In a comment letter responding to the SEC's concept release on derivatives, Oppenheimer proposed that funds use a comprehensive approach to derivative risk currently used by European UCITS. This approach uses value at risk (VaR) models to measure a fund portfolio's total risk, rather than imposing controls intended to minimize the risk of each distinct derivative (e.g., cover or asset segregation). VaR is a tool used to measure the level of risk in a fund's portfolio based on the past performance of each security and type of derivative held by the fund. Based on historical analysis and simulations, VaR can predict the likelihood of a specified level of loss over a defined time period. Once permissible loss limits are established (whether by regulation or fund disclosure), a fund can then be managed so that it stays within these prescribed limits.
Some firms may not have the resources or need to manage risk with a VaR model. Therefore, Oppenheimer suggested a bifurcated approach that would allow these firms to use a principles-based approach relying on cover or asset segregation.