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ARTICLE · 13 JANUARY 2016

SEC Proposes New Derivatives Rules For Registered Funds

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A rule proposed by the US Securities and Exchange Commission would provide for new limits on the use of derivatives—together with new risk management measures...

United StatesFinance and Banking
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A&O Shearman
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John Adams
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Azam Aziz
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Bjorn Bjerke
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Lorna Xin Chen
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A rule proposed by the US Securities and Exchange Commission would provide for new limits on the use of derivatives—together with new risk management measures—for SEC-registered investment companies. All funds registered under the US Investment Company Act of 1940 would be covered, including mutual funds, exchange-traded funds (ETFs), closed-end funds, and business development companies.

New proposed Rule 18f-4 would rescind a patchwork of SEC and SEC staff guidance that developed over almost 40 years and, for the first time, would set hard ceilings on market exposures obtained through derivatives. Here are the highlights:

  • 150% Exposure Ceiling. This would be wholly new. Gross notional exposure through derivatives, together with leverage undertaken by the fund through bank borrowings and debt or preferred stock issuances plus exposures under the fund's so-called "financial commitment transactions," would be capped at 150% of a fund's net asset value.

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