1 / 23

Demand Deposit SLGS Investment

Demand Deposit SLGS Investment. May 17, 2011. Table of Contents. Overview SLGS Regulations – Required Certifications Pricing, Liquidity, and Potential Uses. I. Overview. Definition. Demand Deposit SLGS

karen-lucas
Download Presentation

Demand Deposit SLGS Investment

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Demand Deposit SLGS Investment May 17, 2011

  2. Table of Contents • Overview • SLGS Regulations – Required Certifications • Pricing, Liquidity, and Potential Uses Chapman and Cutler LLP | PFM Asset Management LLC

  3. I. Overview Chapman and Cutler LLP | PFM Asset Management LLC

  4. Definition Demand Deposit SLGS • One-day certificates of indebtedness that are automatically rolled over each day until redemption is requested (31 CFR §344.7) • Pay interest at a variable rate (reset weekly) (31 CFR §344.7(a)) • Exempt from both yield restriction and rebate (Treas. Reg. §1.150-1(b)(2)) Chapman and Cutler LLP | PFM Asset Management LLC

  5. History • 1986 • Demand Deposit SLGS introduced • Suggested as part of the 1986 Tax Act in response to a Congressional Mandate to make the SLGS Program more flexible • Designed to be an investment vehicle for avoiding the need for arbitrage rebate computations • Prohibited for advance refundings 1969 Legislation restricted the yield of investments for tax-exempt bond proceeds 1972 SLGS Program initiated • 1989 • Limited to bond issues of $35mm or less 1996 Regulations eliminated both the $35mm limit and advance refunding prohibition Chapman and Cutler LLP | PFM Asset Management LLC

  6. Monthly SLGS Statistics From: https://www.treasurydirect.gov/govt/reports/slgs/slgs_mnthlyslgsstat.htm Chapman and Cutler LLP | PFM Asset Management LLC

  7. Demand Deposit SLGS Outstanding Chapman and Cutler LLP | PFM Asset Management LLC

  8. Tax Regulatory Treatment • For purposes of arbitrage, treated as tax-exempt bonds (Treas. Reg. §1.150-1(b)) • Excluded from rebate and yield restriction computations (Code Section 148(b)(3)(A) • Treatment for other Code Sections unclear (e.g. Section 149(g)) • Treasury Regulations § 1.149(d)-1(b)(3) provide special rules for “mixed escrows” (may apply to Demand Deposit SLGS) Chapman and Cutler LLP | PFM Asset Management LLC

  9. Demand Deposit vs. Time Deposit SLGS 31 CFR 344.7, 8, 9 31 CFR 344.4, 5, 6 Chapman and Cutler LLP | PFM Asset Management LLC

  10. II. SLGS Regulations – Required Certifications Chapman and Cutler LLP | PFM Asset Management LLC

  11. SLGS Regulations - Required Certifications • Eligible Sources of Funds (31 CFR 344.1) • Certifications (31 CFR 344.2(e)) • Impermissible Practices (31 CFR 344.2(f)) • Subscription (31 CFR 344.8) Chapman and Cutler LLP | PFM Asset Management LLC

  12. 1. Eligible Source of Funds (31 CFR 344.1) Eligible sources are the same as for Time Deposit SLGS and include: • Gross proceeds of a tax-exempt bond issue (or reasonably expected to become gross proceeds) • Former gross proceeds • Amounts held in a commingled fund with gross proceeds • Proceeds of a taxable issue that refunds or is refunded by a tax-exempt issue • Other amounts subject to §148 yield restriction limitations (BAB proceeds that are not excepted) Chapman and Cutler LLP | PFM Asset Management LLC

  13. 2. Certifications • Certifications are similar to Time Deposit SLGS (though not as comprehensive) and include: • Agency Certification (31 CFR 344.2(e)(1)) • Purchased with early liquidation proceeds • Yield means what it means for arbitrage (§ 1.148-5) – not applicable • No certification required on redemption (31 CFR344.2(e)(2)(ii)) Chapman and Cutler LLP | PFM Asset Management LLC

