Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
56.863(9)
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
56.863(9) requires that the
Kentucky Asset/Liability Commission promulgate administrative regulations that
limit the net exposure of the Commonwealth as a result of the commission
entering into financial agreements. This administrative regulation establishes
the limits under which the commission may enter into financial
agreements.
Section 1. Definitions.
For the purpose of this administrative regulation:
(1) "Hedge" means a position in a financial
agreement taken to minimize or eliminate the risk associated with an existing
instrument or portfolio of instruments;
(2) "Net exposure" means the difference
between the sum of the notional amount of financial agreements based on
interest-sensitive assets or interest-sensitive liabilities under which
variable payments are owed, less the sum of the notional amount of financial
agreements based on interest-sensitive assets or interest-sensitive liabilities
under which fixed payments are owed, respectively;
(3) "Notional amount" means the nominal
amount on which a financial agreement is based;
(4) "Obligations" means notes, leases, bonds,
or other financial liabilities;
(5)
"Par amount" means the face or nominal value of a security.
Section 2. Guidelines of the
Commission in the Use of Financial Agreements. The commission shall enter into
financial agreements pursuant to the following guidelines:
(1) The commission shall utilize financial
agreements in a prudent and nonspeculative manner;
(2) The commission shall only enter into
financial agreements with parties which are rated in one (1) of the three (3)
highest rating categories by one (1) of the following rating agencies:
(a) Fitch Investors Service, L.P.;
(b) Moody's Investors Service; or
(c) Standard & Poor's Ratings
Group;
(3) Financial
agreements resulting in variable rate obligations for the Commonwealth shall be
entered into only if the aggregate of all variable rate obligations under
financial agreements does not exceed a net exposure of more than ten (10)
percent of state obligations outstanding which are supported by appropriations
by the General Assembly at the time the agreement is executed. Financial
agreements utilized related to the issuance of tax and revenue anticipation
notes shall be excluded from this limitation;
(4) Financial agreements utilized for the
purpose of refunding or aiding in the refunding of obligations of the
Commonwealth shall be limited to a notional amount not to exceed the par amount
and stated final maturity of the refunding obligations;
(5) Financial agreements utilized as part of
a debt service reserve fund investment strategy shall be limited to a notional
amount not to exceed the maximum required debt service reserve fund amount
required under the resolution, trust indenture, or agreement establishing the
debt service reserve fund;
(6)
Financial agreements utilized for the purpose of maximizing investment income
and alleviating mismatches between an advance refunding escrow and debt service
payments due on an obligation shall be limited to a notional amount not to
exceed the par amount of the securities held in the escrow plus interest;
and
(7) No more than ten (10)
percent of the Commonwealth's investment portfolio shall be subject to
financial agreements utilized for the purpose of managing the net interest
margin. Financial agreements based on the Commonwealth's interest-sensitive
assets shall be coordinated with the State Investment Commission.
STATUTORY AUTHORITY:
KRS 56.863(2),
(9)