Untitled Texas Attorney General Opinion ( 2005 )

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ATTORNEYGENERAL OF TEXAS
GREG ABBOTT
May 13,2005
The Honorable Carole Keeton Strayhom Opinion No. GA-0324
Texas Comptroller of Public Accounts
Post Office Box 13528 Re: Whether the Texas Treasury Safekeeping
Austin, Texas 78711-3528 Trust Company may enter into repurchase agreement
contracts that contemplate the possibilityofcash as
collateral (RQ-0295GA)
Dear Comptroller Strayhom:
You ask whether the Texas Treasury Safekeeping Trust Company may enter into repurchase
investment contracts that contemplate the possibility ofcash as collateral when other collateral is not
available to the party contracting with the state.’ You also ask whether Government Code chapter
404, subchapters C andD, and chapter2257, which establish collateral requirements for public funds
deposited with banks and other financial institutions, would have to be amended to authorize the use
of cash as collateral on an overnight basis under repurchase agreements when other eligible securities
are not available.
I. Deposit of Public Funds
Government Code chapter 404 sets out the comptroller’s powers and duties over the state
treasury. SeeTEx. GOV’TCODE ANN. $404.0011 (Vemon2005); seealso id. 5 404.001(8) (defining
“[tlreasury” as “state funds subject to the custody and control of the comptroller and available for
appropriation by the legislature”). Subchapters C and D of chapter 404 authorize the comptroller
to deposit public funds with private financial institutions, subject to specific collateral requirements.
The comptroller may designate as a state depository certain types of financial institutions doing
business in Texas. See id. 5 404.021 (a state or national bank, a savings and loan association or
credit union); see also id. 5 404.022 (application for designation as a state depository). State funds
may not be deposited with a depository unless the depository secures the funds with collateral
consisting of “eligible investment securities acceptable to the comptroller.” Id. 5 404.03 l(a).
Chapter 2257 of the Government Code, the Public Funds Collateral Act, governs a state or
local governmental entity’s deposit of public funds that are not managed by the comptroller under
‘Letter from Timothy Mashbum, General Counsel, Texas Comptroller of Public Accounts, to Honorable Greg
Abbon,TexasAttomeyGeneral(Nov. l7,2004)(onfilewithOpinionCommittee,alsoavailabIeathttp://www.oag.state
.tx.us) [hereinafkr Request Letter].
The Honorable Carole Keeton Strayhom - Page 2 (GA-0324)
chapter 404. See id. 9 2257.002(3) (Vernon 2000). Chapter 2257 authorizes these public entities
to deposit public funds with an eligible institution, requiring such deposits to be secured “by eligible
security to the extent and in the manner required by this chapter.” Id. 5 2257.021; see also id.
5 2257.002(4) (defining “eligible security”).
II. Texas Treasury Safekeepine Trust Company
Chapter 404 of the Government Code authorizes the comptroller to invest public funds as
well as to deposit them with depository institutions. “State funds not deposited in state depositories
shall be invested by the comptroller” in the investments expressly enumerated in Government Code
section 404.024(b). Id. 5 404.024(a)-(b) (Vernon 2005). The comptrollermay also invest funds held
by the Texas Treasury Safekeeping Trust Company (“TTSTC’or the “trust company”), a special-
purpose trust company incorporated by the comptroller pursuant to chapter 404, subchapter G. See
id. 8 404.102(a). TTSTC provides “a means for the comptroller to obtain direct access to services
provided by the Federal Reserve System and to enable the comptroller to manage, disburse, transfer,
safekeep, and invest funds and securities more efficiently and economically by using established and
reasonable financial practices, including the pooling of funds.” Id.
The comptroller is the “sole officer, director, and shareholder of the trust company.” Id.
5 404.104(a). She “maydeposit funds and securities with the trust company to achieve its purpose.”
Id. 5 404.102(a). TTSTC may “receive, transfer, and disburse money and securities as provided by
statute or belonging to the state, agencies and local political subdivisions of the state,” as well as
certain other entities created on behalf of the state, a state agency, or a political subdivision of the
state. Id. 5 404.103(a). Funds held by the trust company “shall be invested in obligations authorized
by law for the investment of funds held and managed by the comptroller.” Id. 5 404.106(b). But see
id. § 404.106(c) (rule for investing specific funds held by trust company for a particular participant).
TTSTC also manages and invests funds of the Texas Local Government Investment Pool’
(“TexPool”), a public funds investment pool organized under the Interlocal Cooperation Act,
Govermnent Code chapter 791, and the Public Funds Investment Act, chapter 2256 of the
Government Code. See id. $5 791.003(3)(L), .Ol l(a) (Vernon 2004); 2256.002(6) (Vernon 2000)
(defining “investment pool”), 2256.003(a)(4) (Vernon 2000) (’ investment authority of investment
pool); see also Tex. Att’y Gen. Op. No. JC-0359 (2001) at 1 (organization of TexPool). “With
respect to specific funds held by the trust company for a particular participant,” TTSTC “has the
same investment authority as that participant for those specific funds.” TEX. GOV’T CODE ANN.
$404.106(c) (Vernon 2005).
III. Repurchase Agreements
Under chapter 404, the comptroller may invest state funds not placed in state depositories in
“direct security repurchase agreements,” among other investments. See id. 4 404.024(a)-(b). A
“direct security repurchase agreement” is
‘Id. at 1
The Honorable Carole Keeton Strayhom - Page 3 (GA-0324)
an agreement under which the state buys, holds for a specified time,
and then sells back any of the following securities, obligations, or
participation certificates:
(A) United States government securities;
(B) direct obligations of or obligations the
principal and interest of which are guaranteed by the
United States; or
(C) direct obligations of or obligations
guaranteed by agencies or instrumentalities of the
United States government.
Id, § 404.001(3). Thus, state funds held by TTSTC may be invested in direct security repurchase
agreements. See id. 5 404.106(b).
A repurchase agreement, although in the form of a sale, is essentially a short-term
collateralized loan. See&c. &I&h. Comm ‘n Y.Miller, 495 F. Supp. 465,467 (S.D.N.Y. 1980);see
alsoIn re Legel, BraswellGov’t Sec. Corp., 648 F.2d 321,325 (5th Cir. 1981). The transactions are
structured as sales and repurchases rather than straight loans because certain regulations of the
Federal Reserve Bank treat repurchase agreements differently from ordinary loans and because there
are various legal obstacles to using ordinary collateralized loans. See Miller, 495 F. Supp. at 467.
Two agreements are made simultaneously: (1) the “borrower” agrees to sell and the “lender” to buy
specified securities at a specified price, and (2) the “borrower” agrees to buy and the “lender” to sell
at a specific future date the same securities for the same price plus interest. See id. In the initial
agreement, the lender purchases securities from the borrower and, in the second agreement, the
lender resells these securities to the borrower. In the repurchase agreements you describe, TTSTC
is the lender, purchasing securities with funds on hand. The borrower, or “counterparty,” as you term
the borrower, is a “large money-center bank”’ doing business in Texas or a primary government
securities dealer.4 See Request Letter, supra note 1, at 2; see also TEX. GOV’T CODE ANN.
5 2256.01 l(a)(4) (Vernon 2000) (repurchase agreement under section 2256.011 must be “placed
through a primary government securities dealer, as defined by the Federal Reserve, or a financial
institution doing business in this state”). Excess funds invested in overnight repurchase agreements
are expected to earn more interest than the same amount deposited in a bank account. See Request
Letter, supra note 1, at 1.
‘A “money center bank” is a “large bank in a major financial center which borrows from and lends to
govemments, corporations, and other banks, rather than conmnm.” See InvestorWords.com af http://www.investorwords
.com/3 lOZ/money_center_ban.html (last visited Mar. 2,2005); see also IX OXFORD ENGLISHDIC~ONARY 994 (2d ed.
1989) (a money-center bank is “a place of pre-eminent importance in the financial affairs of a region or country; spec.
New York”).
‘A primary government securities dealer is “a tirm with which the Federal Reserve conducts its open market
operations.” 5 C.F.R. $ 6801.102(f) (2005).
The Honorable Carole Keeton Strayhom - Page 4 (GA-0324)
TTSTC may also invest TexPool funds in repurchase agreements as authorized by chapter
2256. See TEX. GOV’T CODE ANN. 5 404.106(c) (Vernon 2005) (where TTSTC holds specific
funds for a particular participant, it has the same investment authority as the participant for those
specific funds). “[AIn investment pool acting on behalf of two or more local governments, state
agencies, or a combination of those entities” may invest its funds and funds under its control in
investments authorized by the Public Funds Investment Act, Government Code chapter 2256. Id.
5 2256.003(a)(4) (Vernon 2000); see id. $9 2256.001 (short title); .003(a) (investment authority of
governmental entities). Chapter 2256 authorizes public entities to invest in “[a] fully collateralized
repurchase agreement” if it
(1) has a defined termination date;
(2) is secured by obligations described by Section
2256.009(a)(l); and
(3) requires the securities being purchased by the entity to be
pledged to the entity, held in the entity’s name, and deposited at the
time the investment is made with the entity or with a third party
selected and approved by the entity; and
(4) is placed through a primary government securities dealer,
as defined by the Federal Reserve, or a financial institution doing
business in this state.
Id. 5 2256.01 I(a). Pursuant to section 2256.011(a)(2) above, the repurchase agreement must be
secured by “obligations, including letters of credit, of the United States or its agencies and
instrumentalities.” Id. 5 2256.009(a)(l) (V emon Supp. 2004-05); see also id. 5 2256.009(b)
(investments not authorized by section 2256.009).
You state that the repurchase agreement countetparty keeps the securities that are bought and
sold under repurchase agreements at a custodian bank, usually a large money-center bank located
in New York City. See Request Letter, supra note 1, at 2. “In many cases, the repurchase agreement
counterparty will keep billions of dollars in securities at the custodian” to serve as collateral for
money lent to it by entities like TTSTC. See id. With respect to the overnight repurchase
agreements you inquire about, you explain that the counterparty will notify the custodian bank,
usually by mid-day, of all its repurchase agreements for that night. See id. The custodian bank
allocates on its books the counterparty’s securities to TTSTC and other repurchase agreement lenders
for the term of the agreement, usually for that night. See id. In some cases, the counterparty’s
securities at the custodial bank are insufficient to cover all of its repurchase agreements for a
particular evening. See id. Usually this occurs late in the day, when the counterparty does not have
time to buy more securities or move securities to the custodian bank from another location. Under
these circumstances, it is customary in the banking industry for the lender under a repurchase
agreement to accept cash as part security for its loan, See id.
The Honorable Carole Keeton Strayhom - Page 5 (GA-0324)
IV. Questions
You wish to know whether TTSTC as lender may accept cash as part security for its loan of
funds under a repurchase agreement. You state that your inquiry concerns a repurchase agreement
that permits cash to be “a substituted eligible security” if (1) cash is used only when other eligible
securities are not available, and (2) there is no diminution of yield resulting from this substitution.
See id. at 5. We paraphrase your questions as follows:
1. If the custodian holds cash for the benefit of the buyer (because
U.S. Treasury securities or agency securities are not available),
is it necessary for such cash to be secured by collateral pursuant
to Government Code chapter 404, subchapters C and D, and
chapter 2257?
2. May the repurchase agreement contemplate the possibility that
cash could be one of the eligible securities allocated to the
repurchase agreement?
3. Would amendments to Government Code chapter 404,
subchapters C and D, and chapter 2257, which require specific
kinds of collateral for the deposit of public funds, be necessary to
authorize the use of cash as collateral on an overnight basis under
repurchase agreements?
See Request Letter, supra note 1, at 1, 3.
Your first question assumes that the custodian bank may hold cash as collateral for a
repurchase agreement in which TTSTC has invested. Your second question asks whether you have
correctly assumed that the custodian bank may hold cash as collateral for a repurchase agreement
in which TTSTC has invested; in essence, whether the premise underlying your first question is
correct. Because your first question is premised on a particular answer to the second, we will begin
by addressing your second question.
V. Mav TTSTC Invest in a BeDurchase Apreement under Which Cash Could Be an
Eligible Securitv?
In construing statutes, the courts seek to determine and give effect to the legislature’s intent.
See City of San Antonio v. City of Boerne, 111 S.W.3d 22,25 (Tex. 2003); State v. Gonzalez, 82
S.W.3d 322,327 (Tex. 2002); see also Am. Home Prods. Corp. v. Clark, 38 S.W.3d 92, 95 (Tex.
2000). A court will look first to the “plain and common meaning of the statute’s words.” Cig of
San Antonio, 111 S.W.3d at 25. If a statute’s meaning is unambiguous, a court will generally
interpret the statute according to its plain meaning. Id.
Government Code sections 404.024 and 2256.011 do not expressly include cash as an eligible
security. Section 404.024 authorizes the comptroller to invest state funds in “direct security
The Honorable Carole Keeton Strayhom - Page 6 (GA-0324)
repurchase agreements,” in which the following securities may be collateral for the loan of state
funds:
(A) United States government securities;
(B) direct obligations of or obligations the principal and
interest of which are guaranteed by the United States; or
(C) direct obligations of or obligations guaranteed by
agencies or instrumentalities of the United States government.
TEXGOV’TCODEANN. 5 404.001(3) (Vemon2005). Repurchase agreementsthat section2256.011
authorizes for TexPool must be secured by “obligations, including letters of credit, of the United
States or its agencies and instrumentalities.” Id. 5 2256.009(a)(l) (Vernon Supp. 2004-05); see id.
4 2256.011 (b) (Vernon 2000). Neither provision authorizes cash as security for the repurchase
agreements in which TTSTC may invest state fimds and TexPool funds. See generally Stewart Y.
