What Is a Forward Delivery Agreement for Bond Proceeds?

A forward delivery agreement is a contract in which a provider agrees to supply securities on future dates at fixed yields, and it fits a fund whose funding dates and investment horizon are known before the cash moves.

The MSRB glossary calls the instrument a forward, also a forward delivery agreement or a forward purchase contract, and its example purpose is optimizing the investment of a debt service reserve fund.

Among the reinvestment products built for bond proceeds, this is the one organized around delivery dates, and the SEC has listed forward purchase agreements alongside guaranteed investment contracts and repurchase agreements as products typically tailored to municipalities' specific collateral and spend-down needs.

This page takes the form in order: the delivery schedule, the funds it is built for, how it is priced, and what happens when plans change.

How does the provider deliver securities on a schedule?

The schedule is the product: the agreement commits the provider to deliver specific types of securities on specified future dates at fixed yields, which is the arrangement the MSRB glossary describes when it defines a forward.

The arbitrage regulation reaches the same structure from the tax side: its definition of a guaranteed investment contract includes any agreement to supply investments on two or more future dates, and it gives the forward supply contract as its example (26 CFR 1.148-1(b)).

That word "includes" means the list is not exhaustive, and whether a particular forward delivery agreement is a guaranteed investment contract for tax purposes is a determination for bond counsel and tax counsel.

The securities laws carry a separate definition that names the form too: Exchange Act section 15B(e)(2) covers any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, including forward supply contracts, and the SEC's rule limits that definition to contracts relating to investments of the proceeds of municipal securities or municipal escrow investments.

The classification matters in practice because Form 8038-G (line 36) and Form 8038-T (line 30) ask whether gross proceeds were invested in a guaranteed investment contract and who the provider is.

The MSRB glossary separately defines a guaranteed investment contract generally as an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity, while its forward entry describes the delivery of specific types of securities on specified future dates, and where a particular agreement falls in the investment agreement versus owned securities question is a determination for bond counsel and tax counsel.

When does a forward delivery agreement fit a debt service or reserve fund?

It fits a fund whose dates are known in advance, and the MSRB glossary's example is exactly that: a forward may provide for delivery of specific types of securities on specified future dates at fixed yields for the purpose of optimizing the investment of a debt service reserve fund.

A reserve fund holds money set aside to pay debt service if pledged revenues fall short, in the glossary's description, and the size and investment of the fund are generally subject to the arbitrage regulations.

The glossary lists the ways the fund can be built: with bond proceeds, with accumulated revenues, with a surety policy, or only on a trigger, which is the springing reserve.

The funding forms that produce later dates are where a delivery schedule has something to match, because cash that arrives on known future dates can be paired with deliveries written for those same dates.

GFOA's guidance on the investment and management of bond proceeds sorts the funds by typical horizon and treats the debt service reserve fund as the long-term case, against construction funds at 12 to 36 months and capitalized interest funds at 6 to 18 months.

GFOA presents those figures as typical ranges that vary with expectations rather than rules, and it points issuers to their advisory team and investment policy.

A construction fund's spending calendar is a different matching problem, covered in the draw schedule guide.

The amount behind the schedule has federal boundaries: an issue consists of arbitrage bonds if sale proceeds above 10 percent of the stated principal amount finance any reserve or replacement fund, whatever the yield on that fund, unless the issuer establishes a higher amount to the Secretary's satisfaction (26 U.S.C. 148(d)(2), restated at Treas. Reg. 1.148-2(f)(1)).

If the issue has more than de minimis original issue discount or premium, the percentage is measured against issue price, net of pre-issuance accrued interest, rather than stated principal (Treas. Reg. 1.148-2(f)(1)).

A narrow grandfather rule covers parity reserves under master indentures in effect before August 16, 1986 (Treas. Reg. 1.148-2(f)(3)).

Separately, the gross proceeds that can be treated as a reasonably required reserve, and so invest at unrestricted yield, cannot exceed the least of 10 percent of the stated principal amount, the maximum annual principal and interest requirements, and 125 percent of the average annual principal and interest requirements (Treas. Reg. 1.148-2(f)(2)(ii)).

