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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
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.

“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.


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