SEC Votes to Modernize Regulatory Framework for Derivatives Use

New rule and amendments will provide a comprehensive approach for derivatives use by registered funds

The Securities and Exchange Commission (SEC) voted on Wednesday to improve the regulatory framework for the use of derivatives by registered investment and business development companies. The commission aims to provide a modernized approach with the introduction of a new rule and some rule amendments.

In an official press release, the SEC expressed its commitment to design a regulatory structure to reflect ever-broadening product innovation and investor choice while considering all the risks associated with the use of complex financial products.

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The new rule now allows investment funds and business development companies registered under the SEC, to get engage in financial transactions that involve potential future payment obligations, provided that they meet certain conditions to protect investors. The regulator asked companies to adopt a ‘Derivatives Risk Management’ program and also to limit the leverage related risk.

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“Derivatives have come to play an important role for many funds in portfolio strategy and risk management, but the regulatory approach for derivatives use has been inconsistent and outdated,” Jay Clayton, chairman at the SEC said in a statement. “The new comprehensive limits on risk will prohibit derivatives use that is inconsistent with the leverage limits imposed by the Investment Company Act but will allow virtually all funds to continue to serve their investors using the most efficient instruments. I thank the staff for their impressive work.” Clayton added.

New Amendments

The regulator pointed out that the new rule amendments will now allow an investment fund to enter into “unfunded commitments” to proceed with certain loans or investments. Funds can now enter into reverse repurchase agreements as well. The SEC also states that the newly introduced rule requirements also apply to inverse Exchange Traded Funds (ETFs) and leveraged products. The new rule will be published on the SEC’s website and Federal Register. To comply with the rules and related requirements, the SEC has provided an 18 month transition period for the registered funds.

SEC has been quite active in recent days regarding regulatory issues, Finance Magnates earlier reported about SEC’s regulation update about the OTC market.

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