  14. 3. Impermissible Practices (31 CFR 344.2(f)) • Generally the same as for Time Deposit SLGS (except for redemptions) • No “cost-free” option • Limitation on yield of purchased SLGS Chapman and Cutler LLP | PFM Asset Management LLC

  15. 4. Subscription • Information needed to enter subscription into SLGSafe: (31 CFR 344.8(b)) • Issue date • Principal amount • Issuer name and TIN • Title of officer authorized to purchase (and redeem) SLGS • Description of tax-exempt bond issue • Time requirements (31 CFR 344.8(a)) • Subscription due • At least 5 business days prior to the issue date for issues consisting of $10 million or less • At least 7 days prior to the issue date for issues greater than $10 million • No more than 60 days in advance Chapman and Cutler LLP | PFM Asset Management LLC

  16. III. Pricing, Liquidity and Potential Uses Chapman and Cutler LLP | PFM Asset Management LLC

  17. Pricing • Tax-exempt and variable rate • Priced off of 3-month Treasury Bill (“T-Bill”) • typically yields 75% of the T-Bill yield • Rate usually refreshed each Tuesday, the day after new T-Bill auction • Demand Deposit SLGS rate may be higher than one- or two-month Time Deposit SLGS rate Chapman and Cutler LLP | PFM Asset Management LLC

  18. Pricing Considerations • Usually don’t know rate when subscription is placed • Subject to weekly reset (makes market calls a bit more difficult) • Preserve optionality • Outperform if Fed increases target rate (“reinvestment risk” not a big concern) Chapman and Cutler LLP | PFM Asset Management LLC

  19. Comparison to Money Market Funds • Demand Deposit SLGS may provide higher yield than Treasury-only money market funds Chapman and Cutler LLP | PFM Asset Management LLC

  20. Comparisons to Other Investment Alternatives Cash (not invested) • No return • FDIC insurance? • Considered imputed earnings for tax law purposes (Treas. Reg. §1.148-5) • Money Market Funds • Returns currently near 0% • Typically AAA-rated • May not provide defeasance security (may lose value because of market risk) Demand Deposit SLGS Securities • Liquidity resembles money market fund for draws less than $10 million • May yield slightly higher than money market funds • Backed by full faith and credit of U.S. (31 CFR 344) • PotentialSLGS window closure is problematic • Redemptions in 1 or 3 business days depending on size (31 CFR 344.9(a)) Chapman and Cutler LLP | PFM Asset Management LLC

  21. Other Considerations • Cash flows uncertain, so generally need to “gross fund” fixed liabilities because rate could go to 0% • Need to set up procedure for redemptions; do not automatically redeem or “mature” • Exhibit to escrow deposit agreement showing subscription and redemption dates • Risk of SLGS window closing • When window closes, Demand Deposit SLGS are rolled over into special 90 day certificates of indebtedness • Certificates of indebtedness can often be redeemed early Chapman and Cutler LLP | PFM Asset Management LLC

  22. Common Uses of Demand Deposit SLGS Escrows • May allow for an escrow that yields above the bond yield • Especially useful for current refundings and float periods Debt Service Funds • Could be useful if not considered a “bona fide debt service fund” – arbitrage a concern • Project Funds • With strict permitted investments language • Good liquidity and potential to earn positive arbitrage if yield curve is flat or inverted Chapman and Cutler LLP | PFM Asset Management LLC

  23. Unique Considerations and Investment Strategies • Useful for periods of less than 30 days when you want to earn interest • Better alternative to 0% SLGS in 15 to 29 day window unless yield restriction concerns exist • Less costly and administratively simple alternative to purchasing open market Treasuries • Use in funds subject to rebate or yield restriction in high interest rate environment – retainable earnings in excess of arbitrage yield Chapman and Cutler LLP | PFM Asset Management LLC

More Related