This post builds upon an idea presented in Part 4 of current series of posts on considerations for investment funds and advisers related to cryptocurrency derivatives.

In particular, this post provides additional perspectives on the relationship of leverage, margin, and financing to two commodity interests: “retail commodity transactions” and a “swaps”.  We decided to present these comments separate from the current multi-part series on cryptocurrency derivatives, since the topic may appeal to a broader audience than funds and advisers.

This post was co-authored with Michael Selig, an associate attorney in the New York office of Perkins Coie.


Continue Reading Swaps and Retail Commodity Transactions (Leverage, Margin or Financing: Will We Know It When We See It or Only After It Has Been Identified As Such?)

I’ve been discussing comments on the SEC’s proposed Rule 18f-4 in light of the SEC’s initial regulation of derivatives in Release No. IC-10666 (“Release 10666”). As explained in my first post, the objectives of the proposed rule include limiting the “speculative character” of funds that use derivatives and assuring they have sufficient assets to cover their obligations. Release 10666 used one means, asset segregation, to achieve both ends. Several comment letters appear to question whether this approach is still tenable.
Continue Reading Should Asset Segregation Do Double Duty?

[Click here for the obscure title reference.]

Release No. IC-10666 (“Release 10666”), issued in 1979 under the direction of my partner Marty Lybecker, was the starting point for the SEC’s regulation of derivatives under Section 18 of the Investment Company Act. This release would provide the basis for proposed Rule 18f‑4’s regulation of “financial commitment transactions.” Many of the comment letters on the proposed rule refer to Release 10666, and many of these assert that subsequent no-action letters extended Release 10666 to derivatives. Their assertion underestimates the original scope of Release 10666, which extended to all derivative contracts commonly used at the time.
Continue Reading 10666 and All That

This post continues my consideration of some conceptual questions underlying the SEC’s proposed Rule 18f-4. The following comment on the proposal caught my attention:

Congress is stating [in Section 1(b) of the Investment Company Act] that there is a problem when leverage unduly increases the “speculative character” (what we now call risk) of the investments. This was particularly a problem back in the 1930s … [when the] combination of opaque products, complex capital structures, pyramiding, bad corporate governance, and leverage created a toxic brew that resulted in serious losses for unwary investors.

Although this wasn’t the commenter’s point, it struck me that derivatives have the potential to present today all of the problems that senior securities presented in the 1930.
Continue Reading Could the Use of Derivatives Create a “Toxic Brew?”

A CLE presentation gave me an excuse to read many of the comment letters regarding the SEC’s proposed Rule 18f-4, which would regulate the amount of “senior security transactions” in which an investment company could engage. I filed a personal comment letter responding to the SEC’s initial concept release in 2011. The proposed rule and most of the comments have moved well beyond the “conceptual” stage and my understanding of quantitative risk management. But several comments reveal some conceptual confusion that a thoughtful review of the law might dispel.
Continue Reading Limitations on the Limitation of Leverage in Investment Companies