FactSet and SEC Rule 18f4

Regulation Objectives

Standardization of the patchwork quilt of section 18 compliance practices and guidance

Risk transparency for regulatory oversight

Investor protection

Who Needs to Comply*

ETFs

Mutual Funds

Closed-end Funds

Business Development Companies

*funds with “derivatives exposure” less than 10% of net assets must measure and report the level of exposure

Key Requirements

We have identified 6 key requirements below that underly the new SEC Rule 18f4

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1. Derivatives Risk Management Program (DRMP)

Funds must adopt a written DRMP with risk guidelines and appoint a derivatives risk manager (DRM). DRMP must include stress testing, backtesting, internal reporting and escalation, and program review.

2. VaR-based leverage limits

“Relative VaR Test” – fund VaR limited to less than or equal to 200% of the VaR of an unleveraged designated index or “Absolute VaR Test” – fund VaR limited to less than or equal to 20% of the fund’s NAV exclusive of derivative transactions.

3. Exception for Limited Derivatives Users (LDUs)

Funds with derivatives exposure of less than or equal to 10% of NAV (LDU test) must have a written policy but are exempt from most program requirements.

4. Record Keeping

Broad recordkeeping requirements for all backtesting and stress testing results, breaches, reports, etc.

5. Board Oversight and Reporting

Direct reporting by DRM to Board on program implementation, stress testing effectiveness, and breaches.

6. Accommodation for Leveraged/Inverse Funds

Leveraged/inverse funds in operation as of October 28, 2020, are not subject to new leverage limits.

How Can FactSet Help

Utilize FactSet’s multi-asset class risk models and portfolio analytics tools to implement an 18f-4 compliance operating model. FactSet enables relative and absolute VaR tests, stress testing, and backtesting, with associated monitoring and reporting capabilities on a single platform, supported by risk and regulatory subject matter experts.

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ANALYSIS

Benefit from our catalog of multi-asset class risk models to drive your risk calculations and analysis including VaR, with the option to include your own custom models. Have the ability to backtest and stress test each fund in your program as demanded by the new regulation from a list of pre-set options or customize your own.

Exposure and VaR in laptop

Dashboard in laptop

REVIEW

Highlight key changes in leverage and risk profiles using the heatmap feature on your dashboard view. Drill into individual funds’ underlying positions using our Portfolio Analysis tool to see contributions, risk, stress, P&L, and more on the portfolio, group, and security level.

REPORTING

Meet the increased requirement of weekly reports with our flexile reporting options from a PDF for each fund for a high-level overview of the fund’s risk profile to our upgraded N-PORT flat file including all calculations required by 18f4.

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mac risk snapshot 18f-4 (5)_Page_1 in laptop

SUPPORT

Optimize your workflow by utilizing FactSet’s managed services to perform data quality checks on your portfolio and resolve time-sensitive issues.

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[BLOG] SEC ADDRESSES FUND LEVERAGE RISK WITH RULE 18F-4

In this article, we review the principal features of Rule 18f-4—its motivation, the in-scope funds, and key requirements—and discuss the impact on funds with respect to data and system requirements.

Rule 18f-4 Derivatives Risk Management