is more impactful and possibly lead to a cascade of additional unwinds.
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    \185\ Advisers would also be required to provide at least one of
the following other identifiers: (1) ISIN; (2) ticker if ISIN is not
available); (3) other unique identifier (if ticker and ISIN are not
available). For reference assets with no CUSIP, or other identifier,
advisers would be required to describe the reference asset. See
proposed Question 40(a).
    \186\ See proposed Question 40(a)(xi).
    \187\ See proposed Question 40 and Form PF Glossary of Terms
(proposed revised definition of ``gross exposure'').
    \188\ E.g., Schedule 13G/13D uses a five percent threshold.
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    The purpose of these amendments is to improve our ability to assess
the magnitude of hedge fund portfolio concentration, as well as to
identify directional exposure. From a systemic risk and an investor
protection perspective, high portfolio concentration carries the risk
of amplified losses that can occur when a fund's investment represents
a large portion of a particular investment, asset class, or market
segment. Leveraged portfolios further amplify this risk. The proposed
amendments are designed to better capture a fund's concentration risk
(e.g., where gross exposure to a reference asset is large compared to
the fund's NAV and/or compared to the market for a reference security).
Reporting positions that are large compared to market size also may
provide some insight about whether multiple firms are ``crowding'' into
trades in certain types of securities or other financial assets. We
believe that such ``crowding'' may increase the risk that one fund's
forced selling may trigger systemic effects across a particular market.
We also believe that collecting information about the composition of
exposure to a reference asset would allow us and FSOC to link the
information reported in proposed Question 40 to exposure reporting in
proposed Question 32, which would give the reported data added context
and facilitate understanding of a fund's investment portfolio and
assessment of any implications for systemic risk and investor
protection purposes. For example, in a convertible arbitrage trade
involving a position in a convertible bond and an offsetting position
in the equity securities of the same issuer, reference asset exposure
might be obtained by positions in two different sub-asset classes
(i.e., investment grade convertible bonds and equities) and using a
combination of instrument types (e.g., physical ownership and futures
or a swap). The combination of information reported in proposed
Question 32 and proposed Question 40 would facilitate our ability to
identify this type of situation, better understand a qualifying hedge
fund's investment approach and whether it is taking on concentrated
positions (potentially with leverage), and assess whether or not a
qualifying hedge fund's activities may have systemic risk or investor
protection implications.
    We request comment on these proposed amendments.
    149. The proposal would require advisers to report (1) the total
number of reference assets to which a fund holds long and short netted
exposure, (2) the percent of net asset value represented by the
aggregated netted exposures of reference assets with the top five long
and short netted exposures, and (3) the percent of net asset value
represented by the aggregate netted exposures of reference assets
representing the top ten long and short netted exposures. Are these
requirements appropriate? If not, how should we modify them? For
example, should we require reporting on more or fewer long and short
netted exposures rather than just the top five and the top ten? Instead
of requiring disclosure on specific exposures described above, should
we require a full position disclosure filing similar to Form N-PORT?
    150. Does our proposed ``reference asset'' definition work in the
context of these questions? For example, does the definition capture
interest rate derivatives? If not, how should we modify the definition
or these questions to capture interest rate derivatives? If we should
collect information about interest rate derivatives, should we specify
reporting by maturity bucket and currency? If so, should we use the
same maturity buckets that we have proposed for purposes of calculating
``adjusted'' exposure in proposed Question 32?
    151. Should the ``reference asset'' definition be more specific or
provide more guidance on how to ``look through'' certain instruments
(e.g., a correlation basket or an index (such as the NASDAQ) or ETFs or
other pooled vehicles and private funds)?
    152. Should we provide additional guidance in the definition of
``reference asset'' such as instructing advisers to refer to the
``issuer''? Should we provide instructions or guidance on how advisers
should address ``reference assets'' that have varying term structures
(e.g., use maturity buckets)?
    153. The proposal would require advisers to provide certain
information on a fund's reference asset to which the fund has gross
exposure (as of the end of each month of the reporting period) equal to
or exceeding (1) one percent of net asset value, if the reference asset
is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the debt security
issuance, (2) one percent of net asset value, if the reference asset is
a listed equity security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding, or (3) either (a) five percent of the
reporting fund's net asset value or (b) $1 billion. Are these
thresholds appropriate? If not, how should they be modified? Should
separate thresholds be used to compare netted exposures, and gross
exposures, to equity volume and debt issue size?

For fixed income, is the reference to ``debt security issuance'' clear?
While this reference is designed to capture a full issue size, should
it instead reference individual tranches of an issue?
    154. For position reporting in Question 40, should we also require
advisers to report the number of shares, principal amount or other
unit, currency value and percent of value compared to NAV? Would this
be burdensome to report?
    155. In Question 40, are there other unique identifiers, in
addition to or in lieu of LEI or CUSIP that we should add in addition
to those proposed (e.g., for commodities or indices)? Alternatively,
should we permit advisers to report FIGI in lieu of CUSIP in Question
40 rather the requiring advisers to report CUSIP?
b. Borrowing and Counterparty Exposure
    Counterparty exposure. As noted above, we propose to revise and
enhance how advisers report information about their relationships with
creditors and other counterparties (including CCPs) and the associated
collateral arrangements for their hedge funds.\189\ For qualifying
hedge funds, we propose to include a new consolidated counterparty
exposure table, similar to the new consolidated counterparty exposure
table proposed for hedge funds in section 1c of the form,\190\ which
would capture all cash, securities, and synthetic long and short
positions by a reporting fund, a fund's credit exposure to
counterparties, and amounts of collateral posted and received. This
table would replace the information currently required by Questions 43,
44, 45, and 47, each of which would be deleted under the proposal.\191\
Under the proposal, proposed Questions 42 and 43 would continue to
collect information about a reporting fund's key individual
counterparties, but in more detail. These revisions are designed to
improve data quality and comparability, close data gaps and provide
better insight into qualifying hedge funds' borrowing and financing
relationships, their credit exposure to counterparties and collateral
practices, and also would enhance the Commissions' and FSOC's ability
to assess the activities of qualifying hedge funds and their
counterparties for investor protection purposes and in monitoring
systemic risk.
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    \189\ See discussion at Section II.B.3 of this Release.
    \190\ See discussion at Section II.B.3 of this Release.
    \191\ In connection with the proposed removal of current
Question 44, we propose to make a corresponding amendment to current
Question 13, which would be redesignated as Question 19, to remove
an instruction that would no longer be relevant.
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    The proposed new consolidated counterparty exposure table would be
designed to capture information on all non-portfolio credit exposure
that a qualifying hedge fund has to its counterparties (including CCPs)
and the exposure that creditors and other counterparties have to the
fund, taking into account netting. The new table would require advisers
to report in U.S. dollars, as of the end of each month of the reporting
period, a qualifying hedge fund's borrowings and other transactions
with creditors and other counterparties by type of borrowing or
transaction (e.g., unsecured, secured borrowing and lending under a
prime brokerage agreement, secured borrowing and lending via repo or
reverse repo, other secured borrowing and lending, derivatives cleared
by a CCP, and uncleared derivatives) and the collateral posted or
received by a reporting fund in connection with each type of borrowing
or other transaction.\192\ The proposed table also would require
advisers to qualifying hedge funds to (1) classify each type of
borrowing by creditor type (i.e., U.S. depository institution, U.S.
creditors that are not depository institutions, and non-U.S.
creditors); (2) classify posted collateral by type (e.g., cash and cash
equivalents, government securities, securities other than cash and cash
equivalents and government securities and other types of collateral or
credit support (including the face amount of letters of credit and
similar third party credit support) received and posted by a reporting
fund, and secured borrowing and lending (prime brokerage or other
brokerage agreement), and (3) report, at the end of each month of the
reporting period, the expected increase in collateral required to be
posted by the reporting fund if the margin increases by one percent of
position size for each type of borrowing or other transaction. We
believe that measuring the impact of a one percent margin change will
allow for a meaningful assessment of qualifying hedge funds'
vulnerability to changes in financing costs and identification of funds
that are most sensitive to potential margin changes. We also believe
that measuring this impact would provide a conventional way to obtain
data on funds' vulnerability to margin increases that is easy to scale
up for analysis purposes and allows for uniform comparisons across
hedge funds to see which funds have lockup agreements and which funds
do not. Furthermore, the proposed table is designed to consolidate
existing questions and provide more specific instructions in an effort
to eliminate information gaps and improve the reliability of data
collected. We believe that this new approach would collect better
information about a qualifying hedge fund's borrowing and financing,
cleared and uncleared derivatives positions, and collateral practices
as well as a fund's credit exposure to counterparties resulting from
excess margin, haircuts and positive mark-to-market derivatives
transactions, which we believe would enhance FSOC's systemic risk
assessments.
---------------------------------------------------------------------------

    \192\ The instructions would direct advisers to classify
borrowings and other transactions and associated collateral based on
the governing legal agreement (e.g., a prime brokerage or other
brokerage agreement for cash margin and securities lending and
borrowing, a global master repurchase agreement for repo/reverse
repo, and ISDA master agreement for synthetic long positions,
synthetic short positions and other derivatives), and instruct
advisers how to report when there is cross-margining under a fund's
prime brokerage agreement. We are also proposing to add new
definitions of ``synthetic long position'' and ``synthetic short
position'' to the Glossary of Terms. See Form PF Glossary of Terms
(proposed definitions of ``synthetic long position'' and ``synthetic
short position''). Additionally, the instructions would permit
advisers to net a reporting fund's exposure with each counterparty
and among affiliated entities of a counterparty to the extent such
exposures may be contractually or legally set-off or netted across
those entities and/or one affiliate guarantees or may otherwise be
obligated to satisfy the obligations of another under the agreements
governing the transactions. The instructions would also direct
advisers to classify borrowing by creditor type (e.g., percentage
borrowed from U.S. depository institutions, U.S. creditors that are
not U.S. depository institutions, non-U.S. creditors) based on the
legal entity that is the contractual counterparty for such borrowing
and not based on parent company or other affiliated group.
---------------------------------------------------------------------------

