Increased SEC Asset Management Supervision Derivatives

Recently, SEC Chair Mary Jo White announced that the Commission plans to increase supervision of asset managers. Oyster Consulting is providing a series of blogs on ways firms can mitigate risks, evaluate their services, and ensure policies and procedures are in place to protect their clients and themselves.

Product Risk Assessment: Portfolio Derivatives

In addition to ensuring that registered funds are enhancing controls regarding fund composition and liquidity, White said the SEC must take steps to ensure registered funds are also upgrading controls over the risks associated with the nature of some specific financial instruments, such as derivatives.

The use of derivatives by registered funds has grown significantly in recent years, and are being used by many funds in increasingly complex ways. According to White, while funds often use derivatives to manage risks or to more efficiently adjust exposure, they also frequently result in leveraged investment exposures and potential future obligations that can create risks for the funds. The SEC staff is reviewing options for measures to appropriately limit the leverage created by a fund’s use of derivatives.

What Your Firm Should Do:

In order to stay ahead of the changing regulatory requirements, firms should:

  • Evaluate policies and procedures for assessing a fund’s use of derivatives with regard to leverage and hedging
  • Evaluate supervisory procedures for policies and procedures for fund derivative use
  • Determine areas where policies for determining risk and use of derivatives can be enhanced

How Oyster Can Help:

Oyster Consulting will not only provide you firm with a written report of problem areas regarding derivative and leverage assessment, but will also identify best practices. Should your firm need any improvements, Oyster can help you facilitate those changes.

eBook

Whether you are looking to change from self-clearing to fully-disclosed (or vice-versa), exploring your clearing options or starting a broker-dealer, Oyster can assist with the assessment, analysis, vendor selection and conversion processes.

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