HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 12/01/2009 - RESOLUTION 2009-109 APPROVING A SECURITIES LENDING DATE: December 1, 2009 AGENDA
STAFF: Chuck Seest FORT COLLINS • IL
Resolution 2009-109 Approving a Securities Lending Program as Part of the City's Investment Policy.
EXECUTIVE SUMMARY
The proposed revision to the 2008 Updated Investment Policy includes the following significant changes:
1. Allows for an increase in the allocation amount of Agency Security investments from 80 percent to 90
percent. This change will allow the City to maximize investment returns while minimizing investment risk.
2. Accepts the Securities Lending amendment document that was created jointly by Wells Fargo Bank and
the City of Fort Collins to specify the investment options that may be utilized in the Securities Lending
program. The amendment aligns with state statute and is specific to the City of Fort Collins.
BACKGROUND / DISCUSSION
The City last updated the Investment Policy in 2008. Going forward, the Investment Policy will be reviewed by the
Council Audit and Finance Committee at a minimum of every three years to determine whether it is properly serving
the City and, most importantly, to ensure the safety of the public funds entrusted to the City for delivering services to
the community. The policy will allow greater allocation to Agency Security Investments as these investments are
providing adequate return and also minimizing risk due implied backing of the Federal Government.
The City began participation in the Securities Lending program in 2002. Securities Lending is a supplemental program
that allows the City to generate income by lending the investment securities that the City owns. The program is
managed by Wells Fargo Bank.
FINANCIAL IMPACT
Investment income would be enhanced slightly while reducing the level of risk compared to alternative investments.
The Securities Lending program has earned $1,228,578 since inception.
STAFF RECOMMENDATION
Staff recommends adoption of the Resolution.
BOARD / COMMISSION RECOMMENDATION
The City Council Audit and Finance Committee recommends adoption of the Resolution.
ATTACHMENTS
1. Excerpt of Updated Investment Policy.
2. City Council Audit and Finance Committee Minutes.
3. Amendment to Indemnified Securities Lending Agreement.
4. Indemnified Securities Lending Agreement dated October 16, 2006.
5. Wells Fargo Securities Lending Presentation.
ATTACHMENT 1
Excerpt from Investment policy dated December 2, 2008:
VII. Investment Parameters
1. Diversification and Asset Allocation
It is the intent of the City to diversify its investment portfolio. Investments shall
be diversified to eliminate the risk of loss resulting from over-concentration of
assets in a specific maturity, issuer or class of securities. Diversification
strategies and guidelines shall be determined and revised periodically by the
Financial Officer. The investments may be diversified by:
a) Limiting investments to avoid over-concentration in securities from a
specific issuer or business sector (excluding U.S. Treasury securities);
b) Limiting investment in securities that have higher credit risks;
c) Investing in securities with varying maturities; and
d) Maintaining a portion of the portfolio in readily available funds such
as local government investment pools, money market funds or short
term repurchase agreements to ensure that City liquidity needs are met.
The maximum investment allowable for each investment category as a
percentage of the entire portfolio is as follows (excluding collateral for
repurchase agreements):
CASH AND CASH EQUIVALENTS......................................................................100%
TREASURY SECURITIES.......................................................................................90%
GOVERNMENT-SPONSORED AGENCY SECURITIES....................................90%
REPURCHASE AGREEMENTS.............................................................................70%
CORPORATE NOTES OR BONDS*......................................................................40%
BANKDEBENTURES*.............................................................................................25%
COMMERCIAL PAPER*.........................................................................................25%
BANKER'S ACCEPTANCES*.................................................................................25%
LOCAL GOVERNMENT INVESTMENT POOLS ...............................................20%
MONEY MARKET FUNDS AND MUTUAL FUNDS.................................15%
CD ACCOUNT REGISTRY SERVICE.....(MAXIMUM 50 MILLION)............15%
CERTIFICATES OF DEPOSIT.................................................................................5%
GUARANTEED INVESTMENT CONTRACTS......................................................5%
* A maximum of 10 percent of the portfolio may be invested in any one
provider or issuer.
1. Investment Maturity and Liquidity
a) A portion of the portfolio should be continuously invested in readily
available funds such as local government investment pools, money
market funds, or short-term repurchase agreements to ensure that
appropriate liquidity is maintained to meet ongoing obligations. The
City must at all times maintain 5 percent of its operating investment
portfolio in instruments maturing in 120 days or less.
b) Reserved funds may be invested in securities exceeding 5 years if the
maturities of such investments are made to coincide as closely as
possible with the expected use of funds.
c) The weighted average final maturity limitation of the total portfolio,
excluding pension funds and long-term reserve funds, will not exceed
3 years.
d) The City may collateralize repurchase agreements with longer-dated
investments, final maturity not to exceed 30 years.