    We request comment on the proposed addition of this new table.
    156. Is the information to be collected in the proposed new table
appropriate? If not, how should we modify the proposed reporting
requirements? Would reporting in the proposed new table be overly
burdensome for advisers? If so, how should we modify the proposed table
to reduce burdens on advisers?
    157. Would the proposed table capture an accurate overall view of
the non-portfolio credit exposure that a qualifying hedge fund has in
aggregate to its counterparties (including CCPs) and the exposure that
creditors and other counterparties have to the fund? Are the table
instructions clear? Would the instructions properly capture a reporting
fund's borrowing and other transactions with creditors? Do we need to
modify the proposed instructions for calculating and reporting
associated collateral to clarify any matters? Do we need to modify the
instructions with

respect to netting to increase clarity or avoid undue burden?
    158. We propose to specify how to classify certain types of
transactions based on legal agreement. We are proposing to classify all
transactions under a master securities loan agreement (``MSLA'') as
other secured borrowing. Is another classification more appropriate? If
so, what classification do you suggest? For example, should borrowing
and collateral received and lending and posted collateral under an MSLA
be reported in a separate category of borrowing or consolidated with
prime broker borrowing? Are the instructions provided for cross
margining reasonable and practicable, or should they be changed in any
way?
    159. In connection with the proposal, we propose to add a new
definition for ``synthetic short position.'' Is the list of assets to
be included or excluded from the definition appropriate or should we
provide a different list of assets? If we should provide a different
list, what assets should be included and excluded?
    160. Is it clear that advisers should calculate the expected
increase or decrease based on a margin increase of one percent of
position size in proposed Question 41 or should we provide further
guidance or clarify the question? Should the metric be something other
than the expected increase or decrease based on a margin increase of
one percent of position size? If so, what metric should be used?
    161. As an alternative, should we include a drop-down box with
possible types of other secured borrowings (e.g., letters of credit,
loans secured by other collateral such as real estate, equipment,
receivables, etc.) and also include an ``other'' ``catch-all'' category
that would need to be explained in Question 4?
    Significant counterparty reporting. The proposal would require
advisers, for each of their qualifying hedge funds, to identify all
creditors and counterparties (including CCPs) where the amount a fund
has borrowed (including any synthetic long positions) before posted
collateral equals or is greater than either (1) five percent of the
fund's net asset value or (2) $1 billion.\193\ We believe this
threshold is appropriate because it highlights two different but
potentially significant risks. First, five percent of a fund's net
asset value represents an amount of borrowing that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Second, $1 billion represents an amount that, in the case of a very
large fund, may not represent five percent of the fund's net asset
value, but may be large enough to create stress for certain of its
counterparties. This change is designed to specify how securities held
should be treated, avoiding a common source of error in how advisers
have completed the current form, and allowing both counterparty risks
related to collateralized transactions to be viewed in one place, i.e.,
the risk that collateral will not be returned, and the risk that the
borrower of cash will fail to repay the amount borrowed, risks that we
have found cannot be fully observed based on information collected on
the current form. For the top five creditors and other counterparties
from which a fund has borrowed the most (including any synthetic long
positions) before posted collateral, advisers would be required to
identify the counterparty (by name, LEI, and financial institutional
affiliation) and to provide information detailing a fund's transactions
and the associated collateral. We have proposed a ``top five''
reporting threshold as this level is consistent with the current
threshold for reporting on collateral practices on Form PF.\194\
Advisers would be required to present this information using a proposed
individual counterparty exposure \195\ table that follows the same
format as the new consolidated counterparty exposure table described
above for Question 41, including borrowings and other transactions by
type and collateral posted and received by type. For all other
creditors and counterparties from which the amount a fund has borrowed
(including any synthetic long positions) before posted collateral that
equals or is greater than either (1) five percent of the fund's net
asset value or (2) $1 billion, advisers would be required to identify
each counterparty (by name, LEI, and financial institution affiliation)
and report the amount of such borrowings and the collateral posted by
the fund in U.S. dollars.
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    \193\ See proposed Question 42. Advisers would use calculations
performed to complete the new table in proposed Question 41 for
purposes of identifying the counterparties to be reported in
proposed Question 42 and Question 43, and the calculation method
would be designed to be similar to the calculations used to identify
counterparties in proposed Question 27 and proposed Question 28 in
order to facilitate aggregation and analysis of data across hedge
funds and qualifying hedge funds. Furthermore, if more than five
counterparties meet the threshold, advisers would complete an
individual counterparty exposure table for the top five creditors or
other counterparties to which a reporting fund owed the greatest
amount in respect of cash borrowing entries (before posted
collateral), and also identify all other creditors and
counterparties (including CCPs) to which the reporting fund owed an
amount in respect of cash borrowing entries (before posted
collateral) equal to or greater than either (1) five percent of the
reporting fund's net asset value as of the data reporting date or
(2) $1 billion. See also Form PF Glossary of Terms (proposed
definitions of ``cash borrowing entries'' and ``collateral posted
entries'').
    \194\ See current Question 36.
    \195\ In connection with the proposal, we propose to add a new
definition for ``individual counterparty exposure table'' to the
Form PF Glossary of Terms.
---------------------------------------------------------------------------

    Similarly, the proposal would require advisers, for each of their
qualifying hedge funds, to identify all counterparties (including CCPs)
to which a fund has net mark-to-market counterparty credit exposure
after collateral that equals or is greater than either (1) five percent
of the fund's net asset value or (2) $1 billion.\196\ We believe this
threshold is appropriate because both portions of the threshold
highlight potential systemic risk: five percent of net asset value is a
level that we believe represents significant exposure (based on the
impact on performance) in the event of counterparty default, and $1
billion, while it may not equal five percent of a large hedge fund's
assets, may indicate a larger systemic stress involving a fund's
counterparties. For the top five of these counterparties, advisers
would identify the counterparty (by name, LEI and financial institution
affiliation) and provide information detailing a fund's relationship
with these counterparties including associated collateral using the
same table required for individual counterparty reporting.\197\ The
proposal also would require qualifying hedge funds to identify all
other counterparties (by name, LEI, and financial institution
affiliation) to which a fund has net mark-to-market exposure after
collateral that equals or is greater than either (1) five percent of a
fund's net asset value or (2) $1 billion and would require these
advisers to report the amount of the exposure before and after
collateral posted by either the counterparty or the reporting fund as
applicable. The purpose of this new requirement is to enhance our
ability to understand the impact a particular counterparty failure like
those that occurred during the 2008 financial crisis and in the period
since (e.g., the failure of MF Global in 2011),\198\ which we believe
is important

for systemic risk assessments and from an investor protection
perspective. In assessing the risk to a fund of a counterparty default,
the proposal would look at whether a fund has net borrowing exposure or
net lending exposure to a counterparty. If the fund is a net borrower
with respect to a counterparty, we would measure cash borrowed by the
fund against collateral posted by fund. Alternatively, when the fund is
a net lender with respect to a counterparty, we would measure cash
loaned to the counterparty against collateral posted by the
counterparty to assess whether the counterparty has posted insufficient
collateral (relative to the amount borrowed).\199\
---------------------------------------------------------------------------

    \196\ See proposed Question 43.
    \197\ Under the proposal, however, if an adviser completes the
table in Question 42 for a particular counterparty, the adviser
would not be required to complete the table twice.
    \198\ See e.g., Gapper, John and Kaminska, Izabella, Downfall of
MF Global--US broker-dealer bankruptcy highlights global reach of
eurozone crisis, Financial Times (November 2011) available at
https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.
    \199\ See Form PF Glossary of Terms (proposed definitions of
``cash borrowing entries,'' ``collateral posted entries,'' ``cash
lending entries,'' and ``collateral received entries'') for a
detailed description of these calculations.
---------------------------------------------------------------------------

    These proposed amendments are designed to streamline the form by
consolidating information currently collected in Question 47 into
proposed Question 42, and to improve the quality and comparability of
reported information and our ability to integrate the data obtained for
analysis with other regulatory data sets by specifying how advisers
determine borrowing and counterparty credit exposure.\200\ The proposed
changes, in conjunction with the proposed new consolidated counterparty
exposure table, would also provide a better overall view of hedge
funds' borrowing and other financing arrangements and counterparty
credit exposure and associated collateral, which we believe would
provide critical insight into (1) creditor and counterparty exposure to
qualifying hedge funds through synthetic long positions through
derivatives, (2) potential gaps in margin received by and posted by
qualifying hedge funds and the size of any such gaps, (3) qualifying
hedge funds' exposure to a large counterparty failure, and (4) the
expected impact on a fund's financing arrangements of a change in
margin requirements.
---------------------------------------------------------------------------

    \200\ The proposal would require creditor legal name and LEI,
which would aid in the identification of counterparties and
facilitate analysis of the interconnectedness of market participants
(e.g., Form N-PORT and Form N-CEN already collect LEI for registered
investment company counterparties, and including LEIs here would
facilitate analysis across data sets).
---------------------------------------------------------------------------

    Finally, the proposal would remove the requirement from current
Question 38 for advisers to report the percentage of the total amount
of collateral and other credit support that a fund has posted to
counterparties that may be re-hypothecated.\201\ We are proposing this
change because we believe that this reporting is burdensome for
advisers, and we have found that the data obtained is generally not
reliable because advisers cannot easily collect and report the required
information as re-hypothecation commonly occurs from omnibus accounts
into which advisers generally do not have visibility.\202\ We request
comment on the proposed amendments.
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    \201\ We would redesignate Question 38 as Question 45.
    \202\ See MFA Letter to Chairman Clayton, Sept. 17, 2018,
available at https://www.managedfunds.org/wp-content/uploads/2020/04/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf (noting
the rehypothecated securities are taken out of an omnibus account,
which makes reporting for advisers with any certainty difficult).
---------------------------------------------------------------------------

    162. Should we amend counterparty reporting as proposed, including
the proposed counterparty identifying information? Is the proposed
identifying information appropriate? If not, what alternatives do you
suggest? Would the proposed amendments lead to more accurate data
regarding counterparties?
    163. We have proposed to limit more detailed reporting in proposed
Question 42 to the top five creditor and counterparties from which a
fund has borrowed the most (including any synthetic long positions)
before posted collateral, and in proposed Question 43 to the top five
counterparties to which a fund has the greatest net mark to market
counterparty credit exposure after collateral. Should we expand this
question to require more detailed reporting for the top, for example,
ten creditors and/or counterparties, as applicable? Alternatively,
should we further limit the scope of creditor and/or counterparty
reporting? Should we require that all creditor and/or counterparties be
listed?
    164. Do advisers find the re-hypothecation reporting burdensome?
Are advisers able to collect and report information currently required
by Question 38 given omnibus accounts?
    165. Are securities lending and borrowing different from other
types of trading and financing activities (e.g., repo/reverse repo,
prime broker borrowing) for purposes of counterparty monitoring and
risk assessment? If so, should we treat them differently?
    166. As proposed, calculations in these questions would exclude
collateral that is not cash and cash equivalents or other securities to
avoid including letters of credit and other illiquid assets (e.g., real
estate) posted as collateral. What other types of collateral would be
omitted under this instruction? Would it omit types of collateral
commonly accepted by creditors and other counterparties? If so, how
should we modify the question?
    167. This proposal would collect information about top
counterparties based on a fund's borrowing from each counterparty legal
entity, rather than borrowing from all entities affiliated with a major
financial institution. Could this approach result in data gaps where a
fund borrows from different counterparties with one affiliated group
below the reporting threshold? Alternatively, should we require funds
to aggregate borrowings from all affiliates of major counterparties,
and report on each affiliate in this counterparty reporting? What data
gaps might occur using this alternative approach? Is the proposed
threshold (i.e., equal to or greater than either (1) five percent of
the fund's net asset value or (2) $1 billion) for identifying
counterparties to which the fund is exposed appropriate? Will it
capture those counterparties to which the fund may have material
counterparty credit exposure? Should we adopt a combination of
thresholds (e.g., greater than five percent or $1 billion for
individual counterparties and greater than 10 percent or $1 billion for
any affiliated group of counterparties)?
c. Market Factor Effects
    The proposal would require advisers to qualifying hedge funds to
respond to all market factors to which their portfolio is directly
exposed, rather than allowing advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with the reporting fund's risk management, as Form PF
currently provides.\203\ These proposed changes are designed to enhance
investor protection efforts and systemic risk assessment by allowing
the Commissions and FSOC to track better common market factor
sensitivities, as well as correlations and trends in those market
factor sensitivities.
---------------------------------------------------------------------------

