United States: VaR Funds Vs. Limited Derivatives Users – Programs vs. Procedures
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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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The Asset Management ADVocate
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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