Institutional Federal Compliance Report 2021

70 • Notes to Basic Financial Statements __________________________________________________________________________

holds the securities in electronic format. Directly held investments include short-term and long-term fixed income, and domestic and international equity sep- arately managed accounts. The aforementioned invest- ments have the lowest custodial risk. Indirectly held fixed income investments are held by third party administrators in trust for the fund. Equity investments held indirectly by the System via limited partnerships, commingled investment funds, joint ventures and other similar vehicles are held in custody by an orga- nization contracted with by the general partner and/or the investment management firm responsible for the management of each investment organization. Title to real property invested in by the System is either held by a real estate holding company or a real estate investment fund. Ownership of mortgage assets is documented by the System’s holding of original mort- gage and note documents by the Division of Pension Investment and Cash Management in the Office of the State Comptroller. Credit Risk New York State statutes and the System’s investment policies provide investment guidance on credit risk. Approximately $24 billion or 54.45 percent of the System’s $44.8 billion long-term bond portfolio is rated AAA by Moody’s. For the balance of the portfolio: 20.94 percent is rated A or AA, 15.95 percent is rated B to BB, and 0.14 percent is rated C to CAA. Exter- nally managed funds account for 8.52 percent and are rated in a range from AAA to D or not rated. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of the System’s fixed income securities. The price volatility of the System’s fixed income holdings are measured by dura- tion. The System attempts to mitigate price volatility by matching the duration of the assets with the duration of the retired lives liabilities so that any change in the market value of the assets resulting from a change in interest rates will result in a similar change in the value of the liabilities. The average duration of the System’s core fixed income portfolio is 5.73 years. Concentration of Credit Risk Issuer limits for investments held by the System are established for each investment area by New York State Retirement and Social Security Law (RSSL), Article 2, Section 13 and Article 4A, Sections 176, 177, 178, and 313, and by policy guidelines adopted by the Comptroller. Restrictions are placed on short-term fixed income investments such that any one issuer of commercial paper must have the highest rating by two NRSROs and a maximum of $1 billion of the short-term port- folio can be invested in any one issuer. In addition, simultaneous purchase and sales of U.S. Treasury

obligations may be executed with primary government dealers; however, no more than $200 million may be invested with any one primary dealer. Restrictions are placed on fixed income invest- ments with maturities longer than one year. These investments are generally limited to obligations payable in U.S. dollars issued by: any department, agency or political subdivision of the U.S. government; any corporation, company or other issuer of any kind or description created or existing under the laws of the U.S.; any state of the U.S.; the District of Columbia; the Commonwealth of Puerto Rico; and Canada or any province or city of Canada, provided each oblig- ation is rated investment grade by two NRSROs. The aggregate investment by the Fund in the obligations of any one issuer should not exceed 2 percent of the assets of the System or 5 percent of the direct liabilities of the issuer. In addition, the aggregate amount invested in interest-bearing obligations payable in U.S. dollars (which at the time of investment are rated one of the three highest grades by each NRSRO) may not exceed 1 percent of the assets of the System, and bonds issued or guaranteed by the State of Israel, payable in U.S. dollars, may not exceed 5 percent of the assets of the System. As of March 31, 2018, the System did not hold any investments in any one issuer that totaled 5 percent or more of fiduciary net position. Investments issued or explicitly guaranteed by the U.S. government and pooled investments are excluded from the above ref- erenced aggregate investment policy. Securities Lending Section 177-d of the RSSL authorizes the System to enter into security loan agreements with broker/dealers and New York State or national banks. The System has designated its master custodian bank (Custodian) to manage a securities lending program. This program is subject to a written contract between the System and the Custodian, who acts as security lending agent for the System. The Custodian is authorized to lend securities within the borrower limits and guidelines established by the System. Types of collateral received from borrowers for securities loaned are cash, gov- ernment securities and federal agency obligations. The Custodian is authorized to invest the cash collat- eral in short-term investments that are legal for the System. These include domestic corporate and bank notes, U.S. Treasury obligations, obligations of federal agencies, repurchase agreements and specific asset- backed securities. All rights of ownership to securities pledged as collateral remain with the borrower except in the event of default. The System has not experi- enced any losses resulting from the default of a bor- rower or lending agent during the year ended March 31, 2018.