In the April issue of our monthly Money Fund Intelligence newsletter, Crane Data interviewed Thomas Poppey, Senior Vice President, Relationship Management, with Brown Brothers Harriman (BBH), America's largest private bank and prominent asset servicer and securities lending agent. Securities lending has been of growing interest to money market funds due to the tremendous investment balances coming from these programs, and due to the stress being felt by some of the 'shadow 2a-7' and 'enhanced cash' reinvestment pools.

On the state of the securities lending business, Poppey says, "From BBH's perspective, the securities lending business remains fundamentally strong. We feel this is a direct result of our program philosophy and approach to the business. Since the inception of our securities lending program in 1999, we have chosen to focus on returns driven from the intrinsic value of the securities, rather than on the reinvestment of collateral. We feel it is important to educate our clients and prospects about the differences between the securities lending business and the securities financing business, because they're very different. Providers that have focused on the 'financing' or reinvestment of cash collateral to generate returns are most likely the ones that have experienced program challenges and in many cases, client losses."

He continues, "Historically, in the U.S. cash has been king, so lenders have accepted cash as the predominant form of collateral. In Europe, cash has only recently started to become more common and is still less prevalent. Non-cash, or securities, collateral, is more widely used. So the acute collateral problems have occurred mostly in the U.S. Also important to note are the types of entities that are participating in lending. Speaking generally, given the risk profile of U.S.-registered investment companies, they have favored either 2a-7 registered funds or funds that have risk profiles similar to a 2a-7 fund for the reinvestment of cash collateral."

Poppey explains, "Public and corporate pension plan sponsors have increasingly accepted enhanced cash vehicles or cash plus vehicles. The investment profiles of these vehicles are much less conservative than the 2a-7 guidelines, so they may have more credit and interest rate risk. They might go out 2-3 years, possibly longer, and as a result generally have more structured products in their portfolios. Within the BBH program, our clients have always trended towards funds that are compliant with 2a-7 guidelines, understanding they can still generate meaningful returns without taking on additional investment risk. However, we also allow clients to self-manage collateral if they so choose."

Finally, Poppey tells us, "While BBH does not directly manage cash collateral, I can tell you that the pools in which our clients are invested have not realized NAV impairment during the course of the last 20 months. Most of our clients have a very conservative risk profile as it relates to collateral investment, and this goes back to our core program philosophy: When you are lending securities, you should be making your money from the lending of securities and not the reinvestment of collateral."

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