Part 2.
TEXAS EDUCATION AGENCY
Chapter 33.
STATEMENT OF INVESTMENT OBJECTIVES, POLICIES, AND GUIDELINES OF THE TEXAS PERMANENT SCHOOL FUND
19 TAC §33.35
The State Board of Education (SBOE) proposes an amendment
to §33.35, concerning the Texas Permanent School Fund (PSF) guidelines
for the custodian and securities lending agent. The section establishes the
guidelines for the investment of cash collateral by the securities lending
agent. The proposed amendment would update the guidelines for cash collateral
investment in line with current market practices and standards.
The Texas Education Code, §7.102(c)(31), states that the SBOE may
invest the PSF within the limits of the authority granted by the Texas Constitution,
Article VII, §5, and TEC, Chapter 43. The rules in 19 TAC Chapter 33
establish investment objectives, policies, and guidelines for the PSF. Section
33.35 includes the guidelines for the investment of cash collateral by the
securities lending agent.
The proposed amendment to 19 TAC §33.35 would add asset backed commercial
paper and asset backed securities to the permissible investment list and extend
the maturity of investments to 13 months from 12 months. These changes would
bring PSF guidelines in line with 2a7 funds, which represent a large liquid
and investable pool of cash. The proposal would also reduce the collateralization
for corporate debt collateral from 110% to 105%. In addition, the proposal
includes clarifications that would specify the requirement of ratings by Moody's
Investor Service and Standard and Poor's Corporation for reverse repurchase
agreements and foreign sovereign debt and modify investment parameters by
clarifying the definition of "Tier 1" credit quality.
Holland Timmins, executive administrator and chief investment office of
the Texas PSF, has determined that for the first five-year period the amendment
is in effect there will be fiscal implications for state government as a result
of enforcing or administering the section. The proposed amendment clarifies
and expands language to allow for cash collateral investments in asset backed
commercial paper and asset backed securities. The specific fiscal impact of
these changes cannot be determined because cash markets change daily. The
objective of the amendment, however, is to increase the investable pool and
thus improve income.
Mr. Timmins has determined that for each year of the first five years the
amendment is in effect the public benefit anticipated as a result of enforcing
the amendment will be the increase of income to the PSF. The distribution
of the PSF will flow to the school districts and reduce the tax burden to
the public and the state of Texas. The proposed amendment is projected to
increase the return on the securities lending portfolio when implemented.
There will be no effect on small businesses. There is no anticipated economic
cost to persons who are required to comply with the amendment.
Comments on the proposal may be submitted to Cristina De La Fuente-Valadez,
Policy Coordination Division, Texas Education Agency, 1701 North Congress
Avenue, Austin, Texas 78701, (512) 475-1497. Comments may also be submitted
electronically to
rules@tea.state.tx.us
or
faxed to (512) 463-0028. All requests for a public hearing on the proposed
amendment submitted under the Administrative Procedure Act must be received
by the commissioner of education not more than 15 calendar days after notice
of the proposal has been published in the
Texas Register
.
The amendment is proposed under the Texas Education Code, §7.102(c)(31),
which authorizes the State Board of Education to invest the PSF within the
limits of the authority granted by the Texas Constitution, Article VII, §5,
and the Texas Constitution, Article VII, §5(d).
The amendment implements the Texas Education Code, §7.102(c)(31),
and the Texas Constitution, Article VII, §5(d).
§33.35.Guidelines for the Custodian and the Securities Lending Agent.
Completing custodial and security lending functions in an accurate
and timely manner is necessary for effective investment management and accurate
records.
(1)
A custodian shall have the following responsibilities regarding
the segments of the funds for which the custodian is responsible.
(A)
Provide complete custody and depository services for the
designated accounts.
(B)
Provide for investment of any cash on a daily basis to
avoid uninvested amounts.
(C)
Implement the investment actions in a timely and effective
manner as directed by the investment managers.
(D)
Collect all realizable income and principal and properly
report the information on the periodic statements to the Texas Permanent School
Fund (PSF) investment staff, the investment managers, or other appropriate
parties.
(E)
Provide monthly and annual accounting statements, as well
as on-line, real-time accounting, that includes all transactions. Accounting
shall be based on accurate security values for cost and market value and provided
within a time frame acceptable to the State Board of Education (SBOE).
(F)
Report to the PSF investment staff situations in which
security pricing is either not possible or subject to considerable uncertainty.
(G)
Distribute all proxy voting materials in a timely manner.
