Development Bank for Puerto Rico (GDB), the Economic Development Bank (EDB), and the State Insurance Fund Corporation (SIFC), discretely presented component units, entered into securities lending and securities sold with agreements to repurchase transactions. These transactions are explained below:
Pension Trust Funds — The Retirement System participates in a securities lending program, whereby securities are transferred to an independent broker or dealer in exchange for collateral in the form of cash, government securities, and/or irrevocable bank letters of credit equal to approximately 102% of the market value of the domestic securities on loan and 105% of the market value of the international securities on loan, with a simultaneous agreement to return the collateral for the same securities in the future. Collateral is marked to market daily, and the agent places a request for additional collateral from brokers, if needed. The custodian bank is the agent for the securities lending program.
At year end, the Retirement System has no credit risk exposure to borrowers because the amounts the Retirement System owes the borrowers (the “collateral”) exceeded the amounts the borrowers owe the Retirement System. At June 30, 2012, the collateral received represented 102% of the fair value of the domestic securities lent.
The securities on loan for which collateral was received as of June 30, 2012, consisted of the following (expressed in thousands):
Fair Value of Underlying
Description Securities
U.S. government and sponsored agencies' securities $26,591
U.S. corporate stocks 3,116
U.S. corporate bonds 1,395
Non-U.S. corporate stocks 3,091
Non-exchange traded mutual funds:
U.S. 34,156
Non U.S. 6,484
Total $74,833
The underlying collateral for these securities had a fair value of approximately $76 million as of June 30, 2012. The collateral received was invested in a short term investment fund sponsored by the custodian bank and is presented as collateral for securities lending transactions in the accompanying statement of fiduciary net assets.
As of June 30, 2012, the distribution of the short-term investment fund by investment type is as follows:
Investment Type Percentage
Securities bought under agreements to resell 100.00 %
Under the terms of the securities lending agreement, the Retirement System is fully indemnified against failure of the borrowers to return the loaned securities (to the extent the collateral is inadequate to replace the loaned securities) or failure to pay the Retirement System for income distributions by the securities’ issuers while the securities are on loan. In addition, the Retirement System is indemnified against loss should the lending agent fail to demand adequate and appropriate collateral on a timely basis.
Component Units:
GDB —The following is selected information concerning securities sold under agreements to
repurchase (expressed in thousands):
Carrying amount at June 30, 2012 $ 884,484
Maximum amount outstanding at any month-end 1,962,901
Average amount outstanding during the year 1,268,238
Weighted average interest rate for the year 0.47 %
The following summarizes the activity of securities sold under agreements to repurchase for the year ended June 30, 2012 (expressed in thousands):
Beginning Ending
Balance Issuances Maturities Balance
GDB Operating Fund $970,819 $15,561,953 $15,648,288 $884,484 All sales of investments under agreements to repurchase are for fixed terms. In investing the proceeds of securities sold under agreements to repurchase, GDB’s policy is for the term to maturity of investments to be on or before the maturity of the related repurchase agreements. At June 30, 2012, the total amount of securities sold under agreements to repurchase mature within one year.
EDB —EDB’s investment policies, as authorized by Act number 22 of July 24, 1985, Article 3, allow
management to sell securities under agreements to repurchase. The following table summarizes certain information on securities sold under agreements to repurchase (expressed in thousands):
Carrying amount at June 30, 2012 $123,925
Average amount outstanding during the year 151,811
Maximum amount outstanding at any month-end 171,210
Weighted average interest rate for the year 1.88 %
Weighted average interest rate at year-end 1.66 %
As of June 30, 2012, securities sold under agreements to repurchase were collateralized with mortgage- backed securities, other government agencies securities, and other investments with a market value of $132.1 million.
The activity for securities sold under agreements to repurchase during 2012 was as follows (expressed in thousands):
Amounts Due Beginning Ending Within One
Balance Issuances Maturities Balance Year
Securities sold under agreements to
repurchase $ 957,091137,400 $ $970,566 $123,925 $ 104,925
SIFC —The Commonwealth statutes and the SIFC’s board of directors’ policies permit the SIFC to use
its investments to enter into securities lending transactions, whereby securities are transferred to an independent broker or dealer in exchange for collateral in the form of cash, securities and/or irrevocable bank letter of credit. The SIFC’s securities custodian, JP Morgan Chase Bank, N.A., as agent of the SIFC, manages the securities lending program and receives cash collateral, securities or irrevocable bank letters of credit as collateral. The collateral securities cannot be pledged or sold by the SIFC unless the borrower defaults. The collateral requirement is equal to 102% for securities issued in the United States of America and 105% for securities issued outside of the United States of America, of the fair value of the securities lent. Additional collateral has to be provided by the next business day if it’s fair value falls to less than 100% of the fair value of the securities lent. All security loans can be terminated on demand by either the SIFC or the borrower. In lending securities, the term to maturity of the securities loans is matched with the term to maturity of the investment of the cash collateral. Such matching existed at
owes the borrowers exceed the amounts the borrowers owe SIFC. Contracts with the lending agents require them to indemnify the SIFC if the borrowers fail to return the securities (and if the collateral is inadequate to replace the securities lent) or fail to pay the SIFC for income distributions by the securities’ issuers while the securities are on loan.
Securities lent as of June 30, 2012 had a fair value of $174.5 million and were secured with collateral received with a fair value of $178.4 million. Securities lent for which cash was received as collateral as of June 30, 2012 consist of the following (expressed in thousands):
Fair Value of Underlying
Description Securities
Corporate bonds and notes $ 33,158
Equity securities 33,256
U.S. sponsored agencies bonds and notes 8,469
U.S. Treasury notes and bonds 34,741
109,624 $
Cash collateral received as of June 30, 2012 amounted to $112.1 million and was invested as follows (expressed in thousands): Fair Value of Underlying Description Securities Resell agreements $ 78,399 Commercial paper 20,659
Certificates of deposit with other banks 13,002
112,060 $
In addition, the SIFC had the following lending obligations as of June 30, 2012 for which securities were received as collateral (expressed in thousands):
Investment Securities Collateral
Description Lent Received
U.S. Treasury notes and bonds $ 59,92558,579 $
Equities 75 77
U.S. sponsored agencies bonds and notes 6,3726,243
64,897
$ 66,374$