    \203\ See current Question 42 and proposed Question 47. For
market factors that have no direct effect on a reporting fund's
portfolio, we propose to instruct filers to enter zero.
---------------------------------------------------------------------------

    We also propose to change the stress thresholds to (1) require
advisers to report one threshold for each market factor, rather than
two as is currently required, and (2) propose different thresholds for
certain market factors to capture stress scenarios that are plausible
but still infrequent market moves.\204\ Information resulting from

stress testing at thresholds in the current form (one low and one high)
is not useful because the thresholds are either too frequent (for the
lower threshold) or too extreme and may not result in accurate
estimates (for the higher threshold). Based on our experience with this
information, we do not believe that collecting data at multiple
thresholds \205\ for each market factor is significantly more
meaningful than collecting market factor sensitivity at a single
plausible but still infrequent threshold.
---------------------------------------------------------------------------

    \204\ For example, on the current form, advisers must report the
effect of an increase or decrease in equity prices by five percent
and by 20 percent, while under the proposal advisers would only
report the effect of a 10 percent increase or decrease, which is a
more plausible but still infrequent scenario.
    \205\ See current Question 42.
---------------------------------------------------------------------------

    The proposal also would add a market factor test concerning non-
parallel risk free interest rate movements. It would test hedge fund
exposure to changes in the slope of the yield curve, which is currently
untested and can be a source of systemic risk when there are sudden
interest rate changes. For example, this market factor could provide
meaningful information on hedge funds that take complex positions, such
as market neutral strategies (e.g., basis trading in particular) and
other strategies that employ trades that take advantage of spreads in
yield curves coupled with high use of leverage.
    The proposal also would revise the instructions so advisers would
report the long component and short component consistently with market
convention, rather than opposite from market convention, as Form PF
currently provides in order to reduce inadvertent mistakes in
completing the form.\206\ We request comment on the proposed
amendments.
---------------------------------------------------------------------------

    \206\ The proposal would amend the instructions to provide that
``risk free interest rates'' would include interest rate swap rates
in which a fixed rate is exchanged for a risk-free floating rate
such as the secured overnight financing rate (``SOFR'') or the
sterling overnight index average (``SONIA''). Additionally, the
proposal would amend the instructions to specify that (1) for market
factors involving interest rates and credit spreads, advisers should
separate the effect on its portfolio into long and short components
where (i) the long component represents the aggregate result of all
positions whose valuation changes in the opposite direction from the
market factor under a given stress scenario, and (ii) the short
component represents the aggregate result of all positions whose
valuation changes in the same direction as the market factor under a
given stress scenario, and (2) for market factors other than
interest rates and credit spreads, advisers should separate the
effect on its portfolio into long and short components where (i) the
long component represents the aggregate result of all positions
whose valuation changes in the same direction as the market factor
under a given stress scenario and (ii) the short component
represents the aggregate result of all positions whose valuation
changes in the opposite direction from the market factor under a
given stress scenario. See proposed Question 47.
---------------------------------------------------------------------------

    168. Should Form PF require advisers to qualifying hedge funds to
respond to all market factors, as proposed? Alternatively, should Form
PF allow advisers to omit a response to any market factor that it does
not regularly consider in formal testing in connection with the
reporting fund's risk management? Do advisers or their reporting funds
regularly consider all, some, or other market factors we are proposing?
If so which ones and why? Are adjustments needed for advisers that use
a different stress test methodology than that required by the question
as proposed?
    169. Should we revise the stress thresholds, as proposed? Would the
proposed thresholds capture stress scenarios that are plausible but
still infrequent market moves? Is there a better way to meet this
objective? Are adjustments needed for advisers that test thresholds
similar, but not identical to, those proposed?
    170. Should Form PF include a market factor concerning non-parallel
risk free interest rate movements, as proposed? Would this proposed
amendment provide meaningful exposure information for hedge funds that
take complex positions, such as market neutral strategies (e.g., basis
trading in particular) and other strategies that employ trades that
take advantage of spreads in yield curves coupled with a high use of
leverage? Would any of the other market factors better describe the
risks such strategies are exposed to?
    171. Are the proposed amendments to how advisers would report long
and short components consistent with market convention? Do market
conventions vary by asset type? Would the proposed change relieve or
increase burdens? Please provide supportive data. Is there a more
effective way to require advisers to report long and short components
that would be consistent with market conventions and allow for data
comparability?
    172. Are there any definitions or instructions that we should
clarify or change in this question?
    173. As an alternative, should Form PF require all advisers to all
types of reporting funds to report market factor data? Which ones and
why?
d. Additional Amendments to Section 2b
    Currency exposure reporting. The proposal would require qualifying
hedge funds to report for each month of the reporting period, in U.S.
dollars, (1) the net long value and short value of a fund's currency
exposure arising from foreign exchange derivatives and all other assets
and liabilities denominated in currencies other than a fund's base
currency, and (2) each currency to which the fund has long dollar value
or short dollar value exposure equal to or exceeding either (a) five
percent of a fund's net asset value or (b) $1 billion.\207\ In
responding, advisers would be required to include currency exposure
obtained indirectly though positions held in other entities (e.g.,
investment companies, other private funds, commodity pools or other
companies, funds or entities) and could report reasonable estimates if
consistent with internal methodologies and conventions of service
providers.\208\ This proposed requirement is designed to provide
insight into whether notional currency exposures reported by qualifying
hedge funds in Question 30 represent directional exposure or are hedges
of equity and/or fixed income positions. This new question would allow
us to understand whether a qualifying hedge fund's portfolio is exposed
to a given currency, and it would also provide a view into the fund's
currency exposure resulting from holdings in foreign securities (e.g.,
Eurobonds). While current Question 30 requires advisers to separate
currency exposure relating to hedging from other currency, we have
found that this data has not been very useful for determining whether a
currency position is speculative or a hedge. Additionally, we believe
that it is important to consider a qualifying hedge fund's currency
exposure to identify vulnerabilities to currency fluctuations and
market events that affect different countries and regions. Finally, we
believe the proposed threshold of either (1) five percent of a fund's
net asset value or (2) $1 billion for reporting individual currency
exposure is appropriate because it represents, in each prong of the
threshold, a material level of portfolio exposure to currency risk at
which we believe a deterioration in the value of a particular currency
could have a significant negative impact on a fund's investors. We also
believe that if multiple large funds have significant exposure to a
currency that is rapidly devaluing, this circumstance could raise
financial stability concerns, and this proposed reporting would better
enable review of this type of situation. More broadly, we also would be
able to use

the information obtained to identify concentrations in particular
currencies and assess the potential impact of market events that affect
particular currencies. We request comment on the proposed amendments.
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    \207\ Proposed Question 33.
    \208\ This instruction is designed to simplify and reduce the
burdens of reporting sub-asset class exposures. Furthermore, the
proposal would permit advisers to provide good faith estimates and
take currency hedges into account, if consistent with their internal
methodologies and information reported internally and to investors.
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    174. Should we add new Question 33, as proposed?
    175. Would this new question enhance systemic risk analysis,
including the impact of currency risk? Is there a better way to meet
this objective? How could we modify the proposed question to better
meet its objective?
    176. Is the proposed threshold of either (1) five percent of a
fund's net asset value or (2) $1 billion for reporting individual
currency exposure appropriate? If not, what threshold is appropriate?
    Turnover. The proposal would require reporting on a per fund basis
on the value of turnover in certain asset classes rather than on an
aggregate basis as currently required.\209\ We believe that requiring
this reporting on a per fund basis would provide more detailed
information to us and FSOC while at the same time simplifying reporting
for advisers. We understand that advisers do not currently aggregate
turnover related information among funds. Aggregating solely for Form
PF reporting is particularly burdensome as the required data is
typically on separate reporting systems and advisers must ``roll-up''
data from these sources to report on the form.
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    \209\ Proposed Question 34. In connection with the proposed
amendments, the proposal would move reporting on the value of
turnover in certain asset classes and the geographical breakdown of
investments from section 2a to section 2b.
---------------------------------------------------------------------------

    We also propose to add new categories for turnover reporting that
would disaggregate combined categories and better capture turnover of
potentially relevant securities, such as various types of derivatives
(e.g., listed equity, interest rate, foreign exchange), which we
believe would help support analysis of hedge fund market activity.\210\
Furthermore, we propose to add a new consolidated foreign exchange and
currency swaps category and make other changes.\211\ During the March
2020 COVID-19-related market turmoil, FSOC sought to evaluate the role
hedge funds played in disruptions in the U.S. treasury market by
unwinding cash-futures basis trade positions and taking advantage of
the near-arbitrage between cash and futures prices of U.S. treasury
securities.\212\ Because the existing requirement regarding turnover
reporting on U.S. treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March 2020 market events,
was unable to obtain a complete picture of activity relating to long
treasuries and treasury futures. Given the significant size of hedge
funds' exposures to certain derivative products, we believe it is
important to gain more insight into trading activities with respect to
these financial instruments to better enable the Commissions and FSOC
to assess and monitor the activity of qualifying hedge funds for
systemic risk implications.\213\ Expanded reporting on turnover also
would provide better information for assessing trading frequency in
lieu of requiring advisers to report what percentage of their hedge
funds' net asset value is managed using high-frequency trading
strategies.\214\
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    \210\ We also propose to break out some categories by futures,
swaps, and options as different types of derivatives have different
risk profiles and implications for systemic risk, and to add a
category for ``other derivative instrument types'' so that all
derivatives are reported.
    \211\ We propose to add instructions requiring advisers to
report turnover in derivatives separately from turnover in physical
holdings for asset classes in proposed Question 32 and to make other
conforming changes to reflect changes to defined terms in the Form
PF Glossary of Terms.
    \212\ See U.S. Credit Markets Interconnectedness and the Effects
of the COVID-19 Economic Shock, U.S. Securities Exchange Commission,
October 2020 available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. See Financial Stability Oversight
Council 2021 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
    \213\ As of the end of the third quarter of 2021, interest rate
derivatives currently make up approximately 25 percent of gross
notional exposure (GNE) reported on Form PF, while foreign exchange
derivatives make up 15 percent of GNE. Additionally, commodity,
credit, and other derivatives when combined make up five percent, or
nearly $1.5 trillion. See Private Fund Statistics Q3 2021, supra
footnote 7.
    \214\ See current Question 21. We propose to remove Question 21
as it would be redundant in light of the proposed expanded turnover
reporting.
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    We request comment on the proposed Question 34.
    177. Would the proposed detailed turnover reporting provide
additional insight into a fund's activities in key markets? Should
additional categories be added to provide a clearer view of turnover
and its potential to help us and FSOC identify and monitor activities
that could indicate systemic risk in the market? If so, what categories
do you suggest and why? Should we exclude any of the proposed
categories? If so, why?
    178. The current instructions state that turnover value should be
reported as the sum of the absolute value of transactions, and as such
the reported value of turnover for certain derivatives may be very
large (reflecting notional value). Should we use a different measure
for valuing turnover (e.g., market value)? Recognizing that the current
instructions result in consistency in reported value among questions on
Form PF, would a different measure be more or less useful?
    179. Do you agree that aggregating information may be burdensome
for some advisers? Do some advisers maintain the required data on
different systems such that ``rolling-up'' the data from different
sources to report on the form would be complex and time consuming?
    Country and industry exposure. We are proposing to require advisers
to report all countries (by ISO country code) \215\ to which a
reporting fund has exposure equal to or exceeding either (1) five
percent of its net asset value or (2) $1 billion, and to report the
dollar value of long exposure and the dollar value of short exposure in
U.S. dollars, for each monthly period to improve data comparability
across funds.\216\ Under the current approach, only certain regions are
identified and these regions are not uniformly defined, which results
in data that is not consistent.\217\ In addition, at times we have
needed to identify countries of interest not on this list. As such, we
propose to replace the country of interest and regional reporting with
this new country level information. Finally, we believe that the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual countries and
geographic regions, and is a level that could significantly impact a
fund and its investors if, for example, there are currency fluctuations
or geopolitical instability. Furthermore, the data obtained would allow
for identification of industry concentrations in particular countries
and/or regions and help assess the potential impact of market events on
these geographic segments. We believe that the five percent threshold
level constitutes a reasonable shock to a fund's net asset value. For
example, to the extent there is a market-wide event, a worst-case
scenario would be for long positions to lose their full value, in this
shock case