(H)
Provide research and assistance to the SBOE and the PSF
investment staff on all issues related to accounting and administration.
(I)
Confirm that the depth of resources and personnel associated
with the designated funds are comparable to those of the nation's leading
custodial banks.
(2)
A securities lending agent for the PSF shall have the following
responsibilities.
(A)
Provide complete transaction reporting for the designated
funds.
(B)
Provide a monthly accounting, as well as on-line, real-time
accounting for securities lending transactions, based on accurate security
values.
(C)
Report to the PSF investment staff any irregular situation
that is outside the standard of practice for securities lending or inconsistent
with the provisions of the securities lending agreement.
(D)
Implement a securities lending program for the PSF in a
manner that does not impair any rights of the PSF by virtue of PSF ownership
in securities.
(E)
As requested, provide research and assistance to the SBOE
and the PSF investment staff on all issues related to accounting and administration.
(F)
Provide indemnification to the PSF satisfactory to the
SBOE in the event of default on securities lending transactions.
(G)
Fully disclose all revenues and other fees associated with
the securities lending program.
(H)
Comply with restrictions on types of securities lending
transactions or eligible investments of cash collateral or any other restrictions
imposed by the SBOE or the PSF investment staff. Cash collateral reinvestment
guidelines must meet the following standards.
(i)
Permissible investments.
(I)
U.S. Government and U.S. Agencies, under the following
criteria:
(-a-)
any security issued by or fully guaranteed as to payment
of principal and interest by the U.S. Government or a U.S. Government Agency
or sponsored Agency, and eligible for transfer via Federal Reserve Bank book
entry, Depository Trust Company book entry, and/or Participants Trust Company
book entry;
(-b-)
maximum
397-day
[
(-c-)
maximum
397-day
[
(-d-)
no maximum dollar limit.
(II)
Bank obligations, under the following criteria:
(-a-)
time deposits with maximum 60-day maturity on fixed rate
or floating rate, with maximum reset period of 60 days;
(-b-)
negotiable Certificates of Deposit with maximum
397-day
[
(-c-)
bank notes with maximum
397-day
[
(-d-)
bankers acceptances with maximum 45-day maturity;
(-e-)
banks with at least $25 billion in assets with a short-term
rating of "Tier 1" as defined in clause (ii)(IV) of this subparagraph. In
addition, placements can be made in branches within the following countries:
(-1-)
Canada;
(-2-)
France;
(-3-)
United Kingdom; and
(-4-)
United States; and
(-f-)
dollar limit maximum per institution of 5.0% of investment
portfolio at time of purchase.
(III)
Commercial paper, under the following criteria:
(-a-)
dollar limit maximum per issuer of 5.0% of investment
portfolio at time of purchase including any other obligations of that issuer
as established in subclause (II)(-d-) of this clause. If backed 100% by bank
Letter of Credit, then dollar limit is applied against the issuing bank;
(-b-)
must be rated "Tier 1" as defined in clause (ii)(IV)
of this subparagraph; and
(-c-)
maximum
397
[
(IV)
Asset backed commercial paper,
under the following criteria:
(-a-)
dollar limit maximum per issuer of 5.0% of
investment portfolio;
(-b-)
must be rated "Tier 1" as defined in clause
(ii)(IV) of this subparagraph; and
(-c-)
maximum 397-day maturity.
(V)
Asset backed securities, under
the following criteria:
(-a-)
maximum 397-day weighted average life on fixed
rate;
(-b-)
maximum 397-day weighted average life on floating
rate, with maximum reset period of 90 days and;
(-c-)
rated Aaa and AAA by Moody's Investor Service
and Standard and Poor's Corporation at time of purchase. One AAA rating may
suffice if only rated by one Nationally Recognized Securities Rating Organization
(NRSRO).
(VI)
[
(-a-)
must be senior debt;
(-b-)
maximum
397-day
[
(-c-)
maximum
397-day
[
(-d-)
issuers or guarantor's short-term obligations must be
rated "Tier 1" as defined in clause (ii)(IV) of this subparagraph; and
(-e-)
dollar limit maximum per issuer of 5.0% of investment
portfolio at time of purchase, including any other obligations of that issuer.
