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NO627 Interest Rate Swaps


                               SCHOOL BOARD POLICY
                                 SECTION: FINANCE

 1                            627. INTEREST RATE SWAPS
 4   Interest Rate Swap Contracts
 5   The Board recognizes that interest rate swaps can increase the District’s financial
 6   flexibility, provide opportunities for interest rate savings or enhanced investment
 7   yields, and help the District manage its balance sheet through better matching of
 8   assets and liabilities. Swaps should be integrated into the District’s overall debt and
 9   investment management guidelines and should not be used for speculation or
10   leverage. The District has legal authorization to enter swaps under the Local
11   Government Unit Debt Act, 53 Pa. C.S. Chs 80-82 (the “Act”). This policy is
12   designed to complement the Act and the requirements thereof.
14   Appropriate Use
15   The District, together with the District’s Financial Advisor and Swap Counsel, shall
16   review each interest rate swap before entering into a contract.
18   Examples of Rationales for Utilizing Interest Rate Swaps and Options
20          1.     Optimize capital structure; including schedule of debt service
21                 payments and/or fixed vs. variable rate allocations.
22          2.     Achieve appropriate asset/liability match.
23          3.     Manage risk, including:
24                       Interest rate risk;
25                       Tax risk;
26                       Yield curve risk; or
27                       Liquidity renewal risk.
28          4.     Provide greater financial flexibility.
29          5.     Produce greater expected interest rate savings or incremental yield
30                 than cash market alternatives.
31          6.     Manage exposure to changing markets in advance of anticipated bond
32                 issuances (through the use of anticipatory hedging instruments).
33          7.     Provide a specific benefit not otherwise available.

35   Permitted Instruments
36   The District may utilize the following financial products on a current or forward
37   basis, after identifying the objective(s) to be realized and assessing the risks:
39          1.     Interest rate swaps, including floating-to-fixed, fixed-to-floating
40                 and/or floating-to-floating basis swaps
41          2.     Interest rate caps/floors/collars
42          3.     Options, including swaptions, caps, floors, collars and/or cancellation
43                 or index-based features
                              SCHOOL BOARD POLICY
                                SECTION: PUPILS


 2   Procedure for Submission and Execution
 3   The District may consider interest rate swaps and options that are either presented
 4   as proposals or that are developed by the District in consultation with consultants,
 5   advisors and legal counsel.
 7          Procurement and Execution
 8          The District will not have a fixed guideline with respect to swap procurement
 9          and execution. The District will assess the benefits of competitively bidding
10          financial products that are non-proprietary or generally available in the
11          marketplace. On a product-by-product basis, the District will also have the
12          authority to negotiate the procurement of financial products.
14          For both competitively and negotiated procurements, the execution of any
15          interest rate swap or option transaction shall be the subject of an
16          independent review, analysis and finding that its terms and conditions
17          reflect a fair market value of such agreement as of the date and time of its
18          execution.
20          Counterparty Risk Assessment
21          The District will only do business with highly rated counterparties or
22          counterparties whose obligations are supported by highly rated parties. Per
23          the requirements of the Act, which enabled local government units such as
24          the District to enter into interest rate management agreements, the credit
25          rating of any counterparty shall be at least the third highest rating category
26          from a nationally recognized rating agency.
28          Per the Act, qualified swap counterparties, or their guarantor shall be rated
29          at least “A”, or equivalent by any of the nationally recognized rating agencies
30          (i.e. Moody’s, Standard and Poor’s, and Fitch). In addition, the counterparty
31          must have a demonstrated record of successfully executing swap
32          transactions.
34          The District should not have an immutable credit standard. However, it shall
35          be the District’s preference to do business with highly rated counterparties of
36          “Aa3” or “AA-” or better. For lower rated (below “Aa3” or “AA-”)
37          counterparties, the District will consider credit enhancement in the form of:
39          1.     Contingent credit support or enhancement; or
40          2.     Collateral consistent with the policies contained herein.
42   Risk Exposure Associated with Swap Contracts
43   In connection with any swap, the District and its Financial Advisor shall review the

                              SCHOOL BOARD POLICY
                                SECTION: FINANCE

 1   proposed transaction and outline any risks associated with the transaction The
 2   District shall evaluate all of the risks inherent in a swap transaction before
 3   proceeding. The risks to be evaluated should include counterparty risk, termination
 4   risk, basis risk, tax event risk, yield curve risk, liquidity / remarketing risk, and
 5   market access risk.
 8   Legal and Contractual Requirements
 9   Unless otherwise approved by the District, the District will use standard ISDA
10   swap documentation including the Schedule to the Master Agreement and a Credit
11   Support Annex as applicable. The District may use additional documentation if the
12   product is proprietary or the District deems in its sole discretion that such
13   documentation is otherwise in its interest.
15          Pennsylvania Legal Authorization and Requirements
16          Per Pennsylvania’s Local Government Unit Debt Act, 53 Pa. C.S. Chs 80-82,
17          any derivatives agreement entered by the District must relate to an
18          outstanding debt instrument of the District. The Agreement must contain
19          the following provisions:
21          Termination Provision
22          The agreement must contain a termination provision granting the District
23          the right to optionally terminate a swap agreement at any time over the term
24          of the agreement. In general, exercising the right to terminate an agreement
25          should produce a benefit to the District, either through the receipt of a
26          payment from a termination or, if the termination payment is made by the
27          District, in conjunction with a conversion to a more beneficial (desirable)
28          debt obligation of the District, as determined by the District.
30          Collateral
31          As part of any swap agreement, the District may require collateralization or
32          other forms of credit enhancements to secure any or all swap payment
33          obligations, as deemed appropriate by the District and its Swap Counsel and
34          Financial Advisor and under the following guidelines:
36          1.     Each counterparty to the District may be required to post additional
37                 collateral if the credit rating of the counterparty or parent falls below
38                 a rating as determined by the District and its Financial Advisor at the
39                 time of executing the agreement.
40          2.     Collateral shall be deposited with a third party trustee, or as
41                 mutually agreed upon between The District and the counterparty.
42          3.     Acceptable securities that may be posted as collateral include cash,
43                 government treasuries and agency securities.
                               SCHOOL BOARD POLICY
                                 SECTION: PUPILS

 1          The District will not agree to post collateral under any circumstance.
 3          Interest Rate Management Plan
 4          Per the Act, the District and its Financial Advisor will prepare an Interest
 5          Rate Management Plan prior to entering any transactions under these
 6          Guidelines.
 7          Per the terms of the Act, the District will receive a Fair Market Opinion from
 8          its Financial Advisor with respect to each transaction and will monitor the
 9          risks with respect to all outstanding transactions on a regular basis.
11   Ongoing Management
12   Per the Act the District shall contract to receive on-going monitoring of interest rate
13   risk, basis risk, termination risk, credit risk, market-access risk, and other risks
14   associated with the outstanding swaps.
16   The District will seek to maximize the benefits and minimize the risks of derivative
17   instruments by actively managing its derivative program. This will entail frequent
18   monitoring of market conditions, by the District’s Business Administrator and the
19   Financial Advisor, for emergent opportunities and risks relating to existing
20   qualified interest rate management agreements. Active management may require
21   modifications of existing positions including for example:
22           1.     Early termination; or
23           2.     Temporary suspension of cash flows; or
24           3.     Shortening or lengthening the term; or
25           4.     Sale or purchase of options; or
26           5.     Use of basis swaps.
29                                                         ADOPTED:        11/11/2009


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