New Jersey is seeking proposals for derivative advisory services, as its current contract with Lamont Financial Services Corp. will expire Jan. 30.

While Lamont has been monitoring the state's existing swap agreements, the firm has also consulted New Jersey on changes to those derivatives and evaluating new swap transactions.

Treasury Department officials are now seeking two separate firms, with one consultant evaluating and monitoring the state's current swap portfolio and a second firm working as a swap consultant on derivative transactions, although the state could choose one firm to serve in both positions.

Firms are permitted to apply to both the swap portfolio monitor post and the swap advisory consultant position, but must submit separate proposals for each service. Responses are due by Dec. 24 at 12 p.m. Eastern Standard Time. Interested parties should e-mail any questions by Dec. 17 at 5 p.m. to Treasury officials will post answers on its public finance Web site on or about Dec. 19.

New Jersey offers a smorgasbord of derivative transactions - 27 different swap agreements among three state authorities.

Of those swaps, three transactions are forward-starting floating-to-fixed-rate swap agreements connected to New Jersey Economic Development Authority school facilities construction bonds, which are state contract bonds. Officials are reviewing whether to terminate the derivatives or sell variable-rate debt to help offset the swaps once they begin.

In each agreement, the NJEDA will pay 62% of one month of the London Interbank Offered Rate plus 40 basis points to three different counterparties, according to the RFP.

A $250 million swap with Royal Bank of Canada as counterparty paying the NJEDA a fixed-rate of 4.512% will begin on May 1. The Bank of Montreal Nov. 1 will start paying a fixed rate of 4.548% on a $250 million forward swap. On May 1, 2010, a $500 million Merrill Lynch Capital Services Inc. swap will begin, with the bank paying the authority a fixed rate of 4.251%.

The swap portfolio monitor will create a swap portfolio database and submit monthly reports, including mark-to market valuations.

Officials are also requesting e-mail alerts for counterparty credit rating changes, mergers and acquisitions of banks or bankruptcy announcements, or any changes in swap valuation that would place the state in additional risk or offer New Jersey an opportunity to alter any existing swap agreements.

The swap advisory consultant will review and update the state's swap policy, evaluate the swap portfolio and recommend changes to help manage risk, and brief Treasury officials on new derivative products or swap opportunities.

In addition, the firm will craft fair market value of any potential swap terminations and restructurings, an example of which is included in the RFP in Attachment V.

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