RELATES TO: KRS 41.610, 42.500(9)-(14), 42.520, 42.525
STATUTORY AUTHORITY: KRS 42.500(10), 42.520(2), 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:
(a) A commercial bank, or savings and loan association:
1. Chartered to do business in Kentucky by the Commonwealth of Kentucky, or by an agency of the United States government; and
2. That maintains an office in Kentucky; or
(b) A broker-dealer approved pursuant to the provisions of Section 10 of 200 KAR 14:011.
(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. (1) An eligible financial institution shall:
(a) Submit a copy of its quarterly financial reports as furnished to Department of Financial Institutions, including accompanying schedules, to the commission within thirty (30) days from the end of each quarter; and
(b) Complete and sign the "Public Securities Association Master Repurchase Agreement, incorporated by reference in 200 KAR 14:011".
(2) An approved broker-dealer shall:
(a) Submit a copy of its annual audited financial statements and copies of quarterly financial statements, as published, to the commission; and
(b) Complete and sign the "Public Securities 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.
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 collateralized 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. (19 Ky.R. 538; Am. 1066; eff. 10-22-92; 24 Ky.R. 1355; 1647; eff. 2-10-98; 26 Ky.R. 420; 994; eff. 10-28-99; 31 Ky.R. 1880; 32 Ky.R. 49; eff. 8-5-05; 39 Ky.R. 817; 1110; eff. 1-4-13.)