at least five percent. Furthermore, and particularly for funds without
a benchmark, five percent is often evaluated for industry, individual
position, and country risk, and is a common and easy to measure
threshold. With respect to the $1 billion threshold, we believe it
constitutes sufficiently large nominal value exposure from a risk
perspective.
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    \215\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
    \216\ Proposed Question 35. In connection with the proposed
amendments, the proposal would move reporting on geographical
breakdown of investments from section 2a to section 2b.
    \217\ Currently, consistent with staff guidance in Form PF
Frequently Asked Questions 28.1 and 28.2 advisers may report
geographical exposure based on internal methods and indicate in
Question 4 if methods do not reflect risk and economic exposure. See
Form PF Frequently Asked Questions, supra footnote 79.
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    We also propose to add a new question that would require advisers
to provide information about each industry to which a reporting fund
has exposure equal to or exceeding either (1) five percent of its net
asset value or (2) $1 billion.\218\ Advisers would be required to
report, for each monthly period, the long dollar value and short dollar
value of a reporting fund's exposure by industry based on the NAICS
\219\ code of the underlying exposure. The purpose of this new question
would be to collect information that would provide insight into hedge
funds' industry exposures in a standardized way to allow for
comparability among funds and meaningful aggregation of data to assess
overall industry-specific concentrations. Further, we believe the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual industries, and is a
level that could significantly impact a fund and its investors if, for
example, there are market or geopolitical events that affect
performance by a particular industry, such as the burst of the ``tech
bubble'' in the early 2000s or COVID-19's impact on airline,
accommodation and food service industries. Furthermore, the data
obtained would allow for identification of industry concentrations and
help assess the potential impact of market events on industries. While
we considered a lower threshold, we believe that the proposed threshold
strikes an appropriate balance between identifying significant industry
exposure and the burdens of reporting this information on Form PF. We
believe this information would be useful to the Commissions and FSOC in
monitoring systemic risk, particularly if multiple funds have
significant concentrations in industries that are experiencing periods
of stress or disruption.
---------------------------------------------------------------------------

    \218\ Proposed Questions 36.
    \219\ North American Industry Classification System.
---------------------------------------------------------------------------

    When responding to these questions about country and industry
exposure, advisers would be required to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other company, funds
or entities). Without this requirement, a fund's exposure to geographic
regions and industries could be obscured and hinder the Commissions'
and FSOC's ability to assess risks and the potential impact of events
and trends that affect a particular industry or geographic region, both
of which could have implications for investors. While we believe that
advisers typically maintain this information, the proposed instructions
to these questions seek to minimize filer burdens by permitting
advisers to report reasonable estimates if such reporting is consistent
with internal methodologies and information reported internally and to
investors.
    We request comment on the proposed Question 35 and proposed
Question 36.
    180. Should we require advisers to report all countries (by ISO
country code) \220\ to which a reporting fund has exposure of equal to
or exceeding (1) five percent or more of its net asset value or (2) $1
billion, and to report exposure in U.S. dollars? Is this threshold
appropriate? If not, should the threshold be higher or lower? Do you
agree that removing regional level reporting is appropriate? Are there
any other alternatives? If so, what alternatives?
---------------------------------------------------------------------------

    \220\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
---------------------------------------------------------------------------

    181. Should we require advisers to provide information about each
industry to which a reporting fund has exposure equal to or exceeding
(1) five percent or more of its net asset value or (2) $1 billion? Is
this threshold appropriate? If not, should the threshold be higher or
lower?
    182. With respect to requiring advisers to provide information
about portfolio industry exposure, what level of industry detail should
be gathered (for example, 2-digit NAICS codes represent 20 unique
industries)? Is it more burdensome to provide more detail, or does
aggregation to broader industry categories create additional burden?
    183. We propose to modify the instructions to require that
investments be categorized based on concentration of risk and economic
exposure. Should we add instructions or guidance for currency crosses
or dollar denominated non-U.S. sovereign debt? Furthermore, current
Question 77 (for private equity funds) also uses NAICS codes for
reporting industry exposure. Should we use Global Industry
Classification Standard (GICS) codes or another classification
standard? Finally, how should ETFs and other exchange traded products
be reported in this question? Are these financial instruments typically
coded to industry sector? If not, what alternatives do you suggest and
why?
    184. We propose to require advisers, when responding to proposed
Question 35 and proposed Question 36 to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other funds or
entities). Is this appropriate? If not, why? Would this be overly
burdensome for advisers?
    Central clearing counterparty (CCP) reporting. We propose to
require advisers to identify each CCP or other third party holding
collateral posted by a qualifying hedge fund in respect of cleared
exposures (including tri-party repo) equal to or exceeding either (1)
five percent of a reporting fund's net asset value or (2) $1
billion.\221\ The proposed new question would exclude counterparties
already reported in proposed Question 42 and proposed Question 43,\222\
and require advisers to provide information on: (1) the legal name of
the CCP or third party; (2) LEI (if available); (3) whether the CCP or
third party is affiliated with a major financial institution; (4) the
reporting fund's posted margin (in U.S. dollars); and (5) the reporting
fund's net exposure (in U.S. dollars). We are proposing this new
question based on our experience with Form PF since adoption as we have
found data gaps with respect to identifying qualifying hedge fund
exposures to CCPs and other third parties that hold collateral in
connection with cleared exposures. Furthermore, we understand that (1)
many large hedge fund advisers already track margin posted for cleared
exposures because margin requirements at any given time may well exceed
the clearinghouse's exposure to a fund and therefore are an important
credit risk exposure metric for a fund, and (2) that CCP recovery,
resiliency and resolution also are current concerns for some
advisers.\223\ Given these factors, we

believe that the burden of this proposed new question would be
justified by valuable insight the data obtained would provide into an
area that could have significant implications from a systemic risk
perspective. Additionally, we have chosen a reporting threshold of
equal to or exceeding either (1) five percent of net asset value or (2)
$1 billion to be consistent with the thresholds for other counterparty
exposure questions,\224\ as we believe that a qualifying hedge fund is
similarly exposed where a third party holds collateral irrespective of
whether the third party is a CCP or other counterparty. The proposal
would also remove current Question 39, which requires information about
transactions cleared directly through a CCP, as the information
collected is duplicative of information already collected in current
Question 24. We request comment on the proposed addition of new
Question 44.
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    \221\ Proposed Question 44.
    \222\ See discussion at Section II.C.2.b of this Release.
    \223\ See ``A Path Forward For CCP Resilience, Recovery, And
Resolution,'' March 10, 2020 available at https://www.blackrock.com/corporate/literature/whitepaper/path-forward-for-ccp-resilience-recovery-and-resolution.pdf. See also J.P. Morgan Press Release,
March 10, 2020, available at https://www.jpmorgan.com/solutions/cib/markets/a-path-forward-for-ccp-resilience-recovery-and-resolution.
    \224\ See discussion at Section II.C.2.b of this Release.
---------------------------------------------------------------------------

    185. Should we collect information about the exposure of qualifying
hedge funds to CCPs and other third parties holding collateral in
respect of cleared exposures? If so, what information should be
collected on these exposures? Does the proposed question collect
helpful information? Should we collect different information, more
information or less information? Is the proposed reported threshold of
equal to or exceeding either (1) five percent of a reporting fund's net
asset value or (2) $1 billion appropriate? If not, how should the
threshold be modified?
    186. Do you agree that many large hedge fund advisers already track
margin posted for cleared exposures because margin requirements at any
given time may well exceed the clearinghouse's exposure to a fund and
therefore are an important credit risk exposure metric for a fund?
Additionally, do you agree that CCP recovery, resiliency, and
resolution also are current concerns for some advisers?
    Risk metrics. We propose to eliminate the requirement that an
adviser indicate whether there are risk metrics other than, or in
addition to, Value at Risk (``VaR'') that the adviser considers
important to managing a reporting fund's risks.\225\ Advisers generally
do not report detailed information in response to this requirement.
Currently, about 60 percent of advisers to qualifying hedge funds
(representing about 75 percent of the aggregate gross asset value of
qualifying hedge funds) report using VaR or market factor changes in
managing their hedge funds.\226\ Instead, we propose to require
advisers to provide additional information about a reporting fund's
portfolio risk profile, including reporting on portfolio correlation,
investment performance by strategy and volatility of returns and
drawdowns.\227\ The proposal would expand the amount of data collected
by collecting risk data in circumstances where advisers do not use VaR
or market factor changes, and thus provide insight across all (rather
than only some) qualifying hedge funds. This new information would
provide uniform and consistently reported risk information that will
enhance our ability to monitor and assess investment risks of
qualifying hedge funds to gauge systemic risk. In particular,
volatility of returns and drawdown data is a simple measure of risk
that enables us to monitor risk-adjusted returns, changes in volatility
and thereby risk profiles.
---------------------------------------------------------------------------

