TRS Risk Management Committee Documents/board... · expected to trend up. The TEAM program is a...

TRS Risk Management Committee

April 2017

TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES

AND RISK MANAGEMENT COMMITTEE

(Committee Chair and Members: Ms. Charleston, Chair; Mr. Corpus; Mr. Elliott,

Mr. Kelly; & Mr. Moss)

All or part of the April 6, 2017, meeting of the TRS Risk Management Committee and Board of Trustees may be held by telephone or video conference call as authorized under Sections 551.130 and 551.127 of the Texas Government Code. The Board intends to have a quorum and the presiding officer of the meeting physically present at the following location, which will be open to the public during the open portions of the meeting: 1000 Red River, Austin, Texas 78701 in the TRS East Building, 5th Floor, Boardroom.

AGENDA

April 6, 2017 – 2:45 p.m.

TRS East Building, 5th Floor, Boardroom

1. Call roll of Committee members.

2. Consider the approval of the proposed minutes of the December 1, 2016, committee meeting – Chair Karen Charleston.

3. Review the Investment Risk Report – James Nield.

NOTE: The Board of Trustees (Board) of the Teacher Retirement System of Texas will not consider or act upon any item before the Risk Management Committee (Committee) at this meeting of the Committee. This meeting is not a regular meeting of the Board. However, because the full Risk Management Committee constitutes a quorum of the Board, the meeting of the Committee is also being posted as a meeting of the Board out of an abundance of caution.

Minutes of the Risk Management Committee

December 1, 2016

The Risk Management Committee of the Board of Trustees of the Teacher Retirement System of Texas met on December 1, 2016, in the boardroom located on the fifth floor of the TRS East Building offices at 1000 Red River Street, Austin, Texas.

Committee Members present: Ms. Karen Charleston, Chair Mr. David Corpus Mr. John Elliott Mr. David Kelly Mr. Chris Moss Other Board Members present: Ms. Anita Palmer Others present: Brian Guthrie, TRS Dr. Keith Brown, Investment Advisor Ken Welch, TRS Steve Huff, Fiduciary Counsel, Reinhart Boerner Van Deuren s.c. Carolina de Onís, TRS Steve Voss, Aon Hewitt Britt Harris, TRS Ted Melina Raab, Texas AFT Jerry Albright, TRS Sylvia, TRS Ashley Baum, TRS Heather Traeger, TRS Dennis Gold, TRS Rebecca Merrill, TRS Rebecca Smith, TRS Katherine Farrell, TRS Risk Management Committee Chair Ms. Charleston called the meeting to order at 2:35 p.m.

1. Call roll of Committee members.

Ms. Farrell called the roll. A quorum was present.

2. Consider the approval of the proposed minutes of the September 22, 2016 committee meeting – Chair Karen Charleston.

On a motion by Mr. Kelly, seconded by Mr. Moss, the proposed minutes for the September 22, 2016 Risk Management Committee meeting were approved as presented.

3. Review of the Enterprise Risk Management Report by Jay LeBlanc and Michelle Pagán.

Mr. Jay LeBlanc provided a brief overview of the Strategic Planning and Risk Management Department and Enterprise Risk Management (ERM) and reviewed the types of reporting provided to the committee. Mr. LeBlanc noted two new separate categories in the Stoplight Report. He said cyber security was previously reported but not in a stand-alone category. The other category is global initiatives.

Ms. Michelle Pagán reviewed the Stoplight Report. Ms. Pagán stated TRS-Care funding continues to be a high risk and is expected to remain at this level for the next 12 to 24 months. TRS-ActiveCare and employer reporting are at an elevated risk and both are expected to trend up. Ms. Pagán reported records management is an elevated risk and is expected to remain stable over the next 12 to 24 months. She reported legacy information systems is a moderate risk and is still expected to trend up. The TEAM program is a moderate risk, which Ms. Pagán noted is a decrease in the risk level from the last report due to the improved processes being implemented. Ms. Pagán reported information security and confidentiality category and cyber security category are both moderate risk. She explained that the risk level for pension funding category rose from guarded to caution because the funding period continues to grow while the funded ratio is decreasing and interest on the unfunded liability is increasing. Another change risk change noted by Ms. Pagán was the 403(b) program, originally a low risk but increased to a guarded risk due to the many unknowns with the program.

