976 CMR: Finance Advisory Board Regulations

Section



2.01: Regulatory Authority, Purpose and Application
2.02: Definitions
2.03: Requirement for State Entities to Adopt Policies
Relating Investment of Public Funds
2.04: Requirement for Certain State Entities to Adopt Policies Relating
to Debt Management
2.05: Prohibition of Certain Derivative Financial Products
2.06: Review of Financial Transactions Involving Derivative Financial
Products
2.07: Review of Qualified Conduit Transactions Involving Derivative
Financial Products
2.08: Review of Requests for Waiver from Presumption of a
Competitively Bid Financing

2.01: Regulatory Authority, Purpose and Application

The powers and responsibilities of the Board set forth in St. 2009, c. 10, §1 are intended to further transparency, accountability and best practices among State Entities with respect to investments, borrowing or other financial transactions involving public funds made or entered into by State Entities. These regulations are necessary and desirable to further the Board's statutory purpose. Regulations 2.04 through 2.07a apply to the management of debt and derivative financial products by State Entities Authorized to Issue Debt.

2.02: Definitions

For purposes of 976 CMR, the following terms shall have the following meanings:

Board shall mean the Finance Advisory Board.

Commonwealth shall mean the Commonwealth of Massachusetts.

Derivative Financial Productshall mean any financial instrument which is a bond or note issue of a State Entity Authorized to Issue Debt or which is related to a bond or note issue of a State Entity Authorized to Issue Debt the value of which is derived from or based upon the value of other assets or on the level of an interest rate index including, but not limited to, a call option on a bond, interest rate swap agreements, interest rate swaptions, caps, floors, collars, inverse floaters and auction rate securities; provided, however, that any bonds or notes issued by State Entities Authorized to Issue Debt with fixed rates of interest shall not constitute Derivative Financial Products, regardless of whether such fixed rate bonds or notes are issued with a call option, regardless of whether such fixed rate bonds or notes are insured by bond insurance or other form of credit enhancement, and regardless of investment or lending of such fixed rate bond or note proceeds.

Public Funds shall mean any funds appropriated by the Commonwealth to a State Entity Authorized to Issue Debt or any other funds received by a State Entity Authorized to Issue Debt from any public or private source that are under the control of and are expended at the discretion of the State Entity Authorized to Issue Debt.

Qualified Conduit Debt Transaction shall mean any issue of bonds or notes issued by a State Entity Authorized to Issue Debt acting in a conduit role for a non-governmental, for-profit or non-profit corporation or group of related or unrelated for profit or non-profit corporations (none of which are themselves a State Entity Authorized to Issue Debt) (collectively, the borrower), and any derivative financial products related to such issue, that are secured by and payable by the borrower, any related guarantor or any third party guarantee such as a letter of credit or bond insurance and that are not payable under any circumstances from public funds of, and are not the liability of, the State Entity Authorized to Issue Debt that issued the bonds or notes, the Commonwealth or any other State Entity Authorized to Issue Debt.

Qualified Conduit Debt Transaction with Guarantee shall mean Qualified Conduit Debt Transaction for which there is a related guarantee provided by the State Entity Authorized to Issue Debt acting in a conduit role.

State Entity shall mean the Commonwealth, any quasi-public entities and independent authorities or other state entities of the Commonwealth with responsibility for managing and overseeing Public Funds.

State Entity Authorized to Issue Debt shall mean the Commonwealth, any quasi-public entities, independent authorities or other state-level governmental entities with responsibility for managing and overseeing Public Funds and with authority to issue bonds or notes, including the following currently existing State Entities Authorized to Issue Debt and any future State Entities Authorized to Issue Debt that are created by statute and that meet the definition set forth in St. 2009, c. 10, §1 and 976 CMR:



