SEC explores buyside stress tests

Author: Edward Price | Published: 8 Jun 2016

The Securities and Exchange Commission (SEC) is considering how best to implement Dodd-Frank's insistence on measuring the systemic risk of funds with stress tests. US counsel believe a one-size-fits all approach is unlikely to work. 

The 2010 Dodd-Frank Act mandated the SEC to establish stress-testing methodologies for registered investment companies and advisers with total assets of over $10 billion. Now, the regulator is looking into conditional value-at-risk (CoVAR) for measuring the effects of funds selling in distressed market environment, and potentially for measuring the systemic effects of distressed funds too.

Michael Rosella, Paul Hastings "The SEC is trying to gauge the possibility of a particular fund’s liquidity problems, a run on the bank so to speak, having a broader impact on the fixed income market," said Michael Rosella, partner at Paul Hastings. In addition, the stress test for asset managers (AMs) would focus on assessing an individual fund's ability...