SEC Votes to Modernize Regulatory Framework for Derivatives Use

The Securities and Exchange Commission (SEC) voted on Wednesday to improve the regulatory framework for the use of derivatives by registered investment and business development companies. The commission aims to provide a modernized approach with the introduction of a new rule and some rule amendments.

In an official press release, the SEC expressed its commitment to design a regulatory structure to reflect ever-broadening product innovation and investor choice while considering all the risks associated with the use of complex financial products.

The new rule now allows investment funds and business development companies registered under the SEC, to get engage in financial transactions that involve potential future payment obligations, provided that they meet certain conditions to protect investors. The regulator asked companies to adopt a ‘Derivatives Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term’ program and also to limit the Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term related risk.

“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,” Jay Clayton, chairman at the SEC said in a statement. “The new comprehensive limits on risk will prohibit derivatives use that is inconsistent with the leverage limits imposed by the Investment Company Act but will allow virtually all funds to continue to serve their investors using the most efficient instruments. I thank the staff for their impressive work.” Clayton added.

New Amendments

The regulator pointed out that the new rule amendments will now allow an investment fund to enter into “unfunded commitments” to proceed with certain loans or investments. Funds can now enter into reverse repurchase agreements as well. The SEC also states that the newly introduced rule requirements also apply to inverse Exchange Traded Funds (ETFs) and leveraged products. The new rule will be published on the SEC’s website and Federal Register. To comply with the rules and related requirements, the SEC has provided an 18 month transition period for the registered funds.

SEC has been quite active in recent days regarding regulatory issues, Finance Magnates earlier reported about SEC’s regulation update about the OTC market.