ATTACHMENT
City ®f ' Finance Administration
215 N. Mason
F6rt Collains Floor
PO Box 580
97Fort Collins,CO 80522
970.221.6788
970.221.6782-fax
fcgov.com
Council Audit Et Finance Committee
Minutes
10/19/09
10:30 a.m. - 12:00 p.m.
Council Attendees: Mayor Doug Hutchinson, Mayor Pro Tern Kelly
Ohlson
City Staff Attendees: Darin Atteberry, Mike Freeman, Chuck Seest, Jim
O'Niell, Kraig Ecton, John Voss, Harold Hall,
Heather Shepherd
Others: John Knezovich, citizen , Ann Hutchison, Chamber
of Commerce, Garry Bostwick and Bob Smith,
Wells Fargo
Approval of the Minutes from the September meeting.
Ben Manvel moved to approve the September minutes and Doug Hutchinson seconded the
motion. The minutes were approved unanimously.
Update to Investment Policv
Harold Hall updated the Committee on one change to the investment policy, which is to increase
the allowable maximum investment for the government sponsored agency securities category
from 80% to 90%. This change would strengthen safety and yield as the City's alternative
to government sponsored agency securities is the corporate market, which is more
volatile and has greater exposure to the uncertainty of the economy. This change would
not impact liquidity since a daily market exists for government agency investments.
This item will be coming to the full Council for a vote later this year.
Sales Tax Update
Chuck Seest summarized data showing that the City is down nearly 8% in sales tax
collection (September collections for August activity).
➢ 4th Qtr of 2009 will meet/slightly exceed projection (-4%)
✓ During 2008, 4th Qtr was weak due to financial crisis.
✓ Vehicle sales have started to recover beyond "Cash for Clunkers"
✓ Anticipate a 13th month payment from major Food Store Vendor
➢ Confident of the Year-to-Date projection (-4%)
✓ Barring unforeseen events, consumer confidence improving.
✓ With 9 months in the books, hard to move YTD trend.
City of
Fort Collins
Investment - Amendment to Securities Lending Agreement .
Representatives from Wells Fargo presented information on how the City can stay
involved in Securities Lending while mitigating risks. This would require amending the
current agreement between the City and Wells Fargo.
• Managing Investment Risk
Investment Selection Process
• Title 24, Article 75 —Colorado Statute
• Only purchase fixed income or cash market securities that meet quality standards.
• Issues and issuers reviewed and pre-approved through proprietary Wells Fargo liquidity
management process
• Collateral investments strictly limited to US Government issues, Repurchase
Agreements, Commercial Paper, and AAA rated money market funds.
• Strict Maturity , Ratings, and Diversification limits
• Minimum A-1/P-1 short-term AA- long term ratings
• Maximum maturity of any investment limited to 270 days
• 5% issuer limit
• Maximum 25% exposure limit for commercial paper
• Emphasis on risk management
• Focus on intrinsic value of lending
• Strategic utilization of lendable securities
This item will come to City Council as a resolution approving the City's participation in
securities lending under the amended agreement.
Update on Purchasing Items
Jim O'Neill some follow up information related to some Council Finance Questions on how
the City bid process works, how proposals and bids are evaluated, how cost is used to
evaluate Requests for Proposals, and data on P-Card Spending for the last year.
Kelly Ohlson asked if purchasing regulates the products that are bought to ensure they are
'green'.
Jim O'Neill, Mike Freeman, and Darin Atteberry gave several of examples of how purchasing
definitely is directed in a way the City prefers, however, at this time, Purchasing is not a
gatekeeper on all spending and does not tell departments what they can or cannot buy.
Jim O'Neill stated that Purchasing is continually working on improvements, especially in the
green purchasing area. Going forward, Darin suggested a plan would be to determine how
Council can get reports on what progress and improvements are being made.
Kelly Ohlson asked if the Council could obtain a summary follow-up report on major projects.
Projects like the Aztlan Center, Police Building, Spring Canyon Park, etc.)
Darin Atteberry also requested data on what our benchmark Cities are doing to eliminate cost
in Request for Proposal processes. Doug Hutchinson requested that this data is viewed in
context, not just on it's own.
Staff agreed to provide information on the topics mentioned.
