# The Opers Model

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[00:00:00.000] Hello, welcome to another Global Peer Financing Association Peer Connections Podcast.
[00:00:05.520] I'm Greg Cochran with Ohio Public Employees Retirement System, OPRS, and I'm your host
[00:00:10.000] for today.
[00:00:10.860] I'm excited to host today's podcast because we will be chatting about a subject that I
[00:00:14.700] know well, which is how OPRS approaches our securities lending program.
[00:00:18.980] Our guest speaker today is none other than Jerry May, Senior Portfolio Manager at OPRS.
[00:00:24.340] Jerry has been with OPRS since 2004, and in his role, he oversees $17 billion in cash
[00:00:29.880] investments for the plans cash and securities lending collateral. He also has oversight over
[00:00:34.700] the plan securities lending program and external agent and also manages the team of securities
[00:00:39.900] lending and cash traders for the 98 billion retirement fund, of which I'm a part. So if
[00:00:45.060] you weren't following all of that, I am very fortunate to call Jerry my boss. Welcome, Jerry,
[00:00:49.840] and thanks for joining today. Hey, Greg, how are you doing today? I'm very good. I'm good. How are
[00:00:54.860] you. Good. All right. So I guess we'll just jump right into this. How would you describe our
[00:01:01.060] securities lending model given this podcast is the OPRS model? Well, OPRS has a little bit of
[00:01:07.940] a hybrid model. There's some traditional lending going on where we're doing some lending that most
[00:01:13.600] people would be familiar with using securities lending agent. And then we mix that with a
[00:01:19.000] internal lending program where we're doing a little bit of the fixed income lending. And maybe
[00:01:23.760] a little later, you can give what that looks like for everyone as well. I would say that from my
[00:01:28.240] perspective, our approach would be that we look at securities lending in particular as an asset
[00:01:34.400] liability model. People that are able to manage the assets of the program on the reinvestment side
[00:01:41.380] versus the liability where we're having to pay a rebate to a borrower. Those people in those
[00:01:48.360] programs that are able to manage that efficiently, I think, are the ones that are most successful.
[00:01:53.160] and we try to generate incremental revenue. We're not trying to swing for the fences. We're just
[00:01:59.180] trying to be consistent and steady with the revenue that we're generating from securities
[00:02:03.520] lending. You've been with OPRS since 2004. How has, from the beginning, since you started,
[00:02:09.520] how has the model evolved over the years? Significantly in the short term, that's what
[00:02:15.240] I would say. When I got to OPRS, and I came from two lending programs previous to arriving at OPRS,
[00:02:22.760] So securities lending is my background.
[00:02:25.620] I came from two agent lenders, two banks.
[00:02:29.600] And when I got to OPRS, each of the asset classes managed their own securities lending
[00:02:36.200] program.
[00:02:37.320] So U.S. equities managed the U.S. equity lending.
[00:02:41.020] Fixed income managed the fixed income lending.
[00:02:43.560] So prior to my arrival, the board had commissioned a consultant to come in and to talk with them
[00:02:50.760] about how to make the program more efficient to maximize revenue. The consultant recommended that
[00:02:56.340] they dedicate resources to the program. And because of that, I was hired to come in and
[00:03:02.280] manage the program. One of the first things that we did was that we wound up consolidating a lot
[00:03:08.220] of the programs under one umbrella. We started doing auction programs with ESAC lending on the
[00:03:15.260] U.S. equity side, then transitioned to doing some non-U.S. equity lending and focusing a little bit
[00:03:22.120] on our fixed income program as well. So it was kind of a segregated program when I got here.
[00:03:28.080] We tried to aggregate it into one cohesive program and we started managing some cash
[00:03:33.740] collateral for securities lending. And that was a challenge as well because we were relying on
[00:03:39.980] global fixed income analysts who were not used to dealing with the short-term markets. They were
[00:03:46.120] used to dealing with managing their credits based upon managing against an index. But we were
[00:03:52.120] utilizing the credits that they managed in our cash program to a little different standard. We
[00:03:57.400] didn't want to lose any money. So that was a little transition for them. And then the financial
[00:04:02.100] crisis taught us that one of the big lessons that we learned from the financial crisis was that at
[00:04:07.260] the time, we had some of our cash collateral managed by external managers. We were having
[00:04:13.220] to monitor the holdings of those external managers very closely. And we determined that if we were
[00:04:19.080] going to have to manage and have to watch and monitor the holdings in those programs that
[00:04:24.760] closely, why don't we manage it ourselves? So we did bring all of the cash collateral in-house
[00:04:30.320] subsequent to the financial crisis in 2007 to 2009. So that pretty much brings us up to date
[00:04:36.980] to about 2010, which is when we started doing some of our own internal lending. And why don't
[00:04:43.220] you tell them about how that looks today? Yeah, sure, Jerry. So the asset classes that we manage
[00:04:49.080] in-house are the U.S. Treasuries, mortgage-backed securities, tips, agencies, and corporate bonds.
[00:04:55.200] We lend all of those directly from our desk and receive support from our agent lender with any middle and back office functions.
[00:05:03.200] We utilize all of those asset classes lending out to keep cash balances stable, as well as build up our term book, as well as open loans that we have.
[00:05:13.520] So currently to date, the total program that we have in securities lending, we have about $8 billion on loan.
[00:05:19.900] About $5 billion of that is from our internal lending.
[00:05:23.480] We have about $4 billion in treasuries on loan. $3 billion of that is term. About $1.5 billion in MBS on loan. All of that is essentially term. We do have a very small open balance of about $50 million. Then we have about $325 million in corporate bonds on loan with $260 of that in term.
[00:05:44.920] And the reason that we have such large amounts of term loans out is we are able to find areas in the cash markets where we're able to either match off a trade or invest in a space that makes sense for us to put term loans out for as long as we do.
[00:06:00.760] Yeah, I think that's a great point, Greg, because the way that we look at our program, again, as an asset liability model, where we're trying to find ways to generate revenue, sometimes those opportunities show up on the cash side. So we have an opportunity to invest some cash in an instrument that we think is viable for the short term.
[00:06:20.800] and we're able to then match off that lending to that investment with some lending on the other
[00:06:26.640] side. Alternatively, there's sometimes opportunities on the lending side where we think that rates look
[00:06:32.140] really aggressive.