Commonwealth of Massachusetts

Massachusetts Water Pollution Abatement Trust

Massachusetts Bay Transportation Authority

Massachusetts Water Resources Authority

Massachusetts Development Finance Agency

University of Massachusetts Building Authority

Massachusetts Educational Financing Authority

Woods Hole, Martha's Vineyard, Nantucket Steamship Authority

Massachusetts Health and Educational Facilities Authority

Regional Transit Authorities

Massachusetts Housing Finance Agency

Massachusetts Port Authority

Massachusetts School Building Authority

Massachusetts State College Building Authority

Massachusetts State College Building Authority

Massachusetts Department of Transportation as successor to Massachusetts Turnpike Authority



State Entity Authorized to Issue Debt Subject to Waiver Process (SESWP) shall have the meaning set forth in 2.08 herein.

2.03: Requirement for State Entities to Adopt Policies Relating to Investment of Public Funds

State Entities shall cause one or more policies related to investment of Public Funds to be formally adopted by its governing board and filed with the Board no later than March 31, 2011 and each odd-numbered year thereafter,

2.04: Requirement for State Entities Authorized to Issue Debt to Adopt Policies Relating to Debt Management

State Entities Authorized to Issue Debt shall cause one or more policies related to debt management to be formally adopted by its governing board and filed with the Board by December 31, 2010. Such policies shall be formally adopted at least every two years and the adopted policies or evidence that there has been no material changes to the most recently filed policies, shall be filed with the Board by March 31 st of each even-numbered year beginning in 2012.

  1. Filings with the Board - the State Entity Authorized to Issue Debt shall cause such adopted policies to be filed with the Board together with a certified copy of the governing body's vote to adopt such policies. The first of such State Entity Authorized to Issue Debt filings shall take place not later than December 31, 2010.
  2. Review - the State Entity Authorized to Issue Debt shall periodically meet with the Board to report on adopted policies, risk assessment of outstanding debt and derivative financial products portfolio, including post issuance monitoring, changes in portfolio, future borrowing plans and assessment of how effective adopted policies have been to achieve objectives.
  3. Availability to Public - the Board shall make the policies filed with it available on its website and to any member of the public upon reasonable request to review.
  4. Policies Subject Matter - the subject of each policy listed below may be included in one or more policies adopted by the State Entity Authorized to Issue Debt. For example, a Debt Issuance Policy and a Derivatives Policy may be submitted as two separate documents or included in a single Debt Management Policy which addresses both.
  5. Debt Management-Related Policies Content - At a minimum, the policies must address the following aspects of debt management. (Provide explanation for any item that the State Entity Authorized to Issue Debt believes does not apply to its situation or, if applicable, that the State Entity Authorized to Issue Debt only expects to enter into Qualified Conduit Debt Transactions and accordingly has not adopted any debt management policy.)
    1. Use of debt proceeds; purpose for debt
    2. Internal debt management organizational structure, personnel qualifications, training
    3. Legal authorization; debt limits (constitutional, statutory, policy, covenant, resolution)
    4. Process for debt issuance
  • Method of sale determination (i.e., competitive v. negotiated sale)
  • Circumstances to refund bonds
  1. Selection process for professional services
  2. Debt affordability/borrowing capacity
  3. Risk controls/monitoring
  4. Debt structure parameters
  • Amount of outstanding debt
  • Maturity structure/principal repayment
  • Credit enhancement/insurance/liquidity
  • Proportion of variable interest rates to fixed interest rates
    1. Credit ratings and rating agencies management and communications
    2. Investor relations management
    3. Derivatives (see other Board regulations below)
    4. Post sale monitoring, management, compliance
    5. Continuing disclosure
    6. Other reporting requirements
  1. Failure to Comply with Regulations - Any State Entity Authorized to Issue Debt failing to meet the requirements of CMR 976 2.04 shall be placed on a list of State Entities Authorized to Issue Debt in noncompliance (Non-Compliance List), which shall be posted on the Board's website.

