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CFTC and SEC suggest amending Form PF To Include Crypto Assets.

03-Sep-2022 By: Divya Behl
CFTC and SEC suggest

Form PF changes are being proposed by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (Tether CFTC).

To ensure proper reporting, the amendment suggests separating the categories of "cash and cash equivalents" and "digital assets". This implies that if the change is approved, a new sub-asset class for digital assets would be included in the Form PF. According to documents posted on the Federal Register website, an adjustment to the phrase "cash and cash equivalents" is being considered. If approved, the change would instruct advisers to exclude digital assets when reporting cash and cash equivalents.

Specific investment advisers to private funds that are registered with the SEC and the Tether CFTC must submit Form PF as a covert reporting document.

Why is a distinct category for digital assets necessary?

The commissions have maintained that recent years have seen both growth and volatility in the so-called "crypto assets," also known as digital assets. Various hedge funds have been established in the current environment to invest in digital assets. Several other hedge funds that are already in existence are also seen investing a portion of their portfolios in these assets at the same time. Therefore, it is essential to gather data on hedge funds' exposure to digital assets in order to understand their entire market exposures.

What does the proposed amendment's use of the term "digital assets" mean?

Any asset that is issued and/or exchanged using distributed ledger or blockchain technology is referred to in the proposal as a "digital asset." This includes "coins," "tokens," and so-called "virtual currencies," but is not limited to them.

The commission claims that the changes are intended to enhance its capacity to assess the degree of portfolio concentration held by hedge funds and to identify directional exposure. High portfolio concentration, it said, entails the possibility of losses being compounded when a fund's holdings account for a sizable fraction of investment, asset class, or market sector. Portfolios with leverage increase this danger even more. The proposed changes are intended to highlight a fund's concentration risk, which arises when its gross exposure to a reference asset exceeds its NAV.

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