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SEC Rule 18f-4

Use of derivatives for registered Investment companies

SEC rule 18f-4 under the Investment Company Act of 1940 was adopted by the SEC to provide an updated, comprehensive framework on the use of derivatives by registered investment companies, business development companies(BDCs), ETFs, and closed-end funds. UITs and money-market funds are exempt. Firms must be in compliance by August 19, 2022.

Interested in our regulatory solutions?

Funds must either be classified as Limited Derivatives Users or adopt a formal derivatives risk management program that includes:

Mortgage Solutions
Designating a derivatives risk manager that reports to the board at least annually on program implementation and effectiveness and other matters
Calculating portfolio VaR and ensuring it is either below 200% of its designated reference portfolio (relative VaR test) or, if unavailable, below 20% of NAV (absolute VaR test)
Running at least weekly stress-testing that considers all market risk factors and their interdependencies, and
At least weekly backtesting the VaR model against actual realized PNL

Benefits of our service

Perform Limited Derivatives User test cost effectively

  • Calculate notionals for all derivatives
  • FX adjust non-USD positions
  • Scale down options and swaptions by their deltas
  • Factor all IR futures, swaps and swaptions to their 10-year equivalent
  • Allow for IR and FX hedged positions to be excluded

Calculate portfolio VaR daily

  • Use historical simulation methodology to calculate portfolio VaR daily
  • Run relative VaR tests against both the securities-only portfolio and a benchmark or weighted-basket of benchmarks
  • Calculate absolute VaR test
  • Provide evidentiary support for all calculations

Run weekly stress tests and back tests

  • Prepacked scenarios with a mix of historical-based and pre-defined risk-factors scenarios
  • Comparison of mark-to-market PNL to 1-day VaR and count the number of breaches for the weekly backtests

Why ICE?

  • Workflow portable from existing connectivity with fund families and their service providers (e.g. ICE Liquidity Indicators and N-PORT)
  • Historical VaR calculations that leverage ICE’s expertise in both Fixed Income and Derivatives
  • Quality derivatives analytics and market data including an already existing HVAR model within ICE Portfolio Analytics (IPA)
  • Robust and flexible methodology for structured assets utilizing indices administered by ICE Data Indices. A client can choose from over 6,000 indices for the security-mapping and beta calculations
HVAR Screenshot

Screenshot of HVAR in ICE Portfolio Analytics (IPA) - Derivatives



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