Form N-PORT. Only funds that rely on the derivatives-limited user exception are required to report derivatives risks at the end of the reporting period. A fund invoking the exemption must disclose (i) its risk on derivatives, (ii) its exposure to currency derivatives that hedge currency risk, and (iii) its exposure to interest rate derivatives that hedge interest rate risk. In addition, a fund invoking the exemption must report the number of business days, which may exceed the five-business day payback period allowed by the rule, during which the fund`s risk derivative exceeded 10% of its net assets during the reporting period. Information on exposure to derivatives reported by funds invoking the limited exemption for derivatives users will not be made public.22 The amendments to Rule 6c-11 of the Investment Companies Act allow leveraged or reverse ETFs to rely on Rule 6c-11 if they comply with all applicable provisions of Rule 18f-4. The Commission repeals exemption orders previously issued to leveraged or reverse ETF sponsors with respect to these changes. A derivatives risk manager approved by the Fund`s Board of Directors will administer the program. This person must be a senior officer of the Fund`s Investment Advisor and must not be a portfolio manager of the Fund. The Fund`s derivatives risk manager is accountable to the Fund`s Board of Directors for the implementation and effectiveness of the derivatives risk management program to facilitate the Board`s oversight function. The derivative risk manager must have a direct reporting relationship to the Fund`s Board of Directors. The rule requires the derivatives risk manager to provide certain written reports on the program to the Fund`s Board of Directors. Form N-PORT. The amendments to this form require a fund to report information on its derivatives risk when relying on the limited user exception for derivatives and (for applicable funds) information on compliance with the VaR-based leverage limitation.

Some of this information is communicated to the Commission on a confidential basis. Form N-CEN. The amendments to this form require funds to check a box to determine whether they relied on Rule 18f-4 during the reporting period, including whether they relied on various specific provisions of the rule. The Commission`s Investment Management department would be pleased to answer your questions about Rule 18F-4. You can IMOCC@sec.gov send a question by email. In addition, you may contact the Office of the Chief Counsel of the Investment Management Division at (202) 551-6825. The rule replaces a patchwork of SEC no-action letters and other guidance dating back to Publication 10666 (issued in 1979) and subsequent SEC personnel guidelines. In general, the rule allows a fund to enter into « derivatives transactions » notwithstanding the prohibitions and restrictions on the issuance of senior securities under section 18 of the 1940 Act, provided that the fund complies with the conditions of the rule described below.1 The rule also addresses the ability of a fund (i) to enter into reverse repurchase agreements and similar financing transactions; (ii) enter into « naked commitment agreements », and (iii) acquire securities that are traded at the time of issuance or on a forward settlement basis or on a non-standard settlement cycle. The rule does not specify what « relevant experience in derivatives risk management » means or what qualifications or experience the derivatives risk manager must have. The SEC notes in the press release that this aspect of the rule is intended to give boards the flexibility to determine what experience is relevant to the derivatives risks applicable to the fund, but it is not clear what types of experience and qualifications are required for this position. Presumably, derivatives risk professionals already occupy positions such as portfolio manager, quantitative analyst or trader, which offer more attractive compensation and bonus opportunities than a mutual fund compliance role. Some advisors (particularly junior advisors) see the cost of hiring a new senior executive for the role of derivatives risk manager as a business matter.

The statements contained in this FDI reflect the views of the Investment Management Division. This update is not a rule, regulation or statement of the Securities and Exchange Commission. Moreover, the Commission neither approved nor rejected its content. Future changes to rules, regulations and/or staff inaction and interpretative positions may replace some or all of the information contained in a particular ADI. The rule requires a fund to « appropriately separate » program functions from the fund`s portfolio management. The press release notes that proper separation does not mean that the derivatives risk manager and portfolio management should be separated by a communication « firewall ». Instead, the SEC « recognized the importance of the Fund`s use of derivatives and insight that the portfolio manager can provide, and generally understands that the Fund`s [derivatives risk manager] would work with the Fund`s portfolio management to implement the [program]. » Unfunded commitment agreements. The rule allows a fund to enter into an uncovered commitment agreement17 provided that it reasonably expects that, at the time of entering into such an agreement, it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its uncovered commitment agreements at maturity. For each unhedged liability agreement entered into by a fund on the basis of the rule, the fund must document the basis of its reasonable assumption that its cash and cash equivalents are sufficient to satisfy its unhedged liability agreement.

Non-covered commitment agreements are not « derivative transactions » within the meaning of the rule. Funds that use derivatives on a limited scale are subject to simplified requirements. The rule also allows a fund to enter into reverse repurchase agreements and similar financing transactions, as well as « unfunded bonds », in order to grant certain loans or investments on specific terms tailored to those transactions. Funds, including MMFs, are now generally allowed to invest in securities on a futures settlement basis. Funds are also subject to reporting and record-keeping obligations with respect to their use of derivatives. The new rules will be published on the Commission`s website and in the Federal Register. The rule and associated rule and form changes will be effective 60 days after they are posted in the Federal Register. The Commission has provided for a transitional period of eighteen months to allow the Funds to comply with the relevant rules and reporting obligations. The Commission voted in favour of adopting further amendments to the rules, rules and forms to provide an updated and comprehensive approach to the regulation of the use of derivatives and certain other transactions by funds. New Rule 18f-4, an exemption under the Investment Companies Act of 1940 (the « Act »), allows mutual funds (other than money market funds), exchange-traded funds (« ETFs »), registered closed-end funds and business development corporations (collectively, the « Funds »), to enter into transactions in derivatives and certain other transactions, notwithstanding the restrictions set out in section 18 of the Act. In the context of these new rules, the Commission amended Rule 6c-11 of the Act to allow leveraged or reverse ETFs to operate without granting an exemption.

Finally, the Commission introduced new reporting requirements and amendments to certain disclosure forms. Limited exception for derivatives. The user limited derivatives test, whereby a fund`s exposure to derivatives must not exceed 10% of the fund`s net assets, is not aligned with the risk of the fund`s derivative positions. With few exceptions, derivatives that tend to be lower risk relative to their notional amount (e.g., many interest rate derivatives) are treated in the same way as derivatives that tend to be higher risk relative to their notional amount. No credit will be given for margins recognized or received in respect of derivative contracts. Although the rule excludes closing transactions with the same counterparty from this 10% threshold, it does not exclude positions that settle or hedge derivatives transactions with another counterparty, so that a derivatives transaction that hedges the interest rate or foreign exchange risk of a fixed-income instrument held by a fund is excluded from derivative risk for the purposes of the 10% test. it may be necessary to include a derivatives transaction that hedges the interest rate or foreign exchange risk of another derivatives transaction held by the Fund.