This post continues our examination of the “10% buffer” for Hedging Derivatives, which refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value, par or principal amount of the hedged equity and fixed-income investments. In this post we consider whether funds should apply the 10% buffer to Hedging Derivatives in the aggregate or on a “hedge-by-hedge” basis. Continue Reading Rule 18f-4: One 10% Buffer or Many?
This post continues our examination of the “10% buffer” for Hedging Derivatives, which refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value of hedged equity investments, par amount of hedged fixed-income investments or principal amount of hedged borrowings. In this post we examine what it means for Hedging Derivatives to exceed the 10% buffer. Continue Reading Rule 18f-4: The 10% Buffer and Changes in Hedged Investments
We promised a few posts back to discuss how a Limited Derivatives User should apply what we termed the “10% buffer” to determine whether currency and interest-rate derivatives may be excluded from its derivatives exposure. This post begins to tackle the question What is the 10% Buffer? and explain how it might work.
Yesterday, the Investment Adviser Association published our article on “Dealing with the New Derivatives Rule: A Guide of Legal and Compliance Professionals” in the “Compliance Corner” of its September 2021 IAA Newsletter.
At a high level, the article:
- Provides a background on the limitations on senior securities under the Investment Company Act of 1940 (the “1940 Act“);
- Affords readers with an overview of Rule 18f-4 under the 1940 Act;
- Summarizes how a fund qualifies as a limited derivatives fund (including a six-step process for calculating derivatives exposure); and
- Describes the key elements of a derivatives risk management program that is required to be implemented by a fund that does not qualify as a limited derivatives fund (i.e., a VaR Fund).
Regular readers of this blog have already read about all of this in more detail. But the article provides a handy summary, including many of the tables found in our posts.
We are grateful for the opportunity to have contributed the article to the IAA Newsletter.
Our last post examined examples of currency hedges that we believe Rule 18f‑4(c)(4)(i)(B) should allow a fund seeking to comply with the Limited Derivatives User requirements to exclude from its derivatives exposure. This post struggles with examples of interest-rate hedges that may, or may not, be excluded. Continue Reading Limited Derivatives Users—Applying the Interest Rate Hedging Exclusion
Our last two posts surveyed what Rule 18f-4 and its adopting release (the “Release”) tell us about excluding currency and interest-rate derivatives from the derivatives exposure of a fund seeking to comply with the Limited Derivatives User requirements of Rule 18f-4(c)(4). The Release indicates that the SEC intends to exclude only those derivatives that:
will predictably and mechanically provide the anticipated hedging exposure without giving rise to basis risks or other potentially complex risks that should be managed as part of a derivatives risk management program.”
This post considers questions we have encountered in applying this exacting standard to currency hedging strategies. Continue Reading Limited Derivatives Users—Applying the Currency Hedging Exclusion
In Part 1 of this post, we focused on the July 7, 2021, recommendations for funds and advisers from the Diversity and Inclusion (D&I) Subcommittee of the SEC’s Asset Management Advisory Committee (AMAC). Here we cover the August 6, 2021, SEC order approving diversity disclosure rules proposed by The Nasdaq Stock Market LLC (Nasdaq) and the public responses of SEC Commissioners. Suffice it to say, the Commission is not of one mind.
In recent weeks two important regulatory developments focused on diversity and inclusion (D&I) have come out of the SEC: the D&I Subcommittee of the SEC’s Asset Management Advisory Committee (AMAC) presented and received approval for its recommendations, and the SEC issued an order approving rule changes proposed by The Nasdaq Stock Market LLC (Nasdaq) relating to board diversity. SEC Chair Gary Gensler and other commissioners have publicly supported the Subcommittee’s recommendations and the new Nasdaq rules. But these developments are not uniformly popular at the SEC.
This post continues our examination of how a fund must treat hedges when calculating its derivatives exposure to qualify as a limited derivatives user. Commenters on proposed Rule 18f-4 suggested several types of derivatives hedges, in addition to currency derivatives, that the Commission might exclude from derivatives exposure. In the release adopting Rule 18f-4 (the “Adopting Release”), the Commission agreed to exclude interest rate derivatives from the calculation of derivatives exposure, but rejected the other suggestions. These other hedging strategies should therefore be included in a fund’s derivatives exposure.
We previously discussed covered call options and purchased option spreads, which are derivatives transactions and should be included in derivatives exposure. Other potential hedges that should be included in derivatives exposure include the following. Continue Reading Rule 18f-4: Trimming Hedges—Hedges Included in Derivatives Exposure
Our post on the derivatives exposure equation began with a separate equation concerning interest rate and currency hedges. This post explains the significance of this equation and what hedges should be excluded from a fund’s derivatives exposure. Our next post will address hedges included in derivatives exposures before we raise some interpretive questions about how the exclusion should be applied. Continue Reading Rule 18f-4: Trimming Hedges—Hedges Excluded from Derivatives Exposure