976 CMR 2.00: Review Procedure
Pursuant to St. 2009, c. 10, §1, the Finance Advisory Board (the Board) is required to review and, within a reasonable period of time, to provide conclusions with respect to any derivative financial product related to a transaction entered into by a state entity. The new provision of St. 2009, c. 10, §1 and the other powers and responsibilities of the Board set forth in St. 2009, c. 10, §1 is intended to further transparency, accountability and best practices among state entities in carrying out certain financial transactions, including derivative financial products. The Board is committed to achieving this statutory purpose in a responsible, informed, and deliberate manner. Due to the limited resources currently available to the Board and the complicated nature of many of the financial transactions entered into by state entities, particularly those that involve derivative financial products, it will take the Board some time to do the diligence necessary to develop regulations, policies and procedures necessary to further its statutory purpose in a responsible, informed and deliberate manner that best serves the citizens of the Commonwealth. In the meantime, state entities must continue to engage in financial transactions in order to manage their finances and to further their missions. Specifically, 976 CMR 2.00 provides clarification of certain aspects of the new provision of St. 2009, c. 10, §1; and provides a process for reviewing certain financial transactions that involve derivative financial products. The process described in 976 CMR 2.04 is intended to allow qualified conduit debt transactions involving derivative financial products to proceed and the process described in 976 CMR 2.05 is intended to allow modifications or other actions relating to existing transactions involving derivative financial products to proceed provided the related state entity has engaged in an appropriate level of diligence and to allow new financial transactions involving derivative financial products to proceed so long as state entity provides evidence satisfactory to the Board that the transaction is consistent with the state entity's core mission, that the derivative financial product is necessary to carry out the transaction and that the financial risk to the state entity is limited and modest relative to its entire financial portfolio.
976 CMR 2.00 applies to state entities seeking to execute certain transactions involving derivative financial products related to debt issued by such state entities.
For purposes of 976 CMR 2.00, the following terms shall have the following meanings:
Commonwealth shall mean the Commonwealth of Massachusetts.
Derivative Financial Productshall mean any financial instrument related to a bond or note issue of a state entity 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, floor, collars, inverse floaters and auction rate securities; provided, however, that any bonds or notes issued by state entities 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 or any other funds received by a state entity from any other public or private source that are under the control of and are expended at the discretion of the state entity.
Qualified Conduit Debt Transaction shall mean any issue of bonds or notes issued by a state entity 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) (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 that issued the bonds or notes, the commonwealth or any other state entity.
State Entity 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 and any future state entities that are created by statute and that meet the definition set forth in St. 2009, c. 10, §1 and 976 CMR 2.00:
- Commonwealth of Massachusetts
- Massachusetts Bay Transportation Authority
- Massachusetts Development Finance Agency
- Massachusetts Educational Financing Authority
- Massachusetts Health and Educational Facilities Authority
- Massachusetts Housing Finance Authority
- Massachusetts Port Authority
- Massachusetts School Building Authority
- Massachusetts State College Building Authority
- Massachusetts Turnpike Authority
- Massachusetts Water Pollution Abatement Trust
- Massachusetts Water Resources Authority
- University of Massachusetts Building Authority
- Woods Hole, Martha's Vineyard, Nantucket Steamship Authority
- Regional Transit Authorities
2.04: Process for Board Review of Derivative Financial Products Related to Qualified Conduit Debt Transactions
- 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.
- In order to request a review of any derivative financial products that are related to a qualified conduit debt transaction, a state entity must submit the following items to the Board prior to such derivative financial product being executed:
- A written description of the proposed transaction, including: the parties involved in the transaction; the proposed schedule of the transaction; a description of the amount and terms of the related outstanding bonds or notes or a preliminary description of the amount and terms of the proposed bonds or notes to be issued by the state entity, including the security and entity or entities responsible for making payment obligations on the bonds or notes, including any guarantor; the parties to the proposed derivative financial products; and a description of the terms of the proposed derivative financial products, including the security and entity or entities responsible for making payment obligations on the proposed derivative financial products, including any guarantor.
- A certification of bond counsel to the proposed transaction confirming that the transaction constitutes a qualified conduit debt transaction pursuant to 976 CMR 2.00.
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 in writing (which may be by e-mail) to either:
- confirm that, based on the materials provided under 976 CMR 2.00, the transaction constitutes a qualified conduit debt transaction and no public funds are at risk in the transaction, or
- notify the state entity that the materials submitted were incomplete or that they fail to demonstrate that the transaction constitutes a qualified conduit debt transaction.
2.05: Process for Board Review of Certain Financial Transactions Involving Derivative Financial Products:
- In the event that a state entity is:
- modifying or taking other action relating to a financial transaction involving a derivative financial product entered into by a state entity prior to April 24, 2009, that results in a substantive change to the terms of such transaction or to the risks, costs or benefits associated with such transaction for the state entity, or
- entering into a new financial transaction that involves a new derivative financial product, the state entity shall submit the following materials to the Board:
- A written analysis of the proposed transaction by an independent financial advisor with relevant expertise, together with the advisor's recommendation as to whether or not the state entity should enter into the proposed transaction;
- A certified copy of the minutes of the meeting of the governing board of the state entity, or a certificate of the authorized official of the state entity, in the event that there is no governing board, demonstrating or confirming that the written analysis and recommendation of the independent financial advisor was presented to the board or to the official and that the board or the official approved the proposed transaction; and
- For any new bond or note issue that involves a derivative financial product, evidence that:
- the transaction is consistent with the state entity's core mission,
- the transaction would not occur but for the proposed derivative financial product, and
- the risk assumed by the state entity as a result of the proposed transaction and derivative financial product is limited and modest relative to its entire financial portfolio.
- The Board's review pursuant to 976 CMR 2.05, shall consist of reviewing the items required to be submitted to the Board described in 976 CMR 2.05(1). The Board shall either conclude that the materials required to be submitted pursuant to 976 CMR 2.05(1) have been submitted, evidencing compliance with the level of diligence required to be undertaken by the state entity under 976 CMR 2.05 has been undertaken and, with respect to any of such proposed transactions that constitute new bond or note issues involving new derivative financial products, evidencing that the transaction is consistent with the mission of the state entity, the transaction would not occur without the derivative financial product and the financial risk to the state entity resulting from the transaction is limited and modest relative to its entire financial portfolio, or that said items have not been submitted in a manner consistent with the purpose and intent of 976 CMR 2.05. Any conclusion shall be established by vote of the Board, and confirmed in writing (which may be by e-mail) to the state entity.
A state entity seeking the Board's review of any derivative financial product pursuant to 976 CMR 2.06 shall submit the requisite items at least ten business days prior to a scheduled Board meeting, unless a transaction is a qualified conduit debt transaction, in which case the requisite items may be submitted without regard to a scheduled Board meeting, to:
Neil Arkuss, Chair
State Finance and Governance Board
c/o Elizabeth Thorne
Executive Office for Administration and Finance
State House, Room 373
Boston, MA 02133
The submittal package must reference a transaction relating to derivative financial products.
2.07: Board Review of Derivative Financial Products for Debt Transactions that are not the subject of 976 CMR 2.00:
With respect to any derivative financial products for debt transactions that are not the subject of 976 CMR 2.00, the Board will review such transactions in accordance with St. 2009, c. 10, §1.
976 CMR 2.00: M.G.L. c. 6, §98