An effective securities lending program requires a coordinated strategy between the group responsible for raising the cash and the group responsible for reinvesting the cash. Global Collateral Management (GCM) is a dedicated team of portfolio managers responsible for the investment management of all assets derived from State Street's securities lending activities worldwide. Together, GCM and the trading and risk management teams evaluate and negotiate the economic consequences of term trades, pending interest rate movements, and anticipated changes in the loan portfolio composition (such as subscriptions, redemptions, asset reallocation strategies and investment updates). These strong lines of communication improve liquidity management, lead to enhanced returns and reduce risks associated with the reinvestment of cash in all of our collateral portfolios.

Our overall strategy for generating income from securities lending is to seek the optimal value at all times with respect to loans of securities. However, we recognize the value of taking a blended approach that includes combining loans of higher-valued securities with lower-spread general collateral loans. Our strategy has three main components:

1. Value Lending — Our large program and asset base, knowledgeable trading staff, sophisticated trading models, and relationships with our borrowers are key assets that enable us to price loans aggressively and make our clients the most income possible on securities that are in high demand in the borrower community.
   
   
2. General Collateral — We leverage our relationships with our borrowers by providing access to the most attractive assets via loans of securities that are not in high demand (general collateral). This creates stability of loan balances, thus eliminating the peaks and valleys that are common in a "value only" securities lending program.
   
   
3. Market Risk Management — Our market risk management team coordinates our trading area with Global Collateral Management to ensure that our clients are receiving optimal earnings from the reinvestment portfolio for a given level of risk that is within the clients' tolerance level.

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.

Compliance is one of the cornerstones of our conservative approach to risk management. State Street has had a lending-specific compliance department since 1995, and its efficiency and realm of responsibilities has rapidly evolved to meet the demands of an increasingly sophisticated and complex industry. Some of the factors contributing to that growth include increased client emphasis on risk management, technology improvements and increasing transaction volume.

Our compliance team covers areas including data control, audits, tax compliance, investment vehicle monitoring, operational risk and information security. It also implements company-wide compliance policies, procedures and controls and monitors the ever-changing regulatory environment.