SEC proposes asset segregation rule
14 December 2014 Washington DC
Image: Shutterstock
The US Securities and Exchange Commission (SEC) has approved a new rule that will require funds to segregate certain assets for repo and short selling transactions.
The latest proposal will compliment existing regulation on 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.
Funds would be limited in their use of derivatives and be required to put risk management measures in place, which would result in better investor protections.
“Today’s proposal is designed to modernise the regulation of funds’ use of derivatives and safeguard both investors and our financial system,” said SEC chair Mary Jo White.
“Derivatives can raise risks for a fund, including risks related to leverage, so it is important to require funds to monitor and manage derivatives-related risks and to provide limits on their use.”
The Investment Company Act limits the ability of funds to engage in transactions that involve potential future payment obligations, including derivatives such as forwards, futures, swaps and written options.
Funds can enter into these derivatives transactions, provided that they comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions, according to the SEC.
A fund would also have to manage the risks associated with their derivatives transactions by segregating certain assets in an amount designed to enable the fund to meet its obligations, including under stressed conditions.
A fund that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalised derivatives risk management program.
The proposal will be published on the commission’s website and in the Federal Register. The comment period for the proposal will be 90 days after publication in the Federal Register.
The latest proposal will compliment existing regulation on 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.
Funds would be limited in their use of derivatives and be required to put risk management measures in place, which would result in better investor protections.
“Today’s proposal is designed to modernise the regulation of funds’ use of derivatives and safeguard both investors and our financial system,” said SEC chair Mary Jo White.
“Derivatives can raise risks for a fund, including risks related to leverage, so it is important to require funds to monitor and manage derivatives-related risks and to provide limits on their use.”
The Investment Company Act limits the ability of funds to engage in transactions that involve potential future payment obligations, including derivatives such as forwards, futures, swaps and written options.
Funds can enter into these derivatives transactions, provided that they comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions, according to the SEC.
A fund would also have to manage the risks associated with their derivatives transactions by segregating certain assets in an amount designed to enable the fund to meet its obligations, including under stressed conditions.
A fund that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalised derivatives risk management program.
The proposal will be published on the commission’s website and in the Federal Register. The comment period for the proposal will be 90 days after publication in the Federal Register.
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