4. Cyber Security Overview – Chris Cutler and Frank Williams. Mr. Chris Cutler reviewed the various headlines of recent examples of companies and government agencies’ information being breached due to hackers. He noted that a Verizon Data Breach Investigations Report showed that 40 percent of all security breaches in 2016 happened in either the public administration, finance, or health care sectors. Mr. Cutler reported that, during a seven day period, TRS experienced 10,533 attempted network intrusions, 84,500 blocked websites, and 678,473 email and web viruses detected and blocked. Mr. Cutler reviewed why TRS is a likely candidate for being hacked. Mr. Cutler highlighted three risk events: permanent data loss, data breach, or data inaccessible due to ransomware. He stated all these events can result in lost confidence by members and stakeholders, reputational harm, business disruption, financial loss, litigation, and noncompliance with TRS standards. Mr. Cutler stated an organization must make a conscious decision on what to do, how much to spend, and what level of risk to accept. He said our goal is to build a sustainable program that balances the need to protect against the needs to run the organization. Mr. Frank Williams provided an overview of TRS Information Security program, including its challenges and its management initiatives. Mr. Williams stated the challenges came mainly from external forces, such as increased complexity, speed of change, and enhanced scrutiny. Mr. Williams stated that, once the business decision is made as to what should be protected, the risks are assessed and the baseline is identified. He said the easiest way to determine whether TRS is experiencing an attack is assessed against the baseline and any anomalies. Mr. Williams stated once an incident has occurred, Information Security focuses on the incident to fix it and then reviews the incident response to learn how to better the system. Without further discussion, the committee adjourned the meeting at 2:30 p.m.

APPROVED BY THE RISK MANAGEMENT COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE 6th DAY OF April 2017.

______________________________ _________________ Katherine H. Farrell Date Secretary of the TRS Board of Trustees

Investment Risk Report

James Nield, Deputy Chief Risk OfficerApril 2017

2

Agenda

Policy Requirements

1. Asset Allocation

2. Value at Risk (VaR)

3. Tracking Error

4. Leverage

5. Liquidity

6. Counterparty Risks

7. Derivatives

Conclusion

Appendix

Securities Lending

3

Policy Requirements Description In compliance?In compliance with policy

6.8% (72% of the VaR limit range)

3. Tracking Error 126 bp (42% of maximum)

4. Leverage In compliance with policy

Total TrustNet Leverage 103.8% (Within historical norm) Gross Leverage 110.9% (Within historical norm)

Securities LendingNet Leverage 100.3% (Within historical norm) Gross Leverage 112.6% (Within historical norm)

Hedge FundNet Leverage 41.7% (Within historical norm) Gross Leverage 268.1% (Within historical norm)

Strategic PartnersNet Leverage 107.7% (Within historical norm) Gross Leverage 181.6% (Within historical norm)

Real AssetsLoan to Value 41.9% (Within historical norm)

5. Liquidity In compliance with policy

6. Counterparty In compliance with policy

Exposure In compliance with policy Rating In compliance with policy

7. Derivative Exposures In compliance with policy

1. Asset Allocation

2. Value at Risk

Policy RequirementsAs of December 31, 2016

4

Absolute Return 1.7%Private Equities 0.4%ENRI 0.4%

Long Treasuries -1.6%US TIPS -0.5%Emerging Markets -0.4%

Top Three Overweights

Top Three Underweights

-5%

-3%

-1%

1%

3%

5%

Q1-16 Q2-16 Q3-16 Q4-16

0.2%

-1.5%

0.2%

-0.5%-1.4%

1.0%

-0.5%

0.6%0.3%

-0.2% -0.6% -0.1%

0.7% 0.9%

-0.1%Al

loca

tion

Global Equity Stable Value Real Return Risk Parity

-5%-3%-1%1%3%5%

-0.5% -0.4% -0.3% -0.4%

0.2% 0.4% 0.6% 0.2%1.7%

-1.6%

0.3%

-0.1% -0.5%

0.0% 0.4% 0.0%

-0.1%

Group Active Allocation

Asset Group/Class Active Allocation(In Compliance with Policy)

