§ 401-55. Risk tolerance.

A. 

Credit risk.

(1) 

"Credit risk" is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

(2) 

There will be no limit to the amount of United States Treasury and United States Government agency obligations, as they carry "AAA" ratings.

(3) 

In regards to other investments, the Town will only purchase investment grade securities with a high concentration in securities rated "A" or better.

B. 

Custodial risk.

(1) 

The "custodial credit risk" for deposits is the risk that, in the event of the failure of a depository financial institution, a municipality will not be able to recover deposits or will not be able to recover collateral securities that are in possession of an outside party. The custodial risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a municipality will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. For securities not covered by FDIC insurance, the institution should maintain Securities Investor Protection Corporation (SIPC) coverage and sufficient additional insurance to cover the amount of the Town's deposits with that institution.

(2) 

The Town will review the financial institution's financial statements and the background of the advisor. The institution should have at least $100 million in asset management. The intent of this qualification is to limit the Town's exposure to only those institutions with a proven financial strength, capital adequacy of the firm and overall affirmative reputation in the municipal industry.

(3) 

Further, all securities not held directly by the Town, will be held in the Town's name and tax identification number by a third-party custodian approved by the Treasurer and evidenced by safekeeping receipts showing individual CUSIP numbers for each security.

C. 

Concentration of credit risk.

(1) 

"Concentration of credit risk" is the risk of loss attributed to the magnitude of a government's investment in a single issuer.

(2) 

The Town will minimize concentration of credit risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized. In terms of the total amount of Town investments at any point in time, there shall be 10% or less exposure for any one type of security or issuer with the exception of instruments backed by the full faith and credit of the United States Government or bank instruments or investment vehicles fully insured by FDIC or DIF. For more specific information relating to diversification percentages, refer to § 401-56, below.

D. 

Interest rate risk.

(1) 

"Interest rate risk" is the risk that changes in interest rates will adversely affect the fair value of an investment.

(2) 

The Treasurer will manage interest rate risk by managing the duration in the account. For general Town funds, the weighted average days to maturity for the overall Town portfolio should be 365 days or less.

E. 

Foreign currency risk. "Foreign currency risk" is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit.