SEC Finalizes Derivatives Rules for Investment Companies

On October 28, the Securities and Exchange Commission finalized rule 18f-4 Use of Derivatives by Investment Companies (including Mutual Funds and ETFs) and Business Development Companies.

Rule 18f-4 requires investment companies, mutual funds, ETFs and BDCs to implement Value-at-Risk based limits on the use of derivatives, provide a written Risk Management Program that defines the overall governance of the funds and meet additional documentation and recordkeeping requirements. The SEC provides an 18-month transition period to achieve compliance with the rules. The final rule requires enhanced:

• Board of Directors (BOD) Oversight and Reporting
• BOD Approval of an Independent Derivatives Risk Manager
• Establishment of a Comprehensive Risk Management Program
• Value-at-Risk (VaR) Calculation and Stress Testing Requirements
• VaR Limits, Limit Excess Compliance, Documentation and Reporting Requirements
• Recordkeeping and Record Retention Requirements.

NextGen Strategic Advisors and Numerix have developed a turnkey Managed Services solution to support the 18f-4 regulatory compliance requirements. The Managed Services solution provides the Derivatives Risk Manager with the required Derivatives Risk Management Program, required policies and procedures, the daily risk reports and a daily limit monitoring capability. Our solution will enable companies to comply with these rules efficiently and cost effectively.