Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
42.500(9)-(14), 42.520,
42.525,
17 C.F.R.
270.2a-7, 15 U.S.C. 80a, 26 U.S.C.
1-9834
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
42.500(10) requires the
State Investment Commission to promulgate administrative regulations for the
investment and reinvestment of state funds.
KRS
42.520(2) requires the
commission to promulgate administrative regulations concerning the assignment
of priorities to public depositories.
KRS
42.525(1) requires the
commission to promulgate administrative regulations for the investment and
reinvestment of state funds and the acquisition, retention, management, and
disposition of investments. This administrative regulation establishes the
standards that govern the commonwealth's investment and cash management
programs.
Section 1. Definitions.
(1) "Commission" means the State Investment
Commission.
(2) "Hedge" means a
position in a financial instrument taken to minimize or eliminate the risk
associated with an existing instrument or portfolio of instruments.
(3) "Interest rate swaps" means an agreement
governed by an International Swap and Derivatives Association master contract
between two (2) parties to exchange, or have the conditional right to exchange,
specified cash flows.
(4) "NRSRO"
means "Nationally Recognized Statistical Ratings Organization", which is a
credit rating agency that is registered with the Securities and Exchange
Commission, and which provides its opinion on the creditworthiness of an entity
and the financial obligations issued by that entity.
(5) "Office" means the Office of Financial
Management.
(6) "Options" means a
contract that provides the right, but not the obligation, to buy or sell a
specific amount of a security within a predetermined time period and includes
specific bonds or notes, an exchange traded futures contract, or the cash value
of an index.
(7) "Pools" means the
investment pools that are managed by the Office of Financial Management, under
the guidance of the commission.
Section 2. The commission shall:
(1) Not invest state funds in an institution
or instrument that it deems unsafe and a threat to the security of state
funds;
(2) Maintain adequate
liquidity to meet the cash needs of the state; and
(3) Within the limits established by this
administrative regulation, invest in securities that maximize yield or return
to the Commonwealth.
Section
3.
(1) The commission may:
(a) Engage in securities lending.
(b) Allow inter-pool transfers to meet short
term cash needs.
(2)
Within the limited term pool, if borrowing exceeds thirty-three (33) percent of
the value of the pool's total assets resulting from a change in values of net
pool assets at any time, the pool shall then reduce borrowing to no more than
thirty-three (33) percent within three (3) business days and shall continue to
use prudence in bringing the percentage of borrowing back into
conformity.
Section 4.
Interest earned on the cash balances shall be calculated daily on an accrual
basis.
Section 5. Investment
Criteria.
(1) The criteria to determine the
amount of funds per investment instrument shall be the:
(a) Liquidity needs of the state in aggregate
as budgeted;
(b) Rates available
per instrument; and
(c) Safety of
principal and interest.
(2) An investment instrument shall qualify if
it is specified by:
(a)
KRS
42.500;
(b) This administrative regulation;
(c)
200 KAR
14:081; or
(d)
200 KAR
14:091.
Section 6. Investment Securities. The
commission shall invest only in the following security types:
(1) U.S. Treasury, agency, and government
sponsored entity agency securities with a maturity of less than seven (7)
years, or an embedded put of less than three (3) years.
(2) Mortgage pass-through securities issued
by U.S. government agencies or by government sponsored entities, including
Government National Mortgage Association, Fannie Mae, Freddie Mac, and Small
Business Administration with an average life of less than four (4) years at the
time of purchase, using Bloomberg consensus prepayment projections, if
available, or other reasonable prepayment assumptions if there is no consensus.
The commission may hold pass-throughs purchased under this subsection which
have an average life of less than six (6) years, using Bloomberg consensus
prepayment projections, if available, or other reasonable prepayment
assumptions if there is no consensus.
(3) Real estate mortgage investment conduit
obligations, as defined by the Internal Revenue Code, 26 U.S.C. 1-9834, also
known as collateralized mortgage obligations, or CMOs, rated in the highest
category by an NRSRO with an average life of less than four (4) years at the
time of purchase, using Bloomberg consensus prepayment projections, if
available, or other reasonable prepayment assumptions if there is no consensus.