1. Asset AllocationAs of December 31, 2016

Source: State Street Bank

5

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Maximum1 = 7.7%

Minimum1 = 4.4%

Total Fund = 6.8%Benchmark = 6.1%

VaR as Percent of Market Value(One Month, 95% Confidence)

7.8% 7.6% 7.6% 7.4%6.9% 7.1% 7.1% 6.9% 7.1% 6.8% 7.0% 6.8%

7.3% 7.1% 7.0% 6.8% 6.6% 6.6% 6.5% 6.5% 6.5% 6.4% 6.4% 6.1%

0%

2%

4%

6%

8%

10%

12%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Total Fund

Benchmark

12.4%

4.2%

9.4%

13.6%

18.4%

58.0%

20.6%

2.1%

14.4%

18.3%

26.1%

81.5%

0% 20% 40% 60% 80%

Private Equity

Directional HF

Emerging Market

Non-US Developed

USA

GLOBAL EQUITY

VaR Contribution $ Asset Allocation

1.3%

10.2%

1.7%

4.2%

17.4%

0.0%

-8.3%

0.5%

0.4%

-7.4%

-10% 0% 10% 20%

Cash

US Treasury

Absolute Return

Hedge Funds

STABLE VALUE


5.0%

12.6%

0.0%

3.7%

3.3%

19.6%

3.3%

19.6%

0.0%

3.5%

-0.4%

22.6%

-5% 5% 15% 25%

RISK PARITY

Real Assets

Commodities

ENRI

US TIPS

REAL RETURN


VaR History(as Percent of Market Value)

VaR vs $ Allocation

2. Value at Risk (VaR)As of December 31, 2016

Source: State Street Bank1Minimum and maximum VaR are determined by adjusting the allocation to each policy asset class within the allowable policy range such that VaR is minimized and maximized.

Risk-reducing assets are circled in grey and have risk contributions significantly lower than their portfolio weights

6

79.6% 78.5% 78.5% 77.9% 77.9% 77.9% 77.9%80.8%

77.3% 78.7% 80.2% 81.4%

-2.7% -2.1% -2.4% -2.8% -4.4% -5.2% -3.7%-6.4%

-3.6% -4.9% -3.1%-7.4%

23.1% 23.6% 23.9% 23.9% 25.1% 25.4% 23.6% 24.0% 23.7% 22.9%19.3%

22.7%

0.9% 1.4% 1.9% 2.2% 1.6% 2.5% 3.3% 3.6% 3.3%

-20%

0%

20%

40%

60%

80%

100%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

GLOBAL EQUITY STABLE VALUE REAL RETURN RISK PARITY

VaR Contribution by Asset GroupsAs of December 31, 2016


7

USA $23.5 139 118Non-US Developed 17.3 193 272Emerging Market 12.3 147 189Directional Hedge Funds 5.6 299 294US Treasuries 13.6 13 9 2

Absolute Return 2.3 765 701Stable Value Hedge Funds 5.6 247 244Cash 1.6 0 4Global Inflation Linked Bonds 4.4 16 16Commodities 0.0 5085 2126Total Public Assets $92.8 89 126Private Equity $16.4 192 206ENRI 4.9 874 639Real Assets 16.7 676 135Total Private Assets $38.0 377 120Total Risk Parity $6.6 324 NA 3

Total Assets $132.5 156 51

Policy AssetsMarket Value

($, billions)Current Forecast

(bp)13-Year Realized

(bp)

3. Tracking ErrorAnnualized as of December 31, 2016


Policy neutral is 100 bp and policy maximum is 300 bp

1Current forecast uses past experiences from January 1, 2008 to December 31, 2016 and therefore includes the effects of the Global Financial Crisis.2Tracking error shown is for standalone US Treasury portfolio. If TAA and SPN allocation positions are included, the forecast is 27 bp and realized is 227 bp3Realized tracking error cannot be calculated due to the short history of Risk Parity

