“We’re doing everything we can to be equitable to all investors…[the higher buy/sell spreads] reflect the increased transaction costs of liquidating the collateral from our securities lending programs when there’s very poor liquidity in the secondary markets.” This month’s introduction of in specie redemeptions was a further step to protect continuing investors, Shead said, so that their exposure to collateral assets was not unduly increased. He added there was scope to reduce the redemption spread for departing investors who accepted some of the securities lending collateral.

Market sources indicate a typical SSgA investor is having 85-90 per cent of their redemption paid in cash. In a May 1 letter to clients, SSgA’s Goodlad said it was intended that the new redemption policy be temporary. Shead said the global process of “running down” the book of assetbacked securities had begun 18 months ago, but that some of the intermediate securities had terms that lasted a number of years.

SSgA now invested new sec lending collateral only in short term money market securities with 1-3 months’ maturity, he added. SSgA Australia was talking to local investors about launching new versions of its trusts that did not have a securities lending program attached, Shead said – this is understood to be standard practice in other SSgA businesses around the world. Some investors said a ‘liquidating trust’ had been proposed to them by SSgA. For investors who lack a custodian or the wherewithal to deal with illiquid securities, it is understood SSgA would issue them units in this trust instead of the in specie portion of a redemption, and manage down the exposure to collateral assets for them.