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H. 5107
STATUS INFORMATION
General Bill
Sponsors: Rep. Wilkins
Document Path: l:\council\bills\dka\3888dw04.doc
Introduced in the House on April 14, 2004
Currently residing in the House Committee on Ways and Means
Summary: Hedge contracts
HISTORY OF LEGISLATIVE ACTIONS
Date Body Action Description with journal page number ------------------------------------------------------------------------------- 4/14/2004 House Introduced and read first time HJ-9 4/14/2004 House Referred to Committee on Ways and Means HJ-9
View the latest legislative information at the LPITS web site
VERSIONS OF THIS BILL
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING CHAPTER 55 TO TITLE 11 SO AS TO AUTHORIZE GOVERNMENTAL ENTITIES TO ENTER INTO HEDGE CONTRACTS, TO PROVIDE FOR DEFINITIONS, REQUIRED DETERMINATIONS, CONSTRUCTION, AND RELATED MATTERS.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Title 11 of the 1976 Code is amended by adding:
Section 11-55-10. The General Assembly finds that:
(1) In an increasingly complex financial and economic environment, the State and its political subdivisions face varying levels of exposures to interest rate and other risks relative to the issuance and carrying of bonds, notes, and other obligations and the acquisition and carrying of investments, and various challenges in sustaining or otherwise maintaining the amounts of these risks at levels considered appropriate by governmental entities.
(2) In part in response to these challenges, the financial marketplace has developed and continues to create and implement various types of instruments and agreements, of varying degrees of sophistication, such as interest rate swaps and other hedge contracts referred to and as defined in this chapter, which offer assistance to the State and its political subdivisions in hedging, establishing, or otherwise managing the actual or potential interest rate, payment, or other risk involved with the issuance or carrying of these obligations or acquisition or carrying of the investments including, but not limited to, management of the overall amount of obligations or investments of the governmental entity which, taking hedge contracts into account, bear interest at a net effective rate which is fixed or variable. These instruments and agreements may enable the State and its political subdivisions to manage these risks on bases that provide economic efficiencies or other benefits not as easily, if at all, available under more conventional financial arrangements.
(3) Although various states and their political subdivisions have, to date, entered into hedge transactions involving various terms and providing various types of costs and benefits, the volume of these transactions within this State is expected only to increase and, therefore, it is in the interest of this State and its citizens that greater certainty be provided as to circumstances in which these entities may legally enter into hedge contracts and certain provisions which may be included in them. It is correspondingly in the interest of this State and its citizens that, as a condition to entering into transactions under the authority of this chapter, certain determinations first be made by or on behalf of the applicable governmental entity and that any counterparty to a transaction meet certain qualifications.
Section 11-55-20. As used in this chapter:
(1) 'Governing body' means the board, commission, council, group, agency, or other body to whom is delegated the legislative or administrative duties of a governmental entity.
(2) 'Governmental entity' means the State, any agency, department, or institution of the State, any political subdivision of the State including, but not limited to, any municipality, county, school district, public service district, special purpose district, commissioners of public works, or similar entity, including combinations of one or more of these entities acting jointly, and any other state or local authority, board, commission, agency, or department, or other political subdivision.
(3) 'Hedge contract' means:
(a) an agreement, including terms and conditions incorporated by reference in the agreement, between a governmental entity and one or more qualified hedge provider, that is an interest rate swap agreement, whether the governmental entity exchanges payments based on fixed rates for floating payments or payments based on floating rates for fixed payments, or a combination of them, basis swap, forward rate agreement, interest rate option, interest rate cap, floor, lock, or collar agreement, rate of return guarantee or assurance, any other agreement providing for payments based on levels of or changes in interest rates or other indices or rates or to exchange cash flows or a series of payments, or any other similar agreement, or that otherwise represents an agreement to place an obligation or investment of the governmental entity, including a future delivery of obligations or investments, in whole or in part, on the interest rate, currency, cash-flow, or other basis desired by the governmental entity, including any option, put, or call with respect to any of the foregoing;
(b) any combination of agreements described in subitem (a); or
(c) a master agreement for an agreement or a combination of agreements described in subitem (a) or (b), together with all schedules, confirmations, and other supplements to them.
(4) 'Obligation' means a:
(a) bond, including, without limitation, any general obligation bond or revenue bond;
(b) note, including, without limitation, any bond anticipation note or tax anticipation note;
(c) certificate or other obligation of any kind to evidence any repayment obligation for money borrowed; or
(d) lease or an installment purchase contract or other obligation.
(5) 'Qualified hedge provider' means any bank, insurance company, or financial institution qualified to do business in the State:
(a) which has, at the time of entering into the hedge contract, a long-term unsecured debt rating or financial strength rating in one of the three highest general rating categories issued by no fewer than two nationally recognized credit rating organizations; or
(b) which, under the hedge contract, the obligations are guaranteed by an entity which, at the time the hedge contract is entered into, has a long-term unsecured debt rating or financial strength rating in one of the three highest general rating categories issued by no fewer than two nationally recognized credit rating organizations.
