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There is risk in every investment activity, including securities lending. While
State Street is committed to helping its lending clients obtain optimal returns
in all market environments, we never compromise on our conservative approach
to risk management. In addition, we work with our lenders on an ongoing basis
to establish lending programs that will help them meet their investment goals
while remaining within their desired risk parameters. Some of the risks we manage
and monitor on a daily basis are market, credit, liquidity, operational, legal
and regulatory risks. For a more thorough discussion of our approach to risk
in securities lending, please see our Financial Digest of Securities Lending.
Our borrower credit management staff works in conjunction with State Street's
Enterprise Risk Management team to establish appropriate credit limits for all
approved borrowers based upon an extensive review of the borrower's creditworthiness.
These limits are approved and administered for each borrower in "risk
equivalent" terms, which are monitored and managed in State Street's
proprietary risk system. This unique system allows credit to be allocated across
all lending products based on the price volatility of the loaned securities
relative to the collateral securing the loan.
Our risk management staff monitors these credit limits daily to ensure compliance.
Formal written reviews of all borrowers occur at least annually, with additional
reviews scheduled as appropriate. Our credit management staff meets with our
borrowers' senior management on a regular basis to gain better insight
into their financial condition and business strategy.
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