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06-20-07 FPAC Minutes
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06-20-07 FPAC Minutes
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06-20-07 Minutes
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6/20/2007
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• <br /> • <br /> Government Finance Officers Association <br /> Recommended Practice <br /> Use of Commercial Paper(2001 and 2007) (CASH) <br /> Background. Commercial paper is a short-term,unsecured promissory note issued by corporations for <br /> working capital, for general cash flow,and for financing receivables. Commercial paper has maturities <br /> ranging anywhere from 1 to 270 days. By federal law,commercial paper issues are exempt from <br /> registration with the U.S. Securities and Exchange Commission. Nationally recognized statistical rating <br /> organizations(NRSROs)routinely rate commercial paper and regularly review the strength of the credit <br /> quality. Commercial paper may be sold directly to investors by the issuing company(direct issued)or <br /> by the underwriting brokerage firm (dealer placed). Commercial paper is used by many government <br /> entities as a short-term investment for funds not immediately required,and to provide diversification and <br /> competitive rates of return. Typically, governments purchase commercial paper with a buy and hold <br /> until maturity strategy;however,there is a secondary market that can be utilized for sales prior to <br /> maturity. State statutes vary as to the extent or ability of governments to utilize commercial paper. <br /> Recommendation. The Government Finance Officers Association(GFOA)recommends that if <br /> commercial paper is used as part of an investment program of state and local governments, government <br /> • investors are highly encouraged to develop policies and procedures to appropriately manage the risk of <br /> such investments. <br /> To protect public funds invested in commercial paper, government investors should consider practices <br /> such as: <br /> • diversification by industry sector or type <br /> • limitation on percentage of portfolio comprised of commercial paper <br /> • limitation on percentage of commercial paper issued by any one issuer,industry, or type <br /> • limitation of investments to shorter maturities reflecting the most active part of the commercial <br /> paper market and providing the least opportunity for credit quality changes <br /> • recognizing different types of commercial paper, such as corporate promissory notes,asset- <br /> backed paper, funding paper,or extendible paper(also called liquidity notes or structured notes) <br /> and determining the appropriateness of each for the government's portfolio <br /> • limitation to first tier short-term credit ratings by two NRSROs(for example,A-1,P-1,F-1 or <br /> better) <br /> • evaluation of underlying credit enhancements such as bank lines of credit or insurance in <br /> addition to the dual credit ratings <br /> • maintenance of information on each commercial paper issue in the portfolio <br /> • monitoring of ratings and rating outlook analyses <br /> • <br />
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