IV. Safekeeping and Custody
A. Authorized Financial Dealers and Institutions: All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply, as appropriate:
(1) Audited financial statements;
(2) Licensing Representation form provided by OST; and
(3) Understanding and acknowledgement of OITP Portfolio Rules located on the Oregon State Treasury’s website.
B. Internal Controls: Fixed Income Investment Officer(s) and designated Fixed Income Investment staff should jointly collaborate to establish and maintain an adequate internal control structure designed to reasonably protect the assets of the OITP from loss, theft or misuse.
C. Delivery vs. Payment: All trades where applicable will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in an eligible financial institution prior to the release of funds.
D. Safekeeping: Securities will be held by a third-party custodian as evidenced by safekeeping receipts.
V. Investment Guidelines
1. Eligible Investments
Investments shall be limited to the following:
(1) The Oregon Short Term Fund (the “OSTF”);
(2) Obligations issued or guaranteed by the United States (U.S.) Treasury or by U.S. federal agencies and instrumentalities, including inflation-indexed obligations;
(3) Non-U.S. Government Securities and their Instrumentalities;
1.Non-U.S. government securities and Instrumentalities must have minimum long-term ratings of AA-, Aa3 or better at the time of purchase and must be rated by at least two Nationally Recognized Statistical Rating Organizations (NRSRO).
(4) Certificates of deposit;
(5) Bankers acceptances that are eligible for discount at a U.S. Federal Reserve Bank;
(6) Corporate debt obligations (e.g., commercial paper, term debt, etc.);
(7) Taxable and non-taxable municipal debt securities issued by U.S. states or local governments and their agencies, authorities and sponsored enterprises;
(8) U.S. Agency Mortgage-backed Securities (MBS) which include both pass-through securities and Collateralized Mortgage Obligations (CMO). The weighted average life at purchase shall be 5 years or less;
(9) Commercial Mortgage-backed Securities (CMBS) which must be rated triple-A at the time of purchase and have a weighted average life of 5 years or less;
(10) Asset-backed securities (ABS) which must be rated triple-A at the time of purchase and have a weighted average life of 5 years or less;
(11) Repurchase Agreements;
i. Maximum maturity will be 180 days.
ii. Counterparties must have a minimum Standard & Poor’s or Moody’s Investor Services credit rating of “AA” or “Aa2” for maturities one year or longer or “A-1” or “P-1” for maturities less than one year.
iii. Repurchase Agreements must equal no more than 5% of liabilities of the counterparty.
iv. No more than 10% of OITP assets shall be placed with the same counterparty for repurchases.
v. Counterparty must be either a Primary Dealer as recognized by the Federal Reserve Bank or the Oregon State Treasury’s custodial agent as non-primary dealer counterparty.
vi. The counterparty must have a signed repurchase agreement.
vii. Collateral must be delivered to the Oregon State Treasury's account at its custodian or to an account established for the Oregon State Treasury pursuant to the terms of the specific Repurchase Agreement in the name of the Oregon State Treasury.
viii. Collateral for repurchase agreements may be U.S. Treasury or U.S. Agency Senior Unsubordinated securities only.
ix. The market value of the delivered collateral must be maintained at not less than 102% of the cash invested.
(12) Reverse Repurchase Agreements;
i. Maximum maturity will be 180 days.
ii. Counterparties must have a minimum Standard & Poor’s or Moody’s Investor Services credit rating at least equivalent to “AA” or “Aa2” for maturities one year or longer or “A-1” or “P-1” for maturities less than one year.
iii. Reverse Repurchase Agreements must equal no more than 5% of liabilities of the counterparty.
iv. No more than 10% of OITP assets shall be placed with the same counterparty for reverse repurchase agreements.
v. Counterparty must be a Primary Dealer as recognized by the Federal Reserve Bank.
vi. The counterparty must have a signed reverse repurchase agreement.
vii. Acceptable reinvestment vehicles include securities that may otherwise be purchased outright.
viii. Securities will be reversed on a fully collateralized basis.
ix. Reverse repurchase investments for interest rate arbitrage shall only be done on a matched book basis.
2. Denomination: All securities will be denominated in U.S. dollars only.
3. Form: All securities will be non-convertible to equity.
4. Benchmark: The benchmark for the portfolio is the The BofA Merrill Lynch 1-5 Year U.S. Corporate, Government & Mortgage Index.