8

89

133

195

213

160

338

247

299

16

126

111

227

326

174

237

244

294

16

100

100

300

300

300

300

400

400

300

200

0 50 100 150 200 250 300 350 400 450

TOTAL PUBLIC ASSETS

Internal Global Best Ideas

External USA

External Non-US Developed

External Emerging Market

External World Equity

Stable Value Hedge Funds

Directional Hedge Funds

Global Inflation Linked¹

(bp)

Current Forecast TE

3-Year Realized TE

Policy Neutral

Policy Maximum

3. Tracking ErrorAnnualized as of December 31, 2016

Source: State Street Bank1 No policy neutral tracking error is set for Global Inflation Linked Bonds

9

115.6%112.4%

115.9% 114.1%119.7% 120.8%

117.7%121.3% 120.2%

114.5% 113.2% 110.9%

96.3% 97.8% 97.3% 99.4% 99.1% 99.5% 100.8% 102.6% 103.4% 103.3% 104.3% 103.8%

80%

90%

100%

110%

120%

130%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Gross Leverage Net Leverage

Trust-Level Leverage(Excludes Securities Lending)

119.3% 119.0% 117.6% 118.2% 117.0% 114.5% 115.7% 114.4% 114.2% 115.1% 113.7% 112.6%

100.4% 100.4% 100.5% 100.4% 100.4% 100.3% 100.3% 100.3% 100.3% 100.3% 100.4% 100.3%

80%

90%

100%

110%

120%

130%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16


Securities Lending Leverage

4. LeverageAs of December 31, 2016

Source: State Street BankNote: Trust level leverage includes 0.1% of funded securities sold short

10

292.2% 302.4% 305.8%

259.6%236.8% 237.9%

260.4%278.2% 282.8% 278.1% 291.8%

268.1%

67.2% 71.5% 79.3%50.2% 42.9% 36.5% 44.6% 38.3% 31.2% 32.1% 41.1% 41.7%

0%

50%

100%

150%

200%

250%

300%

350%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16


196.1% 192.0% 189.0% 197.8%210.7% 214.0%

172.9%199.5% 188.8%

171.5%185.7% 181.6%

97.7% 94.3% 95.0% 104.6% 103.3% 99.3% 108.2% 103.4% 107.4% 102.8% 105.2% 107.7%

0%

50%

100%

150%

200%

250%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16


Hedge Fund Leverage

Strategic Partners Leverage

4. LeverageAs of December 31, 2016


11

0%

10%

20%

30%

40%

50%

60%

70%

80%

Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16

Real Assets SpecialSituationsValue-Add Portfolio

Opportunistic Portfolio

Total Real Assets

Core Portfolio

Other Real Assets

Real Assets Leverage (Loan to Value)

4. LeverageAs of September 30, 2016

Source: The Townsend Group

12

Sources of Liquidity ($, billions)

Market Value

Stressed Value

Liquid Assets Not on Loan (Cash, UST, TIPS, Equity, Commodities) 60.1 32.4Securities Lending Collateral (Cash, Fixed Income) 16.6 13.2Total Sources of Liquidity 76.7 45.5Note: Excluded Iliquid Assets (Private Equity, Real Assets, Hedge Funds, Other) 57.9 NANote: Excluded Liquid Assets remaining on loan 14.0 NA

Uses of Liquidity ($, billions)

Market Value

Stressed Value

Normal Uses of Liquidity -0.7 -0.7Stressed Securities Lending -2.3Stressed Derivatives -0.2Stressed Private Markets -3.7Total Uses of Liquidity -0.7 -6.9

Liquidity RatioSources of Liquidity 45.5Uses of Liquidity -6.9Ratio (Sources/Uses) 6.6Alert Threshhold 4.0Fail Threshhold 3.0Test Result PassNote: Net Liquidity (Sources less Uses) 38.6Note: 12 Months Benefit Payments (at 3% Annual) 4.0

5. LiquidityAs of December 31, 2016

Source: State Street BankAssumptions: In the stress case, Liquid Assets are valued at 54% and Securities Lending collateral is valued at 79% which is meant to approximate 1.5x the worst monthly performance of these assets in the past ten years plus an additional liquidity stress. Within Securities Lending, 50% of equity on loan and 0% of US Treasuries on loan are assumed to be returned to TRS. Derivatives are assumed to experience the same market stress applied to the Liquid Assets. Private Market investments are assumed to not return any capital and experience capital calls at 6x the normal amount expected for a month.

