Annual Report PDF file 2009 - State of Illinois

Note 2 (continued)Deposits, Investments, and Investment RiskSecurities LendingISBI participates in a securities lending program with StateStreet who acts as a securities lending agent. Securities areloaned to brokers and, in return, ISBI has rights to a portion ofa collateral pool. All of the securities are eligible for thesecurities lending program. Collateral consists solely of cash,letters of credit, commercial paper, and government securitieshaving a fair value equal to or exceeding 102% of the value ofthe loaned securities (105% for non-U.S. securities). In theevent of borrower default, State Street provides ISBI withcounterparty default indemnification. ISBI had no credit riskas a result of its securities lending program as the collateralreceived exceeded the fair value of the securities loaned. Asof June 30, 2009 and 2008, there were outstanding loanedinvestment securities having fair values of $1,476,903,266 and$1,851,952,625, respectively; against which collateral wasreceived with a fair value of $1,528,744,414 and $1,912,742,552,respectively. Collateral received at June 30, 2009 and 2008consisted of $1,467,250,961 and $1,703,959,890 respectively, incash and $61,493,453 and $208,782,662, respectively, insecurities for which the Board does not have the ability topledge or sell.The cash collateral received is invested in a short terminvestment pool having a fair value of $1,395,768,803 and$1,703,959,890 as of June 30, 2009 and 2008, respectively. Thisinvestment pool had an average duration of 42.64 days and41.84 days as of June 30, 2009 and 2008, respectively. Anydecrease in the fair value of invested cash collateral isrecorded as unrealized losses and reported as a component ofthe investment income (loss) on the Statement of Changes inNet Assets. Regarding the investment pool, at the time ofpurchase, all securities with maturities of 13 months or lessmust qualify as first-tier securities and all securities withmaturities in excess of 13 months will (a) be rate A or better byat least two nationally recognized statistical ratingorganization (NRSROs) or (b) if rated by only one NRSRO, berated A or better by such NRSRO, or (c) if unrated, bedetermined by State Street to be of comparable quality.Derivative SecuritiesSome of ISBI’s managers invest in derivative securities. Aderivative security is an investment whose payoff dependsupon the value of other assets such as bond and stock prices,a market index, or commodity prices. ISBI’s investments inderivatives are not leveraged. Obligations to purchase (long afinancial future or a call option) are held in cash or cashequivalents. In the case of obligations to sell (short a financialfuture or a put option), the reference security is held in theportfolio. Derivatives transactions involve, to varying degrees,credit risk and market risk. Credit risk is the possibility that aloss may occur because a party to a transaction fails toperform according to terms. Market risk is the possibility thata change in interest or currency rates will cause the value of afinancial instrument to decrease or become more costly tosettle. The market risk associated with derivatives, the pricesof which are constantly fluctuating, is regulated by imposingstrict limits as to the types, amounts, and degree of risk thatinvestment managers may undertake. The Board and seniormanagement approve these limits, and the risk positions of theinvestment managers are reviewed on a regular basis tomonitor compliance with the limits.During the year, derivative investments included forwardforeign currency contracts, collateralized mortgageobligations (CMO’s), futures, and options.Forward foreign currency contracts are used to hedge againstthe currency risk in ISBI’s foreign stock and fixed incomeportfolios. Forward foreign currency contracts areagreements to buy or sell specific amounts of a foreigncurrency at a specified delivery or maturity date for an agreedupon price. As the fair value of the forward contracts varies,ISBI records an unrealized gain or loss. Forward foreigncurrency contracts represent an off-balance sheet obligation,as there are no balance sheet assets or liabilities associatedwith those contracts. The fair value of forward foreigncurrency contracts outstanding at June 30, 2009 and 2008 wasas follows:Cost Fair Value Gain (Loss)$ $ $June 30, 2009Forward currencypurchases 173,126,960 181,554,864 8,427,904Forward currency sales 183,451,357 197,473,806 (14,022,449)Total gain (loss) (5,594,545)June 30, 2008Forward currencypurchases 6,018,928 6,025,470 6,542Forward currency sales 5,890,350 5,969,514 (79,164)Total gain (loss) (72,622)ILLINOIS STATE BOARD OF INVESTMENT21