2.05: Prohibition of Certain Derivative Financial Products

State Entities Authorized to Issue Debt shall be prohibited from:

  1. Entering into a Derivative Financial Product for speculation;
  2. Entering into a Derivative Financial Product, including a swaption, in which the State Entity Authorized to Issue Debt receives an upfront payment in exchange for foregoing future flexibility or optionality by granting the counterparty the right to enter into the swap at a future date; and
  3. Restructuring an existing derivative product unless it can be demonstrated that the restructured derivative product results in a reduction of risk as a result of the restructure of such derivative product or that a complete cost-benefit analysis has been done prior to the restructuring comparing any additional risks to expected benefits and it is demonstrated that (i) the expected benefits of the restructuring significantly outweigh the potential risks and (ii) the additional potential risks are manageable and reasonable for the State Entity Authorized to Issue Debt.

2.06: Review of Financial Transactions Involving Derivative Financial Products

The premise behind these regulations is that Derivative Financial Products are inherently complex and risky. Under limited circumstances and when combined with informed financial management, however, use of Derivative Financial Products may provide benefits to a State Entity Authorized to Issue Debt. Prior to entering into any Derivative Financial Product, the State Entity Authorized to Issue Debt must demonstrate that the use of a Derivative Financial Product is a superior option to not using such product.

In furtherance of its statutory authority and mandate and consistent with the premise stated above, the Board hereby establishes CMR 976 2.06 to ensure that financial transactions involving a Derivative Financial Product are properly analyzed and managed to ensure consistency with State Entity Authorized to Issue Debt objectives, suitability of the transaction, and avoidance of unintended consequences.

In the event that a State Entity Authorized to Issue Debt is entering into a new financial transaction that involves a Derivative Financial Product, the State Entity Authorized to Issue Debt shall submit the following materials to the Board:

  1. If not previously submitted, a copy of the State Entity Authorized to Issue Debt's derivative policy* with a certified copy of the vote of the governing board of the State Entity Authorized to Issue Debt or certificate of the authorized official of the State Entity Authorized to Issue Debt if such State Entity Authorized to Issue Debt does not have a governing board, approving the policy within two years from the time of submittal; and
  2. A written analysis of the proposed Derivative Financial Product transaction by an independent financial advisor with relevant expertise, together with the advisor's recommendation as to whether or not the State Entity Authorized to Issue Debt should enter into the proposed transaction. Such analysis should include but not be limited to (i) a detailed description of the Derivative Financial Product, (ii) a description of risks, strategies for mitigating any such risks, any benefits, and (iii) scenario analyses or stress tests demonstrating impact on the State Entity Authorized to Issue Debt under extreme financial market events or conditions as a result of entering into the subject Derivative Financial Product; and
  3. A certified copy of the minutes of the meeting of the governing board of the State Entity Authorized to Issue Debt (such meeting to be held on a date not greater than two years prior to the date of Board review), or a certificate of the authorized official of the State Entity Authorized to Issue Debt if such State Entity Authorized to Issue Debt does not have a governing board, demonstrating or confirming that (i) the written analysis and recommendation of the independent financial advisor was presented to the board or to the official, (ii) that the transaction is consistent with the State Entity Authorized to Issue Debt's core mission, (iii) that the structure of the Derivative Financial Product is consistent in all ways with the derivative policy adopted by the board or approved by the authorized official, (iv) that the benefits of the Derivative Financial Product cannot be substantially achieved without the use of a Derivative Financial Product, and (v) that the governing board or the official approved the proposed transaction.

*Such derivative policy shall, at a minimum, include the following:

  • Evidence of clear legal authorization to enter into such arrangements and guidelines for how derivative products fit within the overall debt management program
  • Expected outcomes or goals of entering into a derivative product (i.e. synthetically fix a variable rate at lower rate than otherwise available in the market)
  • Security and sources of payments for ongoing costs associated with the derivative product and for termination costs of the derivative product.
  • A list of the types of derivative products that may be used and a list of the types of derivative products that are prohibited.
  • The conditions under which these types of products can be utilized (i.e. bidding procedures, minimum benefit thresholds, terms of master agreements, etc.)
  • The maximum amount of derivatives contracts, or a means of determining such amount.
  • Guidelines and criteria for selecting counterparties.
  • Methods for evaluating, measuring and managing derivative risk.
  • Methods and process for procuring derivative products.
  • Post issuance monitoring, reporting and ongoing risk mitigation procedures, including periodic valuation.

