TRS 2011 Comprehensive Annual Financial Report

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TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements Investments: Alternative Total Currency Debt Equity Investments Derivatives Fair Value Australian Dollar $ 970,403 $ 734,955,748 $ $ (185,134) $ 735,741,017 Botswana Pula 4,854,270 4,854,270 Brazilian Real 975,801,805 975,801,805 Canadian Dollar 1,805,333 1,085,102,548 (102,345) 1,086,805,536 Chilean Peso 72,413,682 72,413,682 Colombian Peso 18,664,609 18,664,609 Croatian Kuna 5,492,938 5,492,938 Czech Koruna 33,602,172 33,602,172 Danish Krone 108,178,032 108,178,032 Egyptian Pound 50,697,112 50,697,112 Euro 6,434,602 2,816,038,728 2,606,298,201 (149,425) 5,428,622,106 Ghanaian Cedi 3,942,575 3,942,575 Hong Kong Dollar 1,713,190,010 104,117 1,713,294,127 Hungarian Forint 49,021,599 49,021,599 Indian Rupee 826 394,122,977 394,123,803 Indonesian Rupiah 360,574,376 360,574,376 Israeli Shekel 53,365,729 53,365,729 Japanese Yen 2,294,525,774 33,346 2,294,559,120 Jordanian Dinar 6,821,148 6,821,148 Kenyan Shilling 4,785,483 4,785,483 Malaysian Ringgit 181,502,632 22,803 181,525,435 Mauritius Rupee 6,128,271 6,128,271 Mexican Peso 365,497,667 365,497,667 Moroccan Dirham 15,258,678 15,258,678 New Turkish Lira 213,649,668 213,649,668 New Zealand Dollar 12,062,793 12,062,793 Nigerian Naira 6,353,387 6,353,387 Norwegian Krone 175,154,778 175,154,778 Pakistan Rupee 15,935,578 15,935,578 Peruvian Nuevo Sol 4,820,829 4,820,829 Philippine Peso 53,071,305 53,071,305 Polish Zloty 81,070,934 81,070,934 Pound Sterling 2,561,891,922 156,010,516 177,552 2,718,079,990 Qatar Riyal 18,594,074 18,594,074 Romanian Leu 3,033,513 3,033,513 Singapore Dollar 140,801,095 140,801,095 South African Rand 681,707,169 681,707,169 South Korean Won 1,181,566,847 1,181,566,847 Swedish Krona 3,039,295 255,089,705 (380,861) 257,748,139 Swiss Franc 1,026,733,478 24,460 1,026,757,938 Taiwan Dollar 656,628,491 656,628,491 Thai Baht 255,884,007 255,884,007 United Arab Emirates Dirham 11,134,450 11,134,450 Total Investments Subject to Foreign Currency Risk $ 12,250,459 $ 18,709,722,586 $ 2,762,308,717 $ (455,487) $ 21,483,826,275 H. SECURITIES LENDING The system is authorized by Texas Government Code, Section 825.303 to contractually lend securities to borrowers in accordance with policy established by the board of trustees and as required by statute. The system has a contract with State Street Bank and Trust Company to administer its securities lending program for domestic and international equity and fixed income securities. Authorized collateral for the program consists of cash or government securities eligible for book entry in either the Federal Reserve System or Participants Trust Company. The required collateral is based upon the lent security’s fair value plus accrued income. At a loan’s inception, the value of the collateral must be at least 102% of the value of domestic lent securities and at least 105% for international lent 54 FINANCIAL SECTION
TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements securities. Collateral is marked to market daily, and in the case it falls below 100% for domestic or 105% for international, it is reinstated to the original requirements by the borrower. Cash collateral can be invested in a cash collateral pool, U.S. government or U.S. government sponsored entity securities, time deposits, bank certificates of deposit, bankers’ acceptances, master notes, repurchase agreements, bank and corporate notes, commercial paper, asset backed securities, and derivative instruments. The system’s policies for securities lending provide investment guidelines for different asset classes to limit its exposure to different types of risks. The par value, dollar-weighted average maturity of the collective cash collateral investment may not exceed 120 days. The expected final maturity of any individual fixed-rate instrument has a limit of 36 months and any floating-rate instrument has a limit of seven years. Each instrument having a maturity of 13 months or less at the time of purchase must qualify as “first tier securities” within Rule 2a-7 under the Investment Company Act of 1940 and any instrument over 13 months must be rated within the highest major, long-term rating category of an NRSRO, or, if unrated, be determined to be of comparable quality by the trustees. The system does not have a formal custodial credit risk policy relating to its securities lending program. All cash collateral received is invested in an unrated cash collateral pool held by the counterparty, the system’s securities lending agent and is not exposed to custodial credit risk. The following table shows the underlying securities for non-cash collateral loans which are also held by the counterparty, the securities lending agent, but not in the system’s name and are not insured. Investment Type Fair Value U.S. Government Obligations $ 254,803,385 Domestic Equities 20,483,793 International Equities 8,334,579 Total $ 283,621,757 The system earns income from fees paid by the borrowers and interest earned from investing the cash collateral. The contract requires the custodian to indemnify the system if the borrower fails to return the securities or income distributions made while the securities are on loan. Non-cash collateral cannot be pledged or sold unless the borrower defaults. Substantially all securities loans can be terminated on demand either by the system or the borrower, although, as of August 31, 2011, the weighted average term of these loans was 8 days. As of August 31, 2011, the weighted average maturity of the invested cash collateral was 31 days, and there was no credit risk exposure to borrowers because the amounts owed to borrowers exceeded the amounts owed to the system. During the year there were no borrower or custodian default losses and no recoveries of prior period losses. Authorized borrowers have specific limits that vary from $50 million to $5.5 billion. During fiscal year 2011, one of TRS’ approved borrowers exceeded their borrowing limit. At all times, the loan was sufficiently collateralized and no losses were incurred. The borrower was brought into full compliance with its borrowing limit within 20 days and the exception was presented to the Compliance Committee of the TRS Board. During the year, there were no other significant violations of contractual provisions. The total market value of all loans cannot exceed 30% of the portfolio. The following table represents the fair market values of the securities lending transactions based on type of collateral received as of August 31, 2011. Cash Non-Cash Total Securities on Loan $ 22,119,226,323 $ 283,621,757 $ 22,402,848,080 Collateral Received $ 22,748,923,912 $ 289,961,257 $ 23,038,885,169 Reinvested Collateral $ 22,760,168,002 $ 22,760,168,002 For fiscal year 2011, the system earned income of $79,452,915 from securities lending. I. OTHER INVESTMENTS AND CONTINGENT COMMITMENTS The system’s investment derivative instruments include provisions that require the system to post collateral in the event that the fair value surpasses a specified contractual threshold. At August 31, 2011, the aggregate fair value of all investment derivative instruments with these collateral posting provisions is ($93,266,114). If the collateral posting thresholds of all these investment derivative instruments did not exist at August 31, 2011, the system would be required to post the aggregate amount of $173,448,571 in collateral to its counterparties. Where none of the contractual thresholds were surpassed, the system has posted no collateral at August 31, 2011. The system’s investments in certain limited partnerships commit the system to possible future capital contributions. At August 31, 2011, the remaining commitment was $14,305,596,488. FINANCIAL SECTION 55
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TRS 2011 Comprehensive Annual Financial Report

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