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ARTICLE · 28 JUNE 2021

Derivatives Exposure: Adjusting For Multipliers

Perkins Coie LLP
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This post continues our discussion of the calculation of "gross notional amounts" included in a fund's "derivatives exposure" under Rule 18f-4.

United StatesFinance and Banking
Stephen Keen
Stephen Keen
Andrew P. Cross
Andrew P. Cross

This post continues our discussion of the calculation of "gross notional amounts" included in a fund's "derivatives exposure" under Rule 18f-4. Previously, we identified the best guidance we could find on how to calculate a derivatives transaction's gross notional amount, and three adjustments to such amounts permitted by the rule's definition of derivatives exposure. In this post, we discuss another adjustment not anticipated by Rule 18f-4, but which we believe is necessary to avoid a fund that purports to be a limited derivatives user from circumventing the 10% limit on its derivatives exposure.

The Distributive Property and Swaps

A swap is essentially an equation for calculating payments. For example, if a fund enters into a swap to pay one-month LIBOR and receive 1% on a notional amount of $2,000,000, then the fund would receive (or pay if the result is negative) on an annual basis:

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