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SIFMA’s Asset Management Group’s (SIFMA AMG) letter supports the SEC’s regulatory goals, while expressing opposition to the proposed portfolio limits and recommending important changes to certain aspects of the proposed rule, including changes to the proposed portfolio limits and asset segregation requirements.
“SIFMA’s Asset Management Group members share the SEC’s goal of promoting a resilient marketplace that promotes the best interests of investors. We support the SEC’s efforts to consolidate and update its guidance regarding the use of derivatives by regulated funds,” said Kenneth E. Bentsen, Jr., SIFMA president and CEO. “At the same time, however, derivatives are important investment tools, and it is imperative that any new rules be appropriately balanced to provide sufficient flexibility for regulated funds to use derivatives in order to manage risks effectively and help investors achieve their financial goals.”
Timothy W. Cameron, managing director and head of SIFMA AMG, added, “We are recommending important changes to the proposed rule to help the SEC more effectively accomplish its regulatory goals and avoid unnecessary restrictions that could have an adverse impact on the very investors the proposal seeks to protect, including the broad base of investors who rely on regulated funds as their primary savings and wealth-accumulation tool.”
SIFMA AMG believes the proposed portfolio limits are not the best means to achieve the SEC’s policy objectives, as they could create perverse incentives for portfolio managers to invest in riskier, less liquid instruments and would restrict regulated funds from engaging in risk management and portfolio management activity that otherwise may be beneficial for investors. SIFMA AMG notes the SEC’s policy objectives would be better addressed through the proposed rule’s asset segregation requirements, as well as prospectus disclosure and effective risk management.
If the SEC is disinclined to eliminate portfolio limits, SIFMA AMG’s comment letter urges revisions to the portfolio limits. The recommendations include changes to calculate exposure based on the relative riskiness of the derivative rather than flat notional amount, substitute an absolute value at risk (VaR) test for the proposed relative VaR test when applying the SEC’s proposed 300% risk-based portfolio limit, and raise the proposed 150% exposure-based limit to 200%.
SIFMA AMG recommends enhancements to ensure asset segregation requirements are workable and effective. Importantly, SIFMA AMG encourages the SEC to allow a broader group of portfolio instruments, beyond cash and cash equivalents, to satisfy asset segregation requirements. Expanding the definition of “qualifying coverage assets” to include high-quality instruments allowed under the margin rules applicable to uncleared swaps, subject to application of haircuts, would promote regulatory consistency and help avoid potential negative impacts to investor returns caused by a “cash drag,” among other benefits.