Institutional Federal Compliance Report 2021

collateralized by direct obligations of, or obligations the principal and interest on which are guaranteed by, the United States of America, with a net market value of at least 102 percent of the net market value of the contract to the issuer and such collateral shall be deposited with the issuer or its agent. The following table presents the counterparty credit ratings as of March 31, 2019 and includes scheduled notional reduc- tions to the CUNY business-type activity swap that occurred after June 30, 2018 (amounts in millions): 94 • Notes to Basic Financial Statements __________________________________________________________________________

Credit Ratings

Notional Amount

Counterparty

Moody’s

S&P A+ AA– A+

Fitch

Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Goldman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JP Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merrill Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Societe Generale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Certain of the State’s swap agreements contain set-off provisions. Under the terms of the agreements, should an agreement terminate, close-out set-off pro- visions permit all outstanding transactions with the related counterparty to terminate and net the trans- action’s fair values so that a single sum will be owed by, or owed to, the State. There were no interest rate swap agreements in asset positions at March 31, 2019; therefore, the State was not exposed to credit risk and no collateral was required to be posted by counterparties. However, should interest rates change and the fair values of interest rate swap agreements become positive, the State would be exposed to credit risk in the amount of those swaps’ fair value. Basis Risk The State is exposed to basis risk on its pay-fixed inter- est rate swaps, which is the possibility that the variable rate payments received by the State in the swap are less than the variable rate payments made by the State on the underlying bonds issued. Because the swaps are based on a percentage of LIBOR, there is a pos- sibility that this floating rate will not match the actual interest rates set in the tax-exempt market on the underlying bonds. Times when the mismatch may be out of favor to the State are in very low interest rate environments or if major changes in the tax code were to be enacted causing tax-exempt floating-rate bonds to trade less favorably in comparison to taxable floating rate bonds. Should the relationship between LIBOR and the actual variable rate payments converge, the expected cost savings may not materialize. Termination Risk The swap contracts use the International Swap Dealers Association Master Agreement (Master Agreement), which includes standard termination events, such as failure to pay and bankruptcy. The schedule to the *Not rated

303 180 213 99 205 94 268

Aa3 Aa2 Aa2 A2 A3 A1 Aa3

A+ —* AA A+

A–

BBB+

A A

A

A+

AA–

1,362

Master Agreement includes “additional termination events,” providing that the swaps may be terminated if either the State or a counterparty’s credit quality rating falls below certain levels. The State or the coun- terparties may terminate the swap agreements if the other party fails to perform under the terms of the contract. The State may also terminate the swaps at its option. If a swap agreement is terminated, the syn- thetically created fixed or variable interest rate will cease to exist and the State’s interest payment will be based solely upon the rate required by the related bonds as issued. When a termination occurs, a mark- to-market (or fair market value) calculation is per- formed to determine whether the State is owed money or must pay money to close out a swap position. A negative fair market value means the State would incur a loss and need to make a termination payment to settle the swap position. A positive fair market value means the State would realize a gain and receive a termination payment to settle the swap position. Rollover Risk The State is exposed to rollover risk on interest rate swap agreements that are hedges of debt that mature or may be terminated prior to the maturity of the hedged debt. When these swap agreements terminate, or in the case of a termination option, when the option is exercised, the State will be re-exposed to the risks being hedged by the swap agreement. Currently, the maturity dates of the State’s interest rate swap agree- ments and hedged debt are coterminous. Operating Leases The State is also committed under numerous operating leases covering real property and equipment. Rental expenditures, reported for the year ended March 31, 2019 under such operating leases, totaled $306 million and were financed primarily from the General Fund.