State of Florida Department of Financial Services. Invitation to Negotiate DFS (TR) ITN 11/12-16 Addendum #1 Questions and Responses

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1 State of Florida Department of Financial Services Invitation to Negotiate DFS (TR) ITN 11/12-16 Addendum #1 Questions and Responses For Global Custody, Investment Consulting and Securities Lending 1. Can you provide your average daily dollar trading volume in US $ amounts (debits and credits)? The estimated daily dollar trading volume by US dollars is as follows: Maturities Purchases Sales $787 million $886 million $ 52 million 2. Can you provide your monthly number of wire transfers in $ value and the peak $ amounts? The average monthly outgoing wires are approximately $7 billion monthly comprised of approximately 350 outgoing wires. We have a weekly wire that averages $500 million. 3. Please provide your monthly number of FX trades, and peak USD values of the trades? We do not trade FX. 4. Concerning the contract language provided on security interest, the section in the draft contract refers to Appendix IV for lien and set off language. This section is blank, can you please provide this section to review? The Appendix IV is the same as Attachment C of the ITN. 5. Could you please provide Attachment J of the RFP in excel format? Yes, please contact the Issuing Officer via for this document. 6. Do bidders have the ability to make comments to the Deliverables/Minimum Work Requirements and the Respondent's Statement of Agreement? No

2 7. Under Cash and Cash Movement - The Respondent will cover Department overnight overdrafts, which may occasionally occur. Can you confirm that Overdrafts will be compensated by use of one of the following two methods: 1. The Department will leave a compensating balance to cover the overdraft on the day(s) following the overdraft. 2. The Respondent will be reimbursed based on the Fed Effective Rate. Charges and payments associated for overdraft charges less than $30 per account will not apply. 3. No other fees will be charged. Only overdrafts that incur $30 in fees or more will either pay the overdraft fee or leave a compensating balance. 8. Under Corporate Actions - Respondent will provide completed documentation as requested to file all legal actions for signature at least three (3) weeks prior, provided the Respondent has been provided the information and it meets market convention, or as the corporate notice is provided to the Respondent, for action on the due date? The Respondent will be responsible for filing the legal action if the security was held during the contract term. 9. Respondent's Statement of Agreement requires a statement that Respondent agrees to not seek indemnification from the Department for any costs or services? Please elaborate on this broad statements? Article VII, Section 10 of the Florida Constitution prohibits Florida state agencies from pledging the credit of the state. The effect of this is that indemnification by the Department is not legally permissible. Therefore, if a vendor requires the state to agree to indemnify it from any liability, no agreement will be possible. There is no room to negotiate on this point. 10. What was your gross and net securities lending revenue for 2011? 2010? 2009? Attachment D is used to determine how productive the Securities Lending Department is when it comes to rebate rates, utilization and gross earnings. We believe that giving you this information at this time could obstruct the information on Attachment D. This information will be released once the responses have been received. 11. What is your current fee-sharing arrangement for securities lending? The Department keeps 75% of the earnings plus pays 1.5 basis points of the weighted daily average amount of Cash Collateral invested.

3 12. What is your average on loan balance for 2011? 2010? Attachment D is used to determine how productive the Securities Lending Department is when it comes to rebate rates, utilization and gross earnings. We believe that giving you this information at this time could obstruct the information on Attachment D. This information will be released once the responses have been received. 13. Have you imposed any restrictions on your lending program, i.e. minimum spread, etc? Only restrictions are found in the Attachment I. 14. Are you currently fully indemnified for repo transactions in the securities lending cash collateral investment account? If yes, please define the asset classes covered, provide the aggregate value, and the contract language which governs these transactions. No 15. Is it your expectation that the indemnification for such repo transactions is provided by a US Registered and/or Regulated Financial Institution, and operates under the jurisdiction of the United States Courts? Yes 16. Can you provide the Name/title of the person or persons who will call our references? Nat Toulon, Bureau Chief of Collateral Management 17. Can you provide further details as to when such reference calls will occur? A general timing would be helpful? We anticipate that the references will be called between June 25th and July 27 th. However, due to the number of calls, it might go into August. 18. Please confirm which custody accounts and the number of custody accounts that require mutual fund accounting ( Net Asset Valuation -NAV) and the frequency (monthly or daily)? One account on a monthly basis. 19. Can you elaborate on the level of detail requested for mutual fund accounting and Net Asset Valuation? The following is from Attachment C of the ITN. 5. Short-Term Investment Fund (STIF) Custody Account

