Swap Guidelines
This policy will govern the use by the University of interest rate swap transactions for the
purpose of hedging existing and planned bond issues.
I. Authority
The University has the statutory authority to enter into swap transactions and related
agreements. The Board first authorized the University to enter into a Master Swap
Agreement in 1999. The Board has authorized the University to enter into Master Swap
Agreements as part of the approval process for bond financings.
II. Purpose
As part of its liability management program, the University may enter into swap
transactions. By utilizing swaps in a prudent manner, the University can take advantage
of market opportunities to reduce debt service cost and interest rate risk. The University
shall not enter into swap transactions for speculative purposes.
III. Legality/Approval
In order to enter into a swap transaction, the University must receive: 1) approval from
the Board, and 2) an opinion acceptable to the market from a nationally recognized bond
counsel firm or general counsel that the agreement relating to the swap transaction is a
legal, valid and binding obligation of the University and that entering into the transaction
complies with applicable state and Federal laws.
IV. Form of Swap Agreements
Master swap agreements entered into by the University shall contain terms and conditions
as set forth in the International Swap and Derivatives Association, Inc. (“ISDA”) Master
Agreement and such other terms and conditions including schedules and confirmations as
deemed necessary by an Authorized Representative.
V. Methods of Soliciting and Procuring Swaps
In general, swaps should be completed with firms with provider credit ratings of at least
“A” category from at least two nationally recognized credit rating agencies. Like the
bond underwriting process, an Authorized Representative of the University may procure
swaps by negotiated method as long as, in light of the facts and circumstances, doing so
will promote the University’s interests by encouraging and rewarding ongoing service
and innovation to the University.
VI. Management of Swap Transaction Risk
Certain risks are created when the University enters into any swap transaction. In order
to manage the associated risks, guidelines and parameters are as follows:
Counterparty Risk
In addition to the “A” category ratings, a collateralized approach is considered an
additional benefit to the University. However, it is not required. Collateral will consist
of cash, U.S. Treasury securities and Agency securities. Collateral shall be deposited
with a third party trustee, or as mutually agreed upon between University and a provider.
Termination Risk
The termination provisions of any swap agreement shall be bilateral; however, the
University shall have the right to optionally terminate a swap agreement at any time over
the term of the agreement (elective termination right). In general, exercising the right to
optionally terminate an agreement should produce a benefit to the University, either
through receipt of a payment from a termination, or if a termination payment is made by
the University, a conversion to a more beneficial debt instrument or credit relationship.
Amortization Risk
The amortization schedules of the debt and associated swap transaction should be closely
matched to the duration of the swap. Mismatched amortization schedules can result in a
less than perfect hedge and create unnecessary risk.
Term Risk (Average Life of Swap Agreement)
In no circumstance may the term of a swap agreement entered into for liability
management purposes between the University and a qualified swap provider extend
beyond the final maturity date of the affected debt instrument, or in the case of a
refunding transaction, beyond the final maturity date of the refunding bonds.
Basis (Index) Risk
Any index chosen as part of an interest rate swap agreement shall be a recognized market
index including but not limited to BMA or LIBOR.
Basis risk shall be understood and detailed as part of the approval process.
VII. Reporting Requirements
An annual summary is prepared by the University and included in the financial
statements, which are provided to the Board.
Swap Guidelines (PDF)