When one billion dollars evaporates, people notice. This lesson was learned—and learned very publicly—by the California Public Employees’ Retirement System (CalPERS) last August when it announced an unrealized loss of $854.3 million in its internally managed securities-lending program. While the loss actually occurred via poor reinvestment of the cash that collateralized the securities’ loans, securities lending as a whole took the blame.
CalPERS’ experience has been echoed around America in the past three years. Pensions, endowments, foundations, and insurance funds took hits. However, ex-America securities-lending programs have encountered fewer, if still some, issues over this time frame. The reason: a pronounced difference in the percentage of beneficial owners accepting cash as collateral for lending their portfolios. In Canada, for example, only about 20% of programs utilize cash collateral, a far cry from the nearly universal practice south of the border, according to CIBC Mellon’s Senior Vice President, Capital Markets, James Slater.
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