Title
Authorizing the Committee on Rules to hold public hearings investigating the use of qualified interest rate management agreements by the City and School District; assessing whether corrective actions, including legal remedies, should be pursued; and determining the conditions, if any, under which it would be appropriate to enter into future agreements; and in furtherance of such investigation, authorizing the issuance of subpoenas to compel the attendance of witnesses and the production of documents to the full extent authorized under Section 2-401 of the Home Rule Charter.
Body
WHEREAS, Qualified interest rate management agreements, also known as interest rate "swaps," belong to the class of financial instruments known as derivatives. The use of swap agreements in public financial management was encouraged by the federal Commodity Futures Modernization Act of 2000, and authorized by the Pennsylvania Legislature in Act 23 for use by local government units in 2003; and
WHEREAS, Swaps are complex financial transactions used to hedge against the risk posed by fluctuating interest rates. In the most common form of a swap, two parties exchange one stream of variable interest payments for a stream of fixed interest payments. The party agreeing to make fixed interest payments seeks to avoid the risk of future increases in the variable interest rate that it would otherwise have to pay; and
WHEREAS, In such a transaction, a municipality (or other local government unit) that had to make variable interest rate payments on an outstanding bond would exchange ("swap") that obligation for an obligation to make fixed interest rate payments to a banking institution. In return, the bank would agree to make periodic payments that would rise (or fall) according to a benchmark interest rate such as LIBOR (the interest rate that high-credit quality banks charge one another for short-term financing). If the swap worked as intended, the payments due on the outstanding bo...
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