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.

Continue Reading D&I Developments at the SEC – Part 2 of 2

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.

Continue Reading D&I Developments at the SEC – Part 1 of 2

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

This post catches up on the ESG front at the SEC following the appointment of Gary Gensler as Chairman. The switch from a Chairman appointed by President Trump to one appointed by President Biden may add momentum to the SEC’s ESG proposals. Continue Reading No Summer Slump on ESG at the SEC: Board Duties, Exams, Rulemaking and Skepticism

This post continues our discussion of the calculation of “gross notional amounts” included in a fund’s “derivatives exposure” under Rule 18f-4. Previously, we identified the best guidance we could find on how to calculate a derivatives transaction’s gross notional amount, and three adjustments to such amounts permitted by the rule’s definition of derivatives exposure. In this post, we discuss another adjustment not anticipated by Rule 18f‑4, but which we believe is necessary to avoid a fund that purports to be a limited derivatives user from circumventing the 10% limit on its derivatives exposure. Continue Reading Derivatives Exposure: Adjusting for Multipliers

Our previous post gave the best account we could of what the SEC staff has said about calculating the “gross notional amount” of derivatives transactions. In this post, we examine three adjustments that a fund may (but is not required to) make when calculating its “derivatives exposure.” Specifically, a fund may:

  • exclude any closed-out positions;
  • delta adjust the notional amounts of options contracts; and
  • convert the notional amount of interest rate derivatives to 10-year bond equivalents.

We anticipate that a fund seeking to qualify as a “limited derivatives user” would make these adjustments to lower its derivatives exposure. Continue Reading Derivatives Exposure: Adjusting Notional Amounts

In this post, we tackle the question of how to calculate the “gross notional amount” of a derivatives transaction for purposes of the limited derivatives user provision of Rule 18f-4. This is a surprisingly difficult question because, although the adopting release for Rule 18f-4 (the “Adopting Release”) refers to “notional amount” 63 times, the release never directly addresses what the term means. We think we found an answer, but it required us to wind our way through a series of earlier SEC statements. Continue Reading Derivatives Exposure: A Circuitous Path to “Gross Notional Amounts”