ATTACHMENT 3
Amendment to Indemnified Securities Lending Agreement
WHEREAS, Wells Fargo Bank, N.A., as Agent (`Bank") and the City of Fort Collins,
Colorado, a municipal corporation ("Participant"), (collectively, the "Parties")have
entered into an Indemnified Securities Lending Agreement dated October 16, 2006
("Agreement"); and
WHEREAS, the Bank has established the Wells Fargo Securities Lending Program(the
"Program") to allow its clients to loan securities; and
WHEREAS, the Participant, through the Bank as it Agent, has contributed its securities
for use in the Program; and
WHEREAS, the Parties wish to continue to cooperate in the use of the Program and that
amendments should be made to the Agreement; and
WHEREAS,the Parties have determined that the Agreement needs to be clarified to
assure that the securities lending collateral is invested only in high-quality, U.S. dollar-
denominated short-term money market instruments; securities with fixed,variable,or
floating rates of interest; and that the prime considerations for the investment portfolio
shall be safety of principal and liquidity requirements.
Now therefore, the Parties hereby agree to execute this Amendment to the Indemnified
Securities Lending Agreement, as of the date indicated below, and amend the Agreement
as follows:
1. Amend Paragraph I by deleting it and replacing it with:
Participant has appointed the Bank, pursuant to a Custodial Agreement
dated October 16, 2006, as custodian of certain assets (the "Account").
Participant hereby appoints the Bank as its Agent for the purpose of
lending securities from its Account in the Wells Fargo Securities Lending
Program.
2. Amend Paragraph 2a by deleting the last sentence "A list of Borrowers shall be
provided from time to time to Participants or will be furnished upon request' and
replacing it with:
The Bank will provide Participant with a list of Borrowers from time to
time or within five days of Participant's request.
3. Amend Paragraph 2c by deleting it in its entirety and replacing it with:
No loans shall be negotiated using a finder.
4. Amend Paragraph 2f by deleting it and replacing it with:
To receive and take possession of collateral in the form of U.S. Government
Securities, irrevocable letters of credit, or cash.
a. Cash received as collateral for all loans shall be invested as follows:
i) Types of Investments
(a) Cash collateral may be invested in U.S. dollar denominated
Repurchase Agreements, Medium Term Notes, AAA rated
registered money market mutual funds, U.S. Government
Securities (direct obligations or guaranteed or insured
issues of the United States and its agencies), and
Commercial Paper. Other U.S. dollar denominated money
market instruments meeting the quality and maturity
standards outlined below may be purchased after review
and approval by the Securities Lending Management
Committee.
(b) No investments shall be made in securities or deposits of
Wells Fargo& Company or any of its subsidiaries.
(c) Transactions involving Repurchase Agreements will be
preceded by an appropriately executed investment
agreement and approved by the Securities Lending
Management Committee. All other transactions involving
the investment of cash collateral will require a post-
transaction confirmation.
ii) Quality Standards for Investments
(a) Bank Deposits, Investments and Guarantees
Domestic banks and domestic thrifts (a "Bank") must meet
or exceed the rating criteria below in order to be approved
for investments or as a guarantor. The Bank must be rated
by at least two of these services; if the Bank is rated by
more than one of these services, each rating must meet the
minimum rating criteria.
Rating Long-term
Agency Short-term Rating Debt Rating
Moody's P-1 Aa3
Standard & Poor's A-1 AA-
(b) Commercial Paper and Other Short-Term Obligations
In order to be eligible for purchase, the obligor(or guarantor)
must be rated by at least two Nationally Recognized Statistical
Reporting Organizations ("NRSRO"). If the obligor is rated by
more than one NRSRO, each rating must meet the minimum
rating criteria. In the event the obligor does not have a short-
term rating, its long-term debt must meet the minimum rating
criteria. The ratings must meet or exceed the following:
Rating Long-term
Agency Short-term Rating Debt Ratine
Moody's P-1 Aa3
Standard & Poor's A-1 AA-
Fitch/IBCA F-1 AA-
(c) Repurchase Agreement
(i) A financial institution approved for repurchase
agreement transactions must carry the highest short-
term rating by at least two NRSROs. One of the two
highest short-term ratings of the NRSROs must be
either Standard&Poor's Corp., or Moody's Investors
Service,
(ii) The market value, including accrued interest, of the
security collateral received under a repurchase
agreement is to be equal to, or greater than the
Collateral Requirement of the face amount, before
transfer of the funds is to be made. In order to assure
continued adequate coverage of the repurchase
agreement, all collateral shall be marked to market
daily.
(iii)Collateral is limited to US Treasury issues, US Agency
debentures, and money market instruments. The
specific collateral ization margin will not be less than
102%. A confirmation of the collateral underlying a
Tri-Party repurchase agreement must be provided by
the Tri-Party custodian and reviewed daily for
compliance.
iii) Diversification for Adequate Liquidity and Concentration
Limits
(a) No more than 5%of the account may be invested with any
one issuer, except for the U. S. Government and its
agencies, AAA rated registered money market mutual
funds, and repurchase.agreements.
