SEC issues stricter rules for financial derivatives

SEC logo 050218 - SEC issues stricter rules for financial derivatives

THE Securities and Exchange Commission (SEC) has issued new guidelines for financial derivatives to be more specific on rules that guide investment companies and fund managers.

SEC Memorandum Circular No. 15 was published on Thursday outlining stricter requirements for financial derivatives. It will take effect after 15 days.

Derivatives are types of investments where an investor does not own an underlying asset, but instead makes a bet on the direction of the price movement of this underlying asset through an agreement with another party.

The new rules said if an underlying is a financial index, it must comprise eligible assets and commodities and be diversified such that the maximum weight per constituent does not exceed 30% of the index.

Investment limitations have also been set such that for a single business group, an investment company must not invest, in aggregate, more than 20% of its net assets in transferable securities, money market instruments, deposits and over-the-counter (OTC) financial derivatives.

Investments in deposits in a non-investment grade deposit-taking institution, in debt securities not dealt in an organized market, in unlisted shares, and in OTC financial derivatives with a non-investment grade counterparty, must also not exceed 15% of the net assets of the investment company.

The new rules require that the global exposure to financial derivatives should not exceed 20% of the net assets of an investment company. It likewise prohibits the fund manager of an investment company to act as counterparty to an OTC derivative invested into by the investment company.

The maximum exposure of an investment company to the counterparty of an OTC financial derivative is limited to 10% of an investment company’s net assets if a counterparty has a minimum long-term rating of investment grade. Otherwise, the limit is 5% of the net assets of the investment company.

The SEC said these rules are “designed to improve the regulatory compliance of investment companies and their fund managers and to ensure adequate protection for shareholders and unit holders.” — Denise A. Valdez

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