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18.85. Repurchase Agreements Risk

Subject to its investment objectives and policies, the Investment Compartment may invest in repurchase agreements. Repurchase agreements typically involve the acquisition by the Investment Compartment of fixed income securities from a selling financial institution such as a credit institution, savings and loan association or broker-dealer. The agreement provides that the Investment Compartment will sell the securities back to the institution at a fixed time in the future. The Investment Compartment does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Investment Compartment could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Investment Compartment seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in fixed income securities, the Investment Compartment follows procedures approved by the Board that are designed to minimize such risks. In addition, the value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Investment Compartment generally will seek to liquidate such collateral. However, the exercise of the Investment Compartment’s right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Investment Compartment could suffer a loss.