(as amended on October 3, 2002, February 24, 2003 and May 10, 2013)
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:
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 those enumerated above and shall only entail prudent risks that are appropriate for NYW to take.
In general, NYW should procure derivatives by competitive bidding. NYW shall determine, in consultation with its Swap Advisor, 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:
NYW will utilize a swap advisor (“Swap Advisor”) to assist with the evaluation and execution of swap transactions, as well as with the ongoing monitoring and valuation of its derivatives portfolio. The Swap Advisor will meet all the necessary registration, qualification and other requirements required under applicable law, rules and regulations. In addition, the Swap Advisor selection criteria may be changed from time to time to enable NYW to make any necessary representations related to its Swap Advisor. NYW will periodically update its derivatives policy to reflect any changes and additions to such rules and regulations affecting the requirements related to swap advisors and will periodically evaluate the performance and services provided by its Swap Advisor.
The Swap Advisor shall qualify as a Qualified Independent Representative (“QIR”) under rules and regulations of the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) promulgated pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as set forth below:
NYW and its Swap Advisor shall enter into a written contract pursuant to which the Swap Advisor shall (i) undertake a fiduciary duty to act in the best interests of NYW, (ii) agree to make appropriate and timely disclosures to NYW of all material conflicts of interest that could reasonably affect the judgment or decision making of the Swap Advisor with respect to its obligations to NYW, (iii) agree to develop and comply with written policies and procedures reasonably designed to manage and mitigate such material conflicts of interest and (iv) evaluate, consistent with any guidelines provided by NYW, fair pricing and appropriateness of the derivatives transaction and provide a written opinion that the terms and conditions of any derivative transaction entered into reflect a fair market value as of the date of its execution. The contract between NYW and its Swap Advisor shall also contain such terms and conditions as the Swap Advisor and NYW shall mutually agree upon.
To the extent possible, the over-the-counter 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, as these may be updated from time to time to reflect then-current legal requirements and best practices. The schedule should be modified to reflect specific legal requirements and business terms desired by NYW. When possible, NYW should attempt to negotiate the Master Agreement, Schedule and Credit Support Annex with qualified counterparties in advance of a potential transaction 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 and Termination Events
Events of default and termination events shall include the following:
An event of default or termination event shall permit NYW to terminate the agreement with the termination payment being calculated on the side of the bid-offered spread which is most beneficial to NYW.
Before entering into a derivative, NYW shall evaluate, with the assistance of its Swap Advisor, all the risks inherent in the transaction. These risks to be evaluated should include counterparty risk, termination risk, rollover risk, basis risk, and tax event risk.
NYW shall endeavor to diversify its exposure to counterparties. To that end, before entering into a derivative 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, through the use of sensitivity analysis showing reasonable worst-case scenarios. The analysis should be based on all outstanding derivative transactions of NYW. NYW may also elect to take into account the exposure of the City and any related entities to a particular counterparty. NYW should also take into account investment, credit, liquidity and other exposures to potential counterparties in evaluating risks.
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:
NYW will, with its Swap Advisor, monitor counterparty ratings and net mark-to-market derivatives values so that if and when collateral posting requirements may be reasonably expected to be triggered, it can establish a collateral account with its Bond Trustee or other appropriate party, enter into necessary collateral agreements and establish procedures for collateral monitoring, management and reporting.
In evaluating a particular transaction involving the use of derivatives, NYW shall review, with the assistance of its Swap Advisor, 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.
NYW shall reflect the use of derivatives on its financial statements in accordance with generally accepted accounting principles
No less than quarterly, NYW shall request the Swap Advisor to determine, or shall determine internally, the information identified in numbers 2, 3, 6 and 7 below. 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:
NYW intends to comply with all applicable regulatory requirements concerning derivatives as these may be promulgated from time to time by the CFTC, the SEC or other regulatory body with jurisdiction over NYW derivatives. NYW will periodically review and update this Derivatives Policy to reflect any changes or additions to relevant rules and regulations.