SIFMA: SEC’s asset management rules must change
30 March 2016 Washington DC
Image: Shutterstock
Important changes must be made to the Securities and Exchange Commission’s (SEC) proposed portfolio limits and asset segregation requirements, the Securities Industry and Financial Markets Association (SIFMA) has said.
The association voiced its concerns in a recent comment letter in which it outlined its support for the SEC’s regulatory goals but stated its opposition to the portfolio limits and suggested changes to the asset segregation rules.
According to SIFMA, the current portfolio limits could “ create perverse incentives for portfolio managers to invest in riskier, less liquid instruments and would restrict regulated funds from engaging in risk management and portfolio management activity that otherwise may be beneficial for investors”.
If the portfolio limits are not scrapped, SIFMA’s recommended reforms include changes to calculate exposure based on the relative riskiness of the derivative rather than flat notional amount.
There should also be a substitute to the absolute value-at-risk (VaR) test for the proposed relative VaR test when applying the SEC’s 300 percent risk-based portfolio limit, and raise the 150 percent exposure-based limit to 200 percent.
The suggested assets segregation revisions include enhancements to ensure asset segregation requirements are workable and effective.
A broader group of portfolio instruments, beyond cash and cash equivalents, should also be allowed to satisfy asset segregation requirements.
Additionally , the definition of ‘qualifying coverage assets’ should be expanded to include high-quality instruments allowed under the margin rules applicable to uncleared swaps, subject to application of haircuts, to promote regulatory consistency and help avoid potential negative impacts to investor returns caused by a ‘cash drag’, among other benefits.
“We support the SEC’s efforts to consolidate and update its guidance regarding the use of derivatives by regulated funds,” said SIFMA president and CEO Kenneth Bentsen Jr.
“At the same time, however, derivatives are important investment tools, and it is imperative that any new rules be appropriately balanced to provide sufficient flexibility for regulated funds to use derivatives in order to manage risks effectively and help investors achieve their financial goals.”
The association voiced its concerns in a recent comment letter in which it outlined its support for the SEC’s regulatory goals but stated its opposition to the portfolio limits and suggested changes to the asset segregation rules.
According to SIFMA, the current portfolio limits could “ create perverse incentives for portfolio managers to invest in riskier, less liquid instruments and would restrict regulated funds from engaging in risk management and portfolio management activity that otherwise may be beneficial for investors”.
If the portfolio limits are not scrapped, SIFMA’s recommended reforms include changes to calculate exposure based on the relative riskiness of the derivative rather than flat notional amount.
There should also be a substitute to the absolute value-at-risk (VaR) test for the proposed relative VaR test when applying the SEC’s 300 percent risk-based portfolio limit, and raise the 150 percent exposure-based limit to 200 percent.
The suggested assets segregation revisions include enhancements to ensure asset segregation requirements are workable and effective.
A broader group of portfolio instruments, beyond cash and cash equivalents, should also be allowed to satisfy asset segregation requirements.
Additionally , the definition of ‘qualifying coverage assets’ should be expanded to include high-quality instruments allowed under the margin rules applicable to uncleared swaps, subject to application of haircuts, to promote regulatory consistency and help avoid potential negative impacts to investor returns caused by a ‘cash drag’, among other benefits.
“We support the SEC’s efforts to consolidate and update its guidance regarding the use of derivatives by regulated funds,” said SIFMA president and CEO Kenneth Bentsen Jr.
“At the same time, however, derivatives are important investment tools, and it is imperative that any new rules be appropriately balanced to provide sufficient flexibility for regulated funds to use derivatives in order to manage risks effectively and help investors achieve their financial goals.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
