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CASE STUDY — Jan 08, 2024
On October 28, 2020 the Securities and Exchange Commission announced an enhanced regulatory framework for derivatives use by registered investment companies, including mutual funds (other than money market funds), exchange-traded funds (ETFs) and closed-end funds, as well as business development companies where derivatives exposure is greater than 10% of net assets.
Reflecting the critical part played by derivatives in portfolio and risk management, the rule establishes a modernised, comprehensive approach to regulating the use of derivatives by funds, to meets investor protection concerns. Compliance has required significant changes in technology and governance for many funds.
Like all impacted investment firms, this large global asset manager - with over $30B in assets under management (AUM) - needed to get ready for the new SEC rule ahead of the deadline on August 19 2022. Their portfolio consists of structured products, derivatives, private equity, real estate, securitized products and leveraged loans.
In order to comply with SEC 18F-4 the fund needed the ability to perform a series of defined, daily Value-at-Risk (VaR) calculations, back testing, and stress tests, that had never been a required part of their workflow previously. These calculations needed to meet specific requirements, for example having 99% confidence level, a 20-day risk horizon, and 3 years minimum of historical data.
In trying to meet these requirements internally, the firm immediately faced challenges:
After making the decision to invest in a risk solution, the firm began discussions with a vendor, however they immediately found significant shortcomings with the solution:
The fund's head of portfolio risk met with S&P Global Market Intelligence to discuss the Buy Side Risk solution
The Buy Side Risk solution from S&P Global Market Intelligence instantly provided the client with a turnkey, cloud-based risk platform that does all the calculations and reporting needed for SEC 18F-4.
By partnering with S&P Global Market Intelligence the client not only ensured compliance with SEC Rule 18f-4 but also strengthened its risk management framework.
It allowed them to achieve rapid compliance, with a powerful risk engine that performs Value at Risk (VaR) calculations using historical or Monte Carlo simulation, as well as stress testing and backtesting.
As a low-maintenance, turnkey solution created by experts in buy side risk and quantitative modelling, the system has freed up the firm's internal resources to focus on their business priorities.
Critically the Buy Side Risk Solution includes full asset class coverage so the firm can be confident it will be able to meet the SEC rules.
The collaboration empowered the firm to navigate complexities associated with derivatives, enhance risk oversight, and uphold its commitment to delivering value to clients while meeting stringent regulatory standards.
Due to the success of the initial project the client expanded their usage of the Buy Side Risk solution to calculate risk measures such as key-rate duration on their fixed income and loan portfolios.
S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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