We promised a few posts back to discuss how a Limited Derivatives User should apply what we termed the “10% buffer” to determine whether currency and interest-rate derivatives may be excluded from its derivatives exposure. This post begins to tackle the question What is the 10% Buffer? and explain how it might work.

What is the 10% Buffer?

Our earlier post described the conditions under which a fund seeking to comply with the Limited Derivatives User requirements of Rule 18f-4 could exclude currency and interest-rate hedges (“Hedging Derivatives”) from its derivatives exposure. The third condition is that the notional amount of Hedging Derivatives:

do not exceed the value of the hedged investments (or the par value thereof, in the case of fixed-income investments, or the principal amount, in the case of borrowing) by more than 10 percent.

The “10% buffer” refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value or par amount of the hedged investments or principal amount of hedged borrowings.

Continue to the full post at The Asset Management ADVocate