    \225\ See current Question 41.
    \226\ See Private Funds Statistics Q2 2020 (Table 58/59).
Current Question 40 requires advisers to report certain risk data if
the adviser regularly calculates VaR of the reporting fund. Current
Question 42 requires advisers, for specific market factors, to
determine the effect of specified changes on a reporting fund's
portfolio, but permits advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with a reporting fund's risk management.
    \227\ See Proposed Question 48 (portfolio correlation), proposed
Question 49 (investment performance breakdown by strategy), and
proposed Question 23(c) (volatility of returns and drawdown
reporting). See discussion at Section II.B.2 of this Release. We
propose to also revise the title of Item C. of current section 2b to
``Reporting fund risk metrics and performance'' to reflect that the
proposal would add new questions on performance to this section of
the form.
---------------------------------------------------------------------------

    We request comment on the proposed removal of Question 41.
    187. Do you agree with the proposed removal of Question 41?
Instead, should we change this question to make it easier for advisers
to report more detailed information? Do you believe that new Questions
48, 49 and 23(c) will provide better information about the risk
profiles of qualifying hedge funds?
    Investment performance by strategy. The proposal would require
advisers to qualifying hedge funds that indicate more than one
investment strategy for a fund in proposed Question 25 to report
monthly gross investment performance by strategy if the adviser
calculates and reports this data for such fund, whether to current and
prospective investors, counterparties, or otherwise.\228\ An adviser
would be required to provide monthly performance results only if such
results are calculated for a reporting fund (whether for purposes of
reporting to current and prospective investors, counterparties, or
otherwise), but would not be required to respond to this question if
the adviser reports performance for the fund as an internal rate of
return. This question is designed to integrate Form PF hedge fund data
with the Federal Reserve Board's reporting on Financial Accounts of the
United States, which the Federal Reserve uses to track the sources and
uses of funds by sector, and which are a component of a system of
macroeconomic accounts including the National Income and Product
accounts and balance of payments accounts, all of which serve as a
comprehensive set of information on the economy's performance. We also
believe that this information could be helpful to the Commissions' and
FSOC's monitoring and analysis of strategy-specific systemic risk in
the hedge fund industry. We request comment on the proposed addition of
new Question 49.
---------------------------------------------------------------------------

    \228\ Proposed Question 49. The strategies in proposed Question
49 would be based on the strategies set forth in proposed Question
25 (the proposal would also revise the strategy categories in
current Question 20, which we would redesignate as Question 25, to
better reflect our understanding of hedge fund strategies and to
improve data quality and comparability). See discussion at Section
II.B.3 of this Release.
---------------------------------------------------------------------------

    188. Do you agree with the addition of new Question 49 as proposed?
If not, what alternatives would you suggest and why? Would responding
to this question be burdensome? If it would be overly burdensome, how
would you suggest we modify the proposal?
    Portfolio correlation. The proposal would add a new question on
portfolio correlation to collect data on the effects of a breakdown in
correlation.\229\ Based on feedback from advisers filing Form PF and
data reported on Form PF, it appears that hedge funds using the most
leverage tend to engage in long/short, relative value, and similar
strategies that seek to pair trades in highly correlated instruments,
possibly with a focus on factor models. For these hedge funds, VaR
calculations that rely on static correlation matrices may not factor in
periods of market turmoil when assumed correlations break down.
Therefore, a breakdown in assumed correlations could cause these funds
to de-lever and could have a significant impact on financial stability,
particularly if there are ``crowded'' or overlapping positions across
funds, which could lead to cascade effects. We recommend a new question
that gathers data on the effects of a breakdown in assumed correlations
rather than just historical correlations. The proposed new question
would focus on assessing the risks associated with a correlation
breakdown, and would require qualifying hedge funds to report for

their portfolios (as of the end of each month of the reporting period)
(1) the average pairwise 3-month realized prior Pearson correlation of
each portfolio position's periodic (e.g., daily or weekly) total rates
of return using the greatest available frequency of data over the
measurement window (e.g., daily or weekly), (2) the frequency of the
data used over the prior 3-month window (e.g., daily or weekly) (3) the
expected annualized volatility utilizing 3-month realized prior Pearson
correlations of each portfolio position's periodic (e.g., daily or
weekly) total rates of return and assuming realized prior volatilities
of portfolio positions with the same frequency window as that chosen
when computing 3-month realized correlations, and (4) what the
resulting annualized volatility would be if a reporting fund uniformly
reduced or increased pairwise correlations by 20 percentage points
utilizing 3-month realized prior Pearson correlations of portfolio
positions' periodic rates of return and assuming 3-month realized prior
volatilities of portfolio positions' periodic rates of return with the
same frequency window as that chosen when computing 3-month realized
correlations. This question is designed to (1) isolate the impact of a
breakdown in correlation on the volatility of long/short funds that may
de-lever if there is an increase in their volatility, (2) avoid some of
the pitfalls of VaR models such as relying on backwards looking
assumptions on the relationship between securities, and (3) provide a
measure of volatility sensitivity in addition to one-day VaR. We
believe that this new question would not create a significant burden
for advisers because portfolio positions' periodic total rates of
return and corresponding correlation matrices are likely available for
most qualifying hedge funds. We request comment on the proposed
addition of new Question 48.
---------------------------------------------------------------------------

    \229\ Proposed Question 48.
---------------------------------------------------------------------------

    189. Are the effects of a breakdown in correlations useful for
monitoring systemic risk? Would this question provide helpful
information for purposes of comparing fund activities and assessing
risk? Does it offer insight into funds with a range of strategies or is
it useful for only some strategies? What other questions could isolate
the effects of a breakdown in correlations? Will it be burdensome for
advisers to qualifying hedge funds to respond to this question and, if
so, what burdens will be imposed? Are total rates of return and
corresponding correlation matrices readily available for most
qualifying hedge funds? If not, what strategies would have the most
difficulty completing this question? Are there less burdensome
questions that could help isolate the effects of a breakdown in
correlations?
    190. As an alternative or in addition to measuring sensitivity to
correlation, would any of the following approaches be preferable to our
proposal: (1) subtract aggregate portfolio VaR from the sum of VaR
computed at the asset class level, or some other sub-portfolio level,
to measure the impact of diversification and the sensitivity to
correlation, or (2) combine single factor stress tests for the
portfolio assuming zero correlation?
    191. As proposed, would responding to new Question 48 create an
undue burden for advisers? If so, how should we modify the question to
make it less burdensome for respondents? Does the flexibility embedded
in the proposed question (i.e., the flexibility for a fund to choose
its own frequency of position marks (be it daily, weekly, monthly))
make it easier for funds to respond?
    192. Is the proposed 20 percentage point sensitivity metric
appropriate? If not, what alternative do you suggest?
    Portfolio Liquidity. We propose to require advisers to include cash
and cash equivalents when reporting portfolio liquidity, rather than
excluding them, as the question currently provides.\230\ We understand
that reporting funds typically include cash and cash equivalents when
analyzing their portfolio liquidity. We believe the proposed change
would improve data quality by reducing inadvertent errors that result
from requiring advisers to report in a way that is different from how
they may report internally. We believe this proposed change is more
reflective of industry practice, and it is preferable to receive
reported data in a format that reflects how advisers typically analyze
portfolio liquidity.
---------------------------------------------------------------------------

    \230\ See current Question 32 and proposed Question 37.
---------------------------------------------------------------------------

    We also propose to amend the form's instructions to allow advisers
to assign each investment to more than one period, rather than
directing advisers to assign each investment to only one period, as
Question 32 currently provides. We understand that directing advisers
to assign an investment to only one period may make a reporting fund's
portfolio appear less liquid than it is because it would not reflect
that reporting funds may divide up sales in different periods (e.g., a
reporting fund could sell off a portion in the first time period, and
sell of the remainder in subsequent time periods). Therefore, this
proposed change is designed to reflect the liquidity of a reporting
fund's portfolio more accurately.
    While advisers would continue to be able to rely on their own
methodologies to report portfolio liquidity, we propose to add an
instruction explaining that estimates must be based on a methodology
that takes into account changes in portfolio composition, position
size, and market conditions over time. Based on experience with the
form, we have found that some advisers have used static methodologies
that do not consider portfolio composition and position size relative
to the market, and therefore do not reflect a reasoned view about when
positions could be liquidated at or near carrying value. Therefore,
this proposed change is designed to continue to allow advisers to use
their own methodologies, but improve data quality to ensure that the
methodologies generate reporting that reflects a reasonable view of
portfolio liquidity in light of changes in portfolio composition and
size, and market conditions, over time.
    Finally, to facilitate more accurate reporting, collect better
data, and reduce filer errors, we propose to amend the table to be
included in proposed Question 37 to reflect that information should be
reported as a percentage of NAV consistent with SEC staff Form PF
Frequently Asked Questions.\231\
---------------------------------------------------------------------------

    \231\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 32.3.
---------------------------------------------------------------------------

    We request comment on the proposed amendments.
    193. Should proposed Question 37's portfolio liquidity requirements
include cash and cash equivalents, as proposed, regardless of what
types of advisers would complete it? Would this proposed amendment help
the Commissions and FSOC better analyze portfolio liquidity? Would this
proposed change make Form PF more consistent with how the industry
analyzes portfolio liquidity? Is there a better way to meet these
objectives? For example, should Form PF instead require advisers to
report cash and cash equivalents for all reporting funds separately
than other positions when reporting portfolio liquidity?
    194. Do you agree that reporting funds typically include cash and
cash equivalents when analyzing their portfolio's liquidity?
    195. Should Form PF allow advisers to assign investments to more
than one period, as proposed? Would this proposed change more
accurately reflect the liquidity of a reporting fund's portfolio?
    196. Should Form PF continue to allow advisers to rely on their own

methodologies in reporting on portfolio liquidity?
    197. Should Form PF include an instruction that provides that
estimates must be based on a methodology that takes into account
changes in portfolio composition, position size, and market conditions
over time, as proposed? Would this proposed change improve data
quality? Is there a better way to achieve this objective? If we add the
instruction to this question, in particular, would it suggest that the
instruction would not apply to other liquidity analysis, or other
portfolio metrics?
    198. As an alternative, should Form PF require all advisers to
report portfolio liquidity for all reporting funds?
    199. Should Form PF change how advisers report portfolio liquidity
in any other ways? For example, should we require advisers to report
information in dollars, in addition to or instead of reporting as a
percentage of the portfolio, as Form PF currently requires? Would such
a requirement help the Commissions and FSOC to compare portfolio
liquidity with other data on Form PF that advisers report in dollars?
    Financing Liquidity. Question 46 is designed to show the extent to
which financing may become rapidly unavailable for qualifying hedge
funds.\232\ We propose to amend current Question 46 to improve data
quality thereby supporting more effective systemic risk analysis.\233\
Advisers would provide the dollar amount of financing that is available
to the reporting fund, including financing that is available but not
used, by the following types: (1) ``unsecured borrowing,'' (2)
``secured borrowing'' via prime brokerage, (3) secured borrowing via
reverse repo, and (4) other secured borrowings.\234\ Currently, the
Commissions and FSOC infer this data from this question and current
Question 43 (concerning the reporting fund's borrowings).\235\ However,
these inferences may not be accurate given the number of assumptions
that currently go into making such inferences. This proposed
information would help us understand the extent to which a fund's
financing could be rapidly withdrawn and not replaced.
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    \232\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying n.281.
    \233\ We would redesignate Question 46 as Question 50.
    \234\ Form PF defines ``unsecured borrowing'' as obligations for
borrowed money in respect of which the borrower has not posted
collateral or other credit support. Form PF defines ``secured
borrowing'' as obligations for borrowed money in respect of which
the borrower has posted collateral or other credit support. For
purposes of this definition, reverse repos are secured borrowings.
See Form PF Glossary of Terms. These categories are designed to be
consistent with borrowing categories that qualifying hedge funds
would report on the new counterparty exposure table.
    \235\ Current Question 43 collects data on the reporting fund's
borrowing by type (e.g., unsecured, and secured by type, i.e., prime
broker, reverse repo or other), while current Question 46 only
collects a total amount of financing available, both used and
unused, with no breakdown by type of financing.
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    We request comment on the proposed amendments.
    200. Should Form PF require advisers to report the amount of
financing that is available to the reporting fund but not used, as a
dollar amount, as proposed? Alternatively, should Form PF require
advisers to report this information in a different way? For example,
should Form PF require advisers to report the amount of financing that
is available to the reporting fund but not used, as a percentage of
total financing? Would it be more or less burdensome for advisers to
report this information as a dollar amount than as a percentage of
total financing? Please provide supportive data.
    201. As an alternative, should Form PF require all advisers to
report financing liquidity for any size hedge funds they advise? If so,
why?

