1. CMTA: Essentials of Treasury Management Allowable Investments Presentation for: California Municipal Treasurers’ Association Presented by: Tony Garcia, CFA, Vice President Pomona, CA September 28, 2010

2. In theory, there is no difference between theory and practice. In practice, there is. - Chuck Reid

3. Allowable Investments  (a) Local Agency Bonds  (b) U. S. Treasury Issues  (c) State of California issues  (d) Issues by entities outside CA  (e) Issues by other CA entities  (f) Agency Issues (GSEs)  (g) Banker’s Acceptances  (h) Commercial Paper  (i) Negotiable CDs  (j) Repurchase Agreements  (k) Corporate Bonds  (l) Shares of Beneficial Interest  (m) GICs  (n) CDARs et.al.  (o) Mortgage/Asset backed securities  (p) Caltrust et.al.

4. Allowable Investments  (a) Local Agency Bonds  (b) U. S. Treasury Issues  (c) State of California issues  (d) Issues by entities outside CA  (e) Issues by other CA entities  (f) Agency Issues (GSEs)  (g) Banker’s Acceptances  (h) Commercial Paper  (i) Negotiable CDs  (j) Repurchase Agreements  (k) Corporate Bonds  (l) Shares of Beneficial Interest  (m) GICs  (n) CDARs et.al.  (o) Mortgage/Asset backed securities  (p) Caltrust et.al.

5. Section 53601 - Preamble Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security…that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment.  Maximum Term To Maturity Of Five Years  Unless Specifically Authorized To Go Longer

6. Section 53601 - Preamble This section shall apply to a local agency that is a city, a district, or other local agency that does not pool money in deposits or investments with other local agencies… However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies.  Counties Are Treated Differently  Section 53635

7. Section 53601 – Preamble Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase.  Percentage Limits Apply To Percent On Purchase Date

8. Municipal Issues  Local Agency  (a) Bonds issued by the local agency…  State Of California  (c) Registered state warrants or treasury notes or bonds of this state…  Any State Or Local Agency In The U. S.  (d) Registered treasury notes or bonds of any of the other 49 United States in addition to California…  Any California Local Agency  (e) Bonds, notes, warrants, or other evidences of indebtedness of any local agency within this state…

9.  Credit Ratings  Ratings Change Direction  Purpose Of Proceeds  Source Of Repayment Funds  Economic Considerations  Risks To Tax Exempt Status Municipal Issues

10. Government Sponsored Enterprises (GSEs) - Agencies (f) Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government- sponsored enterprises.  Chartered By Congress  Most created in the Great Depression  Designed To Support Specific Segments Of Economy

11. Agencies  Federal Farm Credit Bank System (FFCB)  Federal Home Loan Banks (FHLB)  Fannie Mae (FNMA)  Freddie Mac (FHLMC)  Tennessee Valley Authority (TVA)

12.  Mandate  Funding  Types Of Issuance  Short-term funding  Fixed / Floating  Structured securities  Political Environment – What Does The Future Hold  Should All GSEs Be Treated Equally  How Do You Determine Relative Value  Yield / Spread / OAS Agencies

13. Medium Term Notes – Corporate Bonds (k) Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States.  Includes all Corporate and Bank Debt less than five years  Primary Use  Raise Working Capital funds  Raise funds for Capital Assets  Credit Quality  What Do the Credit Ratings Mean  Other Sources of Information regarding quality  Leading Indicators  Capital Structure  Types of Issues – Fixed / Floating  TLGP

14. U.S. Treasury Securities (b) United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest.  Full Faith And Credit Of U.S. Government  Historically considered a “risk free” asset  Largest, Most Liquid Market In The World  Traditionally The Lowest Yielding Asset In It’s Sector

15. U.S. Treasury Securities  Treasury Bills  No longer than 1 year  Discounted  Treasury Notes  2 year to 10 year  Interest bearing  Treasury Bonds  Longer than 10 years  Treasury Inflation Protection Securities (TIPS)  STRIPS

16. Bankers’ Acceptances (g) Bankers' acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank.  Purpose  To improve international and domestic trade  Non-revocable obligation of all related parties  No known failure to pay  Issuers  Domestic money center and regional Banks  Domestic branches of foreign Banks (Yankees)  Restrictions  No longer than 180 days  No more than 40% of Surplus Funds  No more than 30% in any one Bank

17. Bankers’ Acceptances

18. Commercial Paper (h) Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):  Paragraph (1) – Non Asset Backed CP  Paragraph (2) – Asset Backed CP  Unsecured Promissory Notes – Credit Quality  Reasons For Issuance  Seasonal cash needs  Bridge financing  When cheaper than Bank financing

19.  Exempt From Registration With The SEC Under The Securities Act Of 1933  Section 3(a)3 - Working Capital  Any note, draft, bill of exchange, or banker’s acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is limited.  Issuers  General Electric  Toyota Motor Credit  JP Morgan Chase Commercial Paper

20.  Section 4(2) 144A – Private Placement  transactions by an issuer not involving any public offering  Qualified Institutional Buyers (QIB)  $100 Million in investable assets  Public Entities can only purchase new issuance  Issuers  Johnson & Johnson  Sigma Aldrich  Hewlett-Packard  Mass Mutual Life Commercial Paper

21.  Qualified Issuers  Prime quality and ‘A’ long-term rating by one of the rating agencies (NRSROs)  Organized and operating in U.S.  And, total assets in excess of $500MM  And, other debt is rated ‘A’ or higher  Or, organized in U.S. as Special Purpose Entity (ABCP)  And has program-wide credit enhancements and rated ‘A- 1’ or higher  Restrictions  No longer than 270 days  No more than 10% of Issuer’s outstandings  No more than 25% of Surplus Funds Commercial Paper

22. Negotiable CDs (i) Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a state-licensed branch of a foreign bank.  Characteristics  Not collateralized or FDIC insured  Can be bought and sold after issuance  Interest bearing  Longer than 7 days at issuance  Issuers  Money center and regional Banks  Yankee Banks  Restrictions  No more than 30% of Surplus Funds

23. Negotiable CDs

24. Repurchase Agreements Purchase of securities in conjunction with an agreement by which the seller will repurchase the securities on or before a specific date for a specific amount.  Short-term Financing  This is how dealer inventories are financed  Simultaneous Buy And Sell  No Longer Than One Year  Valued At 102% Of Funds Borrowed  Adjustments Must Occur At Least Quarterly

25. Shares Of Beneficial Interest: Money Market Funds (l) (1) Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (j), inclusive, or subdivisions (m) or (n) and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630).  Must Be Invested In Authorized Securities  Valued At $1  Investment Objectives And Constraints  No asset longer than 13 months  Average maturity no longer than 60 days  Fund Management Styles Differ

26. Shares Of Beneficial Interest: Mutual Funds  Invested In Authorized Securities  Valued At Net Asset Value (NAV)  Fund Management Style Differs  Investment objectives  Investment style  Fund Manager

27. Prohibited Investment – Section 53601.6  Any Security That Can Result In Zero Interest  Does not apply to shares Of beneficial interest  Inverse Floaters  Range Notes  Mortgage Derived Interest-Only Strips

28. - Doing Nothing Is Very Hard To Do. You Never Know When You’re Finished. -Leslie Nielson (actor)

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