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MFA, AIMA file comment letter on SEC derivatives rule

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The Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) have submitted a joint comment letter to the US SEC on the it's proposed rule on the use of derivatives by mutual funds and other registered investment companies. 

While generally supporting several aspects of the SEC’s proposal, including asset segregation requirements and an activities-based approach to regulation, the Associations have concerns with the adverse effects of the rule’s imposition of a new notional-based leverage limit on registered funds.  
 
The letter also questions the SEC’s attempt to redefine and regulate derivatives as “senior securities” under Section 18 of the Investment Company Act of 1940.
 
MFA President and CEO Richard H Baker says: “Both institutional and retail investors have shown increasing demand for registered funds that offer alternative strategies using derivatives. Many of these strategies provided substantial benefits to investors during the global financial crisis and continue to do so today. While we support many aspects of the SEC’s proposal, the Commission’s policy objective to protect investors would be well-served by establishing a better balance between authorising funds to use derivatives for hedging, risk-mitigation and investment purposes, and imposing reasonable, practical restrictions that address the risks derivatives may present to funds and their investors.”
 
AIMA CEO Jack Inglis (pictured), says: “Basing funds’ portfolio exposure limits on the aggregate notional amounts of derivatives transactions is too blunt a measure, and will force many funds that do not, in fact, have a material amount of risk due to leverage to substantially alter their strategies or de-register without good reason.  This outcome will have the potential unintended effects of limiting investor choice and undermining investor protection by depriving investors of opportunities to invest in alternative mutual fund strategies and their potential benefits.” 

The letter suggests alternative options for the Commission’s consideration and provides qualitative and quantitative support for the Associations’ main concern – that a new notional-based limit is “unnecessary and inappropriate, because it lacks sufficient justification given the practical effect of the Commission’s proposed asset segregation requirements and the potential reinforcing effect of the Commission’s other related regulations after their adoption.” The letter also notes that basing a fund’s portfolio leverage limit on the aggregate notional amount of a fund’s derivatives is too blunt of a measure because it has inherent problems as an accurate measure of risk and leverage.
 
To address these and other concerns with the proposed rule, the Associations make several recommendations in their letter, including that: a broader scope of liquid assets with appropriate regulatory haircuts 

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