The commission may hold CMOs purchased under this subsection which have an
average life of less than six (6) years, using Bloomberg consensus prepayment
projections, if available, or other reasonable prepayment assumptions if there
is no consensus.
(4) Asset-backed
securities (ABS) rated in the highest category by an NRSRO with an average life
of four (4) years or less.
(5) U.S.
dollar denominated corporate and Yankee securities issued by foreign and
domestic issuers, rated in one (1) of the three (3) highest categories by an
NRSRO, with a maturity not longer than five (5) years, or an embedded put of
less than three (3) years.
(6) U.S.
dollar denominated sovereign debt rated in one (1) of the three (3) highest
categories by an NRSRO, with a maturity not to exceed five (5) years.
(7)
(a)
Money market securities, including:
1.
Commercial paper;
2. Certificates
of deposit; and
3. Bankers'
acceptances issued by banks having the highest short-term rating by an
NRSRO.
(b) Maturities
shall be limited to 180 days for bankers' acceptances and 270 days for all
other money market securities.
(8) Repurchase agreements collateralized at a
minimum of 102 percent (marked to market daily) with treasuries, agencies, and
agency mortgage backed obligations with a maximum maturity of one (1) year and
a maximum of three (3) years for the Kentucky Bank Repurchase Program
participants.
(9) Municipal
obligations rated in one (1) of the three (3) highest categories by an NRSRO,
with a maturity not to exceed five (5) years. The maturity and credit
restriction shall be waived for obligations issued by the Commonwealth of
Kentucky or any entity within the Commonwealth of Kentucky.
(10) Mutual funds in which the underlying
holdings of the fund are in securities in which the pools could invest
directly.
(11) In meeting credit
standards listed previously in this section, the lowest rating issued by an
NRSRO shall be used to determine compliance. The commission, at a minimum on an
annual basis, shall determine which NRSRO's shall be used.
Section 7. Limits on Investment Securities.
(1) U.S. agency mortgage backed securities
and collateralized mortgage obligations shall not exceed twenty-five (25)
percent of total pool assets in aggregate.
(2) Asset-backed securities shall not exceed
twenty (20) percent of total pool assets.
(3) U.S. dollar denominated corporate and
Yankee and sovereign securities issued by foreign and domestic issuers shall
not exceed thirty-five (35) percent of an individual pool or $25,000,000 per
issuer within an individual pool, inclusive of commercial paper, bankers'
acceptances, and certificates of deposit unless:
(a) These securities are guaranteed by the
full faith and credit of the United States government; or
(b) These securities were purchased between
February 19, 2009 and March 31, 2009.
(4) Municipal securities shall not exceed
$25,000,000 per issuer.
(5) U.S.
dollar denominated sovereign debt shall not exceed five (5) percent of any
individual portfolio and $25,000,000 per issuer.
(6) The investment amount for a single mutual
fund shall not exceed ten (10) percent of total pool assets.
(7) The credit and diversification
requirements documented in this administrative regulation shall apply at the
time of purchase based on book value for the Limited Term Pool and market value
for other pools.
(8) The limits set
forth in this section may be waived by unanimous vote of the commission if a
situation arises which could damage the state's credit.
Section 8. Risk Management. The pools may
utilize interest rate swaps, over-the-counter and exchange traded U.S. Treasury
contracts and options to manage the portfolio's exposure to interest rate risk.
These instruments shall only be used if the results are demonstratively
superior to cash market transactions.
Section
9. Pools and Operating Procedures.
(1)
(a) The
limited-term pool shall not purchase a security with a final maturity exceeding
365 days.
(b) The weighted average
maturity, adjusted for interest rate resets and demand features, shall not
exceed sixty (60) days; and the weighted average life, adjusted for demand
features only but not interest rate resets, shall not exceed 120
days.