D. Proposed Amendments To Enhance Data Quality

    We are also proposing several amendments to the instructions to
Form PF to enhance data quality.\236\ Specifically, we are proposing
the following changes:
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    \236\ Proposed Instruction 15 (provides guidelines for advisers
in responding to questions on Form PF relying on their own
methodology).
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    Reporting of percentages. For questions that require information to
be expressed as a percentage, we propose to require that percentages be
rounded to the nearest one hundredth of one percent rather than rounded
to the nearest whole percent. We believe that this additional level of
precision is important, especially for questions where it is common for
filers to report low percentage values (e.g., risk metric questions
such as current Question 40 and current Question 42) to avoid
situations where advisers round to zero and no data is reported,
potentially obscuring small changes that may be meaningful from a risk
analysis or stress testing perspective.
    Value of investment positions and counterparty exposures. We
propose to specify how private fund advisers determine the value of
investment positions (including derivatives) and counterparty
exposures. The proposed changes are designed to provide a more
consistent presentation of reported information on investment and
counterparty exposures to support more accurate aggregation and
comparisons among private funds by us and FSOC in assessing systemic
risk. Under the form's current instructions, advisers may report
portfolios with similar exposures differently.\237\ We understand that
some advisers net legs of partially offsetting trades when calculating
the value of derivatives positions in accordance with internal
methodologies, but others do not, resulting in inconsistent reporting
that may obscure a fund's risk profile. We propose to require these
trades to be reported independently on a gross basis, consistent with
derivatives reporting on Form N-PORT.\238\ We also propose to instruct
advisers that for all positions reported on Form PF, advisers should
not include as ``closed-out'' a position if the position is closed out
with the same counterparty and results in no credit or market exposure
to the fund, making the approach on Form PF with respect to closed out
positions consistent with rule 18f-4 of the Investment Company Act and
our understanding of filers' current practices.\239\
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    \237\ See Form PF: General Instruction 15.
    \238\ Specifically, proposed Instruction 15 requires that if a
question in Form PF requests information regarding a ``position'' or
``positions,'' advisers must treat legs of a transaction even if
offsetting or partially offsetting, or even if entered into with the
same counterparty under the same master agreement as two separate
positions, even if reported internally as part of a larger
transaction. See also instructions to N-PORT, General Instruction G.
    \239\ See Use of Derivatives by Registered Investment Companies
and Business Development Companies, IC Release No. 34084 (Nov. 2,
2020), Section II.E.2.c. [85 FR 83162, 83210] Dec. 21, 2020. See
also Form PF Frequently Asked Questions, supra footnote 79, Question
44.1.
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    Reporting of long and short positions. We propose to amend the
instructions regarding the reporting of long and short positions on
Form PF to improve the accuracy and consistency of reported data used
for systemic risk analysis. We propose to specify that if a question
requires the adviser to distinguish long positions from short
positions, the adviser should classify positions based on the
following: (1) a long position experiences a gain when the value of the
market factor to which it relates increases (and/or the yield of that
factor decreases), and (2) a short position experiences a loss when the
value of the market factor to which it relates increases (and/or the
yield of that factor decreases).
    Calculating certain derivative values. We propose to amend the
instruction to provide that, (1) for calculating the value of interest
rate derivatives, ``value'' means the 10-year bond

equivalent, and (2) for calculating the value of options, ``value''
means the delta adjusted notional value (expressed as a 10-year bond
equivalent for options that are interest rate derivatives).\240\ The
amended instruction would also provide that in determining the value of
these derivatives, advisers should not net long and short positions or
offset trades, but should exclude closed-out positions that are closed
out with the same counterparty provided that there is no credit or
market exposure to the fund. The proposed amendments are designed to
provide more consistent reporting by advisers, which we believe would
help support more accurate aggregation of data, better comparisons
among funds, and a more accurate picture for purposes of assessing
systemic risk.\241\
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    \240\ See Form PF Glossary of Terms (proposed definition of
``10-year bond equivalent'' specifies the zero coupon bond
equivalent).
    \241\ This is consistent with prior staff positions. See Form PF
Frequently Asked Questions, supra footnote 79, Questions 24.3 and
26.1.
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    Currency Conversions for Reporting in U.S. Dollars. We propose to
amend Instruction 15 to clarify that if a question requests a monetary
value, advisers should provide the information in U.S. dollars as of
the data reporting date or other requested date (as applicable) and use
a foreign exchange rate for the applicable date. We also propose to
amend Instruction 15 to provide that if a question requests a monetary
value for transactional data that covers a reporting period, advisers
should provide the information in U.S. dollars, rounded to the nearest
thousand, using foreign exchange rates as of the dates of any
transactions to convert local currency values to U.S. dollars.\242\
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    \242\ See proposed Instruction 15.
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    We request comment on the proposed amendments to Instruction 15.
    202. Should we require reporting of ``gross'' positions and
exposure as proposed? Would the proposed approach cause advisers to
report misleading data? Would the proposed approach cause compliance or
operational issues? What other approach could we take to obtain
consistent data that would better reveal risks associated with a
particular fund? We understand that most advisers' risk management
systems incorporate offsetting or netting methods, but they may take
different approaches. Should we permit advisers to report using the
offsetting or netting methods they use internally? Would that provide
useful data? Should we instead require advisers to offset and net based
on a consistent, prescribed method?
    203. The proposal would instruct advisers to not include as
``closed-out'' a position if the position is closed out with the same
counterparty and results in no credit or market exposure to the fund.
Do you agree that the proposed changes would make the approach on Form
PF with respect to closed out positions consistent with rule 18f-4 of
the Investment Company Act and filers' current practices? If not, what
alternative approach do you suggest?
    204. Should we capture derivative exposure differently or request
additional measures of derivatives? For example, the CFTC's Form CPO-
PQR requires reporting of positive/negative open trade equity (OTE),
which refers to the amount of unrealized gain/loss on open derivative
positions. Would this measure improve our ability to assess and compare
private fund activities and assess systemic risk?
    205. Does reporting to the nearest one hundredth of one percent
involve additional burdens compared to the current requirement to round
to the nearest one percent? Would it meaningfully increase the accuracy
of the reporting? Would permitting rounding to the nearest one percent
on any of the questions on Form PF that request information expressed
as a percentage reduce burdens on filers?
    206. Are the proposed instructions with respect to classifying long
and short positions consistent with industry conventions? Are these
instructions clear for different types of products? If not, how should
they be modified? For example, are there any elements of the
Alternative Investment Fund Managers Directive or Open Protocol
Enabling Risk Aggregation that would be helpful to incorporate?
    207. The proposal would require that advisers report two or more
legs of a transaction--even if offsetting--as separate positions. This
proposed amendment is designed to elicit a more consistent presentation
of investment and counterparty exposures. We understand, however, that
this approach may inflate the value of a reporting fund's long and
short investment exposures in a way that does not represent the
adviser's view of a reporting fund's investment exposures and the
associated risks. Is this a valid concern? Are there other approaches
we should use for investment exposure reporting? For example, should we
require netting of long and short positions under certain conditions
(e.g., identical underlying securities and same counterparty) when
consistent with the adviser's internal recordkeeping and risk
management? Should we require advisers to report exposures on both a
``gross'' basis as well as after all netting consistent with the
adviser's internal recordkeeping and risk management?
    208. The proposal would amend the instruction to provide that, (1)
for calculating the value of interest rate derivatives, ``value'' means
the 10-year bond equivalent, and (2) for calculating the value of
options, ``value'' means the delta adjusted notional value (expressed
as a 10-year bond equivalent for options that are interest rate
derivatives). Is this approach appropriate? If not, what alternatives
do you suggest?
    209. Are the proposed instructions with respect to reporting in
U.S. dollars when a question requests a monetary value appropriate? If
not, how should they be modified? If a reporting fund's base currency
is not U.S. dollars, how and when do advisers convert the base currency
to U.S. dollars? Should Form PF include additional instructions on how
or when to convert base currency to U.S. dollars? For example, should
Form PF require advisers to report the conversion rate? Is further
specificity needed regarding return series, volatility and other
percentage measures for funds that have base currencies other than the
U.S. dollar?