(b) No more than 20%of the account may be invested with any
one counterparty on Repurchase Agreements, except for
Repurchase agreements collateralized with U.S.
Government Securities (direct obligations or guaranteed or
insured issues of the United States and its agencies)
(c) At least 20% of the account shall be invested on an
overnight basis, using the contractual maturity date(except
as specifically directed by the Participant).
(d) No more than 20%of the account may be invested in any
one industry except for the financial services industry.
(e) No more than 25% of the account may be invested
commercial paper.
(f) The maximum weighted average maturity limit of the
account, using the reset date as the maturity date, will be 45
days,
(g) The maximum weighted average maturity to final maturity
limit of the account using the contractual maturity date for
the calculation will be 180 days.
(h) The purchase of securities or investments deemed "illiquid
instruments" is prohibited.
(i) Up to 100%of the account may be invested in AAA rated
registered money market mutual funds. With specific
approval of the Participant, the account may invest in
Money Market Funds advised and/or sponsored by Wells
Fargo & Co. and any affiliate thereof.
(j) The purchase of securities or investments in foreign
securities denominated in U.S. dollars is prohibited.
iv) Maturity
To reduce exposure to market volatility the following
maturity schedule will apply to the maximum term for all
collateral investments:
(a) The maturity of repurchase agreements may not exceed 30
days.
(b) The maturity of commercial paper investments may not
exceed 90 days.
(c) The contractual maturity date of any other fixed rate
security shall not exceed 270 days, or shall have a demand
feature exercisable at Agent's option within 270 days.
(d) Securities with a float or variable rate, and with a reset
date, shall use the reset date as the maturity date for interest
rate sensitivity calculations, and shall use the contractual
maturity date as the maturity date, unless the security has a
demand feature, exercisable at Agent's option.
v) Transition and Compliance
These Guidelines are applicable to all new investments for
the collateral purchased after the Effective Date noted
below. Assets already held in the portfolio for this
Participant prior to the Effective Date ("previously-held
assets")were subject to the Collateral Investment
Guidelines effective at the time of purchase. Upon
maturity of such previously-held asset, the collateral
investments shall be subject to the Guidelines stated herein.
Compliance with the standards outlined herein will be
determined at time of purchase. Should a non-compliance
event occur it will be addressed and reviewed by both
parties within 60 days.
The account may retain a security whose rating has been
lowered(or a security of comparable quality to a security
whose rating has been lowered) below the account's lowest
permissible rating category if it is determined that retaining
the security is in the best interest of the account. Continued
retention of any downgraded asset requires the approval of
the Securities Lending Management Committee.
b. Non-Cash Collateral parameters areas follows:
i) Eligible instruments may include obligations issued or
guaranteed by the U.S. Government, or its agencies.
ii) Eligible instruments may include irrevocable standby
letters of credit.
5. Amend Paragraph 3 by deleting the words "Omnibus Account" and replacing
them with the word "Program".
6. Amend Paragraph 4 by deleting the last sentence thereof.
7. Amend Paragraph 8 by removing the second to last full sentence thereof,and
inserting the following language:
"Participant assumes all risk of loss arising out of collateral investment loss
and any resulting collateral deficiencies for all collateral investment activity
undertaken within the parameters and constraints of this Amendment to
Indemnified Securities Lending Agreement."
8. Amend Paragraph 12 by deleting the word"Minnesota" and replacing it with the
word"Colorado".
9. Adding a new Paragraph 15 as follows:
15. Indemnification
The Parties expressly acknowledge that public entities must comply with
Colorado statutes regarding the investment of public fund. Subject to the
proviso that the City bears responsibility for investment losses on collateral
investments properly purchased within the limits of Title 24, Article 75, Part 6
of the Colorado Revised Statutes and the investment guidelines established
herein, the Bank agrees to indemnify, defend, and hold harmless the City, and
the City's employees, directors,officers, affiliates, representatives, and agents
(collectively referred to as the "Indemnified Party")against any claim, suit,
action, liabilities,costs, and expenses, including any proceeding brought by a
third party against the Indemnified Party(collectively referred to as
"Claims"), to the extent that such Claim results from the negligent or willfully
wrong delivery of the services provided by the Dank, including Colorado law
and specifically Title 24, Article 75, Part 6 of the Colorado Revised Statutes.
10. Adding a new Paragraph 16 as follows:
16. Contingent Approval
This Amendment is continuant on approval of the City Council by the
adoption of a resolution by a rnajority ol,its members.
The Partics hereto have executed this Amendment to the Agreement effective as of
November g 3Moo.