The Board's review pursuant to these regulations shall consist of reviewing the items required to be submitted to the Board described above. The Board shall either conclude that the items required to be submitted have in fact been submitted consistent with the purpose and intent of these regulations, or that said items have not been submitted in a manner consistent with the purpose and intent of these regulations. Any conclusion shall be established by vote of the Board, and confirmed in writing (which may be by e-mail) to the State Entity Authorized to Issue Debt. Such conclusion shall be valid unless the State Entity Authorized to Issue Debt informs the Board of any material change in any of the submittals pursuant to this section 2.06 above or unless six months has lapsed from the date of Board conclusion.

A State Entity Authorized to Issue Debt which has received a Board conclusion that the items required to be submitted in connection with these regulations were in fact submitted consistent with the purpose and intent of these regulations must report to the Board at the Board meeting next following the execution of the Derivative Financial Product transaction. Such report should include, but not be limited to, the results or final terms of the Derivative Financial Product transaction.

A State Entity Authorized to Issue Debt seeking the Board's review of any Derivative Financial Product pursuant to these regulations shall submit the above items, at least ten business days prior to a scheduled Board meeting, to:

Chair

Finance Advisory Board

c/o Executive Office for Administration and Finance

State House, Room 373

Boston, MA 02133

2.07: Review of Qualified Conduit Debt Transactions Involving Derivative Financial Products

  1. With respect to any proposed Derivative Financial Products that are related to a Qualified Conduit Debt Transaction, the Board's review of such transaction shall be limited to confirming that the transaction constitutes a Qualified Conduit Debt Transaction.
  2. In order to request a review of any Derivative Financial Products that are related to a Qualified Conduit Debt Transaction, a State Entity Authorized to Issue Debt must submit the following items to the Board prior to such Derivative Financial Product being executed:
    1. A written description of the proposed Derivative Financial Product transaction(s), including: the parties involved; the schedule; the amount; the security (including any guarantor of payment obligations); and terms.
    2. A certification of bond counsel to the proposed transaction confirming that the transaction constitutes a Qualified Conduit Debt Transaction pursuant to 976 CMR.

Not later than five business days following receipt of the material submitted in connection with any Derivative Financial Product related to a Qualified Conduit Debt Transaction, the Secretary of the Board will contact the State Entity Authorized to Issue Debt in writing (which may be by e-mail) to either (i) confirm that, based on the materials provided under 976 CMR, the transaction constitutes a Qualified Conduit Debt Transaction and either no public funds are at risk in the transaction or that the amount of guarantee, if any, is equal to or less than the threshold amount in 2.07a below, or (ii) notify the State Entity Authorized to Issue Debt that the materials submitted were incomplete or that they fail to demonstrate that the transaction constitutes a Qualified Conduit Debt Transaction.

2.07a: Review of Qualified Conduit Debt Transactions With Guarantee Involving Derivative Financial Products