E. Proposed Additional Amendments

    The proposal would make several additional amendments to the
general instructions to Form PF. Specifically, we propose to amend
Instruction 14 to allow advisers to request a hardship exemption
electronically to make it easier to submit a temporary hardship
exemption,\243\ and provide, by way of an amendment to rule 204(b)-1(f)
under the Advisers Act, that for purposes of determining the date on
which a temporary hardship exemption is filed, ``filed'' means the
earlier of the date the request is postmarked or the date it is
received by the Commission.\244\ We are

proposing the latter change to assist advisers with determining what
constitutes a ``filed'' temporary hardship exemption in the context of
the requirement that the request be filed no later than one business
day after a filer's electronic Form PF filing was due as required under
Instruction 14. Additionally, the proposal would amend Instruction 18
based on recent rule changes made by the CFTC with respect to Form CPO-
PQR.\245\ While the CFTC no longer considers Form PF reporting on
commodity pools as constituting substituted compliance with CFTC
reporting requirements, some CPOs may continue to report such
information on Form PF.
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    \243\ The proposal would also update the mailing address to
which advisers requesting a temporary hardship exemption should mail
their exemption filing, include the email address for submitting
electronically the adviser's signed exemption filing in PDF format,
add an instruction noting that filers should not complete or file
any other sections of Form PF if they are filing a temporary
hardship exemption. See Proposed Instruction 14. The proposal would
indicate that the reference regarding the instruction pertaining to
temporary hardship exemptions should refer to Instruction 14 instead
of Instruction 13. See Form PF General Instruction 3, Section 5--
Advisers requesting a temporary hardship exemption.
    \244\ We are also amending rule 204(b)-1(f) under the Advisers
Act to remove certain filing instructions in the rule for temporary
hardship exemptions and instead direct filers to the instructions in
the form. See 204(b)-1(f)(2)(i) (indicating that advisers should
complete and file Form PF in accordance with the instructions to
Form PF, no later than one business day after the electronic Form PF
filing was due).
    \245\ See Form CPO-PQR Release, supra footnote 56.
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    The proposal would revise the terms ``EEA,'' which Form PF defines
as the European Economic Area and ``G10,'' which Form PF defines as The
Group of Ten, to (1) remove outdated country compositions and (2)
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF if adopted, advisers would use the current composition as of the
data reporting date. This proposed amendment is designed to address
questions from advisers about whether to report data based on the
composition of the EEA and G10 as of the effective date of these
proposed amendments to Form PF if adopted, or the current composition
of the EEA and G10, if it changes.
    We request comment on the proposed amendments.
    210. Would the proposed amendments to Instruction 14 and to rule
204(b)-1(f) under the Advisers Act make it easier to submit a temporary
hardship exemption and assist advisers in determining the date on which
a temporary hardship exemption is filed? If not, are there
alternatives?
    211. Would the proposed amendments to the Glossary of Terms
appropriately update the terms and provide clarification? Is there a
better way to meet these objectives? If so, please provide examples.
    212. The proposal would amend Instruction 18 based on recent rule
changes made by the CFTC with respect to Form CPO-PQR. Is this proposed
change appropriate?
    213. The proposal would remove the list of country compositions and
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF (if adopted), advisers would use the current composition as of the
data reporting date. Is this approach appropriate? If not, what
alternative approach do you suggest?

III. Economic Analysis

A. Introduction

    The SEC is mindful of the economic effects, including the costs and
benefits, of the proposed amendments. Section 202(c) of the Advisers
Act provides that when the SEC is engaging in rulemaking under the
Advisers Act and is required to consider or determine whether an action
is necessary or appropriate in the public interest, the SEC shall also
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors.\246\ The
analysis below addresses the likely economic effects of the proposed
amendments, including the anticipated and estimated benefits and costs
of the amendments and their likely effects on efficiency, competition,
and capital formation. The SEC also discusses the potential economic
effects of certain alternatives to the approaches taken in this
proposal.
---------------------------------------------------------------------------

    \246\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to
quantify. For example, the SEC cannot quantify the effects of how
regulators may adjust their policies and oversight of the private fund
industry in response to the additional data collected under the
proposed rule. Also, in some cases, data needed to quantify these
economic effects are not currently available and the SEC does not have
information or data that would allow such quantification. For example,
costs associated with the proposal may depend on existing systems and
levels of technological expertise within the private fund advisers,
which could differ across reporting persons. While the SEC has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The SEC seeks
comment on all aspects of the economic analysis, especially any data or
information that would enable a quantification of the proposal's
economic effects.

B. Economic Baseline and Affected Parties

1. Economic Baseline
    As discussed above, the Commissions adopted Form PF in 2011, with
additional amendments made to section 3 along with certain money market
reforms in 2014.\247\ Form PF complements the basic information about
private fund advisers and funds reported on Form ADV.\248\ Unlike Form
ADV, Form PF is not an investor-facing disclosure form. Information
that private fund advisers report on Form PF is provided to regulators
on a confidential basis and is nonpublic.\249\ The purpose of Form PF
is to provide the Commissions and FSOC with data that regulators can
deploy in their regulatory and oversight programs directed at assessing
and managing systemic risk and protecting investors.\250\
---------------------------------------------------------------------------

    \247\ See supra footnote 3. When the SEC adopted the amendments
to section 3 in 2014 in connection with certain money market
reforms, it noted that under the proposal it was concerned that some
of the proposed money market reforms could result in assets shifting
from registered money market funds to unregistered products such as
liquidity funds, and that the proposed amendments were designed to
help the SEC and FSOC track any potential shift in assets and better
understand the risks associated with the proposed money market
reforms. See, e.g., D. Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators (DERA White Paper Jan. 2017)
(``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf; 2011 Form PF Adopting Release; 2014
Form PF Amending Release at 466; Commissioner Aguilar Statement,
July 23, 2014, available at https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statment-laa.
    \248\ Investment advisers to private funds report on Form ADV,
on a public basis, general information about private funds that they
advise, including basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://adviserinfo.sec.gov/.
    \249\ As discussed above, SEC staff publish quarterly reports of
aggregated and anonymized data regarding private funds on the SEC's
website. See supra footnote 7; see also Private Fund Statistics Q3
2021
    \250\ See supra section I.
---------------------------------------------------------------------------

    Private funds and their advisers play an important role in both
private and public capital markets. These funds, including hedge funds,
currently have more than $18.0 trillion in gross private fund
assets.\251\ Hedge funds in particular have more than $9.7 trillion in
gross private fund assets.\252\ Private funds invest in large and small
businesses and use strategies that range from long-term investments in
equity

securities to frequent trading and investments in complex instruments.
Their investors include individuals, institutions, governmental and
private pension funds, and non-profit organizations.
---------------------------------------------------------------------------

    \251\ These estimates are based on staff review of data from the
Private Fund Statistics report for the third quarter of 2021, issued
in March 2022. Private fund advisers who file Form PF currently have
$18.1 trillion in gross assets. See Private Fund Statistics Q3 2021.
    \252\ See Division of Investment Management, Private Fund
Statistics, (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
---------------------------------------------------------------------------

    Before Form PF was adopted, the SEC and other regulators, including
the CFTC, had limited visibility into the economic activity of private
fund advisers and relied largely on private vendor databases about
private funds that covered only voluntarily provided private fund data
and did not represent the total population.\253\ Form PF represented an
improvement in available data about private funds, both in terms of its
reliability and completeness.\254\ Generally, investment advisers
registered (or required to be registered) with the Commission with at
least $150 million in private fund assets under management must file
Form PF. Smaller private fund advisers and all private equity fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors.\255\ In addition, large private
equity advisers provide data about each private equity fund they
manage. Large hedge fund and liquidity fund advisers also provide data
about each reporting fund they manage, and are required to file
quarterly.\256\
---------------------------------------------------------------------------

    \253\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
    \254\ Id.
    \255\ Id.
    \256\ Id.
---------------------------------------------------------------------------

    The SEC and other regulators now have almost a decade of experience
with analyzing the data collected on Form PF. The collected data has
helped FSOC establish a baseline picture of the private fund industry
for the use in assessing systemic risk \257\ and improved the SEC's
oversight of private fund advisers.\258\ Form PF data also has enhanced
the SEC's and FSOC's ability to frame regulatory policies regarding the
private fund industry, its advisers, and the markets in which they
participate, as well as more effectively evaluate the outcomes of
regulatory policies and programs directed at this sector, including the
management of systemic risk and the protection of investors.\259\
Additionally, based on the data collected through Form PF filings,
regulators have been able to regularly inform the public about ongoing
private fund industry statistics and trends by generating quarterly
Private Fund Statistics reports \260\ and by making publicly available
certain results of staff research regarding the characteristics,
activities, and risks of private funds.\261\ As discussed above, these
data may also be used by the CFTC for the purposes of its regulatory
programs, including examinations, investigations and investor
protection efforts.\262\
---------------------------------------------------------------------------

    \257\ See, e.g., OFR, 2021 Annual Report to Congress (Nov.
2021), available at https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf; Financial Stability
Oversight Council, 2020 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
    \258\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
    \259\ See supra footnotes 257, 258.
    \260\ See supra footnote 249.
    \261\ See, e.g., David C. Johnson and Francis A. Martinez, Form
PF Insights on Private Equity Funds and Their Portfolio Companies
(OFR Brief Series No. 18-01, June 14, 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; Hiltgen Paper; G. Aragon, T. Ergun, M.
Getmansky, and G. Girardi, Hedge Funds: Portfolio, Investor, and
Financing Liquidity, (DERA White Paper, May 2017), available at
https://www.sec.gov/files/dera_hf-liquidity.pdf; George Aragon,
Tolga Ergun, and Giulio Girardi, Hedge Fund Liquidity Management:
Insights for Fund Performance and Systemic Risk Oversight (DERA
White Paper, Apr. 2021), available at https://www.sec.gov/files/dera_hf-liquidity-management.pdf; Mathis S. Kruttli, Phillip J.
Monin, and Sumudu W. Watugala, The Life of the Counterparty: Shock
Propagation in Hedge Fund-Prime Broker Credit Networks (OFR Working
Paper No. 19-03, Oct., 2019), available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-03_the-life-of-the-counterparty.pdf; Mathias S. Kruttli, Phillip J. Monin,
Lubomir Petrasek, and Sumudu W. Watugala, Hedge Fund Treasury
Trading and Funding Fragility: Evidence from the COVID-19 Crisis
(Federal Reserve Board, Finance and Economics Discussion Series No.
2021-038, Apr. 2021), available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; Mathias S. Kruttli, Phillip
J. Monin, and Sumudu W. Watugala, Investor Concentration, Flows, and
Cash Holdings: Evidence from Hedge Funds (Federal Reserve Board,
Finance and Economics Discussion Series No. 2017-121 Dec. 15, 2017),
available at https://www.federalreserve.gov/econres/feds/investor-concentration-flows-and-cash-holdings-evidence-from-hedge-funds.htm.
    \262\ See supra section I.
---------------------------------------------------------------------------

    However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where more granular and
timely information would improve the SEC's and FSOC's understanding of
the private fund industry and the potential systemic risk relating to
its activities, and improve regulators' ability to protect
investors.\263\ For example, as discussed above, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S treasury market.\264\ Also during the COVID-19 market turmoil, FSOC
sought to evaluate the role hedge funds played in disruptions in the
U.S. treasury market by unwinding cash-futures basis trade positions
and taking advantage of the near-arbitrage between cash and futures
prices of U.S. treasury securities. Because the existing requirement
regarding turnover reporting on U.S. treasury securities is highly
aggregated, the SEC staff, during retrospective analyses on the March
2020 market events, was unable to obtain a complete picture of activity
relating to long treasuries and treasury futures.\265\ The need for
more granular and timely information collected on Form PF is further
heightened by the increasing significance of the private fund industry
to financial markets, and resulting regulatory concerns regarding
potential risks to U.S. financial stability from this sector.\266\ The
SEC's and FSOC's experiences analyzing Form PF data has also identified
certain areas of Form PF where questions result in data received that
is redundant to other questions, or instructions that result in
unnecessary reporting burden for some advisers.\267\
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    \263\ See supra section I.
    \264\ See supra section II.C.2.a.
    \265\ See supra section II.C.2.d. This also includes the SEC's
and FSOC's experience analyzing data from multiple regulatory
filings. For example, one SEC staff paper has used Form PF data and
Form N-MPF data to study rule 2a-7 risk limits and implications of
money market reforms. See, e.g., Hiltgen Paper.
    \266\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. See supra footnote 7. See also
Financial Stability Oversight Council Update on Review of Asset
Management Product and Activities (2014), available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
    \267\ Based on the PRA analysis in section IV.A.3, the current
costs associated with filing Form PF report are estimated to be
$4,173.75 per quarterly filing or $16,695 annually for smaller
private fund advisers, $41,737.50 per quarterly filing or $166,950
annually for large hedge fund advisers, $19,477.50 per quarterly
filing or $77,910 annually for large liquidity fund advisers, and
$27,825 per quarterly filing or $111,300 annually for large private
equity advisers. The calculation for large liquidity fund advisers
incorporates the adjustment explained in footnote 9 to Table 6
(yielding an estimate of costs prior to the proposal of $29,216.25/
105*70 = $19477.50). See Table 6. A 2018 industry survey of large
hedge fund advisers observed filing costs that ranged from 35% to
72% higher than SEC cost estimates. See Managed Funds Association,
``A Streamlined Form PF: Reducing Regulatory Burden,'' September 17,
2018, p. 3, available at https://www.managedfunds.org/wp-content/uploads/2018/09/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf. However, a 2015
academic survey of SEC-registered investment advisers to private
funds affirmed the SEC's cost estimates for smaller private fund
advisers' Form PF compliance costs, and observed that the SEC
overestimated Form PF compliance costs for larger private fund
advisers. See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9 Brooklyn Journal of Corporate, Financial, and
Commercial Law 428 (2015).

