FINANCE AND ADMINISTRATION CABINET

Office of the Secretary

(Amendment)

 

††††† 200 KAR 14:081. Repurchase agreement.

 

††††† 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 an entity approved for repurchase agreements by the commission[:

††††† (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:

††††† (1)[(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

††††† (2)[(b)] Complete and sign the Securities Industry and Financial Markets["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.

††††† (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 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.

 

LORI FLANERY, Secretary

††††† APPROVED BY AGENCY: May 15, 2015

††††† FILED WITH LRC: May 15, 2015 at 11 a.m.

††††† PUBLIC HEARING AND PUBLIC COMMENT PERIOD: A public hearing on this administrative regulation shall be held on June 23, 2015 from 10 a.m. to 12 p.m., in Room 381, Capitol Annex Building, Frankfort, Kentucky 40601. Individuals interested in being heard at this hearing shall notify this agency in writing at least five (5) workdays prior to the hearing, of their intent to attend. If no notification of intent to attend the hearing is received by that date, the hearing may be cancelled. This hearing is open to the public. Any person who wishes to be heard will be given an opportunity to comment on the proposed administrative regulation. A transcript of the public hearing will not be made unless a written request for a transcript is made. If you do not wish to be heard at the public hearing, you may submit written comments on the proposed administrative regulation. Written comments shall be accepted until end of day on June 30, 2015. Send written notification of intent to be heard at the public hearing or written comments on the proposed administrative regulation to the contact person.

††††† CONTACT PERSON: Doug Hendrix, Deputy General Counsel, Finance and Administration Cabinet, 392 Capitol Annex, Frankfort, Kentucky 40601, phone (502) 564-6660, fax (502) 564-9875.

 

REGULATORY IMPACT ANALYSIS AND TIERING STATEMENT

†††††

Contact Person: Doug Hendrix

††††† (1) Provide a brief summary of:

††††† (a) What this administrative regulation does: The regulation prescribes the standards applicable to repurchase agreements used in the short-term investment of state funds by the State Investment Commission (SIC).

††††† (b) The necessity of this administrative regulation: KRS 42.525(10) directs the SIC to promulgate regulations regarding the management and investment of the stateís funds.

††††† (c) How this administrative regulation conforms to the content of the authorizing statutes: Sets forth the criteria for the short-term investment of state funds.

††††† (d) How this administrative regulation currently assists or will assist in the effective administration of the statutes: It provides the guidelines the SIC and Finance and Administration Cabinetí Office of Financial Management must follow regarding the management and investment of state funds.

††††† (2) If this is an amendment to an existing administrative regulation, provide a brief summary of:

††††† (a) How the amendment will change this existing administrative regulation: The amendment allows the SIC flexibility to choose entities other than broker-dealers for repurchase agreements to invest state funds for a short-term. These other entities must meet certain credit standards.

††††† (b) The necessity of the amendment to this administrative regulation: The amendment allows SIC flexibility in its investments.

††††† (c) How the amendment conforms to the content of the authorizing statutes: The amendment allows for better investing opportunities while protecting the investments through confirming credit worthiness of vendors.

††††† (d) How the amendment will assist in the effective administration of the statutes: The amendment will allow for diversity of the type of counter-party while increasing credit worthiness reviews.

††††† (3) List the type and number of individuals, businesses, organizations, or state and local governments affected by this administrative regulation: No effect on in-state entities. Small businesses are not affected.

††††† (4) Provide an analysis of how the entities identified in question (3) will be impacted by either the implementation of this administrative regulation, if new, or by the change, if it is an amendment, including:

††††† (a) List the actions that each of the regulated entities identified in question (3) will have to take to comply with this administrative regulation or amendment: No additional actions required.

††††† (b) In complying with this administrative regulation or amendment, how much will it cost each of the entities identified in question (3): No Costs.

††††† (c) As a result of compliance, what benefits will accrue to the entities identified in question (3): No entities identified in question (3).

††††† (5) Provide an estimate of how much it will cost the administrative body to implement this administrative regulation:

††††† (a) Initially: No initial costs.

††††† (b) On a continuing basis: Minimal on-going costs of less than $500 per year.

††††† (6) What is the source of the funding to be used for the implementation and enforcement of this administrative regulation: The minimal costs will be greatly offset by increased investment earnings potentially in excess of $100,000 per year.

††††† (7) Provide an assessment of whether an increase in fees or funding will be necessary to implement this administrative regulation, if new, or by the change if it is an amendment: No increase in fees or funding required.

††††† (8) State whether or not this administrative regulation established any fees or directly or indirectly increased any fees: No additional fees directly or indirectly.

††††† (9) TIERING: Is tiering applied? Tiering is not applied; the amended regulation relates only to the investment of funds by the SIC, which marginally affects the Finance and Administration Cabinetís Office of Financial Management, which is staff to the SIC. The amended regulation has no impact on other government agencies, local governments or small businesses.

 

FISCAL NOTE ON STATE OR LOCAL GOVERNMENT

 

††††† 1. What units, parts or divisions of state or local government (including cities, counties, fire departments, or school districts) will be impacted by this administrative regulation? This will impact the short term investment transactions executed by the Office of Financial Management in the Finance and Administration Cabinet. These transactions are executed under the supervision of the State Investment Commission. The amended regulation will have no fiscal impact on local governments. The only state agency it will marginally impact is the Office of Financial Management, which is staff for the SIC.

††††† 2. Identify each state or federal statute or federal regulation that requires or authorizes the action taken by the administrative regulation. KRS 42.500 Section (11) authorizes the State Investment Commission to execute these transactions.

††††† 3. Estimate the effect of this administrative regulation on the expenditures and revenues of a state or local government agency (including cities, counties, fire departments, or school districts) for the first full year the administrative regulation is to be in effect.

††††† (a) How much revenue will this administrative regulation generate for the state or local government (including cities, counties, fire departments, or school districts) for the first year? The increased investment income during the first year could exceed $100,000.

††††† (b) How much revenue will this administrative regulation generate for the state or local government (including cities, counties, fire departments, or school districts) for subsequent years? The increased investment income should exceed $100,000 and could approach $200,000 in subsequent years.

††††† (c) How much will it cost to administer this program for the first year? There are no up-front costs to implement this program.

††††† (d) How much will it cost to administer this program for subsequent years? On-going administrative costs will be less than $250 per year.

††††† Note: If specific dollar estimates cannot be determined, provide a brief narrative to explain the fiscal impact of the administrative regulation.

††††† Revenues (+/-):

††††† Expenditures (+/-):

††††† Other Explanation: