Glossary of Municipal Securities Terms
Second Edition (January 2004)
FAIL – A transaction between two broker-dealers on which delivery does not take place on the settlement date. A transaction in which a broker-dealer has yet to deliver securities is referred to as a “fail to deliver;” a transaction in which a broker-dealer has not yet received securities is referred to as a “fail to receive.”
FAIRNESS LETTER or FAIRNESS OPINION – A letter or opinion prepared by a financial advisor, pricing advisor or similarly qualified person opining on the fairness of the price paid by the underwriters to the issuer in connection with a new issue of municipal securities or paid by purchasers of assets. The term also sometimes refers to similar letters delivered by an investment banker, financial advisor or similarly qualified person regarding the fairness of the price being paid by an issuer or conduit borrower for assets being purchased with bond proceeds. See: FINANCIAL ADVISOR; PRICING ADVISOR.
FEASIBILITY STUDY – A report detailing the economic practicality of and the need for a proposed capital program. It frequently analyzes demand for the product or service being sold and forecasts financial statements or other operating statistics. The feasibility study may include a user or other rate analysis to provide an estimate of revenues that will be generated for the purpose of substantiating that debt service can be met from pledged revenues. In addition, the feasibility study may provide details of the physical, operating, economic or engineering aspects of the proposed project, including estimates of construction costs, completion dates and drawdown schedules.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) – Federal agency that enforces MSRB rules applicable to its member banks (other than banks that are members of the Federal Reserve System) and thrift institutions that are municipal securities dealers. The FDIC also guarantees (within limits) funds on deposit (other than securities)in member banks and thrift institutions and performs other functions relating to the safety and soundness of its member institutions. Compare: FEDERAL RESERVE BOARD; OFFICE OF THE COMPTROLLER OF THE CURRENCY. See: APPROPRIATE REGULATORY AGENCY.
FEDERAL RESERVE BOARD – The Board of Governors of the Federal Reserve System, which is the federal agency that enforces MSRB rules applicable to the system’s member banks that are municipal securities dealers. In addition, it is responsible for making national monetary policy. Compare: FEDERAL DEPOSIT INSURANCE CORPORATION; OFFICE OF THE COMPTROLLER OF THE CURRENCY. See: APPROPRIATE REGULATORY AGENCY.
FINAL MONIES – Information required by MSRB Rule G-15(a) to be included in a confirmation of a transaction in municipal securities with a customer relating to, among other things, the total dollar amount of the transaction, accrued interest, extended principal, and transaction-based commission or other fees paid by the customer to the broker-dealer. See: ACCRUED INTEREST; COMMISSION; CONFIRMATION; EXTENDED PRINCIPAL.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) – A standard-setting body that prescribes authoritative standards of financial accounting and reporting for the guidance of private sector entities. Compare: GOVERNMENTAL ACCOUNTING STANDARDS BOARD. See: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
FINANCIAL ADVISOR – With respect to a new issue of municipal securities, a consultant who advises the issuer on matters pertinent to the issue, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. A financial advisor may also be employed to provide advice on subjects unrelated to a new issue of municipal securities, such as advising on cash flow and investment matters. The financial advisor is sometimes referred to as a “fiscal consultant” or “fiscal agent.” A broker-dealer that acts as a financial advisor is subject to MSRB rules. Compare: PRICING ADVISOR.
FINANCIAL AND OPERATIONS PRINCIPAL (FINOP) – A person associated with a broker-dealer who has supervisory responsibility for the firm’s compliance with record keeping, net capital, customer protection and financial reporting rules. Such persons must qualify by means of an examination.
FINS NUMBER – An identification number assigned by the Depository Trust and Clearing Corporation to each financial institution (bank, broker-dealer or investor) active in the securities markets. The term is derived from the acronym for “Financial Industry Number Standard.”
FIRM PRICE – A designation that a quotation (a bid or offer price) will not be changed for a specified period of time (i.e., “firm”) and will be the price of any transaction executed with the party to whom the quotation is given during that period. The broker-dealer giving a firm quotation also commits itself not to effect a transaction in the securities with any other party during that period. Firm quotations may sometimes be subject to a “recall,” either immediately upon notice or after a specified period. Alternatively, the quotation might be “firm, fill or kill,” in which case the quoting broker-dealer has the right to contact the second broker-dealer and inform it that it must execute a transaction against the offering price immediately or the quotation will be withdrawn. Compare: SUBJECT BID/OFFER. See: QUOTATION.
FISCAL YEAR – A twelve-month period at the end of which financial position and results of operations of an entity are determined. Financial reporting, budgeting and accounting periods are determined on the basis of the applicable fiscal year. Compare: BOND FISCAL YEAR.
FITCH RATINGS – A nationally recognized statistical rating organization that provides ratings for municipal securities and other financial information to market participants. See: NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION; RATING AGENCY; RATINGS.
501(c)(3) ORGANIZATION – An organization recognized by the Internal Revenue Service as a not-for-profit organization. A 501(c)(3) organization can borrow funds to finance projects on a tax-exempt basis through a conduit issuer. Examples include not-for-profit colleges and universities, hospitals, museums and retirement communities. See: CONDUIT BORROWER; PRIVATE ACTIVITY BOND – Qualified 501(c)(3) bonds.
529 COLLEGE SAVINGS PLAN – A program, sometimes referred to as a “college savings plan,” established by a state as a “qualified tuition program” pursuant to Section 529 of the Internal Revenue Code. Under a 529 college savings plan, a person may make contributions to an account established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account. Contributions generally are used to acquire shares or uints in a state trust, with trust assets invested in a manner consistent with the trust’s stated investment objectives. Shares or units typically constitute municipal fund securities. Under current federal tax law, earnings from a 529 college savings plan used for qualified higher education costs of the designated beneficiary are excluded from gross income for federal income tax purposes. Compare: PRE-PAID TUITION PLAN. See: DESIGNATED BENEFICIARY; 529 PLAN; MUNICIPAL FUND SECURITY; QUALIFIED HIGHER EDUCATION EXPENSES.
529 PLAN – A generic term for a “qualified tuition program” established under Section 529 of the Internal Revenue Code. Both 529 college savings plans and pre-paid tuition plans are considered 529 plans, although the term often is used to refer exclusively to 529 college savings plans. See: 529 COLLEGE SAVINGS PLAN; PRE-PAID TUITION PLAN.
FIXED INCOME SECURITY – An investment representing an indebtedness on the part of the obligor and having the basic characteristic of providing for periodic payments of investment return and repayment on a specified date of the principal amount of the investment. Certain forms of indebtedness that do not provide for periodic payments of a fixed amount of interest income (e.g., variable rate demand obligations, zero coupon bonds) nonetheless generally are considered to be fixed income securities.
FIXED-TO-FLOATING RATE SWAP – An agreement whereby an issuer synthetically converts fixed rate debt into variable rate debt through an interest rate swap. Compare: FLOATING-TO-FIXED RATE SWAP. See: INTEREST RATE SWAP CONTRACT.
FLOAT CONTRACT – A contract between an issuer and a counter-party whereby the counter-party guarantees a rate of reinvestment return on idle moneys (e.g., moneys temporarily available between the time that investments mature or are otherwise paid and the time that such moneys can be reinvested) in one or more funds or accounts under a bond contract or escrow deposit agreement.
FLOAT FUND – A fund in which moneys are deposited for temporary periods between the time that investments mature or are otherwise paid and the time that such moneys can be reinvested.
FLOATING-TO-FIXED RATE SWAP – An agreement whereby an issuer synthetically converts variable rate debt to fixed rate debt through an interest rate swap. Compare: FIXED-TO-FLOATING RATE SWAP. See: INTEREST RATE SWAP CONTRACT.
FLOW OF FUNDS – The order and priority of handling, depositing and disbursing pledged revenues, as set forth in the bond contract. Generally, the revenues are deposited, as received, into a general collection account or revenue fund for disbursement into the other accounts established by the bond contract. Such other accounts generally provide for payment of the costs of debt service, debt service reserve deposits, operation and maintenance costs, renewal and replacement and other requirements. Described below are funds and accounts commonly used in bond contracts. Not all such funds and accounts may exist in every bond contract and other funds and accounts not described below may be created under a particular bond contract:
Debt Service Fund – A fund into which the issuer makes periodic deposits to assure the timely availability of sufficient moneys for the payment of debt service requirements. Typically, the amounts of the revenues to be deposited into the debt service fund and the timing of such deposits are structured to ensure a proper matching between debt service fund deposits and debt service payments becoming due. For many issues, the debt service fund may contain a separate “principal account” and “interest account” in which moneys for such respective purposes are held. In addition, the debt service fund for many variable rate securities may contain a “letter of credit account” or “reimbursement account” in which moneys are held to reimburse the issuer of a liquidity facility for draws made to pay amounts owing on the securities. See: DEBT SERVICE SCHEDULE.
Debt Service Reserve Fund or Reserve Fund – A fund in which moneys are placed in reserve to be used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. The debt service reserve fund may be entirely funded with bond proceeds at the time of issuance, may be funded over time through the accumulation of pledged revenues, or may be funded only upon the occurrence of a specified event (e.g., upon failure to comply with a covenant in the bond contract). In addition, issuers may sometimes authorize the provision of a surety bond or letter of credit to satisfy the debt service reserve fund requirement in lieu of cash. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the fund from the first available revenues. See: DEBT SERVICE RESERVE FUND REQUIREMENT.
Mandatory Redemption Fund – A fund into which the issuer makes periodic deposits of moneys to be used to pay the costs of calling bonds in accordance with the mandatory redemption schedule in the bond contract or to purchase bonds in the open market in satisfaction of such mandatory redemption requirement. This term is sometimes used interchangeably with the term “sinking fund.” See: FLOW OF FUNDS – Sinking Fund.
Operations and Maintenance Fund – A fund into which moneys are deposited to be used for the purpose of meeting the costs of operating and maintaining the financed project.
Renewal and Replacement Fund – A fund into which moneys are deposited to cover anticipated expenses for major repairs of the project whose revenues are pledged to the bonds or for repair and replacement of related equipment. Compare: FLOW OF FUNDS – Reserve Maintenance Fund.
Reserve Maintenance Fund – A fund into which moneys are deposited to cover extraordinary maintenance or repair expenses of the project whose revenues are pledged to the bonds. The fund is intended to protect the bondholders by ensuring against interruptions of operation of the financed project due to unavailability of moneys to pay for repairs of unexpected damage or breakdown. In some cases, a single fund may serve the purposes of the Reserve Maintenance Fund and the Renewal and Replacement Fund. Compare: FLOW OF FUNDS – Renewal and Replacement Fund.
Revenue Fund – A fund into which specified revenues are initially placed and from which the moneys for all other funds are drawn.
Sinking Fund – A fund into which moneys are placed to be used to redeem securities in accordance with a redemption schedule in the bond contract. This term is sometimes used interchangeably with the term “mandatory redemption fund.” See: FLOW OF FUNDS – Mandatory Redemption Fund.
Surplus Fund – A fund into which are deposited moneys that remain after operations and maintenance expenses, sinking fund, debt service reserve and other mandated distributions have been satisfied. In some cases, moneys in this fund may be used for various specified purposes related to the bond issue or the facilities financed with proceeds of the bond issue. In other cases, such moneys may be used for any lawful purposes of the issuer or for such specific unrelated purposes as provided in the bond contract.
FOCUS REPORT – A document summarizing information concerning a broker-dealer’s financial and operational status that a broker-dealer is required to file with its regulatory authority on a periodic basis. Part I (an abbreviated listing of essential data) is filed monthly; Part II (a more detailed reporting including a balance sheet and income statement) is filed quarterly and annually. The term is derived from the acronym for “Financial and Operational Combined Uniform Single” report.
FORWARD – A contract (variously known as a “forward contract,” forward delivery agreement” or “forward purchase contract”) wherein the buyer and seller agree to settle their respective obligations at some specified future date based upon the current market price at the time the contract is executed. Forward contracts are generally entered into in the over-the-counter markets. A forward may be used for any number of purposes. For example, a forward may provide for the delivery of specific types of securities on specified future dates at fixed yields for the purpose of optimizing the investment of a debt service reserve fund. A forward also may provide for an issuer to issue and an underwriter to purchase an issue of bonds on a specified date in the future for the purpose of effecting a refunding ofan outstanding issue that cannot be advance refunded. Compare: FUTURES CONTRACT.
FRONT-END LOAD – A sales charge or commission payable by an investor at the time of purchase of a municipal fund security. Compare: CONTINGENT DEFERRED SALES CHARGE. See: COMMISSION; LOAD; MUNICIPAL FUND SECURITY.
FULL DISCLOSURE – The principle that accurate and complete information material to a securities transaction that a potential investor would be likely to consider important in making investment decisions must be made available to purchasers or prospective purchasers. Material facts may include descriptions of the issuer and the conduit borrower in a conduit financing, including operating statistics and financial statements, as well as the structure of and security for the issue. Full disclosure enables the investor to evaluate the credit quality of an issue. The material facts pertinent to a new issue of municipal securities are generally disclosed in the official statement. See: CONTINUING DISCLOSURE; DUE DILIGENCE; MATERIAL OMISSION; RULE 10b-5.
FULL FAITH AND CREDIT BOND – A bond that is backed by all legally available funds of the issuer. Full faith and credit bonds are paid from the issuer’s general fund but are not necessarily backed by ad valorem taxes. Compare: GENERAL OBLIGATION BOND.
FULLY AUTOMATED SECURITIES TRANSFER (FAST) – A system created by the Depository Trust and Clearing Corporation whereby certificates for registered securities are maintained at the offices of individual registrars and can be transferred to a beneficial owner in a more timely and efficient manner.
FULLY REGISTERED – A security that has been registered as to both principal and interest. Such securities are payable only to the owner, or to order of the owner, whose name is noted on records of the issuer or its agent. Compare: BEARER BOND. See: BOND REGISTER; REGISTERED BOND; REGISTRAR.
FUNGIBILITY – The inherent characteristic of existing in many separate units, each of which is indistinguishable from, and can be used in place of, any other unit. Municipal securities are considered generally to lack fungibility because, given the large number of issues and the relatively small principal amount outstanding on most issues, a person seeking to replace securities of a specific issue (e.g., in order to make delivery on a transaction) often finds it difficult to locate identical securities elsewhere in the market. The features of securities that must be identical in order for them to be considered fungible for delivery purposes are specified in MSRB Rules G-12(e) and G-15(c).
FUTURES CONTRACT – An agreement, sometimes referred to as “bond futures,” whereby two parties agree to buy and sell the value of a commodity or security for settlement at a future date. Generally, there is no physical delivery of the underlying commodity or security; rather, settlement is made on a cash basis. Futures are generally exchange-traded. Compare: FORWARD.