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F I S C A L I M P A C T R E P O R T

SPONSOR Carraro

DATE TYPED 02/25/05 HB

SHORT TITLE Broaden Scope For Securities Lenders

SB 49/a SFI#1

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

NFI

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

State Treasurer (STO)

State Board of Finance

Educational Retirement Board (ERB)

Public Employees Retirement Association (PERA)

Attorney Generals Office (AGO)

SUMMARY

Synopsis of SFI#1 Amendment

Senate Bill 49 has been amended by the Senate Floor. The amended Senate Bill 49 would with-

draw the proposed changes to section 6-10-21 NMSA in the original bill. According to the

Board of Finance, the inclusion of this section in the bill was a drafting error and did not pertain

to the intent of this legislation, which is to allow the state's investing agencies the option to use

the state's custodial bank as a securities lending agent.

The AGO provided the following comments on proposed amendments:

This amendment remedies what would have been an apparently unintended consequence of Sec-

tion 2 of the bill had the amendment not been made. As the title to the bill indicates, Section 1 of

the bill removes the “third party” requirement applicable to financial institutions acting as cus-

todians for State investments—including the State’s custody bank, who is responsible for matters

Senate Bill 49/aSF#1 -- Page 2

related to investment transactions of the various investing agencies of the State along with safe-

keeping securities owned or held by those agencies—thus allowing the custody bank and other

custodians to hold securities that are the subject matter of a transaction in which they are acting

as a securities lending agent.

Section 6-10-21, the section that was being amended in Section 2, however, involves a different

type of custodial bank. Section 6-10-21 applies to financial institutions holding collateral that

section 6-10-16 mandates be pledged by “depository” banks who hold cash for the State and its

political subdivisions. Thus, removal of the “third party” requirement in section 6-10-21 does

not facilitate securities lending transactions. Rather, it would remove a protection current law

provides in the context of this completely different type of custody relationship, and would allow

a depository bank holding public money to hold its own collateral pledged to safeguard those

funds. This floor amendment restores that protection.

Synopsis of Original Bill

Senate Bill 49 broadens the range of financial institutions that may serve as either securities

lenders or that may perform custodial functions for state investment agencies. The bill elimi-

nates the requirement that institutions providing custodial services must be a third party, allow-

ing the state’s custodial bank to perform securities lending services. Securities lending services

entail a market transaction where the state agency temporary lends a small portion of its securi-

ties to a broker/dealer, on a collateralized basis, generally in exchange for cash. The bill also

eases requirements to allow non-New Mexico banks to perform custodial functions.

Significant Issues

According to STO, passage of this bill will allow for various structures of custody arrangements

to be used by the state, providing the state more vendors qualified to compete for state business.

This bill is being introduced on behalf of the State Permanent Fund Task Force.

PERFORMANCE IMPLICATIONS

According to the State Treasurer and the State Board of Finance, Senate Bill 49 will simplify in-

ternal investment processes for all state investment agencies. (See Administrative Implications).

FISCAL IMPLICATIONS

There are no direct fiscal impacts to the amended or original bill. That said, broadening the list

of eligible banks that can perform securities lending or that may perform custodial functions

could potentially increase competition for the provision of these services and thus lower the cost

of service for the investment agency. Similarly, according to PERA, by adding an additional ser-

vice the custodial bank can provide, the state may be able to negotiate a lower price for both

custody services and securities lending services.

ADMINISTRATIVE IMPLICATIONS

Senate Bill 49 eliminates administrative inefficiency by keeping the state custodial bank, which

currently resides out of state, from having to enter into a subcontract with the fiscal agent bank,

Senate Bill 49/aSF#1 -- Page 3

which is chartered in New Mexico, to provide custodial services. According to the State Board

of Finance, there are only about 5 to 10 major banks in the United States that can perform custo-

dial securities for big clients such as New Mexico, none of which reside in New Mexico. As an

example of this, the State Board of Finance provided the table below showing the list of banks

responding to the request for proposals for custodial bank services. None of the five banks that

responded were New Mexico banks.

OTHER SUBSTANTIVE ISSUES

Both the State Investment Council and the PERA sent e-mails in support of this bill. The follow-

ing are comments from those e-mails:

State Investment Council

The State Investment Council (SIC) is in favor of Senate Bill 49. SIC notes that the bill would

“allow straight-forward contracting arrangements, with the State Board of Finance to contract

separately and directly, for fiscal agent services and custody service” and “would allow a more

competitive process for requesting and selecting securities lending services”.

PERA

The Public Employees Retirement Association supports the Securities Lending options that will

be available to PERA with the passage of Senate Bill 49.

NM STATE BOARD OF FINANCE

CUSTODY BANK SERVICES - REQUEST FOR PROPOSALS

NO: 30-341-40-12283

OFFERORS

FOR PRESENTATION / DEMONSTRATION

OFFEROR

JP MORGAN

NORTHERN TRUST

STATE STREET

BANK OF NEW YORK

WACHOVIA BANK

Senate Bill 49/aSF#1 -- Page 4

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