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directly to the City. <br />Authorized Collateral <br />Collateral shall be limited to the following: <br />- Obligations of the US Government, its agencies and instrumentalities to include mortgage- backed <br />securities which pass the bank test. <br />- Obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as <br />to investment quality by a nationally recognized investment rating firm not less than A or its equivalent. <br />Collateral will always be held by an independent third party with whom the City has a current custodial <br />agreement. A clearly marked evidence of ownership (report or receipt) must be supplied to the City and <br />retained. The right of collateral substitution is granted with prior City approval. <br />XII. SAFEKEEPING AND CUSTODY <br />The safekeeping function will be provided by the City's banking services depository. In order to ensure <br />protection for City owned securities, the City requires delivery versus payment procedures for all <br />transactions, except pools, money market funds and time deposits, which have no book entry delivery. <br />All security transactions, including collateral for repurchase agreements, entered into by the City shall be <br />conducted on a delivery versus payment (DVP) basis to the City's depository or City approved third party <br />custodian. Securities will be held by a third party custodian approved by the Investment Officer(s) and <br />evidenced by proof of ownership (original safekeeping receipts). <br />XIII. DIVERSIFICATION <br />Diversification of the overall portfolio will be maintained in accordance with the following diversification <br />limits. <br />Security Type <br />US Government Treasury Obligations <br />US Government Agencies and Instrumentalities <br />Municipal Instruments <br />Certificates of Deposit <br />Repurchase Agreements <br />Constant dollar investment pools <br />Commercial Paper <br />Limit per commercial paper issuer <br />Money Market Mutual Fund <br />XIV. INTERNAL CONTROLS <br />Maximum % of Portfolio <br />100% <br />80% <br />30% <br />30% <br />25% <br />50% <br />25% <br />10% <br />50% <br />The Investment Officer(s) shall establish a system of written internal controls that will be reviewed annually <br />with the City or independent auditor along with quarterly investment reports. The controls will be designed <br />to prevent loss of public funds due to fraud, employee error, misrepresentation by third parties, <br />unanticipated market changes, or imprudent actions by employees, contracted investment managers or <br />financial counterparties of the City. <br />Loss of Rating <br />The Investment Officer or investment adviser shall monitor, on no less than a weekly basis, the credit rating <br />on all authorized investments in the portfolio based upon independent information from a nationally <br />City of San Marcos Investment Policy Page 5 <br />