Mutual Funds Defend Use of Derivatives

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According to various news sources, leading asset-management firms asked the U.S. Securities and Exchange Commission for less regulation when it comes to setting new rules for how mutual and exchange-traded funds use derivatives.

In letters to the SEC earlier this week, firms including BlackRock, Inc. and State Street Corp. argued that derivatives have an important role in managing large asset portfolios.

The letter further argued that that a set of rules “cannot take account of the diversity of derivatives and the multiplicity of ways they may be used by portfolio managers.” When used ‘‘appropriately,’’ derivatives can be ‘‘effective tools’’ to achieve returns and control risks in funds.

SEC commissioners approved a first step toward rulemaking questioning the use of funds’ leverage, diversification and valuation of holdings in derivatives.

The agency is considering whether it should intervene to ensure fund managers are properly gauging risk and could move to impose rules limiting leverage and concentration.   

The SEC, which oversees mutual funds under the Investment Company Act of 1940, stopped approving applications for new exchange-traded funds that make significant use of derivatives in March 2010, pending a review of the practice.


Anna Timone (195 Posts)

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