CalPERS’ new sec lending risk controls

Joe Dear (courtesy of Daniel Rosenbaum for The New York Times)CalPERS has made some significant changes to its securities lending policy document in order to reduce risk and improve counterparty diversification in the portfolio, including a reduction in the maximum exposure to any counterparty, from 30 to 25 per cent of the total program.

CalPERS also prohibited special investment vehicles in all forms from its securities lending program, and special purpose vehicles are now required to receive explicit permission from staff for purchase by external parties.

The fund has significantly reduced its external relationships, leading to more reliance on internal staff and more oversight of all investments. The internal staff also increased the amount of liquidity available to the fund by assigning daily, weekly and monthly liquidity targets.

The fund’s consultant, Wilshire, said while the revised changes to the policy decrease risks in the program, they do not protect CalPERS from the potential for any losses in the future, but would lessen the impact of an environment as severe as that experienced in the past two years.

In the past eight years CalPERS has auctioned off access to $835 billion in assets for securities lending through 33 separate auctions, with cumulative net earnings of $1.4 billion. For the year to the end of March 2009, the average market value of securities on loan for the year was $33.5 billion, with annualised earnings of 23 basis points.