The US Securities and Exchange Commission (SEC) on Wednesday voted to improve a regulatory framework for the use of derivatives by registered investment and business development companies.
Working on a modernized approach
The SEC is looking forward to providing a more modernized approach to regulations with the introduction of a new rule. It also plans on bringing amendments to some existing rules. The SEC expressed its commitment to design a regulator structure for reflecting a more dynamic product innovation and investor choice landscape. It also wants to consider all the risks associated with the use of more complex financial products.
The new rule will allow investment funds and business development companies registered with the SEC to engage in financial transactions that include potential payment obligations for the future. However, companies have to meet certain conditions for investor protections. The regulators are proposing a ‘Derivatives Risk Management’ program that will limit the risks related to leveraging.
SEC Chairman Jay Clayton commented on the changes and said,
“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in portfolio strategy and risk management, but the regulatory approach for derivatives use has been inconsistent and outdated.”
What makes derivatives important?
According to Clayton, the new comprehensive limits on risk will prohibit the use of derivatives that is inconsistent will existing leverage limits by the Investment Company Act. It will still allow almost all funds to continue to serve their investors using efficient instruments. He also thanked the SEC staff for the impressive work they have done.
The investment funds can enter into unfunded commitments under the new riles which allows them to proceed with certain investments and loans. Funds will also be allowed to enter reverse repurchase agreements as well. The newly introduced rule requirements will also apply to inverse Exchange Traded Funds (ETFs). The new rule and amendments will be available on the Federal Register and the SEC website.