After voting to change or amend existing rules, the US Securities and Exchange Commission (SEC) will strengthen the regulatory framework for registered investment companies to use derivatives. As part of a new framework covering mutual funds, exchange-traded funds (ETF) and closed-end funds, operators must assume responsibility for implementing written derivative risk management plans.

Modern methods of derivatives supervision

The rule change opens the door to more leveraged ETFs. It will also allow funds to enter into reverse repurchase agreements and similar financing transactions, as well as “no capital commitments” to make certain loans or investments, but it will depend on the nature of these transactions. Condition depends. .

The European Commission said: “The new rules and rule amendments will provide a modern and comprehensive approach to regulating the use of these fund derivatives, thereby addressing investor protection issues and reflecting developments over the past few decades.”

At the same time, SEC Chairman Jay Clayton talked about the importance of derivatives to funds in his comments after announcing the vote. He said:

“In many funds, derivatives have played an important role in portfolio strategy and risk management, but the regulatory methods used by derivatives are inconsistent and outdated.”

Therefore, Clayton said that the actions taken by the SEC will not only help the fund achieve its goals, but will also “provide meaningful protection for investors and provide regulatory certainty for the fund and its advisors.” The enhanced framework is expected to cease. Use of derivative products that are inconsistent with the set restrictions. Clayton explained:

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“Importantly, the new comprehensive risk limit will prohibit the use of derivatives that conflict with the leverage restrictions imposed by the Investment Company Law, but in fact will allow all funds to continue to use the most effective tools to serve investors. I thank the staff. Excellent work.”

Investor protection is the top priority of the SEC

According to the SEC, the Investment Company Law (in its current form) restricts the ability of registered funds and business development companies to engage in transactions involving potential future payment obligations. These transactions include potential future payment obligations, including forwards, futures, Obligations under derivatives such as swaps and written options.

The new rules allow funds to trade under certain conditions designed to protect investors.

At the same time, the SEC said: “A simplified set of requirements will apply to funds that use derivatives in a limited way.”

The rules and related rules and table amendments will take effect 60 days after being published in the Federal Register. The committee provided an 18-month transition period for funds to comply with regulations and related reporting requirements.

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Tags in this story

Derivatives, derivative risk management plan, etfs, federal registration, investment advisors, “Investment Company Act”, investor protection, leverage restrictions, portfolio strategy, registered capital, risk management, US Securities and Exchange Commission

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