13

Counterparty Number of ContractsCounterparty

Exposure Swaps Forwards Futures OTC Options ($, millions)

Over the Counter 1

Bank of America, N.A. 8 8 3 $0.0Barclays Bank PLC 3 20 2.1BNP Paribas SA 24 0.0Citibank N.A. 2 192 28.0Credit Suisse International 1 8 0.0Deutsche Bank AG 1 1.0Goldman Sachs International 118 196 5 0.0JPMorgan Chase Bank N.A 18 37 1 1 0.0Macquarie Bank Limited 2 0.0Morgan Stanley & Co. International P 5 26 3 2.8Societe Generale 4 43 3.6Toronto Dominion Bank 8 0.0UBS AG 3 97 3 12.2

Exchange Traded 2

Credit Suisse Securities (USA) LLC 3 121 215.8Goldman Sachs & Co 10 42 1 128.8JP Morgan Securities LLC 156 4 82.2

Grand Total 178 659 320 20 $476.4

Counterparty Exposure

6. Counterparty RisksAs of December 31, 2016

Source: State Street Bank1Counterparty exposure is positive market value of all OTC derivative positions less collateral posted. Policy limits this value to $500 million per counterparty.2Counterparty exposure is initial margin posted.

14

Over the Counter2

Bank of America, N.A. A+ A1 A+ 11.3 10.0Barclays Bank PLC A- A1 A 14.7 15.6BNP Paribas SA A Aa3 A+ 12.2 11.8Citibank N.A. A+ A1 A+ 13.5 14.6Credit Suisse International A A1 A- 18.0 13.4Deutsche Bank AG BBB+ A3 A- 14.7 13.2Goldman Sachs International A+ Aa3 A 13.5 12.4JPMorgan Chase Bank N.A. A+ Aa2 AA- 13.5 11.8Macquarie Bank Limited A A1 A 11.8 15.0Morgan Stanley A+ Aa3 A 17.4 15.1Societe Generale A A1 A 13.5 14.9The Toronto-Dominion Bank AA- Aa1 AA- 11.3 10.8UBS AG A+ Aa3 A+ 21.0 22.9

Exchange Traded Futures3

Credit Suisse Securities (USA) LLC A NR NR 18.0 13.4Goldman Sachs & Co A NR A+ 13.5 12.4JP Morgan Securities LLC A+ Aa3 AA- 13.5 11.8

CommonCapital Ratios1

Counterparty S&P Moody's Fitch Tier 1

Counterparty Ratings and Capital Assessment

6. Counterparty RisksAs of December 31, 2016

Source: Rating Agencies and Bloomberg1Basel 3 requires 8.5% Tier 1 capital and 7.0% Common capital.2Rating of counterparty or counterparty’s credit support provider. Policy requirement is A- or A3 by at least one of Fitch, Moody’s or S&P.3Credit Suisse Securities parent company is rated A1 by Moody’s and A- by Fitch. Goldman Sachs & Co. parent company is rated A3 by Moody’s

15

Gross Notional Net Notional Gross Notional Net NotionalPortfolio ($, millions) ($, millions) Instrument ($, millions) ($, millions)

SPN $7,404.1 $1,141.4 Futures $11,885.7 $5,081.7Risk 6,825.4 3,329.8 Forwards 6,521.9 -2,361.2AA 6,264.4 -1,418.5 Swaps 2,545.3 269.6External Managers 519.4 -51.5 Options 60.5 11.1Total $21,013.3 $3,001.2 Total $21,013.3 $3,001.2

