of such review
Due Diligence on Bank, Treasury
Management Providers
GFOA Best Practice
As part of a due diligence program, governments should review
quarterly and annual financial reports of key counterparty banks
and summary reports from regulator.
Credit Rating Agencies publish a rating in alpha and/or numeric
form, and may rank bank debt instruments as indicators of a
bank’s ability to satisfy obligations
Other methods of determining the credit and soundness of
counterparty are the CAMELS (Capital, Asset Quality,
Management Quality, Assets, Liquidity, Sensitivity to Marker Risk)
ratings and the Probability of Default
Due Diligence on Bank, Treasury
Management Providers
Recommendation:
As part of the ongoing due diligence, governments
should evaluate their key bank(s) and issue an internal
Bank Review Summary on quarterly basis
Operating relationship with bank or non-bank processor
of cash and near cash assets needs to be managed
pro-actively
A. Relationship Management
B. Bank Review Summary
C. Monitoring Financial Conditions
Collateralizing Public Deposits
GFOA Best Practice (October 2007)
Collateralization of public deposits through the pledging of
appropriate securities or other instruments (i.e. surety bonds or
letters of credit) by depositories is an important safeguard for such
deposits.
Federal law imposes rules in order to secure government deposits.
Otherwise, FDIC may void an otherwise perfected security
interest and leave the governmental depositor with only the
right to share with other creditors in the pro rata distribution of
the assets of a failed institution for the amount of deposits that
exceed the FDIC coverage.
Collateralizing Public Deposits
Recommendation:
Use written agreement with pledging requirements as
protection for state or local government's deposits.
GFOA encourages governmental entities to establish
adequate and efficient administrative systems to
monitor such pledged collateral:
1. Implement programs of prudent risk control, such as
formal depository risk policy, credit analysis, and use of
fully secured investments
Collateralizing Public Deposits
Recommendation (cont’d):
2. Ensure compliance with all laws to ensure security
interests in collateral pledged to secure deposits are
enforceable against the receiver of a failed financial
institution. Federal law provides that a depositor’s
security agreement, which tends to diminish or defeat
FDIC interest; agreement:
is in writing;
was approved by the board of directors of the
depository or its loan committee
has been, continuously, from the time of its
execution, an official record of the depository
institution
Collateralizing Public Deposits
Recommendation (cont’d):
3. Pledged collateral should be:
held at independent 3rd party
evidenced by written agreement - UCC req’t control
marked-to-market at least monthly
Substitutions of collateral should meet the
requirements of agreement, be approved, by the
entity in writing prior to release, and the collateral
should not be released until the replacement
collateral has been received.
The public entity should require reporting directly
from custodian
Cash Flow Forecasting
Cash Flow Forecasting
Purpose
Ensure sufficient liquidity
Optimize use of funds
Creating a forecast
Determine sources and uses of cash
Use historical data- bank reports, financial reports
Incorporate future spending needs – budget,
capital projects
Include current investment maturities
Structure Investments
Determine needed cash cushion
Structure maturities to cover large disbursements
Identify maximum maturities
Cash Flow Forecasting
GFOA Best Practices – Cash Flow Forecasting:
• Consult with operating departments when developing
expectations for planned expenditures.
• Create a spreadsheet using historical data and future
expectations to anticipate disbursements and receipts.
• Receipts should include expected inflows and investment
maturities.
• Disbursements should include regular and non-repetitive
expenditures.
• Optimize cash management techniques to collect receipts as soon
as possible and manage disbursements judiciously.
• Forecasts should be made conservatively. Allow a cushion for
unexpected fluctuations in disbursements and receipts.
• Update the forecast regularly. Daily monitoring and recording of
actual revenues and expenditures can be very beneficial.
Investments
Investments
Certificates of Deposit
CDARs, other placement services
Treasuries
Agencies
Municipal Bonds
Corporate Bonds
Local Government Investment Pools (LGIPs)
Money Market Mutual Funds
Others
Diversify
Generally, greater risk increases opportunity for higher
returns, along with increased volatility of returns
Useful strategy for managing risk in portfolio is through
diversification.
Diversification of investments in a portfolio is based on
the different types of risk – primarily interest rate or
market risk, liquidity risk and credit risk. Diversification
is achieved by investing in variety of securities with
dissimilar risk characteristics that respond differently to
changes in the market.
Diversification of Investments in a portfolio
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Diversification of Investments in a portfolio
43
Take-aways
Have an investment policy
Use third-party safekeeping
Know who you’re doing business with
Know what you’re buying
If it sounds too good to be true, it is too good to
be true IT IS NOT REAL!!!!!!!!
Ask why are you doing different - better - than your peers,
your benchmarks
Questions and Answers
If you would like to ask a question, please go to the nearest microphone.
Evaluations
NACo values all feedback.
Evaluation forms can be found in the NACo Conference app and online at
www.naco.org/workshopevals.
Please visit iTunes or Google Play to download the 2015 NACo Annual Conference App!