Section 11-55-30. (A) In connection with or incidental to any issuance or carrying of obligations or acquisition or carrying of investments, in any case whether actual or proposed, a governmental entity has the power pursuant to the provisions of this chapter to enter into, terminate, amend, or otherwise modify a hedge contract as it determines necessary. Before entering into a hedge contract pursuant to the provisions of this chapter, the governing body of that governmental entity has first, subject to Section 11-55-60, to adopt a resolution or ordinance setting forth the following:
(1) A specification in reasonable detail of the obligations or investments, which may be all or any portion of one series or multiple series, and which specification may be changed as necessary by subsequent resolution or ordinance of the governing body, provided that the subsequent resolution or ordinance has reaffirmed the determinations made pursuant to items (2) through (4), inclusive, taking the change in specification into account, to which the hedge contract relates, or, in the case of obligations or investments proposed to be issued, acquired, or carried in the future, those to which the hedge contract will or is proposed to relate.
(2) A determination that the hedge contract is entered into, after consideration of the applicable terms and risks, in order to hedge or otherwise manage the actual or potential interest rate, payment, or other risk involved with the issuance or carrying of the obligations or acquisition or carrying of the investments including, but not limited to, management of the overall amount of obligations or investments of the governmental entity which, taking a hedge contract into account, bear interest at a net effective rate which is fixed or variable.
(3) A determination that the notional amount of the hedge contract is not expected to exceed, at any time during the term of it, and the stated term of the hedge contract is not expected to extend beyond, an amount and term considered appropriate by the governing body, or any officer designated pursuant to Section 11-55-60 to accomplish the provisions of item (2).
(4) A determination that payments upon the termination of a hedge contract are set or to be calculated on terms customary for similar transactions including, without limitation, provisions using market quotations available for giving the net benefit of the hedge contract upon termination to the parties entitled to them or reasonable fair market determinations of the value at termination made in good faith by one or more of the parties to the hedge contract.
(B) A hedge contract entered pursuant to the provisions of this chapter must contain payment, security, default, remedy, valuation, and termination, and other terms and conditions as the governmental entity, after having made the determinations as provided in subsection (A), considers appropriate and must be entered into with one or more qualified hedge providers as the governmental entity selects after giving consideration to criteria as considered appropriate by the governmental entity.
(C) A governmental entity may enter into credit enhancement or liquidity agreements in connection with a hedge contract, containing payment, security, default, remedy, valuation, and termination, and other terms and conditions as the governing body or an officer provided for in Section 11-55-60 determines necessary.
Section 11-55-40. (A) An obligation of the governmental entity under any hedge contract entered pursuant to the provisions of this chapter, including an obligation relative to regular periodic payments or payment of any termination amount or other obligation, may be structured to constitute:
(1) a general contractual obligation of the governmental entity;
(2) a limited recourse contractual obligation of the governmental entity payable from a specified source; or
(3) an obligation the continuing nature of which is subject to the occurrence or nonoccurrence of future events, such as a contract containing provision for termination if appropriated and otherwise unobligated funds are no longer available to satisfy the obligations of the governmental entity under it.
(B) A hedge contract may be made payable from:
(1) the same source or sources of funds from which any related obligations of the governmental entity are, or will be, made payable;
(2) investments owned by the governmental entity which, under the terms of the hedge contract or any related credit support document, are pledged or posted as collateral for the governmental entity's obligations under it; or
(3) any other lawfully available source.
Section 11-55-50. The choice of law for enforcement of a hedge contract entered pursuant to the provisions of this chapter as to a counterparty may be made for any state of the United States, but the law which controls the legal authority of a governmental entity to enter into a hedge contract provided by this chapter is that of the State of South Carolina.
Section 11-55-60. A governmental body, by resolution or ordinance, may delegate to an officer of the governmental body the power to make, on behalf of the applicable governmental entity, a determination of the matters provided for in this chapter.
Section 11-55-70. This chapter does not affect a hedge contract entered into before the effective date of this chapter or otherwise to affect a hedge contract entered into by general or special authority existing apart from this chapter, as to matters of validity or otherwise."
SECTION 2. If any section, subsection, paragraph, subparagraph, sentence, clause, phrase, or word of this act is for any reason held to be unconstitutional or invalid, such holding shall not affect the constitutionality or validity of the remaining portions of this act, the General Assembly hereby declaring that it would have passed this chapter, and each and every section, subsection, paragraph, subparagraph, sentence, clause, phrase, and word thereof, irrespective of the fact that any one or more other sections, subsections, paragraphs, subparagraphs, sentences, clauses, phrases, or words hereof may be declared to be unconstitutional, invalid, or otherwise ineffective.
SECTION 3. This act takes effect upon approval by the Governor.
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