200 KAR 23:010.

Guidelines for use of financial agreements.

 

      RELATES TO: KRS

56.863(9)

      STATUTORY

AUTHORITY: KRS 56.863(2), (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. (24 Ky.R.

790; Am. 1055; eff. 10-22-97.)