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City of Guelph Corporate Policy and Procedure
Corporate Policy and
Procedure
Policy
Investment Policy
Category
Corporate
Authority
Finance
Related Policies
N/A
Approved By
Council
Effective Date
Tuesday, June-05-2018
Revision Date
Monday, February 22, 2021
Policy Statement
The City of Guelph strives for the optimum utilization of its cash resources within
statutory limitations and the basic need to protect and preserve capital, while
maintaining solvency and liquidity to meet ongoing financial requirements.
Purpose
To outline the investment goals and objectives of the City of Guelph and define the
parameters within which staff may invest funds not required immediately.
Definitions
Asset Backed Securities: fixed income securities (other than a government
security) issued by a Special Purpose Entity, substantially all of the assets of which
consist of Qualifying Assets.
Credit Risk: the risk to an investor that an issuer will default in the payment of
interest and/or principal on a security.
Diversification: a process of investing assets among a range of security types by
sector, maturity, and quality rating.
Duration: a measure of the timing of the cash flows, such as the interest payments
and the principal repayment, to be received from a given fixed-income security.
This calculation is based on three variables: term to maturity, coupon rate, and
yield to maturity. The duration of a security is a useful indicator of its price volatility
for given changes in interest rates.
Interest Rate Risk: the risk associated with declines or rises in interest rates
which cause an investment in a fixed-income security to increase or decrease in
value.
Liquidity: a measure of an asset's convertibility to cash.
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City of Guelph Corporate Policy and Procedure
Market Risk: the risk that the value of a security will rise or decline as a result of
changes in market conditions.
Market Value: current market price of a security.
Master Repurchase Agreement: an agreement between a dealer and a client
which substantiates that the securities the client receives under a repurchase
agreement are the property of the client in the event of a dealer failure.
Maturity: the date on which payment of a financial obligation is due. The final
stated maturity is the date on which the issuer must retire a bond and pay the face
value to the bondholder. See "Weighted Average Maturity".
ONE Fund - The One Investment Program ("ONE Fund"): A local government
investment pool in which Ontario municipalities may invest. ONE Fund is operated
by Local Authorities Service Limited (a wholly owned subsidiary of the Association
of Municipalities of Ontario), together with CHUMS Financing Corporation (a wholly
owned subsidiary of the Municipal Finance Officers' Association of Ontario).
Portfolio: collection of securities held by an investor.
Prudent Person Rule: an investment standard outlining the fiduciary
responsibilities relating to the investment practices of public fund investors.
a) The standard of prudence to be used by investment managers shall be the
prudent person standard and shall be applied in the context of managing an
overall portfolio.
b) The prudent person must act in all matters regarding investments with the care,
skill, prudence, and diligence under the circumstances then prevailing that a
prudent person acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character and with like aims.
c) The prudent person must diversify the investments of the Funds so as to
minimize the risk of large losses, unless under the circumstances it is clearly not
prudent to do so.
Qualifying Assets: financial assets, either fixed or revolving, that, by their terms
convert into cash within a finite time period, plus any rights or other assets
designed to assure the servicing or timely distribution of proceeds to security
holders.
Rate of Return: the yield obtainable on a security based on its purchase price or
its current market price. Yield reflects coupon, term, liquidity and credit quality.
Repurchase Agreement: an agreement between a dealer and client to sell a
security and to repurchase that security, with interest, at a later date.
Safekeeping: holding of assets (e.g., securities) by a financial institution.
Securities: include bonds, debentures, treasury bills, commercial paper,
repurchase agreements, promissory notes and asset-backed securities.
Sinking Fund: money accumulated on a regular basis in a separate custodial
account that is used to redeem debt securities or preferred stock issues.
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City of Guelph Corporate Policy and Procedure
Special Purpose Entity: a trust, corporation, partnership or other entity organized
for the sole purpose of issuing securities that entitle the holders to receive
payments that depend primarily on the cash flow from Qualifying Assets, but does
not include a registered investment company.
Weighted Average Maturity (WAM): the average maturity of all the securities
that comprise a portfolio.