Selder, 473 S.W.2d 3,8-9 (Tex. 1971) (the ordinary meaning of “cash” in a will includes checks and
demand deposits in banks as well as coins and paper money).
You note that the relevant statutes do not expressly include cash as an eligible security for
a repurchase agreement. Request Letter, supra note 1, at 4. You further state that you do not believe
this omission was intended to prohibit using cash as security under the circumstances you describe
and that “[o]n its face, the purpose of listing the securities was to limit the universe of eligible
securities to risk-free and highly liquid securities.” Id. You state that there is no risk associated with
holding cash, other than lost purchasing power if it is not earning income, and for that reason you
question whether the legislature necessarily intended to exclude cash from serving as collateral under
a direct security repurchase agreement. See id.
Your suggested reading of Government Code sections 404.001(3) and 2256.009(a)(l)
overlooks the rule of statutory construction requiring us to find the legislature’s intent in the plain,
unambiguous language of the statute. City ofSan Antonio, 111 S.W.3d at 25. We cannot insert
additional words into a statutory provision unless it is necessary to give effect to the clear legislative
intent. See Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547, 552 (Tex. 1981).
The legislature has moreover expressly authorized securities lending programs under chapters
404 and 2256 that permit cash to be used as a security. Section 404.024(1) authorizes the comptroller
to establish a securities lending program under which the loan must be lily secured with “cash,
obligations, or a combination of cash and obligations.” TEX. GOV’T CODE ANN. 3 404.024(1)
(Vernon 2005) (emphasis added). Government Code section 2256.0115 provides for a securities
lending program that requires a loan to be secured by pledged securities, pledged irrevocable letters
of credit, or cash invested in accordance with specific sections of chapter 2256 that authorize (1)
investment in obligations of or guaranteed by governmental entities, (2) commercial paper, (3)
mutual f’unds, and (4) investment pools. See id. 3 2256.0115 (Vernon Supp. 2004-05); see also id.
$5 2256.009 (Vernon Supp. 2004-05), 2256.013, .014, ,016 (Vernon 2000).
The Honorable Carole Keeton Strayhom - Page 7 (GA-0324)
These securities lending provisions show that the legislature expressly authorizes the use of
cash as security when it intends to do so. See MiNer Y. Keyser, 90 S.W.3d 712,719 (Tex. 2002).
Government Code section 2256.0115 moreover restricts the use of cash as security, limiting it to
cash invested under specific provisions of chapter 2256. When the legislature has used a term in one
section of a statute and excluded it in another, a court will not imply the term where it has been
excluded. SeeMeritorAuto., Inc. v. Rum Leasing Co., 44 S.W.3d 86,90 (Tex. 2001) (citing Smith
v. Baldwin, 611 S.W.2d 611,616 (Tex. 1980)); Tex. Att’y Gen. Op. No. GA-0209 (2004) at 4; see
also Jones v. Fowler, 969 S.W.2d 429,432 (Tex. 1998) (legislative intent is determined from the
entire act and not merelyisolatedportions). Given that sections 404.024(L) and 2256.0115 expressly
authorize and limit the use of cash as security, it is not reasonable to read sections 404.024(a) and
2256.011 as impliedlyauthorizing TTSTC to accept cash as collateral inrepurchase agreements. We
conclude that TTSTC may not invest in a repurchase agreement under which cash could be an
eligible security.
VI. Additional Questions
You first asked whether cash that the custodian holds for the benefit of the buyer because
U.S. Treasury securities or agency securities are not available must be secured by collateral. Given
our conclusion that TTSTC lacks authority to invest in a repurchase agreement under which cash
could be an eligible security, we need not answer this question.
You also asked whether amendments to Government Code chapter 404, subchapters C and
D, and chapter 2257, related to the collateral required to secure a deposit ofpublic funds, would be
necessary to authorize the use of cash as collateral under repurchase agreements. As we have
indicated, the existing statutes do not provide this authority to the comptroller in managing the assets
of TTSTC. It is for the legislature to decide whether it wishes to authorize TTSTC to invest in
repurchase agreements partially secured by cash as collateral, and if so, how such legislation should
be written. Accordingly, we do not address this question.
The Honorable Carole Keeton Strayhom - Page 8 (GA-0324)
SUMMARY
The Texas Comptroller of Public Accounts may not invest
state funds or TexPool funds held by the Texas Treasury Safekeeping
Trust Company in direct security repurchase agreement contracts that
contemplate the possibility of cash as collateral.
Very truly yours,
w
of Texas
BARRY R. MCBEE
First Assistant Attorney General
DON R. WILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
Susan L. Garrison
Assistant Attorney General, Opinion Committee