5. Risk Parameters
(1) Credit Risk
i. Investment Rating
Unless noted otherwise, securities must be rated investment grade or higher by a NRSRO at the time of purchase. If a security is rated by more than one NRSRO, the lowest rating is used to determine eligibility.
ii. For newly issued securities, and absent assigned ratings, “expected ratings” may be used as a proxy for actual ratings for not more than 30 business days after the anticipated settlement date.
i. Assets in the account shall be sufficiently diversified by type and maturity to allow for anticipated withdrawals.
ii. No more than 3% of the par value of portfolio shall be invested in one security. This restriction does not apply to obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities.
iii. No more than 5% of the par value of portfolio shall be invested in the securities of one issuer. This restriction does not apply to obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities.
iv. No more than 25% of the portfolio shall be invested in the securities of one sector as defined by the Bloomberg Industry Sector Classification. This restriction does not apply to obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities or to MBS, ABS and CMBS.
v. No more than 25% of the portfolio may be invested in MBS.
vi. No more than 25% of the portfolio may be invested in ABS.
vii. No more than 25% of the portfolio may be invested in CMBS.
(3) Interest-rate Risk
i. The portfolio’s modified duration shall not exceed 3.0 years; and
ii. The maximum maturity on any allowed investment is constrained as follows:
1. The maximum stated maturity should not be greater than 10.25 years from the date of settlement unless otherwise noted.
2. For ABS, MBS and CMBS, weighted average life will be used to measure maturity limitations.
i. To insure the flexibility necessary to take defensive action when appropriate, positions should be in issues with sufficient float to facilitate, under most market conditions, prompt sale without severe market effect.
(5) Prohibited Investments:
i. Alt-A, non-agency, sub-prime, limited documentation or other “sub-prime” residential mortgage pools or related securities;
ii. Collateralized Debt Obligations (CDO); and
iii. Collateralized Loan Obligations (CLO).
VI. Securities Lending for Reinvestment of Cash Collateral
A. Acceptable reinvestment vehicles include securities that may otherwise be purchased outright in accordance with the Portfolio Rules for OITP. Within the securities lending program only, cash collateral may also be reinvested as follows:
(1) Maximum of 15% in ABS rated AAA/Aaa, limited to auto loan and credit card issues with an average life of three years or less;
(2) Maximum of 25% in A, or higher, rated corporate floating rate notes with a maximum final maturity of three years, fixed rate corporate notes with a maximum final maturity of two years and up to 65% maximum in corporate indebtedness including commercial paper;
(3) Repurchase agreements collateralized by U.S. Treasury or U.S. Government Agency securities with a maximum original maturity of 30 years. No more than 25% of assets shall be placed with the same counterparty;
(4) All Repurchase Agreements (under the Special Indemnification by State Street clause1) must be fully collateralized as determined by State Street and limited to the following collateral sources: U.S. Treasuries, U.S. Treasury STRIPS, Federal Agency Obligations, Corporate securities rated A- or higher, ABS rated A- or higher, Agency MBS pass throughs rated AAA, Commercial Paper rated A-1/P-1 or higher or any combination thereof. For purposes of calculating average credit quality, current ratings of the indemnifier, State Street Corp, will be used; and
(5) The target weighted average credit quality shall be < 3.8 by Standard & Poor’s or Moody’s Investors Services.
B. Net capital of lending counterparty must be over $100 million.
C. Securities will only be loaned on a fully collateralized basis.
D. Lending counterparty must be a Primary Dealer as recognized by the Federal Reserve Bank, and have a signed master securities lending agreement.
E. The market value of the delivered collateral must be maintained at not less than 102% of the market value of the securities loaned.
F. Reverse Repurchase Agreements are prohibited within the securities lending program.
G. 25% of the reinvestment portfolio must mature within 93 days, but up to 50% of the portfolio may mature in over one year.
1 Special Indemnification of Client By State Street: Notwithstanding any provision herein to the contrary, if the value of the Liquidation Proceeds under Reverse Transactions (entered into between State Street (as agent for the Client) and a counterparty in respect of whom an event of default has occurred under the agreement governing such Reverse Transactions) is less than the cash to be delivered by that counterparty under such Reverse Transactions on the date of close-out of the same, State Street shall indemnify the Client for any such difference. The term “Liquidation Proceeds” means the market value of the securities used to collateralize the Reverse Transaction(s) on the date that State Street takes action with respect to such securities under the applicable agreement. The term “Reverse Transactions” means each transaction entered into between the Client and a counterparty (through the agency of State Street) under the terms of an agreement pursuant to which the counterparty initially transfers securities to the Client and the Client transfers cash to the counterparty. All of such Reverse Transactions will be entered into in connection with the investment of cash Collateral received from Borrowers in connection with Loans hereunder."