Wells Fa-go Bark, X,4.
BY . e �e
Its .57 a,r 6lrca. �✓es.'<la.
The Citj,of Fort Collins, Culoralo, a municipal corporation
BY
Nlayor
AT FEST:
City Clerk
APPROVED AS TO t=ORiivI:
Assistant City Attornev
ATTACHMENT 4
INDEMNIFIED SECURITIES LENDING AGREEMENT
Wells Fargo Bank, National Association
AS AGENT
And
City of Fort Collins, Colorado
AS PARTICIPANT
This Agreement,made as of the 16th day of October, 2006,by and between Wells Fargo
Bank, N.A., or its agent, (herein the "Bank") and the City of Fort Collins, Colorado (herein
the "Participant").
Whereas, the Bank, has established a Securities Lending Program to permit its
retirement plan, trust and custody clients to loan securities;
Whereas, under the Securities Lending Program, the Bank, as Agent for the
Participant, will make available to selected brokerage firms and other borrowing
organizations (Borrower) use of the Participant's securities; and
Whereas, the Bank has other Participants in the Securities Lending Program and the
Securities Lending Program is designed to allocate securities loans equitably among the
Participants;
Now, therefore, the parties hereto agree as follows:
1. Appointment
Participant has appointed the Bank under other agreements as custodian of
certain assets (herein "Account"). Such agreements authorize Participant to
appoint an agent to tend securities from the Account. Participant hereby
appoints Wells Fargo Bank, N.A. as Agent for the purpose of lending securities
from its Account under the Wells Fargo Securities Lending Program.
2. Agent's Activities
As Agent for the Participant, the Bank undertakes the following:
a. To enter into a Borrower Securities Loan Agreement with each Borrower setting
forth the general terms governing loans made under the Securities Lending
Program. Such Borrower Securities Loan Agreements are available to
Participants upon request. A list of Borrowers shall be provided from time to
time to Participants or will be furnished upon request. Information about each
Participant and the loans made from their accounts will be furnished to
Borrowers upon request or as required by statute, regulation, or rules of
industry self-governance organizations.
b. Subject to the Borrower Securities Loan Agreements, each loan made will be
made on behalf of and solely for the benefit of the Participant's Account. For
accounts subject to ERISA, to the best of Agent's knowledge loans will be made
only to Borrowers which do not have any discretionary authority or control
with respect to investment of the plan assets involved in the transaction and
which do not render investment advice with respect to those assets. For
purposes of this paragraph, the term "Borrower" includes any affiliate of a
Borrower.
c. To negotiate loans directly or through a finder for a minimum of one day but
with no fixed maximum term, retaining the power to terminate the loan at any
time unless otherwise agreed with the Participant.
d. To require each loan when made to be collateralized in the amount of 102% of
the market value of the loaned security and accrued interest.
e. To mark each loaned security to market daily using the closing valuation as of
the prior business day. Agent shall use a pricing service to obtain market
valuation. If the market value of the given collateral falls to 100% of the loaned
security market value, Agent shall request additional collateral to bring the
collateralization back to 10.2%. Collateral in excess of 102% will be returned to
the Borrower if requested.
f. To receive and take possession of collateral in the form of U.S. Government
Securities, letters of credit, or cash. Cash received from all loans from Accounts
will be commingled for investment purposes. Such cash shall be invested in
repurchase agreements, master notes (VPN), U.S. treasuries and agencies, U.S or
Euro dollar certificates of deposit and time deposits, bankers acceptances,
commercial paper and other short-term money market instruments, and.mutual
funds holding any of the previously mentioned securities and subject to policy
and standard guidelines established from time to time by the Bank. The prime
considerations for the investment portfolio shall be safety of principal and
liquidity requirements.
g. Normally securities loaned and corresponding collateral transferred (cash or
U.S. Government Securities) will be processed, similar to security purchases and
sales, through the Depository Trust Company, a Federal Reserve Bank, or any
other clearing organization (Clearing Organization).
3. Allocation of Security Loans Among Participants
The Participant's securities available for lending are listed in the Securities
Lending Omnibus Account as part of the lending inventory. The Bank will use
reasonable efforts to allocate loans on a security by security queue basis. As a
result of the queue, Participant understands that a single Borrower may be lent
a significant portion, or all, of Participant's securities available for lending.
