FY2016 CCDOA Financial Report as of 6302016.pdf - page 117

Notes to Financial Statements
For the Fiscal Years Ended June 30, 2016 and 2015
Tax Policy Risk
The Department is exposed to tax risk if a permanent mismatch (shortfall) occurs between the
floating rate received on the swap and the variable rate paid on the underlying variable rate
bonds due to changes in tax law such that the federal or state tax exemption of municipal
debt is eliminated or its value is reduced.
Termination Risk
The Department is exposed to termination risk if either the credit rating of the bonds associated
with the swap or the credit rating of the swap counterparty falls below the threshold defined in
the swap agreement, i.e. if an ATE occurs. If at the time of the ATE the swap has a negative fair
value, the Department would be liable to the counterparty for a payment equal to the swap’s
fair value. For all swap agreements, except for swaps #08A and #09A, the Department is
required to designate a day between 5 and 30 days to provide written notice following the
ATE date. For the exceptions, the designated date is 30 days after the ATE date.
Rollover Risk and Other Risk
There exists the possibility that the Department may undertake additional refinancing with
respect to its swaps to improve its debt structure or cash flow position and that such
refinancing may result in hedging swap maturities that do not extend to the maturities of the
associated debt, in hedging swaps becoming decoupled from associated debt, in the
establishment of imputed debt, or in the creation of losses.
Terms, Notional Amounts, and Fair and Mark-to-Market Values
The terms, notional amounts, and fair values (FY 2016) and mark-to-market values (FY 2015) of
the Department’s investment derivatives at June 30, 2016 and 2015, are included in the tables
1...,107,108,109,110,111,112,113,114,115,116 118,119,120,121,122,123,124,125,126,127,...169
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