2011 - Division of Administration - Louisiana

State of LouisianaG. SECURITIES LENDINGState TreasuryIn accordance with its authority under LRS. 49:321.1, theState has entered into a securities lending agreement thatfunctions as a reverse repurchase/repurchasearrangement, with Morgan Stanley acting as principal.Under the arrangement, Morgan Stanley purchases (orborrows) on an overnight basis that portion of the State’spool of U.S. Treasury and Agency securities which theState from time to time makes available for such purposes,with a simultaneous agreement to resell or repurchasesuch securities at the termination of the transaction. Thereverse repurchase and repurchase transactions areexecuted pursuant to the terms of a paired repurchaseagreement among the State, the Bank of New York andMorgan Stanley. The State receives U.S. GovernmentSponsored Entity, or “agency”, collateral in return for thesecurities that it reverses to Morgan Stanley under theterms of the reverse repurchase transaction on a fixedspreadbasis.Four separate funds were included in the securities lendingagreement for the fiscal year ending June 30, 2011. AtJune 30, 2011, the collateral exceeded the value of thesecurities on loan by $111,623,733 for the general fund,$4,696,902 for the Louisiana Education Quality Trust Fund(LEQTF), $16,388,671 for the Medicaid Trust Fund for theElderly (the Medicaid Trust), and $13,124,737 for theMillennium Trust Fund (the Millennium Trust).At June 30, 2011, the value of securities on loan was$5,285,425,335 for the Treasurer’s pooled general fundinvestments; $235,145,085 for LEQTF; $256,225,186 forthe Medicaid Trust Fund; and $207,148,090 for theMillennium Trust Fund.In each transaction, Morgan Stanley delivers collateralfrom its account at the Bank of New York to the State’scustodial account at the Bank of New York. The Bank ofNew York monitors the movement of the collateral toensure it is sufficient (equal to at least 102% of the value ofthe securities borrowed) and in compliance with the termsof the reverse repurchase/repurchase agreement. Eachmorning, the overnight repurchase transaction is“reversed” and Morgan Stanley receives the collateralagainst its return of investments to the State. During theterm of any particular transaction, the State’s right toreceive or sell the collateral is determined pursuant to theterms of the repurchase agreement, which provides forsuch rights upon borrower default, and in accordance withother applicable state and federal laws. The State hasexperienced no losses on securities lending transactionsand loss indemnification is provided in the contract withMorgan Stanley.As of June 30, 2011, the State had limited credit riskexposure because the market value of the U.S.Government and Government Sponsored Entity securitiespledged as collateral to the State exceeded the value ofsecurities the State had out on loan by $145,834,044. Thevalue of the securities on loan was $5,983,943,696 and thetotal market value of the securities held as collateral was$6,129,777,740. The value of the collateral securities was102.44% of the value of loaned securities. The Risk to theState is further mitigated because loss indemnification isprovided to the State in the securities lending contract withMorgan Stanley.Retirement Systems and Other TrustsThe Teachers' Retirement System of Louisiana (TRSLA),the Louisiana State Police Retirement System (LSPRS),the Louisiana School Employees' Retirement System(LSERS), and the Louisiana State Employees' RetirementSystem (LASERS) are authorized by their respectiveboards of trustees to operate securities lending programs.These programs are designed to produce supplementalincome on investments with little or no additional risk. Allsecurities are available for loan to pre-approved securitiesdealers. Securities dealers must meet specific criteria tobe approved. The TRSLA and LSPRS lend securities forcash, cash collateral or other securities/investmentcollateral. The LASERS and LSERS lend securities forcash, cash collateral, and U.S. government securities.Additionally, LSERS may lend its securities for irrevocableletters of credit and LASERS may lend securities for othersecurities/investments collateral. Collateral held under theprograms, which may be reinvested by the systems underthe terms of the agreement with the broker/dealer, isrecorded as an asset with a corresponding liability;otherwise, the collateral is not recorded on the Statementof Net Assets. None of the retirement systems may pledgeor sell collateral securities received unless the borrowerdefaults.The TRSLA lends domestic securities for cash collateral of100%, domestic securities for other securities collateral at102%, and international securities for cash collateral orother securities collateral of 105%. The LSPRS, LSERSand LASERS lend U.S. securities for collateral valued at102% of the market value of the securities. For theLSERS and LASERS, non-U.S. securities are loaned forcollateral valued at 105% of the market value of thesecurities. In instances where LSPRS, TRSLA andLSERS loans are for term, the reinvestment of the cash ismatched to the maturity of the loan. The majority ofLASERS loans are terminable at will. Therefore, theirduration will not generally match the duration of theinvestments made with cash collateral.At June 30, 2011, neither LASERS, LSPRS, TRSLA norLSERS had any credit risk exposure to borrowers at year- 62 -