Earnings in a qualifying reserve fund are generally still subject to arbitrage rebate, and the reasonably required reserve fund page works through the measurement questions.

State law can bound the term or list the agreements allowed, and the statutes differ.

Texas Government Code 2256.015(b) says bond proceeds may not be invested in a guaranteed investment contract with a term of longer than five years from the date of issuance of the bonds, and it excepts proceeds that are reserves and funds maintained for debt service purposes, which is the statute's own wording.

The Texas clock runs from the bond issue date rather than the date of the agreement, and whether a particular agreement is a guaranteed investment contract under that section is a determination for bond counsel.

Oregon's bond-proceeds statute uses its own term: ORS 294.052(2) lists "forward investment agreements" among the investment agreements a municipality may use for bond proceeds and for amounts in a bond payment reserve or proceeds fund, notwithstanding the general maturity and conduct rules, if the agreement produces a rate of return that is guaranteed, is fully collateralized by U.S. direct or guaranteed obligations, and requires the collateral to be held by the municipality, its agent or a third-party safekeeping agent.

That section sets no rating or bidding condition, and the federal arbitrage rules apply on top of any state statute.

Whether a particular agreement fits a particular state's statute is a determination for bond counsel, and the Oregon and Texas pages collect what each state's law says.

How is a forward delivery agreement priced, and what is paid up front?

The agreement fixes the schedule itself, the yields and the delivery dates, and whether anything is paid up front, and by whom, is set by the agreement's own terms.

The regulatory question about those terms is fair market value, and the SEC's litigation release against Wachovia describes the most common way to establish it for municipal reinvestment products: competitive bidding run by bidding agents.

The SEC's forward-specific warning came in an April 2000 order, Securities Act Release No. 7826, which says underpricing a forward supply contract in a positive-arbitrage situation is yield burning.

The same order describes the general mechanic in escrows: overcharging by dealers for open-market escrow securities in a positive-arbitrage situation diverts tax arbitrage to the dealers at the expense of the U.S. Treasury, a diversion known colloquially as yield burning that the SEC called illegal, and it notes the IRS can declare the interest on the refunding bonds taxable.

Those statements are SEC findings in a settled order, made without the firm admitting or denying them, and the order traces the doctrine to Harbor Bancorp & Subsidiaries v. Commissioner, 115 F.3d 722 (9th Cir. 1997).

The yield burning guide carries the escrow-side treatment in full.

Pricing is therefore a process question as much as a number: the fixed terms are tested through the solicitation, and the fair-market-value safe harbor guide covers what the Treasury regulations ask that solicitation to show.

What is the termination risk?

The exposure is that the schedule is fixed: the yields and the delivery dates are committed terms of the agreement, and the flexibility to change either exists only to the extent the agreement's own provisions supply it.

The tax definition points at those provisions by name, because a nonpurpose investment comes within the guaranteed-investment-contract definition when it has specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate, so the terms that govern changes to the schedule are drafted terms rather than defaults the regulation supplies.

What happens on a missed or cancelled delivery, and what it costs to end the agreement early, are answered by the documents, which start from the bid specifications the solicitation carries.

Termination can also arrive from the credit side where an agreement carries a guarantor: Ambac's 2008 Form 10-K reported that its downgrades triggered cure provisions in nearly all of its investment agreements, with remedies that included collateral posting, termination of the contract, or the designation of a replacement guarantor.

That filing describes one guarantor's contracts in one year rather than market-standard terms, and the credit protection page covers how downgrade triggers and remedies are structured.

mGIC does not sell forward delivery agreements or any other investment for bond proceeds, and it does not act as principal.

As an independent, SEC-registered municipal advisor and Bidding Agent, it prepares the bid specifications, solicits qualified providers, manages provider questions and compares the bids on rate and non-rate terms, with its fee paid by the winning provider rather than the issuer.

To have mGIC bid it, or to ask for a free, no-obligation review of how a fund's current investments line up with its schedule, the contact page is the place to start.

Final determinations about how a forward delivery agreement is classified, whether the structure fits a particular fund and state, and what its terms mean for a specific issue belong to bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.