On Friday, December 11, as previously announced, the SEC voted to propose a new rule regarding the use of derivatives by mutual funds, closed-end funds, ETFs, and business development companies.    Since as far back as the 1990s under Chairman Aurthur Levitt, the SEC has been concerned about the multitude of risks derivatives can raise for funds, including risks related to leverage and liquidity. But, with the dramatic growth in the volume and complexity of the derivatives markets over the past two decades and the increased use of derivatives by certain funds, the risks to funds and the associated investor protection concerns are now significantly greater.  The 420-page proposal is a recognition that the existing framework under the Investment Company Act (the “Act”) is outdated, and with this proposal the SEC is seeking to bring regulation of funds’ use of derivatives into the 21st Century.  According to Chairman Mary Jo White, the “proposal is designed to modernize the regulation of funds’ use of derivatives and safeguard both investors and our financial system.” This new rule is intended to address those concerns at least in part by requiring funds to monitor and manage derivatives-related risks and to provide limits on their use. 

With the conclusion of their November 15 and 16 meeting in Brisbane, the G20 has published their official communiqué outlining the group’s progress, plans, and areas of focus. Financial regulatory reform remains the central focus of G20 activities. However, with the slow global recovery and disappointing job growth, the G20 announced that they expect to emphasize expanding the financial sector's role in building a stronger and more sustainable global economy. The overall thrust of the G20’s Brisbane communiqué is that critical work remains to build a stronger, more resilient financial system. Over the next year, the group intends to continue to finalize the various elements of its policy framework that remain open, fully implement financial regulatory reforms already agreed upon, and be vigilant for new risks and unexpected consequences.

The different approaches to the interpretation of MiFID I across Member States mean that there is no commonly-adopted application of the definition of derivative or derivative contract in the EU for some asset classes. Whilst this issue has in the past been noted as a concern since the implementation of MiFID, the practical consequences have come to the forefront with the implementation of the European Markets Infrastructure Regulation (EMIR).

What exactly is a derivative?  That’s precisely what the European Securities and Markets Authority (ESMA) wants to pin down with it’s latest consultation draft.  Why do they care?  Because ESMA is worried that inconsistent application of the definitions of derivative instruments could have a significant detrimental effect on the consistent application of European Market Infrastructure Regulation (EMIR). According to ESMA, it is imperative that references to the these derivatives definitions be clarified to ensure that regulatory authorities are all taking a common approach to setting reporting and clearing obligations in Europe.