4 a) With regard to the STIF account, in addition to all other requirements previously detailed, the Respondent will calculate a monthly yield for this account. b) The Respondent will apportion interest income, no later than the 5 th business of each month, to each STIF participant based upon the monthly yield and their average daily balance. c) The Respondent will calculate the monthly management fee due and assess each STIF participant account their portion of the fee based upon their average daily balance. 20. Can you please identify a complete list of accounts that need accounting services (excluding the custody account requiring mutual fund accounting)? The following is from Section and Attachment O from the ITN. 1. Internally Managed One custody account holds fixed income securities and will be the primary account for all funding activity for all electronic fund transfers as well as investments. This account is not a zero balance account and will maintain a daily balance. This account will need to receive and originate electronic fund transfers (i.e., federal wires, CHIPS) and receive Automatic Clearing House (ACH) transfers. If the custody account cannot handle these types of transactions, then a demand account will have to be established. The demand account will need to automatically sweep to this custody account. The demand account will be a zero balanced account. One custody account holds Repurchase Agreement (repo) collateral. All repo transactions will be funded by the primary custody account and all maturity proceeds will be transferred into the primary account. Two (2) custody accounts hold fixed income securities. These custody accounts take the end of the day cash balance and transfer positive balances into the External STIF account or fund any negative balances from the External STIF account. These are zero balance accounts. 2. Externally Managed Fourteen (14) custody accounts hold fixed income securities for the active investment managers. These custody accounts will take the cash balance as of 10:45 a.m. Eastern Time and transfer positive balances into the STIF or fund any negative balances from the STIF. SMITH BREEDEN DECLARATION NUVEEN PYRAMIS

5 DELAWARE WESTERN ASSET PRUDENTIAL STERLING CAPITAL GOLDMAN SACHS BLACKROCK WELLS CAPITAL SMITH GRAHAM CUTWATER GALLIARD One custody account that may hold fixed income securities and will be the primary account for funds activity between the internal and external custody accounts. This account may hold investments on occasion as well. All excess cash from this account will sweep into the STIF. Total of 19 accounts 21. Please provide examples of the custom reporting that are required, specifically we would like to get examples of Standard and Customized GASB reports, including GASB 28, 40, and 53? Please provide such samples? We need the data to complete the attached reports. This data should be downloadable into Excel. 22. What are your average daily cash balance levels, both in USD and foreign currency? For foreign currencies, what is the currency breakdown by market? We do not maintain the average daily cash balance levels at a comingled level; however, Internal Investment typically maintains less than $1,000 per day. We do not hold foreign currency. 23. What investment vehicles are you currently utilizing for your short-term cash today? Can you provide a sample (i.e. name, fund, etc.)? This information is located in Attachment I. 24. What are your investment guidelines for short-term cash / investments (i.e. regarding permissible instruments, counterparty limits, etc)? This information is located in Attachment I.

6 25. Can you advise the total number of custody accounts which require Compliance monitoring? Compliance monitoring is needed for 18 custody accounts which includes the STIF account plus cash collateral account for securities lending. 26. Please confirm if compliance monitoring is required Daily or Monthly Compliance? Daily 27. May we provide comments for consideration regarding the agreements and qualification requirements? Only on the Contract/Agreement 28. If yes to the above question, please confirm process? Please review the below language in the ITN Tab D Additional Contract Terms Respondent must identify any additional Contract terms that it believes will be necessary to reach an agreement. Respondent must also identify provisions in Attachment G, Contract, which Respondent will be unable or unwilling to accept. The Respondent can mark changes on the Contract (Attachment G). If you would like a Word copy, please contact the Issuing Officer via Is there any room for negotiation and flexibility on the requirements (a), (c) and (d) of Tab B-1(1), Qualifications Requirements? Are the intention to negotiate these terms with the respective bidders or finalist? No, these sections contain minimum mandatory qualifications that the Department has determined are essential. The Department will not agree to negotiation of these minimum requirements. 30. Would the custodian be required to post collateral to secure any cash balance deposited in the custody accounts under the state s qualified public depository rules? No 31. Are bidders required to be a Qualified Public Depository (QPD)? No

7 32. Would it be possible to receive all the attachments and exhibits in word/excel files? Only Attachments A, D, F, G (without the attachments) and J will be provided in Word/Excel files. Please contact Issuing Officer via to obtain the documents. 33. Would you please provide your current securities lending fee schedule, as well as your current collateral guidelines? The Department keeps 75% of the earnings plus pays 1.5 basis points of the weighted daily average amount of Cash Collateral invested. Current guidelines for investing cash collateral are located on Attachment I of the ITN. The following is Permissible Collateral for Securities Lending from Schedule 3 of the Contract: 1. Cash 2. U.S. Treasuries 3. Agencies a. Senior obligations of the Federal Farm Credit Banks b. Senior obligations of the Federal Home Loan Bank and its district banks c. Senior obligations of the Federal Home Loan Mortgage Corporation d. obligations guaranteed by the Government National Mortgage Association e. Senior obligations of the Federal National Mortgage Association f. Any other senior obligations which are guaranteed as to principal and interest by the full faith and credit of the U.S. Government or are obligations of U.S. Government agencies or instrumentalities that are rated in the highest category by Moody s, S&P or Fitch. 34. We are confident that the Custody requirements of the ITN can be met by a Master Custodian. The ITN references Section , Florida Statutes. Since these statutes, as we understand them, relate to pension plans and not to liquidity funds, can you clarify how the statute pertains to these ITN requirements? Section , F.S. does, by its terms, apply to retirement plans. This ITN does not seek services for a retirement plan. The section only applies by analogy. The vendor is required for exercise fiduciary responsibility on behalf of its client, the State of Florida, to the extent that the vendor will be making decisions on behalf of the state, e.g. recommending specific securities lending transactions or advising the Department on the selection of investment managers. 35. Please confirm that you do not require the custodian to exercises discretionary control or authority over:

8 a) plan management or plan assets, b) anyone with discretionary authority or responsibility for the administration of a plan, or c) anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so. The intent is for the Vendor to act within industry and fiduciary standards for custodial and securities lending services. The Vendor will have discretion within Securities Lending services and will provide advice within the Investment Consulting services. 36. Page 28 (Accounting and Reporting) - Can you clarify for questions 11 and 12, is DFS looking for the bidder to produce GASB 40 and 53 reports on their behalf, or to provide data that the State can use to create their own GASB report? We need the data to complete the attached reports. This data should be downloadable into Excel. 37. Can you please provide sample accounting reports that you are currently receiving from your custodian? No, this is proprietary information. 38. Can you please provide sample performance and analytics reports that you are currently receiving from your custodian? Daily, monthly and via their Investment Consulting capacity. Most of the information is proprietary; however, we are attaching the External performance and analytics reports. 39. Does DFS require the custodian to provide performance reporting on the managers listed? If yes, can you please specify which are separately managed and/or commingled fund/line-item accounts? Yes Individual accounts Internal Liquidity Internal Bridge Internal Intermediate Smith Breeden Declaration Nuveen Pyramis Delaware Western Asset Prudential Sterling Capital Goldman Sachs Commingled Internal Accounts External Accounts

9 Blackrock Wells Capital Smith Graham Cutwater Galliard STIF Open External Account All accounts under Individual accounts All accounts under Individual accounts plus securities lending All accounts under individual accounts except open account 40. For how many accounts does DFS receive post trade compliance? Compliance monitoring is needed for 18 custody accounts which include the STIF account plus cash collateral account for securities lending. 41. Mutual Fund Operations Scope 2.1 Page 8 Please describe the mutual fund operations you require from the custodian. The following is from Attachment C of the ITN. 5. Short-Term Investment Fund (STIF) Custody Account a. With regard to the STIF account, in addition to all other requirements previously detailed, the Respondent will calculate a monthly yield for this account. b. The Respondent will apportion interest income, no later than the 5 th business of each month, to each STIF participant based upon the monthly yield and their average daily balance. c. The Respondent will calculate the monthly management fee due and assess each STIF participant account their portion of the fee based upon their average daily balance. 42. Fees Scope 2.1 Page 8 DFS notes that it would like fees to be paid from a percentage of Securities Lending earnings only. Are you open to other arrangements for fee payment, i.e. hard dollar fee or other services beyond securities lending as a means to compensating the custodian? No, DFS made a statement that all fees will be paid from Securities Lending Earnings. 43. Trades Processing What trade order management system(s) is DFS utilizing for your internally managed portfolios? None, all trades will be entered on the vendor s web-based trade entry system. 44. Participant Recordkeeping Does DFS utilize a transfer agent/recordkeeper? If so how does the custodian interact?

10 No 45. Prime Brokerage How many prime broker relationships does DFS currently have? None 46. Securities Lending Revenue Estimate- If possible, please provide a holdings report at the portfolio/fund level, which will be available for participation in the securities lending program. Please provide security name, security identifier (e.g., CUSIP, SEDOL), asset class to which it is assigned (e.g., fixed income, equity), shares/par value, and market value for all available assets. All securities listed on Attachment J are available to participate in the securities lending program. All information that is requested is available on Attachment J except for portfolio/fund level which will not be disclosed due to proprietary information. 47. Securities Lending Split - If possible, please provide your present securities lending fee split arrangement for your current lending program? The Department keeps 75% of the earnings plus pays 1.5 basis points of the weighted daily average amount of Cash Collateral invested. 48. Cash Management Fee - Are you currently paying a cash management fee for investing your securities lending cash collateral in a separately managed account? Yes, 1.5 basis points of the weighted daily average amount of Cash Collateral Invested. 49. Legacy Collateral - Are there any legacy collateral reinvestment assets that would need to be funded through a transition to a new provider? If yes, can these investments and their current market value be shared? Yes, a representative sample of the Cash Collateral reinvestment portfolio information is attached. A detailed list will be provided during transition.