2
4. Termination oAny Security Loan
A loan may be terminated by the Bank or the Borrower at any time pursuant to
the Borrower Securities Loan Agreement covering the loan. Unless otherwise
agreed to, Participant may request the Bank.to terminate any loan of securities
for.any reason at any time. Upon such loan termination, the Bank will take
delivery or receive through a Clearing Organization the securities to be
returned. The Bank will return to the Borrower directly or through the
Clearing Organization the collateral securing the loan. Borrower Securities
Loan Agreements provide for return of corporate securities not later than the
third business day following loan termination notice and in the case of
government securities not later than the next business day following loan
termination notice. Notwithstanding the foregoing, Bank will have a
reasonable time after receiving Participant's request to terminate any loan to
liquidate cash collateral investments prior to terminating the loan.
5. Portfolio Investment Activity and Corporate Actions In Regard to Loaned
Securities
A Participant Account is entitled to all cash dividends, stock dividends, stock
splits, rights of distribution, conversion privileges, tender and exchange offers,
and similar corporate actions with respect to any loaned securities as if the
securities had not been loaned. During any period when securities are loaned,
the Participant waives its right to vote such securities. Participant may regain
right to vote securities by causing a timely termination of a loan in advance of
the record date established for determining stockholder entitlement to vote.
Any securities of the portfolio that are on loan may be sold by the Participant's
investment manager or fiduciary at any time. The Bank must receive notice on
trade date from the proper party advising the Bank of any sate. Upon such
notice, the Bank will initiate action to terminate the loan of the securities sold. If
such notice is not received by the Bank, the Bank assumes no liability for the
failure of the transaction to settle on contractual settlement date.
6. Recordkeeping and Reporting
The Bank will keep security loan records separate from a Participant's custodial
or fiduciary portfolio records. Income from each loan will be credited to a
Participant's Account once a month. The Participant shall receive,a detailed
report monthly which shall include all loan activity, Borrowers to whom loans
were made and income earned.
7. Fees
Income from the Securities Lending Program is generated by fees paid by the
Borrowers and income from investment of cash collateral. All cash collateral is
pooled for investment purposes. In acting as Agent for the Participant, the
Bank will receive 30% on the net earnings from each loan and the Participant
will receive 70%. The fees will be calculated monthly and the Bank's fee will be
withheld from the remittance to the Participant or the Account.
3
8. Risk of Loss
If the Borrower defaults upon return of the lent security, as provided in the
Borrower Securities Loan Agreement, the Participant, or the Bank if authorized,
may purchase securities identical to the borrowed securities (or their equivalent
in the event of reorganization, recapitalization or merger of the issuer of the
borrowed security) and may apply the collateral to the payment of the purchase
price, expenses and other obligations under the Borrower Securities Loan
Agreement. In the event that the Borrower fails to return the lent security, the
Bank will indemnify the Participants' accounts in the following amounts:
a. The difference between the closing market value of the security on the date it
should have been returned to the account and the cash collateral substituted for
the lent securities, or
b. In the case of collateral received in kind, the difference between the closing
market value of the security on the date it should have been returned to the
account and the closing market value of the collateral in kind on the same date.
Participant assumes all risk of loss arising out of collateral investment loss and
any resulting collateral deficiencies.
The Bank expressly assumes the risk of loss arising from negligent or fraudulent
operation of its Securities Lending Program.
9. Termination
This Agreement may be terminated at any time by either Participant or the Bank
upon 60 days written notice to the other. Upon delivery of such notice and
upon mutual agreement, either party may waive all or part of the Notice period
and the Bank will terminate loans from Participant's Account in accordance
with Borrower Security Loan Agreements.
10. Notices
Notice to Participant shall beAirected and mailed as follows:
City of Fort Collins
Finance Administration
City of Fort Collins
P.O. Box 580
Fort Collins, CO 80522-0580
ATTN: Harold Hall, Investment Administrator
Telephone: 970-221-6784
Fax: 970-221-6782
Email: hhall®fcgov.com
4
Notice to the Agent shall be directed and mailed as follows:
Wells Fargo Bank,N.A.
Asset Management Group,Securities Lending
Wells Fargo Center MAC N9305-090
Sixth Street and Marquette Avenue, Ninth Floor
Minneapolis, MN 55479
ATTN: Robert G.Smith, Senior Managing Director
Telephone: 612.667.5464. Fax: 612.667.4762
Email: Robert.G.Smith®wellsfargo.com
11. _Section Headings
The headings of sections in this Agreement are inserted for convenience of
reference and shall not be deemed to be a part of or used in the construction of
this Agreement.
12. Governing Law
This Agreement and all transactions hereunder shall be governed by,
interpreted, construed and enforced in accordance with the laws of the State of
Minnesota.
13. Successors and Assigns
This Agreement shall be binding on the successors and assigns of the parties.
14. Effective Date
This Securities Lending Agreement shall be effective as of January 1,2007.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first written above.