Scope
The Investment Policy applies to all financial assets of the City of Guelph held
within the following:
-
General Funds;
-
Reserve Funds; and
-
Funds held in Trust with the City of Guelph.
Objectives
The primary objectives of the Investment Policy, in priority order, shall be:
A. Adherence to statutory requirements;
B. Preservation of capital;
C. Maintaining liquidity; and
D. Earning a competitive rate of return.
A) Adherence to Statutory Requirements:
All investment activities shall be governed by the Municipal Act as amended.
Investments, unless limited further by Council, will be those deemed eligible under
Ontario Regulation 438/97 or as authorized by subsequent provincial regulations.
B) Preservation of Capital:
Safety of principal is an important objective of the Investment Program.
Investments of the City shall be undertaken in a manner that protects and
preserves the capital of the portfolio. Investments shall be undertaken in a manner
that seeks to ensure the preservation of capital in the overall portfolio. Staff shall
endeavour to mitigate credit risk and interest rate risk as follows:
Credit Risk:
-
Limiting investments to safer types of securities;
-
Diversifying the investment portfolio so that potential losses on individual
securities will be minimized; and
-
Pre-qualifying the financial institutions, broker/dealers, intermediaries, and
advisers with which the City does business.
In determining the composition of the portfolio, it will be recognised that the
combination of several different investments (diversification) is likely to provide a
more acceptable level of risk exposure than having a single investment. As a result,
some reasonable diversification of the portfolio will be undertaken. To attain this
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City of Guelph Corporate Policy and Procedure
goal, the City will undertake to establish limitations with respect to credit and
investment size.
Investment Quality
All investments shall have a minimum rating within the limitations as set out in
Schedule 1. In addition, investments are further restricted by credit rating
limitations as outlined in this policy.
1. The City shall not invest in a security offered by any Borrower (except
City/Municipal Notes) with a bond rating lower than 'A' as established by
Dominion Bond Rating Services (DBRS) or their equivalent ratings provided
by Moody's Investor Services (Moody's), Fitch Ratings (Fitch), or Standard &
Poor's (S&P).
2. The City shall not invest in securities with a Commercial Paper/ST debt rating
lower than R-1 Mid (except Financial Institutions in Schedule I with ratings
no lower than R-1 Low) as established by DBRS or their equivalent ratings
provided by Moody's, Fitch, or S&P.
Publications of the relevant credit rating agencies shall be monitored on an ongoing
basis. Should a rating change result in increased risk with respect to established
limitations, an exception report must be prepared and reviewed by the Treasurer
with the appropriate action taken to ensure the City's portfolio remains within the
limitations and terms outlined in this policy.
Investment Diversification
Institutional exposure limitations have been established to reflect the relative safety
of various issuers and the maximum desired exposure to various levels of
government and financial institutions.
Diversification will include sector limitations outlined in Schedule I to this policy. All
eligible investments (excluding cash held in the bank accounts of the City of
Guelph) must adhere to the institutional sector limits as established under Schedule
I.
C) Maintaining Liquidity:
The investment portfolio shall remain sufficiently liquid to meet all operating and
cash flow requirements and limit temporary borrowing requirements. This shall be
done, where possible, by structuring the portfolio such that securities mature
concurrent with anticipated cash demands. Furthermore, since all possible cash
demands cannot be anticipated, the portfolio shall consist largely of securities with
active secondary or resale markets. A portion of the portfolio may be placed in
eligible investment pools which offer liquidity for short-term funds.
D) Earning a Competitive Rate of Return:
The rate of return on the investment portfolio will be optimized to the extent
possible given the investment objectives of legality, safety of principal and the need
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City of Guelph Corporate Policy and Procedure
to maintain adequate liquidity. Return on investment is of secondary importance
compared to the safety and liquidity objectives described above.
Normally longer term investments offer higher yields than shorter term
investments. Investments will be made to obtain the most advantageous yields
while at the same time ensuring that funds can be made available to meet expected
cash requirements. The composition of the portfolio, including its term and class of
investments will be adjusted within the guidelines of this policy to take advantage
of market opportunities which arise to enhance the rate of return on the portfolio.
