US Securities and Exchange Commission Proposes New Derivatives Rules for Registered Funds and Business Development Companies

The US Securities and Exchange Commission issued a proposed rule for public comment that would limit the use of derivatives and require new risk management measures by registered investment companies, including mutual funds, exchange-traded funds, closed-end funds, and business development companies. The proposed rule would require a fund to comply with one of two portfolio limitations, that would cap the amount of leverage a fund may obtain  from derivatives and other specified transactions. Specifically, the rule would limit a fund’s aggregate derivatives exposure to 150 percent of the fund’s net assets, or up to 300 percent of the fund’s net assets provided that the fund satisfies a risk-based test based on value-at-risk. A formal derivatives risk management program overseen by a designated derivatives risk manager would be required if a fund engages in more than the limited amount of derivatives transactions or if it uses complex derivatives. In addition, a fund would have to manage the risks related to their use of derivatives by segregating certain assets, generally cash and cash equivalents, in an amount sufficient to ensure that the fund meets its obligations. Funds would also be required to segregate certain assets to cover its obligations related to certain financial commitment transactions, such as reverse repurchase agreements and short sales. The proposed rule will be open for public comment for 90 days following its publication in the Federal Register.

View the SEC press release.

View the proposed rule.