PARTICIPANT
City of Fort Collins,Colorado
B�.
Its IDPZ rc- ooz OF y Q C'Y4 a-ivc. .-f
,2a`5'ti-L6?—
AGENT
ASSET MANAGEMENT GROUP—
SECURITIES LENDING
WELLS FARGO BANK,N.A.
By_.. 06-L-I.X A
Its 15e4•%r 61i'ct VtJ��en/
2006 Client Agreement-Indemnified
5
ATTACHMENT 5
City of Fort Collins
Securities Lending
Program Update
Robert G. Smith
Wells Fargo Securities Lending
Together w 'U go far
Ocrober 2009
C.
Agenda
• Review of Securities Lending Program
• Market Demand
• History and Benefits
• General Enhancements to Mitigate Risk
• Specific steps to Mitigate Risks for Fort Collins
• Next Steps
1,12009~a Fa,.8.0,N,A.Alln Wres—d Far bb use.
C
1
1
Securities Lending Overview
• Lend Securities
U.S. Governments and Agencies, Corporate Bonds.
• Negotiate Rebate Rate
Determine if security is general (low demand) or special (high demand).
• Receive Collateral
Collateral margin for securities
102%OYmea¢
- 1LSwo Interna0onal
• Investment of Cash Collateral
Investment of cash collateral is made in high grade money market
instruments.
• Determine and Distribute Earnings Monthly
Spread between cash collateral investment yield and rebate rate.
Income split between client and lender.
2009 Welts Fargo Bank,NIA All n Ms—mad Far public sr,
Securities Lending Transaction
TypiLvl transaetinnJ(ourrhart �
BORROWER
l CYBTOOIAN 1
SECURRIC9 AVPRABLE - 9ECUR111ES UXPVPItABLE
OGTERMINE MARKET VALUE 1
A COLLATERAL
NEGOTIATE REBATE
BEMD-WLlVi w.PAYMENT-
Is
CERR:&INVEST
CASH COLLATERAL
CALLUTATE 6
018TRIRUTEEMNINO6
&2009 Walls Fa o Bank.N.P.All TOM naerveR.For PVbhc uve. \/\
J
2
C
Market Demand
Despite market turmoil, there is still a demand for securities lending.
Lenders can still earn incremental basis points on general collateral loans.
• Broker Financing
• The broker uses securities to finance their business needs.
• Options
• The broker sells options contracts on securities not owned which are
covered by borrowing the underlying securities.
• Arbitrage
• The broker actively trades in different markets to take advantage of price
differences,. but Is short the securities and borrows to make delivery.
• Fails
• The broker does not have securities available to meet a sale delivery
obligation; therefore, borrows to cover the fail.
®=9 VNIN Far,B.nM.NA All Mt nMrvlo.For public uw. 41
C.
Performance Attribution
Rental vs. Investment Spread
C,n,Foncminc venuur Mmunee Andhurwn JenL th—gh AupJ9
Nadance foe Fee Fund.Bench na.Nem)
1r
I `wnul sal.J
cell
as
,1 p00B Wa116 Fargo Bnnk,N.A.All,. hla,.ae,.d. Fo, ubllc uw.
C
3
City of Fort Collins
Earnings Since Inception in 2oo2
Doi, gNnl Eli—, Bdn4 e..,.EimIn05
x00x $ 21<01
2003 s n 676
206E S 0713
2006 S 1166I
2006 5 11600
2007 S 235.101
3006 S ]%fl 915 5 15•,.502
YT0200. 5 13]116 5 V11311
Tmal I $ 664a 16 1 S 242 332
1f Me Wo116 F...Bank,N.P.Ali n 0IF rB50n6d.For Ou00,uw.
Risk Management Oveniew
Risk Mitigation
y
•Dail coil broke ion
Co
u _ dusty
Default Risk Borrower unable to cover repurchase •Established broker credit limits
ater2pmargin review
•Broker default Indemnification
•On-going credit review
Operational Risk •Recall and/or sale fail •Comprehensive recall&buy-in
•Collateral leveis procedures
•Security niovemenl: •Daily mark to market
•Automated Interfaces to depositories
•Delivery vs, payment:movement
Client Collateral •Credit Risk •Client customization and guidelines
Investment Risk •Interest Rate Risk •In-house professional portfolio management
•liquidity Risk •Utilize proprietary credit research
•Defined approved investment list
'Controls for any exceptions
•Daily Fund accounting
D 2009 Mill FP,09knA N.P.All ailh. Far Piaa,,uY.
