Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/103792 
Year of Publication: 
2014
Series/Report no.: 
SFB 649 Discussion Paper No. 2014-047
Publisher: 
Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk, Berlin
Abstract: 
This study analyzes current regulation with respect to the use of derivatives and leverage by mutual funds in the U.S. and Germany. After presenting a detailed overview of U.S. and German regulations, this study thoroughly compares the level of flexibility funds have in both countries. I find that funds in the U.S. and Germany face limits on direct leverage (amount of bank borrowing) of up to 33% and 10% of their net assets, respectively. Funds can extend these limits indirectly by using derivatives beyond their net assets (e.g., by selling credit default swaps protection with a notional amount equal to their net assets). Additionally, issuer-oriented rules in the U.S. and Germany account for issuer risk differently: U.S. funds have greater discretion to undervalue derivative exposure compared to German funds. All analyses of this study reveal that under existing derivative and leverage regulation, funds in both countries are able to increase risk by using derivatives up to the point at which it is possible for them to default solely due to investments in derivatives. The results of this study are highly relevant for the public and regulators.
Subjects: 
Regulation
mutual funds
leverage
derivative
credit default swaps
JEL: 
G15
G18
Document Type: 
Working Paper

Files in This Item:
File
Size
767.56 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.