80R8387 JJT-F

By: Branch H.B. No. 3539

A BILL TO BE ENTITLED

AN ACT

relating to interest rate management agreements related to financing certain public improvements.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Section 1371.001, Government Code, is amended by adding Subdivisions (2-a), (3-a), and (3-b) to read as follows:

(2-a) "Fair value," with respect to an interest rate management transaction, means the value or range of values specified by an independent financial advisor or swap advisor engaged by the issuer to provide the value or range of values.

(3-a) "Independent financial advisor or swap advisor," with respect to an interest rate management transaction, means a dealer or investment advisor registered in accordance with Section 12 or 12-1, The Securities Act (Article 581-12 or 581-12-1, Vernon's Texas Civil Statutes), who:

(A) is subject to rules of the Municipal Securities Rulemaking Board;

(B) has experience in providing service to issuers in connection with the issuance of securities and with the execution and validation of credit agreements; and

(C) has certified to the relevant issuer that:

(i) the advisor is a financial advisor;

(ii) the advisor and the advisor's affiliates have not received any payment, remuneration, or thing of value from any party other than the issuer in connection with the interest rate management transaction;

(iii) the advisor and the advisor's affiliates do not have any financial interest in the interest rate management transaction or in a related instrument;

(iv) the advisor is in compliance with the Municipal Securities Rulemaking Board's rules G-37 and G-38 with respect to the advisor's engagement by the issuer; and

(v) the advisor will comply with the Municipal Securities Rulemaking Board's rules G-17, G-19, and G-23 with respect to the advisor's engagement by the issuer.

(3-b) "Interest rate management agreement" means an agreement that provides for an interest rate transaction, including a swap, basis, forward, option, cap, collar, floor, lock, hedge, a similar transaction, or any combination of those types of transactions. The term includes:

(A) a master agreement that provides standard terms for transactions;

(B) an agreement to transfer collateral as security for transactions; or

(C) a confirmation of transactions.

SECTION 2. Subchapter B, Chapter 1371, Government Code, is amended by adding Section 1371.061 to read as follows:

Sec. 1371.061. LIMITED AUTHORITY TO ENTER INTO INTEREST RATE MANAGEMENT AGREEMENTS. (a) An issuer may enter into an interest rate management agreement only as authorized by this section.

(b) Subsections (c)-(e) do not apply to an issuer described by this subsection. An issuer may enter into an interest rate management agreement if, before September 1, 2006, the issuer has entered into:

(1) an interest rate management transaction involving a total of $500 million in notional amount; or

(2) at least three interest rate management transactions.

(c) An issuer other than an issuer described by Subsection (b) may enter into an interest rate management agreement only if:

(1) during the preceding two years, the governing body has adopted, amended, or ratified a risk management policy governing the issuer's entering into and managing interest rate management agreements and transactions that addresses:

(A) any conditions under which the issuer may enter into an interest rate management agreement without the advice of an independent financial advisor or swap advisor;

(B) the justification for entering into interest rate management agreements without the advice of an independent financial advisor or swap advisor;

(C) authorized purposes;

(D) permitted types, creditworthiness, and methods of selection of counterparties;

(E) credit risks and other risks;

(F) liquidity; and

(G) award, monitoring, and exposure limits;

(2) the issuer has received the transaction counterparty's:

(A) certificate that the difference in basis points between the rate of the transaction and the mid-market rate for a comparable transaction is in the commonly occurring range for comparable transactions, unless the transaction is awarded through a competitive bidding process; and

(B) disclosure of the counterparty's payments to any third parties in connection with the transaction; and

(3) the governing body or an authorized officer or employee of the issuer has determined that the transaction will conform to the issuer's interest rate management agreement policy.

(d) Unless the governing body has authorized entering into and managing interest rate management agreements and transactions without the advice of an independent financial advisor or swap advisor under a risk management policy the governing body has adopted, amended, or ratified during the preceding two years, the determination under Subsection (c)(3) may be made only after the governing body or the authorized officer or employee of the issuer has considered a report of an independent financial advisor or swap advisor that, with respect to the transaction, states:

(1) its purpose;

(2) the anticipated economic benefit and the method of calculating that benefit;

(3) the use of transaction receipts;

(4) the notional amount, amortization, and average life in comparison to the related obligation;

(5) any floating indices;

(6) its effective date and duration;

(7) the identity and credit rating of the counterparty;

(8) the cost and anticipated benefit of transaction insurance;

(9) the fees of financial and legal advisors;

(10) the security for scheduled and early termination payments;

(11) the associated risks and risk mitigation features; and

(12) any early termination provisions.

(e) While an interest rate management agreement is outstanding, the governing body shall review and amend or ratify its risk management policy at least once every two years.

SECTION 3. The changes in law made by this Act apply only to proceedings related to authorizing the issuance of obligations or the execution of credit agreements or interest rate management agreements that are initiated on or after the effective date of this Act and to transactions related to the obligations or agreements. Proceedings related to authorizing the issuance of obligations or the execution of credit agreements or interest rate management agreements that are initiated before the effective date of this Act, and transactions related to the obligations or agreements, are governed by the law in effect on the date the proceedings were initiated, and the former law is continued in effect for that purpose.

SECTION 4. This Act takes effect September 1, 2007.