Penn Funds Settle With BNY Mellon Over Cash Collateral Reinvestment Losses

The settlement sees the custodian bank entering into a new custodial and an amended securities lending agreement with the Pennsylvania State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS).
By Janet Du Chenne(59204)
The Pennsylvania Treasury said it has reached an agreement with BNY Mellon to recover a portion of the funds lost in connection with an investment in Sigma Finance and has also entered into a new custodial and an amended securities lending agreement.

A press release from the office of Treasurer Rob McCord said funds were lost during the severe national economic downturn of 2007-08. Under the settlement, BNY Mellon will pay Treasury, the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) a combined $19 million. Treasury also previously recouped $22 million in fees from BNY Mellon during the years since the Sigma loss arose in 2008. The state agencies also recovered $6.4 million from Sigma.

BNY Mellon serves as the custodial bank and securities lending agent for the commonwealth funds, including holding all of the commonwealth’s securities. Losses to the three state agencies totalled $133.4 million following Sigma’s default in 2008 and relate to cash collateral reinvestment in the securities lending agreement (SLA). BNY Mellon’s purchase of Sigma securities was made in accordance with guidelines contained in the (SLA), whereby the cash collateral from borrowers of those securities was invested by BNY Mellon on the commonwealth’s behalf.

McCord sought a recovery from BNY Mellon beginning shortly after he took office in January 2009. The negotiations were conducted by Treasury’s legal staff on behalf of the three state parties, without expense of outside counsel.

George Gilmer, head of Asset Servicing – Americas for BNY Mellon, said, “We are pleased to reach an agreement with Treasury that resolves our issues and allows us to continue our long-standing relationship with the Commonwealth of Pennsylvania.”

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