More reporting is key to transparency, says Finadium
14 January 2015 Concord, MA
Image: Shutterstock
Finadium has published its response to the US Securities and Exchange Commission (SEC) plans to increase transparency in the derivatives and securities lending industry, suggesting mandatory reporting and modernisation.
In its Securities Finance Monitor, Finadium responded to a speech made by SEC chair Mary Jo White in December 2014.
In the speech, White addressed the minimal insight that even the SEC has in to the inside workings of derivatives and securities lending, a point that Finadium suggests leads to suspicion of the industry as a whole.
Brown said: “While funds and advisers currently report significant information about their portfolios and operations to the Commission, these reporting obligations have not, in my view, adequately kept pace with emerging products and strategies being used in the asset management industry.”
She added: “The reporting and disclosure of fund investments in derivatives, the liquidity and valuation of their holdings, and their securities lending practices should all be significantly enhanced.”
Finadium agreed with this principle, and suggested quarterly disclosure in the style of Form N-Q, clarifying derivatives and securities lending holdings, collateral held, what collateral is invested in, and who the counterparty is.
It went further however, also advising fees for faster risk and return evaluation, and disclosure on holdings where cash is invested in a money fund, and where it is not published anywhere else.
In the same vein, Finadium encouraged the SEC to allow mutual funds to accept a broader range of non-cash collateral, thereby allowing them to stay current in modern markets.
Brown also suggested that liquidity management and monitoring could be on the horizon, saying: “Liquidity management and the use of derivatives in mutual funds and ETFs are two key areas of focus by the staff.”
“Inadequate controls in those areas can create significant risks for funds themselves and their investors, as well as raising questions about whether there could be a potential impact on the financial system as a whole.”
While Finadium supported this move, it pointed out that some non-major fund managers may not be sophisticated enough to implement this, and expressed concerns over the SEC’s ability to implement new regulations in a timely manner.
In its Securities Finance Monitor, Finadium responded to a speech made by SEC chair Mary Jo White in December 2014.
In the speech, White addressed the minimal insight that even the SEC has in to the inside workings of derivatives and securities lending, a point that Finadium suggests leads to suspicion of the industry as a whole.
Brown said: “While funds and advisers currently report significant information about their portfolios and operations to the Commission, these reporting obligations have not, in my view, adequately kept pace with emerging products and strategies being used in the asset management industry.”
She added: “The reporting and disclosure of fund investments in derivatives, the liquidity and valuation of their holdings, and their securities lending practices should all be significantly enhanced.”
Finadium agreed with this principle, and suggested quarterly disclosure in the style of Form N-Q, clarifying derivatives and securities lending holdings, collateral held, what collateral is invested in, and who the counterparty is.
It went further however, also advising fees for faster risk and return evaluation, and disclosure on holdings where cash is invested in a money fund, and where it is not published anywhere else.
In the same vein, Finadium encouraged the SEC to allow mutual funds to accept a broader range of non-cash collateral, thereby allowing them to stay current in modern markets.
Brown also suggested that liquidity management and monitoring could be on the horizon, saying: “Liquidity management and the use of derivatives in mutual funds and ETFs are two key areas of focus by the staff.”
“Inadequate controls in those areas can create significant risks for funds themselves and their investors, as well as raising questions about whether there could be a potential impact on the financial system as a whole.”
While Finadium supported this move, it pointed out that some non-major fund managers may not be sophisticated enough to implement this, and expressed concerns over the SEC’s ability to implement new regulations in a timely manner.
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