(c) At a minimum:
1. Ten (10) percent of the pool shall be
invested in cash, direct obligations of the U.S. government or securities that
mature or are subject to a demand feature payable within one (1) business day;
and
2. Thirty (30) percent of the
pool shall be invested in cash, direct obligations of the U.S. government,
government agency discount note maturing in sixty (60) days or less or
securities that mature or are subject to a demand feature payable within five
(5) business days.
(d)
All securities purchased for the pool shall be rated by an NRSRO.
(e) No more than five (5) percent of the pool
shall be invested in illiquid securities.
(f) No more than three (3) percent of the
pool shall be invested in second tier securities and no more than five-one
hundredths (.05) percent of the pool shall be invested in a second tier
security issuer.
(g) The net asset
value of pool shares shall be computed using the amortized cost method of
valuing the pool's investments.
(h)
The shadow net asset value using the market value of pool holdings shall be
computed no less than monthly and made public within sixty (60) days of the
calculation date.
(i) Stress
testing of the pool based on redemption and changes in market value shall be
performed no less than quarterly and reported to the commission.
(j) Monthly portfolio listings shall be
published to a public Web site and shall remain available for no less than six
(6) months.
(2)
(a) Except as provided by paragraph (b) of
this subsection, state funds held in agency or university accounts, the
interest of which accrues to the agency or university, shall be placed in the
intermediate pool.
(b) These funds
may be placed in the limited-term pool, if the commission determines that the
liquidity needs of an agency require shorter term investment.
(c) The duration of the intermediate pool
shall not exceed three (3) years.
Section 10. Approved Broker-Dealers.
(1) A broker-dealer who was approved by the
commission prior to the effective date of this administrative regulation shall
be considered an approved broker-dealer.
(2) Except as provided by subsection (1) of
this section, a broker-dealer shall be approved by the commission if the
broker-dealer has met the requirements established by subsection (3), (4), or
(5) of this section, as applicable.
(3) An approved broker-dealer shall be a
broker dealer who meets one (1) of the following qualifications:
(a) Is a primary dealer of the Federal
Reserve;
(b) Maintains an office in
Kentucky, and has either $25,000,000 in excess net capital or has trades that
are guaranteed by a primary dealer of the Federal Reserve;
(c) Has a minimum of $100,000,000 in excess
net capital; or
(d) Is an
alternative trading system as defined by the Securities and Exchange
Commission.
(4) An
approved broker-dealer for hedge vehicles shall:
(a) Have at least $100,000,000 in excess net
capital;
(b) Have market value
transactions limited to his excess net capital; and
(c) Have executed the:
1. International Swap and Derivatives
Association Agreement prior to the implementation of a swap; and
2. Commonwealth of Kentucky Master Agreement,
Over-the-counter Option Transactions - U.S. Treasury Securities, prior to the
implementation of an over the counter option transaction.
(5)
(a) Within 180 days of the end of each
broker-dealer's fiscal year, a broker-dealer shall submit a copy of the
broker-dealer's audited financial statements for that fiscal year.
(b) A broker-dealer who wishes to be approved
by the commission as an approved broker-dealer shall submit a copy of the
broker-dealer's current audited financial statements.
(6) Notwithstanding the broker-dealer
requirements described in this section, the state may purchase securities
directly from the issuer.
Section
11. Incorporation by Reference.
(1) The following material is incorporated by
reference:
(a) "Securities Industry and
Financial Markets Association Master Repurchase Agreement", 12/08;
(b) "Custodial Undertaking in Connection with
Master Repurchase Agreement, Bank of New York", 12/08;
(c) "Custodial Undertaking in Connection with
Master Repurchase Agreement, Chase Manhattan", 12/08;
(d) "International Swap and Derivatives
Association Agreement", 12/02; and
(e) "Commonwealth of Kentucky Master
Agreement, Over-the-counter Option Transactions - U.S. Treasury Securities",
12/97.
(2) This material
may be inspected, copied, or obtained, subject to applicable copyright law, at
State Investment Commission, Suite 76, Capitol Annex, Frankfort, Kentucky
40601, Monday through Friday, 8 a.m. to 4:30 p.m.
STATUTORY AUTHORITY:
KRS
42.500(10),
42.520(2),
42.525