Code of Massachusetts Regulations
976 CMR - FINANCE ADVISORY BOARD
Title 976 CMR 2.00 - State Finance and Governance Board Regulations
Section 2.05 - Review of Financial Transactions Involving Derivative Financial Products

Universal Citation: 976 MA Code of Regs 976.2

Current through Register 1531, September 27, 2024

In furtherance of its statutory authority and mandate, the Board hereby establishes 976 CMR 2.05 to ensure that financial transactions involving a Derivative Financial Product are properly analyzed and managed to ensure consistency with State Entity Authorized to Issue Debt objectives, suitability of the transaction, and avoidance of unintended consequences.

In the event that a State Entity Authorized to Issue Debt is entering into a new financial transaction that involves a Derivative Financial Product, the State Entity Authorized to Issue Debt shall submit the following materials to the Board:

(1) If not previously submitted, a copy of the State Entity Authorized to Issue Debt's derivative policy* with a certified copy of the vote of the governing board of the State Entity Authorized to Issue Debt or certificate of the authorized official of the State Entity Authorized to Issue Debt if such State Entity Authorized to Issue Debt does not have a governing board; and

(2) A written analysis of the proposed Derivative Financial Product transaction by an independent financial advisor with relevant expertise, together with the advisor's recommendation as to whether or not the State Entity Authorized to Issue Debt should enter into the proposed transaction. Such analysis should include but not be limited to:

(a) a detailed description of the Derivative Financial Product;

(b) a description of risks, strategies for mitigating any such risks, and any benefits;

(c) scenario analyses or stress tests demonstrating impact on the State Entity Authorized to Issue Debt under extreme financial market events or conditions as a result of entering into the subject Derivative Financial Product; and

(d) in the case of a restructuring of an existing Derivative Financial Product, a comparison of the expected benefits resulting from the restructuring with the potential risks resulting from the restructuring.

(3) A certified copy of the minutes of the meeting of the governing board of the State Entity Authorized to Issue Debt (such meeting to be held on a date not greater than two years prior to the date of Board review), or a certificate of the authorized official of the State Entity Authorized to Issue Debt, demonstrating or confirming that:

(a) the written analysis and recommendation of the independent financial advisor was presented to the board, or to the official and transmitted to the board;

(b) that the structure of the Derivative Financial Product is consistent with the derivative policy adopted by the board or approved by the authorized official;

(c) that the benefits of the Derivative Financial Product outweigh the risks of the use of a Derivative Financial Product; and

(d) that the governing board or the official approved the proposed transaction.

* The following issues should be considered in connection with such a policy:

1. How derivative products fit within the overall debt management program;

2. Expected outcomes or goals of entering into a derivative product (i.e. synthetically fix a variable rate at lower rate than otherwise available in the market);

3. Security and sources of payments for ongoing costs associated with the derivative product and for termination costs of the derivative product;

4. A list of the types of derivative products that may be used and a list of the types of derivative products that are prohibited;

5. The conditions under which these types of products can be utilized (i.e. bidding procedures, minimum benefit thresholds, terms of master agreements, etc.);

6. The maximum amount of derivatives contracts, or a means of determining such amount;

7. Guidelines and criteria for selecting counterparties;

8. Methods for evaluating, measuring and managing derivative risk;

9. Methods and process for procuring derivative products;

10. Post issuance monitoring, reporting and ongoing risk mitigation procedures, including periodic valuation.

The Board's review pursuant to 976 CMR 2.00 shall consist of reviewing the items required to be submitted to the Board described in 976 CMR 2.05(3)(d)1. through 10. The Board shall either conclude that the items required to be submitted have in fact been submitted consistent with the purpose and intent of 976 CMR 2.00, or that said items have not been submitted in a manner consistent with the purpose and intent of 976 CMR 2.00. Any conclusion shall be established by vote of the Board, and confirmed in writing (which may be by e-mail) to the State Entity Authorized to Issue Debt. Such conclusion shall be valid unless the State Entity Authorized to Issue Debt informs the Board of any material change in any of the submittals pursuant to 976 CMR 2.05 or unless six months have lapsed from the date of Board conclusion.

A State Entity Authorized to Issue Debt which has received a Board conclusion that the items required to be submitted in connection with 976 CMR 2.00 were in fact submitted consistent with the purpose and intent of 976 CMR 2.00 must report to the Board at the Board meeting next following the execution of the Derivative Financial Product transaction. Such report should include, but not be limited to, the results or final terms of the Derivative Financial Product transaction.

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