Futures57%

Forwards31%

Swaps12%

Options0%

SPN35%

Risk33%

AA30%

External Managers

2%

Gross Notional by Portfolio Gross Notional by Instrument Type

7. DerivativesAs of December 31, 2016


SPNs (TAA and benchmark replication), Risk Parity, and AA (tactically adjusting the Trust’s asset allocation) account for the majority of the derivatives usage

Futures and forwards, which are among the most liquid forms of derivatives, constitute the majority of the Trust’s derivatives portfolio

16

0%

5%

10%

15%

20%

25%

30%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Gross Swaps Gross Futures Gross Forwards Gross Options Gross Total Derivatives

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Net Swaps Net Futures Net Forwards Net Options Net Total Derivatives

Gross Notional (% of Total Trust)

Net Notional (% of Total Trust)



17

7.8% 7.6% 7.6% 7.4%6.9% 7.1% 7.1% 6.9% 7.1% 6.8% 7.0% 6.8%

0.1% 0.1% 0.2% 0.4% 0.0% 0.2% 0.3% 0.1% 0.3% 0.2% 0.3% 0.1%0%

2%

4%

6%

8%

10%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Total Trust VaR Contribution from Derivatives

1.3% 1.7%3.0%

4.8%

0.4%

3.2%3.9%

2.1%

4.4%3.4%

4.6%

1.9%

0%

2%

4%

6%

8%

10%

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16

Ratio of Contribution from Derivatives to Total Trust VaR



18

($, millions) SPN Risk AAExternal

Managers TotalFutures 3,959.7 4,279.7 3,642.0 4.3 11,885.7Forwards 2,540.1 2,119.6 1,565.4 296.8 6,521.9Swaps 894.8 404.1 1,057.0 189.4 2,545.3Options 9.5 22.1 0.0 28.9 60.5Total $7,404.1 $6,825.4 $6,264.4 $519.4 $21,013.3


Managers TotalFutures 1,411.4 4,180.0 -514.0 4.3 5,081.7Forwards -148.6 -1,276.3 -908.2 -28.1 -2,361.2Swaps -111.9 404.1 3.7 -26.2 269.6Options -9.5 22.1 0.0 -1.5 11.1Total $1,141.4 $3,329.8 -$1,418.5 -$51.5 $3,001.2

Gross Notional

Net Notional



SPNs ($7.4 billion), Risk ($6.8 billion) and AA ($6.3 billion) account for the majority of derivatives usage

AA’s $6.3 billion gross notional nets to a much lower (-$1.4 billion) net position.

The Trust’s $21.0 billion gross notional nets to a much lower ($3.0 billion) net position.

19


Managers TotalFutures -19.2 41.0 -0.9 0.0 20.9Forwards 8.7 37.1 8.0 -4.2 49.7Swaps -7.8 4.9 1.4 -0.4 -1.9Options 0.0 1.7 0.0 0.0 1.6Total -$18.4 $84.7 $8.5 -$4.6 $70.3

SPN Risk AAExternal

Managers TotalFutures 0.21 0.22 0.19 0.21 0.21Forwards 0.12 0.15 0.03 0.12 0.11Swaps 3.28 4.97 0.24 0.98 2.11Options 0.07 0.02 0.00 0.18 0.10Total 0.55 0.48 0.16 0.44 0.41

Mark-to-Market

Average Tenor in Years



Interest rate swaps and credit default swaps typically have longer tenors of 5-10 years

The low mark-to-market is mainly due to the short term maturity of the derivatives positions – on average 0.41 years

20

Conclusion

• As of December 31, 2016, TRS investment exposures are in compliance with the Investment Policy Statement

o TRS was overweight Stable Value (+0.6%) and was underweight Global Equity (-0.5%), Real Return (-0.1%) and Risk Parity (-0.1%)

o At the asset class level, TRS was overweight Absolute Return, Private Equities and ENRI and was underweight Long Treasuries, US TIPS, and Emerging Markets

