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<br />-32- <br />NOTE 2 – DEPOSITS AND INVESTMENTS (CONTINUED) <br /> <br />C. Investments <br /> <br />Investments are subject to various risks, the following of which are considered the most significant: <br /> <br />Custodial Credit Risk – For investments, this is the risk that in the event of a failure of the <br />counterparty to an investment transaction (typically a broker-dealer), the City would not be able to <br />recover the value of its investments or collateral securities that are in the possession of an outside <br />party. The City’s investment policies do not further address this risk, but typically limits its exposure <br />by purchasing insured or registered investments, or by the control of who holds the securities. <br /> <br />Credit Risk – This is the risk that an issuer or other counterparty to an investment will not fulfill its <br />obligations. Minnesota Statutes limit the City’s investments to direct obligations or obligations <br />guaranteed by the United States or its agencies; shares of investment companies registered under the <br />Federal Investment Company Act of 1940 that receive the highest credit rating, are rated in one of the <br />two highest rating categories by a statistical rating agency, and all of the investments have a final <br />maturity of 13 months or less; general obligations rated “A” or better; revenue obligations rated “AA” <br />or better; general obligations of the Minnesota Housing Finance Agency rated “A” or better; bankers’ <br />acceptances of United States banks eligible for purchase by the Federal Reserve System; commercial <br />paper issued by United States corporations or their Canadian subsidiaries, rated of the highest quality <br />category by at least two nationally recognized rating agencies, and maturing in 270 days or le ss; <br />Guaranteed Investment Contracts guaranteed by a United States commercial bank, domestic branch of <br />a foreign bank, or a United States insurance company, and with a credit quality in one of the top <br />two highest categories; repurchase or reverse purchase agreements and securities lending agreements <br />with financial institutions qualified as a “depository” by the government entity, with banks that are <br />members of the Federal Reserve System with capitalization exceeding $10,000,000; that are a <br />primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York; or <br />certain Minnesota securities broker-dealers. The City’s investment policies do not further address <br />credit risk. <br /> <br />Interest Rate Risk – This is the risk of potential variability in the fair value of fixed rate investments <br />resulting from changes in interest rates (the longer the period for which an interest rate is fixed, the <br />greater the risk). The City’s investment policies do not mandate a limit on the duration of <br />investments. <br /> <br />Concentration Risk – This is the risk associated with investing a significant portion of the City’s <br />investment (considered 5 percent or more) in the securities of a single issuer, excluding United States <br />guaranteed investments (such as treasuries), investment pools, and mutual funds. The City’s <br />investment policies state that no more than 5 percent of the overall portfolio may be invested in the <br />securities of a single issuer, except for the securities of the United States government, or a maximum <br />of 25 percent with any individual counterparty in an external investment pool.