The Securities Lending Program performed well during 2013 by earning over $95 million. The program has averaged over $104 million in earnings over the past four years. Program earnings continue to be a steady source of incremental income, generating over $1.26 billion for CalSTRS since its inception in 1988, adding, on average, over four basis points annually to the CalSTRS portfolio.
While the securities lending markets are continuing to show further signs of returning back to normalcy relative to the financial crisis of 2008, earnings dipped slightly this past year. This was due in part to an increased number of institutions, which were previously on the sidelines, getting back into securities lending. Available assets in the entire securities lending market increased from over $8 trillion to over $11 trillion during the calendar year. While this increased supply benefits the securities lending marketplace in general by creating additional liquidity, it also dampens pricing which lessens earnings potential. Additionally, the demand to borrow specials (individual securities with large spreads of return) and on loan balances in general declined in 2013, which also contributed to fewer income opportunities. The Asia region continued to provide the greatest number of specials relative to overall loan volume versus Europe and North America.
The regulatory environment for securities lending continues to remain uncertain going forward. There is ongoing implementation and finalization of Dodd/Frank legislation, Volcker Rule and BASEL III regulations that could potentially limit the amount of activity that counterparties can do with one another, along with potential cost increases for lending agents to indemnify their lending clients. Staff continues to evaluate the ramifications of these potential rule changes to the program.
The common theme throughout the Investment Branch business plans for this year has been to apply the core mission to “Focus on What Matters Most.” The program sought to accomplish this by continuing to follow and review established policies and guidelines with the goal of providing incremental alpha to the total fund. As a result, the program provided over five basis points, bps, in incremental return to the total fund over the past year. Borrower approval lists, counterparty exposures and excess collateral limits are monitored and reviewed. Duration of cash collateral and term loans remains short and liquidity is emphasized given risk sensitivity to the continued low interest rate environment.
Staff is in the process of evaluating responses to the Securities Lending Request for Proposal that went out to the marketplace in the fourth quarter of the calendar year. The purpose of the RFP is to refresh our agent pool and to ensure that we continue to have high-quality lending agents and cash collateral external managers to complement our internal cash collateral management program. Program staff are committed to strengthening the quality of the overall Securities Lending Program income through maximizing intrinsic value lending income, as well as enhancing income opportunities through continued prudent management of cash collateral.
This annual report represents a review of CalSTRS’ Securities Lending Program for the calendar year ending December 31, 2013, along with any important updates subsequent to that period. Included is an overview of the program, the income earned compared to each of the previous years, and an analysis of the performance of each of the cash collateral portfolios.
Co-Director of Fixed Income (Acting)
Co-Director of Fixed Income (Acting)
Chief Investment Officer
December 31, 2013