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Oklahoma TRS sheds OTC derivatives

by Alexandra Harris
June 11, 2010

Call it intuition. Call it a hunch. Despite having no experience with over-the-counter derivatives the Oklahoma Teachers’ Retirement knew something wasn’t right. 
The fund, which manages $8.6 billion, conducted an internal audit  in fourth-quarter 2009 of its investments as a way to test the validity of its portfolio and investment managers. Of the 26 managers, the Oklahoma TRS found an exception with one: Pacific Investment Management Co., better known as PIMCO, the California-based investment company with $1,070.9 billion in assets as of March 31.
Oklahoma TRS did a deeper audit of the $500 million PIMCO investment portfolio, half of which was invested in OTC derivatives, in first-quarter 2010.

“It was too numerous to work our way through,” said James Wilbanks, executive secretary. “At the end of the day, it was hard to reconcile the daily holdings.” 

What worried Wilbanks and the Oklahoma TRS was that the OTC derivatives were opaque and they were not comfortable not knowing the true value of the positions. 

“We had swaps and we didn’t know which side of the swap we were on,” Wilbanks said. 

Wilbanks believes the only way to truly value OTC derivatives is to mark them to market, or determine at what price they would trade today. “To determine the actual pricing structure would require a model to value and we don’t have that,” Wilbanks said. 

The Oklahoma TRS moved to terminate PIMCO at its March 24 general board meeting. While the fund lost 16 percent on its investments in fiscal year 2009, Wilbanks said Oklahoma TRS’s return on investments through the first three quarters of fiscal year 2010 was 23.83 percent.