The impending SEC Rule 18f-4 that comes into effect August 2022, will change the regulatory framework for financial institutions that engage in derivatives transactions. US-based registered investment companies, including mutual funds, ETFs, closed-end funds and others are gearing up for the reporting requirements that involve complex calculations and modeling techniques. Getting a handle on the data, analytics, risks and determining a framework for stress testing can be a distraction at best and a nightmare at worst for those responsible for 18f-4 reporting. If you are still determining how to prepare for 18f-4, rest assured you’re not alone. The questions below will provide guidance to help get ready.
Key Considerations for 18f-4
- Have you identified how your firm will manage the data elements required for 18f-4?
- Have you determined source systems or data augmentation steps to define in-scope hedges, tagging derivative instruments appropriately?
- Do you have a system and process to accurately aggregate asset class-specific exposures prescribed by the rule?
- Does your system and process take into account aggregating in-scope hedging rules?
- Have you determined which risk model most accurately reflects your material portfolio risk?
- What is your procedure to manage VaR breaches?
- Do you have the tools to analyze breaches and respond accordingly?
- Do you have the necessary data to comply with the model governance requirements around backtesting?
- Is there a process in place for internal board reporting?
- Does your system provide the flexibility to compare methodologies (e.g., Monte Carlo or Historical)
- Have you performed analyses around which model is more appropriate—relative or absolute?
- Does utilizing a reference portfolio or benchmark impact portfolio management?
- How are you determining which one to use?
- Do you have a stress testing framework in place that covers “Extreme but plausible Scenarios”?
- Outside of the required analytics, have you identified other material risk measures that are relevant in the fund?
Best practice dictates a robust, flexible and transparent process enabled with a solution that will ease the burden and ensure efficiencies in complying with 18f-4. Leveraging a solution that is highly configurable and can seamlessly integrate with external platforms can provide an edge in complying with the Rule, while making a sound investment in your firm’s risk management practice.
And finally, start early. These and other questions require your organization to select your analytics solution, determine your N-PORT submission process and define your frameworks and processes. You should run scenarios and test before the deadline, so you aren’t caught off guard.
For more information, view a demo of the SS&C Algorithmics 18f-4 Risk Analytics Service or contact us today.