October 8, 1993
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 32-93
RE: MUTUAL FUNDS' USE OF DERIVATIVE SECURITIES
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As you know, the proliferation and use of derivative securities has been the
focus of significant media attention recently. As a result, the Institute is receiving
inquiries from governmental and other sources regarding the extent and nature of
mutual funds' use of derivative securities. In order to respond to these inquiries and
address regulatory concerns, the Institute is surveying the Accounting/Treasurers
Committee to determine the extent to which fund assets are invested in these types
of securities.
Please complete the attached survey for each open-end fund in your complex
that held derivative securities as of the fund's most recent annual or semi-annual
report. Do not complete the survey for money market funds or funds that held no
derivative securities. Please note that the term derivative securities is defined for
purposes of this survey as those instruments (or categories of instruments) that are
included in the questionnaire. We are excluding VRDNs, Mortgage Backed
Securities (including CMOs) and other similar securities.
Please make additional copies of the survey as needed for each open-end
fund that held derivative securities. Your responses will be confidential and would
be released only as part of aggregate industry totals. Please return the completed
surveys to the Institute no later than October 29, 1993. Please send your completed
survey to Anne Schafer either by mail or fax (202/293-7016). If you have any
questions please call Greg Smith at 202/955-6232.
In the attached survey, please enter both the market value and the notional
or principal amount for each category of derivative security held by the fund as of the
fund's last annual or semi-annual reporting date. For example, assume the fund
held 5 December 45 calls on IBM priced at 4 1/2 per option contract. The Market
Value would be the option premium multiplied by the number of contracts multiplied
by the number of shares per contract (4 1/2 x 5 x 100 = $2,250). The Notional or
Principal Amount would be the strike price multiplied by the number of contracts
multiplied by the number of shares per contract (45 x 5 x 100 = $22,500).
For futures contracts, enter the net receivable (or payable) in the Market Value
column and enter the aggregate face value of the contracts under the Notional or
Principal Amount column. For example, assume the fund purchased 10 S&P 500
December futures contracts at 450 and the current price is 458. The Market Value
would be the current market price minus the original purchase price multiplied by the
number of contracts multiplied by the index multiplier (458 - 450 x 10 x 500 =
$40,000). The Notional or Principal Amount would be the current market price
multiplied by the number of contracts multiplied by the index multiplier (458 x 10 x
500 = $2,290,000).
Your prompt attention to this matter is appreciated.
Donald J. Boteler
Vice President - Operations