Having completed our detour into regulations and interpretations other than re-proposed Rule 18f-4, this post returns to considering possible justifications for carving out “unfunded commitment agreements” from the proposed Value at Risk limitations of Rule 18f-4. We have previously explained why the first two justification identified in the proposing release are ill-founded, which leaves only the following argument for a carveout:
Commenters also asserted that unfunded commitment agreements do not give rise to the risks that Release 10666 identified and do not have a leveraging effect on the fund’s portfolio because they do not present an opportunity for the fund to realize gains or losses between the date of the fund’s commitment and its subsequent investment when the other party to the agreement calls the commitment.”
We believe this is true of some, but not all, commitments. To explain why, we begin with the most important element of the proposed definition of “unfunded commitment agreement:” that it is a commitment to the company receiving the loan or other investment.
Continue Reading Re-Proposed Rule 18f-4: Why Some Commitment Agreements may not have “Leveraging Effects”