(VII)
[
(-a-)
counterparty must be "Tier 1" rated as defined in clause
(ii)(IV) of this subparagraph or be a "Primary Dealer" in Government Securities
as per the New York Federal Reserve Bank;
(-b-)
underlying collateral may be any security permitted for
direct investment;
(-c-)
lending agent or a third party custodian must hold collateral
under tri-party agreement;
(-d-)
collateral must be marked to market daily and maintained
at the following margin levels;
(-1-)
U.S. Government, U.S. Government Agency, sponsored Agency,
International Organization at 100%;
(-2-)
Certificate of Deposits, Bankers Acceptance, bank notes,
commercial paper at 102% under one year to maturity and rated at least "Tier
1" as defined in clause (ii)(IV) of this subparagraph; and
(-3-)
corporate debt (other than commercial paper) at
105%
[
(-e-)
due to daily margin maintenance, dollar limits and maturity
limits of underlying collateral are waived, except with respect to the maturity
limit in subclause (II)(-d-) of this clause;
(-f-)
maximum 180-day maturity; and
(-g-)
dollar limit for total reverse repurchase agreements
is the greater of $300 million or 15% of value of cash collateral portfolio
with one counterparty at time of purchase.
(VIII)
[
(-a-)
any security issued by or fully guaranteed as to payment
of principal and interest by a foreign government whose sovereign debt is
rated AA2/AA or better
by Moody's Investor Service and Standard and Poor's
Corporation at time of purchase
. Securities must be delivered to Lending
Agent or a third party under a Tri-Party agreement;
(-b-)
dollar limit maximum per issuer or guarantor of 2.5%
of investment portfolio; and
(-c-)
maximum maturity of
397 days
[
(IX)
[
(-a-)
funds must comprise investments similar to those that
would otherwise be approved for securities lending investment under the provisions
of this subparagraph, not invest in derivatives, and not re-hypothecate assets;
(-b-)
lender must approve each fund in writing and only upon
receipt of offering documents and qualified letter; and
(-c-)
fund must have an objective of a constant share price
of one dollar.
(ii)
Investment parameters.
(I)
Maximum weighted average maturity of investment portfolio
must be 180 days.
(II)
Maximum weighted average interest rate exposure of investment
portfolio must be 60 days.
(III)
All investments must be U.S. dollar-denominated.
(IV)
"Tier 1" credit quality is defined as
the highest
short-term rating category
[
(-a-)
Standard & Poor's;
(-b-)
Moody's Investors Service;
(-c-)
Fitch Investors Service; and
(-d-)
Duff & Phelps, LLC.
(V)
At time of purchase all investments must be rated in the
highest short-term numerical category by at least two NRSROs, one of which
must be either Standard & Poor's or Moody's Investors Service.
(VI)
Issuer's ratings cannot be on negative credit watch at
the time of purchase.
(VII)
Mortgage
[
(I)
Provide a copy of the investment policy governing the custodian's
securities lending program, as amended, to the PSF investment staff.
(J)
Confirm that the depth of resources and personnel associated
with the designated funds are comparable to those of the nation's leading
securities lending agents.
This agency hereby certifies that the proposal
has been reviewed by legal counsel and found to be within the agency's legal
authority to adopt.
Filed with the Office of
the Secretary of State on May 5, 2005.
TRD-200501805
Cristina De La Fuente-Valadez
Director, Policy Coordination
Texas Education Agency
Earliest possible date of adoption: June 19, 2005
For further information, please call: (512) 475-1497
Subchapter B. MIDDLE SCHOOL
one-year
] maturity
on fixed rate;
one-year
] maturity
on floating rate, with maximum reset period of 90 days; and
one-year
] maturity on fixed rate or floating rate,
with maximum reset period of 90 days;
one
year
] maturity on fixed rate or maximum
397-day
[
one
year
] maturity on floating rate, with maximum reset period of 90 days;
270
]-day maturity.
(IV)
] Corporate debt (other than
commercial paper), under the following criteria:
one-year
] maturity
on fixed rate;
one-year
] maturity
on floating rate, with maximum rest period of 90 days;
(V)
] Reverse repurchase agreements,
under the following criteria:
110%
] rated at least AA2/AA
or better by Moody's
Investor Service and Standard and Poor's Corporation at time of purchase
;
(VI)
] Foreign sovereign debt,
under the following criteria:
one year
].
(VII)
] Short Term Investment Fund
(STIF) and/or Registered Mutual Funds, under the following criteria:
investment grade
] by the following
NRSROs
[
Nationally Recognized Securities Ratings Organizations
(NRSRO)
]:
Asset backed securities and
mortgage
] backed securities are not permitted.
Chapter 111.
TEXAS ESSENTIAL KNOWLEDGE AND SKILLS FOR MATHEMATICS