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More Work for the CCO in SEC’s Proposed Derivatives Rule


The SEC has once again proposed new derivatives rules for registered funds including mutual funds, ETFs, closed-end funds, and BDCs.  Funds that employ derivatives would be required to limit leverage to 150% of the value-at-risk of a designated referenced index.  The fund would also have to create a derivatives management program that would include a designated derivatives risk manager in addition to stress testing, backtesting, reporting and escalation procedures, and reviews.  Different rules would apply to levered or inverse funds, although any adviser or broker-dealer recommending or selling such funds would have to implement due diligence procedures for retail accounts.  A 60-day comment period will follow publication.

Here we go again.  The SEC tried derivatives reform back in 2015 but never adopted the rule in the face of industry objections.  The new proposal puts a lot of burden on the designated derivatives risk manager which, we expect, means more work for the Chief Compliance Officer.