Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS 41.610,
42.500(9)-(14),
42.520, 42.525
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
general standards which shall apply to the employment of repurchase agreements
as investment vehicles with eligible financial institutions.
Section 1. Definitions.
(1) "Commission" means the State Investment
Commission.
(2) "Eligible financial
institution" means an entity approved for repurchase agreements by the
commission.
(3) "Office" means the
Office of Financial Management.
(4)
"Repurchase agreement" means an actual, conditional purchase or sale of
securities of the United States Treasury, an agency, instrumentality, or
corporation of the United States, or another security authorized for investment
pursuant to
KRS
42.500(9)(a) or (b), with an
agreement to resell or repurchase the securities to their original owner on a
specific date in the future.
Section
2. Minimum Interest Rates. Except as provided by
KRS 41.610, the
commission shall not invest public funds in a repurchase agreement with a yield
less than could be received on a directly purchased United States Treasury
security of comparable maturity.
Section
3. Reporting Requirements for Eligible Investment Institutions.
The commission shall inform eligible financial institutions of the reporting
requirements for the investment of state funds in eligible financial
institutions established by this section. An eligible financial institution
shall:
(1) Submit a copy of its quarterly
financial reports including accompanying schedules, to the commission within
thirty (30) days from the end of each quarter; and
(2) Complete and sign the Securities Industry
and Financial Markets Association Master Repurchase Agreement, incorporated by
reference in
200 KAR
14:011.
Section 4. Eligible Securities. Investment
securities authorized for investment pursuant to
KRS
42.500(9)(a) and (b) shall
be considered eligible securities for repurchase agreements.
Section 5. Sufficiency of Securities
Purchased.
(1) The securities purchased shall
have a market value, including accrued interest, of not less than 102 percent
of the face value of the repurchase agreement.
(2) The state's custodian banking contract
shall require the custodial bank to review the sufficiency of collateral on all
repurchase agreements, except those subject to a triparty agreement. The review
shall occur at least every seven (7) calendar days with periodic reviews made
by the office.
(3) The commission
shall demand additional securities to be delivered immediately, if market
conditions cause the value of the securities purchased to drop below 102
percent of the face value of the repurchase agreement.
Section 6. Status of Parties.
(1) The commission and the eligible financial
institutions authorized to enter into repurchase agreements:
(a) Shall be considered principals in
repurchase agreements; and
(b)
Shall not be considered agents for third parties.
(2) Contractual obligations shall apply to
and be binding on the commission and the specific eligible financial
institution with which the repurchase agreement is initially negotiated and
settled.
(3) The commission shall
approve the eligible financial institutions quarterly following fundamental
analysis of the most recent financial releases.
(4) The Office of Financial Management shall
monitor credit worthiness of eligible financial institutions daily based on
financial market indicators.
Section
7. Default.
(1)
(a) If an eligible financial institution with
which the commission has entered into a repurchase agreement defaults, or is
determined by the commission to be in danger of default, the commission shall
set off claims and liquidate property held in respect to the repurchase
agreement against obligations owing to the eligible financial institution under
other repurchase agreements.
(b)
Payments, deliveries, and other transfers made under a repurchase agreement
shall be deemed to have been made in consideration of payments, deliveries, and
other transfers made under any other repurchase agreement by the eligible
financial institution.
(c) The
obligation to make payments, deliveries and other transfers under a repurchase
agreement may be applied against the obligation to make payments, deliveries
and other transfers under any other repurchase agreements of the eligible
financial institution and netted.
(2)
(a)
From the proceeds of liquidated property, the commission shall pay itself the
full principal and accrued interest due as of the date of
liquidation.
(b) Remaining cash
balances shall be forwarded to the financial institution with which the
repurchase agreement was originally executed.
Section 8. Kentucky Bank Repurchase Program.
(1) Repurchase agreements with commercial
banks and savings and loan associations chartered by the Commonwealth of
Kentucky or by the U.S. government with offices located in Kentucky before
being placed shall meet the following criteria:
(a) A loan to deposit ratio equal to or
greater than seventy (70) percent;
(b) A nonperforming loan to capital ratio of
equal to or less than twenty-five (25) percent;
(c) A capital to assets ratio equal to or
greater than eight (8) percent or regulatory requirements; and
(d) A return on assets ratio greater than
five-tenths (0.5) percent.
(2) Repurchase agreements with maturities
equal to or greater than 365 days with commercial banks and savings and loan
associations chartered by the Commonwealth of Kentucky or by the U.S.
government with offices located in Kentucky shall be limited to $5,000,000 per
institution.
(3) The office shall
review the financial ratios listed quarterly to determine eligibility of
institutions. Existing repurchase agreements with institutions which fail to
meet the minimum criteria for two (2) consecutive quarters shall be subject to
call at par value by the commission. Repurchase agreements shall be placed
according to:
(a) Availability of
funds;
(b) Demand for funds by the
institutions; and
(c) Highest loan
to deposit ratio of eligible institutions.
(4)
(a) A
repurchase agreement with a commercial bank or savings and loan shall not be an
amount in excess of its capital structure or ten (10) percent of the
institution's deposits, whichever is less.
(b) The commission shall not enter into a
Kentucky Bank Repurchase Program repurchase agreement with a commercial bank or
savings and loan association that will cause that institution to exceed in
aggregate a total of $25,000,000 in repurchase agreements.
(5) Yield charged and collateral requirements
for commercial banks and savings and loans.
(a) A commercial bank or savings and loan
submitting U.S. Treasuries and agencies excluding mortgage backed securities
and collateralized mortgage obligations shall be charged the same duration
yield generic repurchase rate as quoted by Bloomberg Financial Markets with 102
percent collateral.
(b) A
commercial bank or savings and loan submitting mortgage-backed securities and
col-lateralized mortgage obligations shall be charged the same duration yield
generic repurchase rate as posted on Bloomberg Financial Markets, plus fifty
(50) basis points with 105 percent collateral.
(6) Payment for and safekeeping of purchases.
(a) Each transaction shall be conducted on a
payment-versus-delivery basis.
(b)
A party shall not allow state funds to be released until delivery of adequate,
negotiable collateral has been verified.
(c) Securities purchased from commercial
banks or savings and loan associations in a repurchase agreement shall be
received, verified, and safe-kept by the state's custodial bank or its
agent.
STATUTORY AUTHORITY:
KRS
42.500(10),
42.520(2),
42.525