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York City Municipal Water Finance Authority (“NYW”)
This policy will govern the use by NYW of financial derivative products, such as swaps, swaptions, caps, floors and collars (“derivatives”). The failure by the NYW to comply with any provision of this policy will not invalidate or impair any derivative agreement.
The Conditions Under Which Derivatives May Be Entered Into
Derivatives may be used for the following purposes only:
1. To achieve significant savings as compared to a product available
in the bond market. Significant savings shall be calculated after adjusting
for (a) applicable fees, including takedown, remarketing fees, credit
enhancement and legal fees, and (b) options that may be available. Examples
may include synthetic fixed rate debt and synthetic variable rate debt.
Alternatively, significant savings are deemed to occur if the use of derivatives
helps to achieve diversification of a particular bond offering.
NYW must receive an opinion from a nationally recognized law firm that the agreement relating to the derivative is a legal, valid and binding obligation of NYW and entering into the transaction complies with applicable law. In addition, NYW must receive an opinion acceptable to NYW as to the counterparty from a counsel acceptable to NYW.
Derivatives shall not be used for purposes outside of prudent risks that are appropriate for NYW to take.
Methods of Soliciting and Procuring Derivatives
In general, NYW should procure derivatives by competitive bidding. NYW shall determine which parties and the number of parties it will allow to participate in a competitive transaction. NYW may allow one or more bidders in addition to the winning bidder to participate in the transaction if NYW deems such participation to be in its best interests.
Notwithstanding the above, NYW may procure derivatives by negotiated methods in the following situations:
Regardless of the method of procurement, NYW shall obtain an independent finding that the terms and conditions of any derivative entered into reflect a fair market value of such derivative as of the date of its execution.
Form and Content of Derivatives
To the extent possible, the derivatives entered into by NYW shall contain the terms and conditions set forth in the International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including any schedules and confirmation. The schedule should be modified to reflect specific legal requirements and business terms desired by NYW. If possible, NYW should attempt to negotiate the master agreement and schedule with qualified counterparties to facilitate the use of derivatives in situations in which their use is desirable.
NYW shall consider including provisions that permit NYW to assign its rights and obligations under the derivative agreement and to optionally terminate the agreement at its market value at any time.
Events of Default
Events of default of a counterparty shall include the following:
1. Failure to make payments when due
An event of default by the counterparty shall lead to termination of
the agreement with the termination payment being calculated on the side
of the bid-offered spread which is most beneficial to NYW.
NYW shall endeavor to diversify its exposure to counterparties. To that end, before entering into a transaction, it should determine its exposure to the relevant counterparty or counterparties and determine how the proposed transaction would affect the exposure. The exposure should not be measured solely in terms of notional amount, but rather how changes in interest rates would affect NYW's exposure ("Value at Risk"). The Value at Risk should be based on all outstanding derivative transactions by NYW. NYW may also elect to take into account the exposure of the City and any related entities to a particular counterparty.
Counterparty Credit Standards
Many derivative products create for NYW a continuing exposure to the creditworthiness of financial institutions that serve as NYW's counterparties on derivative transactions. To protect its interests in the event of a credit problem, NYW will take a three-tiered approach:
In evaluating a particular transaction involving the use of derivatives, NYW shall review long-term implications associated with entering into derivatives, including costs of borrowing, historical interest rate trends, variable rate capacity, credit enhancement capacity, opportunities to refund related debt obligations and other similar considerations.
Methods to be Used to Reflect Such Contracts in NYW's Financial Statements
NYW shall reflect the use of derivatives on its financial statements in accordance with generally accepted accounting principles.
Monitoring and Reporting
NYW shall issue a report to the NYW Board of Directors at least once per year and as requested by the NYW Board of Directors. Such report shall include the following: