Rule 18f-4: The 10% Buffer and Adjusting Notional Amounts of Hedges

We promised a few posts back to discuss how a Limited Derivatives User should apply what we termed the “10% buffer” to determine whether currency and interest-rate derivatives may be excluded from its derivatives exposure. This post begins to tackle the question What is the 10% Buffer? and explain how it might work.

What is the 10% Buffer?

Our earlier post described the conditions under which a fund seeking to comply with the Limited Derivatives User requirements of Rule 18f-4 could exclude currency and interest-rate hedges (“Hedging Derivatives”) from its derivatives exposure. The third condition is that the notional amount of Hedging Derivatives:

do not exceed the value of the hedged investments (or the par value thereof, in the case of fixed-income investments, or the principal amount, in the case of borrowing) by more than 10 percent.“

The “10% buffer” refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value or par amount of the hedged investments or principal amount of hedged borrowings.

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