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Announcing a Derivatives Rule Board Solution

Bo Howell - June 21, 2022

FinTech Law Joot EQ partnership

New SEC Rule 18f-4 (the “Derivatives Rule” or “DR”) takes effect on August 19, 2022. By that date, Boards of directors or trustees (a “Board”) must appoint a Derivatives Risk Manager (the “Risk Manager”) for the Funds they oversee. A comprehensive derivatives risk management policy must be in place that includes complex stress testing and backtesting requirements, as well as procedures adopted for reporting risk issues to the Board. There are several other nuances to this new rule, and there's no better time for advice regarding its implementation and ongoing monitoring.

Securities compliance consulting firm Joot, in partnership with FinTech Law and EQ Risk Management Consulting (“EQ”), has developed a set of comprehensive solutions for Boards, Investment Advisers, and Risk Managers to ensure that the creation, implementation, and oversight of a derivatives risk management program are compliant with the Derivatives Rule. This unique partnership allows Joot to integrate legal and compliance understanding of the new rule with operational consulting experience from EQ, which includes capital markets expertise ranging from advising market-makers, hedge funds, mutual funds, investment banks, and investment advisers in quantifying and managing complex derivatives risk.

Here are some additional highlights of the Derivatives Rule:

  • The Board must oversee the derivatives risk management program’s effectiveness.

  • Once the derivatives risk management program is established, the Board must review periodic reports from the Risk Manager, including the results of weekly stress and backtesting. Usually, these reports will consist of quarterly reports on the operations of the program and an annual assessment of the program’s effectiveness. But if issues arise, the Board will receive interim reports.

  • The Risk Manager and Board must oversee strict Value at Risk (“VaR”) requirements and report any violations of these requirements to the SEC.

Most Boards do not have members with the quantitative and capital markets experience to comfortably evaluate a complex derivatives risk management program. Often, the other service providers to a Fund—such as the Fund administrator, legal counsel, and compliance officer—also lack the necessary skill sets to create, maintain, and evaluate an effective derivatives risk management program. That’s where Joot and its partners can help.

Together, Joot and its partners are offering the following solutions for Boards, Investment Advisers, and Risk Managers.

DERIVATIVES RULE BOARD SOLUTION

Joot will serve as a consultant to a Board to assist in the evaluation of the derivatives risk management program’s creation and its periodic reporting. The Board can leverage Joot’s compliance, quantitative, and operational expertise to ensure the program meets the expectations of the SEC and is consistent with the highest industry standards.

Joot’s DR Board Solution is available as

  • a one-time engagement to help set up the derivatives risk management program or

  • an annual engagement to set up and oversee the program for an entire reporting period, including the attendance of quarterly Board meetings, if desired.

Here's a detailed breakdown of Joot’s DR Board Solution.

FinTech Law Joot EQ strategic partnership derivatives rule board solution

DERIVATIVES RULE ADVISER SOLUTION

Joot can serve as a consultant to the Investment Adviser who must establish a derivatives risk management program, provide a Risk Manager, and provide periodic reporting to the Board. The Investment Adviser can leverage Joot’s compliance, quantitative, and operational expertise to ensure the program meets the expectations of the Board and the SEC.

Joot’s DR Adviser Solution is available as

  • a one-time engagement to help set up the derivatives risk management program or

  • a continuous engagement to provide operational consulting meant to enhance the methods through which the Investment Adviser quantifies and manages derivatives risk.

DERIVATIVES RULE RISK MANAGER SOLUTION

Joot can serve as a member of a Derivatives Risk Management Committee, which would be tasked with creating, deploying, and overseeing an effective derivatives risk management program, including periodic reporting to the Board. As a committee member, Joot will bring its compliance, quantitative, and operational expertise to ensure the derivatives risk management program meets the expectations of the Board and the SEC.

Joot’s DR Risk Manager Solution is an annual engagement for an entire reporting period, including attendance of quarterly Board meetings, if desired.

Stay tuned for more information on our Derivatives Rule solutions. In the meantime, please get in touch with JootFinTech Law, or EQ with any questions or feedback. We’d love to hear from you.

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