Derivatives

Responsibility: Vice-President, Finance and Resources 
Authorization: Board of Governors
Approval Date: Mar 9, 2007

The University recognizes that certain risks are associated with normal business operations and that management of financial exposure is a fundamental component in prudent governance.  The purpose of this policy is to provide a framework for the use of derivative instruments to manage foreign currency, interest rate and commodity price risks within levels acceptable to the Board of Governors.

The University may use derivatives, identified below in “Categories of Derivatives”, for foreign exchange, interest rate and natural gas price exposure in order to reduce the risk of the University’s exposure to and minimize the impact of, fluctuations on income and cash flow.

Categories of Derivatives

1.1 Foreign Currency Derivatives - authorized for use by the Pensions and Treasury department as detailed in the Guidelines.

• Foreign currency swaps and forwards may be used to mitigate the risk of foreign currency exposures that arise from foreign denominated revenues or expenses.

1.2  Interest Rate Derivatives - authorized for use by the Pensions and Treasury department as detailed in the Guidelines.

• Interest rate swaps can be used as a means of synthetically altering the duration and/or interest rate of liabilities and assets.   Interest rate swap agreements may be offset or sold if the desired goals are not met

1.3  Commodity Derivatives - authorized for use by the Facilities Management Division as detailed in the Guidelines.

• Natural gas futures may be used to provide stability and predictability to the price of the University’s natural gas purchases.

1. Derivative positions are taken only after an analysis of the risk has been completed and documented

2. Financial Services will regularly monitor reporting requirements related to financial reporting for derivatives and update procedures as required.

3. To minimize counterparty credit risk, the minimum standard for counterparty companies is ‘BBB’ or equivalent as rated by a recognized bond rating agency.  Credit ratings will be monitored annually Pensions and Treasury.

4. The University contract review process will include identification of embedded derivatives in consultation with Financial Services.

5. Documentation and confirmation requirements will be completed by the designated signing authority.

6. All derivative agreements must be signed by two authorized signing officers in accordance with the dollar value of the derivative.

7. To facilitate segregation of duties, the confirmation of derivative transactions entered into will be performed by appropriate person(s), other than the one who initiated the derivative transaction.

8. The market value of outstanding derivative contracts will be reported quarterly to the Controller's Office by Pensions and Treasury for financial statement purposes.

9. An annual report summarizing the cost and effectiveness of the derivatives will be provided to the Board of Governors as part of the year end reporting schedule.