Controversial US derivatives rules resurface at the SEC

Derivatives rules first introduced in December 2015 have come up on the SEC’s spring 2018 regulatory agenda, with a recommendation the rules be revisited.

Rules on the use of derivatives for registered funds in the US have been revived by US regulators three years after they were initially proposed.

The Securities and Exchange Commission’s (SEC) spring 2018 regulatory agenda shows that the division of investment management recommended that the Commission revisit the rules, despite a backlash when plans to impose them were first announced.

Titled ‘Use of Derivatives by Registered Investment Companies and Business Development Companies’, the regulation proposed by the SEC in December 2015 would place restrictions on funds, including mutual funds and exchange traded funds (ETFs), to limit the use of derivatives. 

The regulation includes limits on the size of derivatives positions, asset segregation requirements and the need for a risk management programme for funds that have large positions in derivatives.

After they were first proposed and a comment period was introduced the industry was critical of the SEC’s plans, describing them as being too restrictive and unnecessary.

The Securities Industry and Financial Markets Association (SIFMA) stated in its comment later dated March 2016 that it is essential any regulation provides sufficient flexibility for funds to enter into derivatives transactions for their own objectives. 

“Any unnecessary constraints on the ability of investment managers to Regulated Funds to use derivatives to gain access to markets, participate in investment opportunities, and risk manage the portfolios of regulated funds could have direct adverse impacts on the very retail and institutional investors that the Proposed Rule is intended to protect,” SIMFA said at the time.

Major asset management firms including BlackRock, JP Morgan Asset Management, Credit Suisse Asset Management, Goldman Sachs Asset Management, as well as the Investment Company Institute (ICI), were also critical of the proposed rules. 

“We believe that the Proposed Rule could cause these types of funds to be unable to implement their strategies without being substantially restructured (in some cases), which would result in less diversified, less liquid and more expensive investment options,” William Johnson, head of asset management at Credit Suisse, wrote within a comment letter dated March 2016.

Further commentators also urged the SEC to regard the new rules in the context of rules already in place, such as liquidity risk management and reporting requirements, which are related to funds that use derivatives.