SEC Gives Additional Economic Analysis on Proposed Derivatives Rule

The U.S. Securities and Exchange Commission (SEC) recently announced that its staff has made available additional economic analysis related to the agency’s proposed rule regarding the use of derivatives by registered funds and business development companies.

Basically, the proposed rule would limit funds’ use of derivatives and require them to put risk management measures in place, which would result in better investor protections.

In the report, the SEC said:

The staff believes that the analysis will be informative for evaluating comments on the proposed rule that suggests its portfolio limitations should be based on risk-adjusted gross notional exposure, and that its asset segregation requirement should permit certain liquid assets other than cash or cash equivalents to be segregated against a fund’s derivatives exposures, subject to appropriate haircuts.

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Commenters have suggested using risk-adjustment and haircut schedules that were originally developed for other regulatory purposes. In turn, this analysis evaluates the internal consistency of these schedules across asset classes and categories for purposes of risk-adjustment and risk-weighting with respect to the rule.

The staff is making the analysis available to allow the public to consider this supplemental information.

For those that want to get technical, the analysis is posted on the SEC’s website as part of the comment file for a rule proposed by the Commission in December 2015 that is designed to enhance the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange traded funds (ETFs) and closed-end funds, as well as business development companies.

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