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State Street Global Advisors Australia (SSgA) has reassured investors in 13 of its trusts with exposure to securities lending, which have increased buy/ sell spreads and introduced redemptions mixing cash and collateral due to ongoing illiquidity in the asset-backed markets in which sec lending capital was invested. In a letter to clients following an I&T News article on the matter last month, SSgA senior managing director Rob Goodlad rejected investor protests made in that article that the collateral assets were “toxic”, saying there had been no impairments and that majority of the assets retained the AAA rating they had originally required.

“SSgA strongly believes that some prices for asset-backed securities reported by independent pricing services are generally more reflective of the value that a distressed seller would receive if forced to liquidate a position than a value in a more normalised market between a willing buyer and seller. We therefore recommend that investors continue to hold positions in there securities,” he said.

On May 1, SSgA issued a supplementary PDS for its 13 funds which had participated in securities lending, informing investors that any redemption over $2.5 million would now be paid out only partially in cash, and the rest as an in specie transfer of assetbacked securities from the collateral pool associated with State Street’s global securities lending programs. SSgA is understood to be the only major indexer in Australia that attached sec lending to its funds – most of its passive funds are affected (including its wealth-weighted global offering) as well as its active Australian equities trust.

SSgA invested the cash it received as collateral for loaned securities in money market and intermediate-term asset-backed securities, the secondary markets for which had become “dysfunctional”, according to SSgA product engineer Jonathan Shead. An investor in SSgA’s Global Index Plus Trust questioned why SSgA was not marking the collateral to market in its pay-out calculations, when departing clients would have to mark the assets to market and take an immediate performance hit.

“If the collateral is so good, then why don’t they buy it rather than fob it off to unit holders?” he added, predicting that wholesale investors speaking for “100s of millions” would “just take the haircut and run”. SSgA had already increased the buy/sell spreads on the affected funds late last year. Shead said that increase had been anywhere between 20 and 50 bps depending on the proportion of assets a particular fund had on loan, and admitted the increase more than doubled the spread in some cases.

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