• Risk metrics are within parameters

APPENDIX

22

Futures by Asset Class

USA 15 $1,016.7 4.3% 0.8%Non-US Developed 57 1,315.7 7.6% 1.0%Emerging Markets 9 301.6 2.4% 0.2%US Treasury 30 2,633.6 19.4% 2.0%Cash 6 138.6 8.6% 0.1%Absolute Return 43 2,018.0 87.8% 1.5%Inflation Linked Bonds 35 157.5 3.6% 0.1%Commodities 1 19.9 44.5% 0.0%World Equity 2 4.3 0.1% 0.0%Risk Parity 122 4,279.7 65.0% 3.2%Futures Total 320 $11,885.7 9.0%

Gross Exposure (% of Total Trust)

Gross Exposure (% of Asset Class)

Gross Exposure ($, millions)

Number of Contracts

Futures Notional1

Derivatives ExposureAs of December 31, 2016

Source: State Street Bank1Exposures include TRS internally managed portfolios and externally managed separate accounts.

23

Swaps by Asset Class

USA 29 $322.1 1.4% 0.2%Non-US Developed 99 288.7 1.7% 0.2%Emerging Markets 17 336.6 2.7% 0.3%Absolute Return 3 128.2 5.6% 0.1%Inflation Linked Bonds 0 0.0 0.0% 0.0%Commodities 27 1,065.6 2382.0% 0.8%Real Assets 0 0.0 0.0% 0.0%Risk Parity 3 404.1 6.1% 0.3%Swaps Total 178 $2,545.3 1.9%

Number of ContractsGross Exposure

($, millions)Gross Exposure

(% of Asset Class)Gross Exposure

(% of Total Trust)

Swap Notional1



24

Non-Currency Forwards by Asset Class

Euro Currency 87 1,166.0 0.9%Japanese Yen 66 447.5 0.3%Pound Sterling 85 1,296.5 1.0%Canadian Dollar 66 608.9 0.5%Other Non-US Developed 243 2,047.0 1.5%Emerging Markets 112 956.0 0.7%Forwards Total 659 6,521.9 4.9%USA 15 44.1 0.0%Non-US Developed 2 1.4 0.0%Emerging Markets 2 5.5 0.0%Global TIPS 1 9.5 0.0%Options Total 20 $60.5 0.0%

Number of ContractsGross Exposure

($, millions)Gross Exposure

(% of Total Trust)

Forwards and Options Notional1



25

12.7%8.4% 6.7%

23.1%

9.2% 10.3%

16.6%

6.7%4.1%

2.2%

11.2%9.1% 7.4%

26.8%

6.7%9.8%

13.0%

7.9%4.9% 3.1%

0%5%

10%15%20%25%30%

TRS BM

5.2% 5.7%

2.3%

-3.6%-5.7% -5.3%

-8.9%

-17.4%

5.8% 6.1%

2.5%

-4.0%-6.6% -6.1%

-10.0%

-15.9%-20%

-15%

-10%

-5%

0%

5%

10%

IRSteepening:

Sept 98 - Nov98

EmergingMarkets

Rally: Jan 99 -May 99

Nasdaq Rally:Nov 99 - Jan

00

Asian Crisis97-98 - 5 day

Bond Crash:Feb 94 - May

94

Russian Crisis- 5 Day

NasdaqCorrection:

July 98 - Aug98

October 2008Crisis

Total Fund

Benchmark

Scenario Analysis(% Gain/Loss in Market Value)

0.78 0.79 0.78

0.79 0.76

0.78 0.77 0.76 0.78

0.76 0.79 0.78

0.73 0.73 0.72 0.72 0.71 0.71 0.71 0.71 0.72 0.71 0.71 0.71

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16Total Fund Benchmark

Beta AnalysisMSCI World Index

Equity Sector Allocation (%)

Sector Allocation, Beta and Scenario AnalysisAs of December 31, 2016


26

North East, 13%

Mid East, 7%

East North Central, 6%West North Central, 1%

South East, 8%

South West, 9%

Mountain, 4%Pacific, 17%

Ex-US, 21%

Various, 14%Apartment,

15%

Office, 27%

Industrial, 14%

Retail , 15%

Hotel , 6%

Other, 23%

Geographic DiversificationProperty Type Diversification

Real Estate DiversificationAs of September 30, 2016

Source: The Townsend Group

Securities Lending

28

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