SEC to Improve Derivative Regulation Framework


A vote on Wednesday held by the Securities and Exchange Commission (SEC) resulted in a planned improvement of the agency’s regulatory framework considering the usage of derivatives by investment companies. Its main approach is to introduce a new rule and alter some of its standing guidelines.

SEC wishes to create a structure for regulations that mirrors product innovation and investor choice. However, the commission also wishes for this design to consider the ever-looming risk that comes with the usage of financial products.

The rule we spoke of at the beginning, allows investment companies and business development firms to participate in monetary transactions involving future payment obligations. However, these businesses must always keep in mind the safety of their customers.

For this reason, SEC required all companies to integrate a ‘Derivatives Risk Management’ program. Furthermore, they have been asked to limit the risk related to leverage.

The US regulator noted that now investment funds will be able to enter into “unfunded commitments”, for the purposes of following on on investments and loans. Furthermore, funds can enter can also go into reverse repurchase agreements.

The oversee also stresses that the rules apply to ETF and leveraged products.

There is an 18 month transition period for all registered funds. According to SEC this should be enough for all to comply with the new changes.

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