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Protecting public deposits in New York State.

To aid local officials, the New York State Government Finance Officers Association prepared a checklist to help them determine whether security and custody agreements contain the provisions necessary to constitute sound and legally enforceable documents. Although the checklist was developed specifically to comply with the requirements of New York state law, the guidelines may provide important advice for local officials in other states who are attempting to develop sound security/custodial agreements with their banks. The checklist is reprinted from the New York State GFOA Newsletter, September 1993. Security/Custody Agreement Checklist

* Identify parties to agreement

A. Local government

B. Bank

C. Custodian (if third party)

* Define types of collateral which may be pledged by bank to secure deposits

A. Securities

B. Letters of credit

C. Surety bonds

* Set forth methodology for determining value of collateral provided by bank

A. Statutory haircuts

B. Frequency of valuation

* Prescribe total value of collateral required to be provided by bank

A. Collateral requirement should equal amount of uninsured deposits plus any margin requirements.

B. Requirement that bank provide additional collateral if value falls below collateral requirement.

C. Set forth manner in which collateral requirement may be changed during term of agreement.

* Grant of security interest from bank to local government in pledged securities

A. Pledged securities must be transferred to local government or custodian in form suitable for transfer or with an assignment in blank.

B. Specify conditions under which pledged securities or other collateral may be substituted, released, reduced or presented for payment.

* Define events of default and rights of local government upon default

* Representations and warranties

A. Bank is located and authorized to do business in New York.

B. Form of security agreement has been approved by the bank's board of directors or loan committee which approval has been reflected in their minutes. C. Security agreement has been executed by authorized official of bank and will at all times be maintained as official record of bank.

D. Pledged securities are owned by bank free and clear of liens and claims.

E. Pledged securities, surety bonds and letters of credit comply with statutory requirements.

* Custodial provisions

A. Specify manner in which custodian may hold pledged securities (e.g., vault, federal book entry system or clearing agency registered with Securities and Exchange Commission).

B. Requirement that pledged securities be held by custodian as agent of, and custodian for, the local government and kept separate and apart from general assets of custodian.

C. Requirement that custodial bank confirm in writing receipt, substitution and release of securities to and from custodial account.

D. Requirement that custodial bank make appropriate entries on its books at all times showing local government's interest in pledged securities.

E. Requirement that physical securities be kept in custodian's vault and physically segregated from custodian's property and other property held by custodian.

F. Specify frequency of valuation of pledged securities by custodian and procedures for substitution of ineligible because of a change in rating.

G. Subordination of claims by custodial bank.

H. Provide for access to books and records maintained by custodian with respect to local government's account.

* Miscellaneous

A. Termination

B. Notices and Instructions

C. Fees

D. Indemnification

E. Survival

F. Assignability

G. Integration

H. Governing law
COPYRIGHT 1994 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Publication:Government Finance Review
Date:Feb 1, 1994
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