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Utah Administrative Code (Current through November 1, 2019) |
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R628. Money, Management Council |
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R628-18. Conditions and Procedures for Use of Interest Rate Contracts |
| R628-18-1. Authority |
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This rule is issued pursuant to Section 51-7-18(2)(b)(viii). |
| R628-18-2. Purpose |
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The purpose of this rule is to establish conditions and procedures for the use by public entities of Contracts (as defined in R628-18-3). This rule does not cover instruments such as futures, options, (other than options to enter into swaps), calls or puts entered into for investment purposes, as they are not legal investments under the Act. This rule provides criteria for the use of Contracts, permitted contract terms and the type of contract form to be used. This rule also provides credit criteria for depository institutions, broker dealers, insurance companies and other entities that are counterparties to Contracts, reporting requirements on Contracts and penalties for violation of this rule. |
| R628-18-3. Definitions |
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For purposes of this rule: (1) Contract(s) means: interest rate exchange or swap contracts, cash flow exchange or swap contracts, any derivatives of these contracts including forward swaps and options to enter into swaps, and interest rate floors, caps and collars that are entered into by a public entity. (2) Counterparty means: any party to a Contract who has obligations or rights thereunder. (3) Governing Board means: the board, town council, city council, etc. of a public entity which would oversee the issuing of debt and the management of that debt. (4) Intermediary Contract means: A Contract that is structured such that any payment owed by any counterparty to any other counterparty is to be made through a person or entity that is not a counterparty to the Contract, where the funds constituting such payment are either, (i) subject to the control of such person or entity; or (ii) subject to execution by the creditors of such person or entity. (5) Intermediary means: a person or entity that is not a counterparty to a given Intermediary Contract through whom any payment is to be made by a counterparty to any other counterparty as contemplated under the immediately preceding subsection (4). (6) Notional Amount means: the dollar amount against which a rate is applied to determine the dollar amount payable or receivable by a counterparty under a Contract. |
| R628-18-4. General Requirements |
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Contracts shall be entered into only under the following conditions: (1) The Governing Board shall first determine that the Contract or arrangement or a program of Contracts: (a) is designed to reduce the amount or duration of payment, rate, spread or similar risk, or (b) is reasonably anticipated to result in a lower cost of borrowing. (2) Contracts are to be used for the control or management of debt or the cost of servicing debt and not for speculation. |
| R628-18-5. Credit Criteria Restriction on Counterparties |
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Public entities may enter into contracts only with the following counterparties: (1) Any in-state depository institution that meets the criteria of a qualified depository as described in Sections 51-7-3(28), 51-7-18.1 and R628-12. (2) Any out-of-state depository institution that meets the criteria of R628-10. (3) Any broker dealer that: (i) is either a primary reporting dealer recognized by the Federal Reserve Bank of New York or meets the criteria of R628-16-6(B)(5) and (6), without regard to whether the broker dealer has applied for certification or been certified as contemplated under R628-16, and (ii) is rated, or whose parent company is rated, in one of the highest three rating categories by at least two Nationally Recognized Statistical Rating Organizations as defined in Subsection 51-7-3(20). (4) Any insurance company whose claims paying ability is rated or that has issued currently outstanding debt that is rated in one of the highest three rating categories by at least two Nationally Recognized Statistical Rating Organizations as defined in Subsection 51-7-3(20). (5) Any entity that is directly or indirectly wholly owned by an entity or entities described in any of the immediately preceding subsections (1) through (4). (6) Any entity that is directly or indirectly wholly owned by a holding company or parent company which directly or indirectly wholly owns any entity described in the immediately preceding subsections (1) through (4). (7) Any entity in the business of entering into Contracts that is rated in one of the highest three rating categories for counterparties, financial programs, or senior debt by at least two Nationally Recognized Statistical Rating Organizations as defined in Section 51-7-3(20), provided that if a public entity enters into a Contract under authority of this Subsection (7), the Contract's final maturity may not exceed eighteen years if the counterparty is not rated in the highest rating category for counterparties, financial programs, or senior debt by at least two Nationally Recognized Statistical Rating Organizations as defined in Section 51-7-3(20), and may not exceed nine years if the counterparty is not rated in one of the two highest rating categories for counterparties, financial programs, or senior debt by at least two Nationally Recognized Statistical Rating Organizations as defined in Section 51-7-3(20). (8) Any entity whose obligations under the Contract with the public entity are fully and unconditionally guaranteed by an entity that is rated in one of the highest three rating categories for counterparties, financial programs, or senior debt by at least two Nationally Recognized Statistical Rating Organizations as defined in Subsection 51-7-3(20), provided that if a public entity enters into a Contract under authority of this Subsection (8), the Contract's final maturity may not exceed eighteen years if the counterparty's guarantor is not rated in the highest rating category for two Nationally Recognized Statistical Rating Organizations as defined in Section 51-7-3(20), and may not exceed nine years if the counterparty's guarantor is not rated in one of the highest two rating categories for counterparties, financial programs, or senior debt by at least two Nationally Recognized Statistical Rating Organizations as defined in Section 51-7-3(20). |
| R628-18-6. Authorized Intermediaries |
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A public entity shall not enter into an Intermediary Contract unless each Intermediary thereunder is either: (1) a qualified depository as defined in Subsection 51-7-3(28); (2) a permitted depository as defined in Subsection 51-7-3(24); or (3) a certified dealer as defined in Subsection 51-7-3(2). |
| R628-18-7. Terms of the Contract and Type of Contract |
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(1) To eliminate speculation, the Notional Amount of a Contract cannot exceed 115 percent of the par amount of the debt to which such Contract relates. Nothing in these rules shall be deemed to prohibit a public entity from entering into a subsequent Contract to reverse a position taken in a prior Contract so long as the subsequent Contract otherwise complies with these rules. (2) The final termination date of a Contract shall not be later than 90 days past the final maturity of the debt to which such Contract relates. (3) The public entity must use an industry standard contract form approved by the International Swaps and Derivates Association, Inc., (ISDA), which is currently headquartered in New York City, New York (ISDA), but may make such modifications thereto as are contemplated or permitted by the ISDA form or any ISDA code incorporated therein. |
| R628-18-8. Reporting Requirements and Penalty for Violation by a Public Treasurer |
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(1) Pursuant to Subsection 51-7-18.2(2)(d), the public treasurer of each public entity that is a party to any outstanding Contract must submit a report to the council within 30 days after June 30 and December 31 of each year containing the following information as of the immediately preceding June 30 or December 31, as applicable: (a) A listing of all outstanding Contracts to which the public entity is a party; (b) the Notional amount of each Contract, if applicable; (c) the underlying debt to which each Contract relates; (d) the type of each Contract e.g., interest rate exchange or swap contract, cash flow exchange or swap contract or, if the Contract is a derivative of the foregoing, forward swap, option to enter into a swap, floor, cap, collar, or other derivative; and (e) a description of the basis upon which the public entity's payment obligations are determined under each Contract. (2) Any public entity that willfully violates the provisions of this rule is guilty of a Class A misdemeanor. (3) Any public entity that knowingly makes or causes to be made a false statement or report to the council is guilty of a Class A misdemeanor. |