  • With respect to any proposed Derivative Financial Products that are related to a Qualified Conduit Debt Transaction With Guarantee, the Board's review of such transaction shall be the same as the review of Qualified Conduit Debt Transactions Involving Derivative Financial Products as described in 2.07 above, provided that the governing board of the related State Entity Authorized to Issue Debt has delegated authority to its staff to extend such guarantee without further approval based on established threshold dollar value and/or risk rating of such guarantee as may be determined by the governing board from time to time, or provided that the guarantee is not greater than $1 million.
  • With respect to any proposed Derivative Financial Products that are related to a Qualified Conduit Debt Transaction With Guarantee which does not meet the criteria of 2.07a (1) above, the Board's review of such transaction shall be the same as review of financial transactions involving Derivative Financial Products as described in 2.06 above, excluding 2.06(2).
  • A State Entity Authorized to Issue Debt that issues Qualified Conduit Debt Transactions With Guarantee must submit a periodic (but at least quarterly) report of its guarantee programs (Guarantee Program Report). The Guarantee Program Report shall include, but not be limited to: the number and dollar amount of outstanding guarantees by segregated guarantee program and the change in the number and dollar amount of such guarantees from the prior reporting period; the number and dollar amount of guarantees paid during the reporting period with an explanation of the circumstances surrounding such payments. The Board, in its sole discretion, may request further information about the guarantee program.

2.08: Review of Requests for Waiver from Presumption of a Competitively Bid Financing

Statutorily, the Commonwealth may not sell bonds or notes maturing at a time later than three years from their dates on a negotiated basis without receiving a waiver from the Board. In addition, any State Entity Authorized to Issue Debt (i) for which the Secretary of Administration and Finance approves the sale of its bonds, or (ii) which issues bonds that receive Commonwealth support to the extent that Commonwealth disclosure is used in the marketing of such bonds, may not sell bonds or notes on a negotiated basis without receiving a waiver from the Board, including but not limited to the University of Massachusetts Building Authority, the Massachusetts State College Building Authority, certain of the Massachusetts Department of Transportation bonds, the Massachusetts Water Pollution Abatement Trust, the Massachusetts Development Finance Agency as issuer of bonds supported by Commonwealth contract assistance and the Woods Hole, Martha's Vineyard and Nantucket Steamship Authority (together with the Commonwealth, , "State Entities Authorized to Issue Debt Subject to Waiver Process" or "SESWP"). In the event that a SESWP seeks to sell bonds or notes on a negotiated basis, the SESWP shall submit the following materials to the Board:

  1. If not previously submitted, a copy of the SESWP's Debt Management Policy with a certified copy of the board of the SESWP vote or certificate of the authorized official of the SESWP if such State Entity Authorized to Issue Debt does not have a governing board, evidencing approval of the policy within two years from the time of submittal;
  2. Certified copy of the minutes of a meeting of the governing board of the SESWP or certificate of the authorized official of the SESWP if such State Entity Authorized to Issue Debt does not have a governing board (such meeting to be held on a date not greater than two years prior to the date of Board review), evidencing awareness and approval that the SESWP will be selling bonds or notes on a negotiated basis; and
  3. A letter from an authorized official of the SESWP to the Board and presented at a Board meeting requesting a waiver from the presumption of a competitively bid financing and demonstrating that: (i) the process or criteria to determine the method of sale set forth in the SESWP's Debt Management Policy had been thoroughly followed; (ii) an explanation for why the SESWP believes negotiation is compelling; (iii) the date beyond which such waiver, if granted, would expire; (iv) a "not-to-exceed" amount of bonds to be sold; and (v) a description of the use of proceeds of the subject bonds or notes. Such letter shall be personally presented to the Board by an appropriate official of the SESWP.

Consistent with statute, the Board's presumption is that SESWP bond sales will be sold on a competitive basis. There may be exceptions to this premise, however, where anticipated benefit of a negotiated sale can be demonstrated. The Board's review pursuant to these regulations shall consist of reviewing the items required to be submitted to the Board described above. The Board shall either conclude that the items required to be submitted have in fact been submitted in a manner consistent with the purpose and intent of these regulations and grant a waiver, or that said items have not been submitted consistent with the purpose and intent of these regulations. Any conclusion shall be established by vote of the Board, and confirmed in writing (which may be by e-mail) to the SESWP. Any conclusion will expire six months from the date thereof.

A SESWP that received a waiver pursuant to these regulations must present results of the sale, including comparative pricing information, to the Board at the next Board meeting following the execution of the negotiated sale.