Performance Standards/Benchmarking
The investment portfolio will be managed in accordance with the parameters
specified within this policy. The portfolio should obtain a market average rate of
return throughout the budgetary and economic cycles, commensurate with the
investment risk constraints and cash flow needs of the City. The market yields
should be higher than the rate given by the City's general bank account.
Eligible Investments
The City will only invest in securities permitted under the Municipal Act and Ontario
Regulation 438/97, as amended from time to time.
Only Canadian dollar investments are authorized for the purposes of this policy
within the limitations set out in Schedule I.
Authorized Investment Dealers
The City may invest funds through the investment arm of various Schedule I banks.
The following Schedule I banks are authorized to be the City's primary investment
dealers:
1. RBC Royal Bank
2. BMO Bank of Montreal
3. CIBC
4. TD Bank Financial Group
5. Scotiabank (The Bank of Nova Scotia)
6. National Bank of Canada
The City may invest funds directly through the administrators of the identified
sectors in Schedule I at the approval of the Treasurer and/or Deputy Treasurer
subject to the Schedule I limits for those sectors. If the City, at any given point in
time, is not in accordance to the Schedule I limits it will have one year to correct
the sector balances and become compliant.
Standard of Care
A) Prudence
Investments shall be made with judgment and care, under circumstances then
prevailing, following the prudent person principle of investment management and
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City of Guelph Corporate Policy and Procedure
considering the probable safety of their principal as well as the probable income to
be derived. Consideration will be given to obtaining independent legal and/or
financial advice in circumstances in which the municipality believes additional
expertise is warranted.
Investment staff acting in accordance with written procedure, this investment policy
and exercising due diligence, shall be relieved of personal responsibility for an
individual security's credit risks or market price changes, provided deviations from
expectations are reported in a timely fashion and the liquidation or the sale of
securities are carried out in accordance with the terms of this policy.
B) Ethics and Conflicts of Interest
Staff involved in the investment process shall refrain from personal business
activity that could conflict with the proper execution and management of the
investment policy, or that could impair their ability to make impartial decisions.
Employees and investment officials shall disclose any material interests in financial
institutions with which they conduct business. They shall further disclose any
personal financial/investment positions that could be related to the performance of
the investment portfolio. Employees and officers shall not undertake personal
investment transactions with the same individual with whom business is conducted
on behalf of the City.
C) Delegation of Authority
The Investment Policy and any amendments thereto must be adopted by City
Council. This policy will delegate to the Treasurer the authority to make
investments which comply with this policy, pursuant to section 418(5) of the Act.
The Treasurer has overall responsibility for the prudent investment of the City's
portfolio.
Investment Procedures and Internal Control
The Treasurer will be responsible for the development and maintenance of suitable
procedures to provide for the effective control and management of investments.
The procedures include the following requirements:
-
The Treasurer or designate is authorized to obtain a reasonable number of
quotations with the approved institutions on any individual investment
transaction prior to the decision to invest in a transaction on behalf of the
City of Guelph;
-
All investments are confirmed by signature of the individual making the
investment and ratified by signatures of either the Treasurer or the Deputy
Treasurer;
-
All cash management transactions are recorded and interest earnings
distributed to the various funds, as the case may be, in accordance with City
policies and generally accepted accounting principles for Ontario
municipalities;
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City of Guelph Corporate Policy and Procedure
-
Periodic audits are carried out to determine whether or not the investment
guidelines provided by this policy are being followed. An external audit is
carried out to evaluate the adequacy of internal controls; and
-
Provision is made to obtain insurance coverage at all times to guard against
any losses that may occur due to misappropriation, theft or other acts of
fraud by employees.
Reporting to Council
In accordance with legislation, submit to Council at least twice per year, a report on
the financial position, investment performance, market value and compliance status
of the portfolio. The investment report will include reporting requirements and
should include:
-
A summary, by amount and percentage, of the composition of the
investment portfolio;
-
Monthly investment balances;
-
Year-end balance; and
-
Such other information that City Council may require or that, in the opinion
of the Treasurer, should be included.
