By Stephen A. Keen and Andrew P. Cross
Our last post explained the two basic alternatives for managing derivatives risks under new Rule 18f-4 by qualifying either as a Limited Derivatives User or a VaR Fund. This post outlines the essential differences between VaR Funds and Limited Derivatives Users, primarily that the former must adopt a derivatives risk management program (a “DRM Program”) while the latter need only have policies and procedures.
Elements of a DRM Program
As indicated in our last post, VaR Testing is an essential requirement of a DRM Program. But this is only one of the elements required by Rule 18f-4(c). At its core, a DRM Program must identify and assess a VaR Fund’s derivatives risks that arise from all of its derivatives transactions, taking into account its other investments. Rule 18f-4 also requires a DRM Program to include the following.
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