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.
Lofchie Comment: 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.