D) Safekeeping and Custody
All investments shall be held for safekeeping in the name of the City of Guelph by
financial institutions approved by the City. The depository shall issue a safekeeping
receipt to the City for each investment transaction, listing the specific instrument,
rate, maturity and other pertinent information. On a monthly basis, the depository
will provide reports which list all investment activity, the book value of holdings, the
market value as of month-end and income earned by the investments.
Collateralization
In order to mitigate the City's exposure to credit risk, the City will only invest in
Bank Sponsored asset-backed securities and repurchase agreements having
satisfactory collateralization in place. The level of collateralization for these
investments must be at least 100% of their market value.
Review
This policy will be reviewed at every change in Council and/or as needed.
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City of Guelph Corporate Policy and Procedure
Schedule 1 - Authorized Investments and Limitations at
Time of Purchase
Sector1
Minimum
DBRS
Credit
Rating2
Short-
term
Minimum
DBRS
Credit
Rating2
Long-
term
Maximum
Term
(years)
Maximum
Credit
Exposure
Individual
Limit by
Credit
Rating
Maximum
Credit
Exposure
Portfolio
Limit
(max)
Federal - Government of
Canada
N/A
N/A
20
100%
100%
Federal - Federal
Guarantees
N/A
N/A
20
100%
50%
Provincial Government
and Provincial Guarantees
R-1 high
R-1 mid
R-1 low
AAA
AA low
A low
20
20
7
75%
75%
50%
75%
Country other than
Canada
N/A
AA low
1
5%
5%
Municipal - City of Guelph
N/A
N/A
N/A
N/A
50%
Municipal - Other
Municipalities and
Infrastructure Ontario
N/A
AAA
AA low
10
50%
40%
50%
Municipal - Other
Municipalities and
Infrastructure Ontario
N/A
A low
5
10%
10%
School Boards
N/A
AA low
2
10%
20%
University in Ontario,
Board of Governors of a
College
N/A
AA low
2
10%
20%
Local Board or
Conservation Authority
N/A
AA low
2
10%
20%
1 Per definitions and restrictions contained in Ontario Regulation 438/97.
2 Equivalent ratings from Moody's Investor Services, Standard and Poor's or Fitch Ratings
are acceptable as well.
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City of Guelph Corporate Policy and Procedure
Sector1
Minimum
DBRS
Credit
Rating2
Short-
term
Minimum
DBRS
Credit
Rating2
Long-
term
Maximum
Term
(years)
Maximum
Credit
Exposure
Individual
Limit by
Credit
Rating
Maximum
Credit
Exposure
Portfolio
Limit
(max)
Board of a Public Hospital
N/A
AA low
2
10%
20%
Non-profit Housing
Corporation, Local
Housing Corp.
N/A
AA low
2
10%
20%
Financial Institutions -
Schedule I Banks
R-1 low
AA low
10
75%
75%
Financial Institutions -
Schedule II & III Banks
R-1 mid
AA low
5
25%
25%
Financial Institutions -
Credit Unions
N/A
N/A
2
10%
10%
Financial Institutions -
Loan/Trust Corporations
R-1 high
AA low
1
5%
5%
Supranational Financial
Institution or
Supranational
Government Organization
N/A
AAA
5
25%
25%
Asset Backed Securities3
R-1 high
AAA
5
25%
25%
Corporate Debt
N/A
AAA
AA low
5
>5
25%
15%
25%
Commercial Paper
R-1 mid
N/A
1
15%
15%
Joint Municipal
Investment Pools -
Corporate Bond Fund
N/A
N/A
N/A
40%
40%
3 Canadian Bank administered with a minimum of 2 credit ratings.
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City of Guelph Corporate Policy and Procedure
Sector1
Minimum
DBRS
Credit
Rating2
Short-
term
Minimum
DBRS
Credit
Rating2
Long-
term
Maximum
Term
(years)
Maximum
Credit
Exposure
Individual
Limit by
Credit
Rating
Maximum
Credit
Exposure
Portfolio
Limit
(max)
Joint Municipal
Investment Pools -
Government Bond Fund
N/A
N/A
N/A
40%
40%
Joint Municipal
Investment Pools - Equity
N/A
N/A
N/A
20%
20%
Portfolio Term to Maturity
N/A
N/A
ST - 1
LT - 10
N/A
N/A