A number of firms are lobbying against European proposals to prevent mutual funds from investing in derivatives linked to certain financial indices. The proposals are part of wider Committee of European Securities Regulators rules intended to define exactly what assets--so called eligible assets--a mutual fund can invest in (DW, 4/15). The rules would bar investment in any index-linked derivative if the index itself was referenced to a non-eligible assets, such as commodities and hedge funds. But in letters to CESR firms and banks, including Barclays, HSBC and Schroder Investment Management, have essentially argued it should not matter what the index is because investing in a derivative is completely different from investing in the index.
"With derivatives it doesn't matter what the underlying assets are because you are looking at a different set of risks," said Karen Anderberg, partner with Dechert in London. For example, commodities are not eligible investments because there would be concerns about settling transactions. "The concern is whether you are going to end up receiving a shipment of pork bellies," she said. But derivatives can be settled with cash. "There is absolutely no risk that a [fund] could take possession of ineligible assets," she noted. Dechert wrote to CESR stating its concerns on behalf of its investment management customers, said Anderberg.
HSBC stated in its letter that limiting the types of allowable derivatives is unnecessary because mutual funds using the instruments already comply with strict risk-management rules. Calls to officials at HSBC, Barclays and Schroders were not returned by press time. CESR does not comment on consultation responses.