SEC Explains Methodology for Analyzing Comments on Proposal to Restrict Derivatives Use
Commentary by Steven Lofchie
The SEC Division of Economic and Risk Analysis ("DERA") set forth the methodology it used to analyze comments received on a proposal for the use of derivatives by registered funds and business development companies.
According to DERA, most commenters proposed that Investment Company Act Rule 18f-4 should measure a fund's derivatives exposure using notional amounts adjusted to reflect the risks of the underlying reference assets. These SEC-adopted risk-based adjustments would be derived from standardized schedules used for other regulatory purposes.
DERA evaluated aspects of the proposal that included (i) the internal consistency of using risk-adjustment and haircut schedules across asset classes, and (ii) categories created for the purposes of risk adjustment and risk weighting with respect to the rule.
Commentary
In its analysis, DERA seemed not to differentiate between the use of derivatives for speculation and for hedging. Apparently, DERA assumed that the derivatives would be used only for speculation.
Related Articles
-
Delta Strategy Group analyst and former SEC Chief Economist James A. Overdahl found serious flaws in the SEC proposed rule to regulate the use of derivatives by registered investment companies.
-
Four investment industry groups called for significant revisions to the SEC's proposed restriction of the use of derivatives by investment companies.
-