4
c
Attributes and Enhancements of
General Securities Lending Program
• Broker default indemnification
• Clients indemnified by Wells Fargo Bank, N.A. from borrower default loss
• May enhance protection from counterparty disruption
• Collateral investment management
• Continuation of existing client collateral investment guidelines
• Focus on liquidity management
• RMs and the securities lending team will work with you on program design
• Lending and collateral investment objectives
• Approach to address legacy portfolio assets
• Daily investment management monitored by front end compliance system
• Continue to develop ongoing collateral investment strategies
• Clients will continue to be responsible for any collateral investment risk in the
portfolio
02009 Wells Fargo Omk.N,A.All rights reasrvad For Public ux.
Revised Collateral Guidelines Specifically for
Fort Collins
is Managing Investment Risk
investment Selection Process
• Title 24,Article 75 - Colorado Statute
• Only purchase fixed income or cash market securities that meet quality
standards.
• Issues and issuers reviewed and pre-approved through proprietary Wells
Fargo liquidity management process
• Collateral investments strictly limited to US Government issues, Repurchase
Agreements, Commercial Paper, and AAA rated money market funds.
• Strict Maturity , Ratings, and Diversification limits
• Minimum A-1/P-1 short-term AA- long term ratings
• Maximum maturity of any investment limited to 270 days
• 5% Issuer limit
• Maximum 25%exposure limit for commercial paper
• Emphasis on risk management
• Focus on intrinsic value of lending
• Strategic utilization of lendable securities
9 VIN skills F o Bans,NA All nallits reservist.For Vubblic uu.
5
The Case for Securities Lending
• Opportunity for incremental investment returns
• May offset management fees/expense ratios
• May increase returns relative to benchmarks
• Addition of securities lending allows continuity of core Investment strategies
• Retain dividend and interest payments
• Retain conversion privileges
• Participate in tender offers and corporate actions
• A business model aligned with your interests
• Leveraging strengths of two legacy teams
• Customizable programs
120h9 Walla Fargo Bank.N A.All n ryls goal,.&For lubk uae.
Next Steps
• Revised Securities Lending Agreement will be in effect no later than January 1,
2010.
• Contract amended to reflect the City of Fort Collins Investment Policy and the
State Statutes of Colorado.
r)2ooYWalla Fargo BrMM,.N,A,an rulha refer,Mn! Far umlcuae.
J
6
RESOLUTION 2009-109
OF THE COUNCIL OF THE CITY OF FORT COLLINS
APPROVING A SECURITIES LENDING PROGRAM AS PART OF THE
CITY'S INVESTMENT POLICY
WHEREAS,Article V, Section 12 of the City Charter states that the cash balance of the City
shall be deposited or invested in a manner approved by the City Council; and
WHEREAS, the types of securities in which City funds may be invested have been
established in Ordinance No. 108, 1988 and amended by Ordinance No. 090, 1993; and
WHEREAS, City Council adopted Resolution 1990-044 authorizing a Cash Management
and Investment Policy that established guidelines and limitations to be followed by City staff in
managing the investment of City funds; and
WHEREAS, City Council adopted Resolution 2008-121 that adopted a new Investment
Policy dated December 2, 2008 (the "Investment Policy") reflecting the current financial markets
and providing guidance to the Financial Officer on prudent investment practices to protect
investment principal and maximize return on City investments; and
WHEREAS, City staff has recognized the ongoing turmoil in the financial markets and
recommends amending the Investment Policy to increase the percentage of City investments that
may be allocated to Agency Security instruments as those investments will maximize investment
returns and minimize investment risk; and
WHEREAS,City staff has also recognized that the use of a Securities Lending Program(the
"Program")provides the potential for additional revenues on the City's investments but Section 24-
75-601.1 of the Colorado Revised Statutes requires that such a Program be adopted by resolution
by City Council; and
WHEREAS, City staff has put on'file with the Office of the City Clerk the proposed
amendments to Section VII.1. Diversification and Asset Allocation of the Investment Policy; and
WHEREAS, City Council believes it is in the best interests of the City to approve the
amendment to the Investment Policy and the use of the Program as an investment strategy for the
City.
NOW, THEREFORE, BE IT RESOLVED BY THE COUNCIL OF THE CITY OF FORT
COLLINS that
Section 1. The Securities Lending Program as set forth in the Indemnified Securities
Lending Agreement dated October 16,2006 and amended in the First Addendum to the Indemnified
Securities Lending Agreement dated October 19, 2009, on file in the office of the City Clerk, is
hereby adopted.
Section 2. The Investment Policy dated December 2, 2008 is amended to increase the
percentage of City funds that may be invested in Agency Security investments.
Passed and adopted at a regular meeting of the Council of the City of Fort Collins this 1 st
day of December A.D. 2009.
Mayor
ATTEST:
City Clerk