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Considerations for Securities Lending Programs : 

Considerations for Securities Lending Programs September 13, 2010 Lynn Thompson Josh Lavender Mike Cavanaugh Andy Pettit

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An investment management product where participants generate revenue by temporarily transferring idle securities, in a collateralized transaction, to a borrower LENDER BORROWER Ownership of Securities Collateral and Fees What Is Securities Lending?

How are Earnings Generated? : 

How are Earnings Generated? Cash Collateral Cash collateral is posted by the borrower at the inception of the lending transaction The lending agent pays interest (the “rebate”) on the cash to the borrower at a rate that reflects the supply/demand characteristics of the loaned security The lending agent invests this cash collateral according to the client’s investment guidelines and earns the interest rate yield The difference between the yield on the investment of the cash and the interest paid to the borrower represents the earnings or “spread” Non-Cash Collateral If non-cash collateral is used, the agent will hold the securities and the borrower will pay an agreed upon fee

Securities Lending Earnings : 

Securities Lending Earnings DEMAND SPREAD: Reflects supply/demand characteristics of loaned securities; set by market Special demand for particular securities is constantly changing INVESTMENT SPREAD: Reflects market pricing and risk characteristics of reinvestment portfolio More volatile than Demand Spread, reflecting nature of short-term rates and credit spreads If non-cash collateral is exchanged, a payment is received from the borrower Investment Yield 0.35% Rebate Rate 0.10% Investment Spread 10 bps Demand Spread 15 bps Fed Funds 0.25%

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Third Party Agent : Agent is appointed by client, to be the securities lending agent regardless of existing custodial relationship Custodian as Agent : Custodian of assets for the client acts as agent for securities lending Principal: Borrower of assets is the principal in the securities lending transaction Auction-Based: Inventory is periodically auctioned to a group borrowers for exclusive distribution. Securities Lending Structures Page 5

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Types of Lenders and Borrowers

Benefits of Securities Lending - Lenders : 

Benefits of Securities Lending - Lenders For beneficial owners, an additional revenue opportunity to cover custody/administrative costs. Value-added service which enables clients to increase overall yield on investment portfolio. In many cases, fulfills fiduciary duty to optimize income for the plan. Page 7

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Often cheaper and/or more efficient to borrow shares than to buy them on the open market Facilitate settlement Facilitate trading activities Dividend arbitrage M&A arbitrage Directional trading Hedging Securities are borrowed as part of a financing strategy Provides additional liquidity to the market In short, securities lending provides critically needed liquidity to the financial markets by providing a mechanism to support a variety of trading strategies and to facilitate trade settlements. Benefits of Securities LendingFinancial Markets

Securities Lending Borrower Demand — Hedge Fund Strategy Composition : 

Securities Lending Borrower Demand — Hedge Fund Strategy Composition Source: Credit Suisse / Tremont Hedge Fund Index, July 2010 Credit Suisse / Tremont Hedge Fund Index Current Sector Weights

Historical Securities Lending Risks : 

Robust counterparty and issuer credit analysis Indemnification against borrower default Overcollateralization of loans to borrowers Robust daily process for collateral management Operational flexibility to restrict securities or borrowers when necessary Industry standard securities lending agreement Diverse universe of borrowers, subject to client restrictions Cash collateral reinvestment portfolio liquidity level based upon agreement between client and agent lender Reporting transparency and ongoing program reviews by both agent lender and client Separate account management structure with customized guidelines or commingled funds for cash collateral reinvestment Ability to enter or exit a lending program as appropriate Historical Securities Lending Risks Counterparty / Borrower Cash Collateral Reinvestment Legal / Contractual Operational / Trade Settlement Risk Mitigation Techniques Page 10

Additional Risks to Consider : 

Additional Risks to Consider Types of risks Ways to mitigate risks Concentration Risk Diversify asset, region, industry and counterparty exposure Limit percentage of cash collateral invested in a permitted asset Limit percentage of cash collateral invested in a single issuer Liquidity Risk Focus on liquidity management Check assumptions Size of position matters Pricing Risk Daily mark-to-market; independent pricing sources Consult subject matter experts Well-documented procedures, with flexibility for judgment Black Swan Understand wrong-way risk Long-term view of capital and liquidity requirements Expect cyclical effects Value experience Page 11