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2. Affected Parties
    The proposal amends the general instructions and basic information
reporting requirements facing all categories of private fund advisers.
As discussed above, these include, but are not limited to, advisers to
hedge funds, private equity funds, real estate funds, securitized asset
funds, liquidity funds, and venture capital funds.\268\ The proposal
further amends reporting requirements for large hedge fund advisers,
including specific revisions for large hedge fund advisers to
qualifying hedge funds.\269\
---------------------------------------------------------------------------

    \268\ See supra section I.
    \269\ Form PF currently defines ``hedge fund'' broadly to
include any private fund (other than a securitized asset fund) that
has any of the following three characteristics: (1) a performance
fee or allocation that takes into account unrealized gains, or (2) a
high leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notional
exposure in excess of twice its net asset value (including committed
capital)) or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary of Terms. ``Large'' hedge fund
advisers are those, collectively with their related persons, with at
least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter. Qualifying
hedge funds are hedge funds that have a net asset value
(individually or in combination with any feeder funds, parallel
funds and/or dependent parallel managed accounts) of at least $500
million as of the last day of any month in the fiscal quarter
immediately preceding the adviser's most recently completed fiscal
quarter. See supra section II.C.
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    Hedge funds, the focus of part of the proposal, are one of the
largest categories of private funds,\270\ and as such play an important
role in the U.S. financial system due to their ability to mobilize
large pools of capital, take economically important positions in a
market, and their extensive use of leverage, derivatives, complex
structured products, and short selling.\271\ While these features may
enable hedge funds to generate higher returns as compared to other
investment alternatives, the same features may also create spillover
effects in the event of losses (whether caused by their investment and
derivatives positions or use of leverage or both) that could lead to
significant stress or failure not just at the affected fund but also
across financial markets.\272\
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    \270\ See infra footnote 273.
    \271\ See, e.g., Lloyd Dixon, Noreen Clancy, and Krishna B.
Kumar, Hedge Fund and Systemic Risk, RAND Corporation (2012); John
Kambhu, Til Schuermann, and Kevin Stiroh, Hedge Funds, Financial
Intermediation, and Systemic Risk, Federal Reserve Bank of New
York's Economic Policy Review (2007).
    \272\ See supra footnotes 257, 266.
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    In the third quarter of 2021, there were 9,484 hedge funds reported
on Form PF, managed by 1,758 advisers, with nearly $9.8 trillion in
gross assets under management, which represented approximately 54% of
assets reported by private fund advisers.\273\ Currently, hedge fund
advisers with between $150 million and $2 billion in regulatory assets
(that do not qualify as large hedge fund advisers) file Form PF
annually, in which they provide general information about funds they
advise such as the types of private funds advised, fund size, their use
of borrowings and derivatives, strategy, and types of investors. Large
hedge fund advisers (those with at least $1.5 billion in regulatory
assets under management attributable to hedge funds) \274\ file Form PF
quarterly, in which they provide data about each hedge fund they
managed during the reporting period (irrespective of the size of the
fund). Large hedge fund advisers must report more information on Form
PF about qualifying hedge funds (those with at least $500 million as of
the last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter) \275\ than other
hedge funds they manage during the reporting period. In the third
quarter of 2021, there were 2,013 qualifying hedge funds reported on
Form PF, managed by 592 advisers, with $8.3 trillion in gross assets
under management, which represented approximately 85 percent of the
reported hedge fund assets.\276\
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    \273\ In the third quarter of 2021, hedge fund assets accounted
for 54 percent of the gross asset value (``GAV'') ($9.8/$18.1
trillion) and 42.5 percent of the net asset value (``NAV'') ($5.1/
$12.0 trillion) of all private funds reported on Form PF. Private
Fund Statistics Q3 2021 at p. 5.
    \274\ See supra footnote 269.
    \275\ Id.
    \276\ In the third quarter of 2021, qualifying hedge fund assets
accounted for 85 percent of the GAV ($8.3/$9.8 trillion) and 82
percent of the NAV ($4.2/$5.1 trillion) of all hedge funds reported
on Form PF. Private Fund Statistics Q3 2021 at pp. 4-5.
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    Private equity funds are another large category of funds in the
private fund industry. In the third quarter of 2021, there were 15,835
private equity funds reported on Form PF, managed by 1,455 advisers,
with $4.8 trillion in gross assets under management, which represented
over one quarter of the reported gross assets in the private fund
industry.\277\ Many private equity funds focus on long-term returns by
investing in a private, non-publicly traded company or business--the
portfolio company--and engage actively in the management and direction
of that company or business in order to increase its value.\278\ Other
private equity funds may specialize in making minority investments in
fast-growing companies or startups.\279\
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    \277\ In the third quarter of 2021, private equity assets
accounted for 26 percent of the GAV ($4.8/$18.1 trillion) and 35
percent of the NAV ($4.1/$12.0 trillion) of all private funds
reported on Form PF. Private Fund Statistics Q3 2021 at p. 5.
    \278\ After purchasing controlling interests in portfolio
companies, private equity advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., Private Equity Funds, Securities and Exchange
Commission, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
    \279\ Id.
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    For the remaining categories of funds (real estate funds,
securitized asset funds, liquidity funds, venture capital funds, and
other private funds), advisers required to file Form PF had, in the
third quarter of 2021, investment discretion over $3.5 trillion in
gross assets under management.\280\ These assets were managed by 1,442
fund advisers managing 12,019 funds.\281\
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    \280\ Private Fund Statistics Q3 2021 at p. 5.
    \281\ Private Fund Statistics Q3 2021 at p. 4.
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    Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\282\ Private funds that rely on the exclusion from the
definition of ``investment company'' provided in Section 3(c)(7) of the
Investment Company Act are limited to investors that are also qualified
purchasers (as defined in section 2(a)(51) of the Investment Company
Act). Retail U.S. investors with exposure to private funds are
typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\283\ In the
third quarter of 2021, public pension plans had $1,586

billion invested in reporting private funds while private pension plans
had $1,263 billion invested in reporting private funds, making up 13.2
percent and 10.5 percent of the overall beneficial ownership in the
private equity industry, respectively.\284\ Private fund advisers have
also sought to be included in individual investors' retirement plans,
including their 401(k)s.\285\
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    \282\ See, e.g., Private Equity Funds, Securities and Exchange
Commission, (Investor.gov: Private Equity Funds), available at
https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity; Hedge
Funds, Securities and Exchange Commission (Investor.gov: Hedge
Funds), available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
    \283\ See supra footnotes 251, 282.
    \284\ Private Fund Statistics Q3 2021 at p. 15.
    \285\ See, e.g., Dep't of Labor, Information Letter (June 3,
2020), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.
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C. Benefits and Costs

1. Benefits
    The proposal is designed to facilitate two primary goals the SEC
sought to achieve with reporting on Form PF as articulated in the
original adopting release, namely: (1) facilitating FSOC's
understanding and monitoring of potential systemic risk relating to
activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the SEC's abilities
to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the SEC's efforts to protect investors
and maintain fair, orderly, and efficient markets.\286\
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    \286\ See supra section I. While the proposed amendments are
also designed to improve the usefulness of this data for the CFTC,
this economic analysis does not include the benefits associated with
enhancements to the CFTC's use of reporting on Form PF.
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    The SEC believes the proposal would accomplish these goals in three
key ways, each discussed in detail in the following sections. First,
the proposal would provide for solutions to potential reporting errors
and issues of data quality when analyzing Form PF filings across
advisers and when analyzing multiple different regulatory filings.
Higher quality data across different funds and across different
regulatory filings can allow the SEC and FSOC to develop an
understanding of one set of advisers and apply it to other advisers
more rapidly, or apply lessons from one financial market to other
financial markets. This can help the SEC and FSOC develop more
effective regulatory responses, and help the SEC protect investors by
identifying areas in need of outreach, examinations, and investigations
in response to potential systemic risks, conflicting arrangements
between advisers and investors, and other sources of investor harm.
    Second, the proposal would help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry in terms of ownership, size, investment
strategies, and exposures. This can improve the SEC's and FSOC's
understanding of new developing systemic risks and potential
conflicting arrangements, thereby further aiding in the development of
regulatory responses, and also aiding the SEC in efforts to protect
investors by identifying areas in need of outreach, examinations, and
investigations.
    Third, the proposal would streamline reporting and reduce reporting
burdens without compromising investor protection efforts and systemic
risk analysis. This would improve the efficiency and effectiveness of
the SEC's efforts to protect investors and maintain fair, orderly and
efficient markets.
    The SEC anticipates that the increased ability for the SEC's and
FSOC's oversight, resulting from the proposed amendments, could promote
better functioning and more stable financial markets, which may lead to
efficiency improvements. The SEC does not anticipate significant
effects of the proposed amendments on competition in the private fund
industry because the reported information generally would be nonpublic
and similar types of advisers would have comparable burdens under the
amended Form. For similar reasons, the SEC does not anticipate
significant effects of the proposed amendments on capital formation.
    The proposal would amend the general instructions (as well as
implement additional amendments), section 1 (requiring basic
information about advisers and the private funds they advise), and
section 2 (requiring information about hedge funds advised by large
private fund advisers) of Form PF. The benefits associated with each of
these specific elements are discussed in greater detail below.
a. Proposed Amendments to General Instructions, Proposed Amendments To
Enhance Data Quality, and Proposed Additional Amendments
    The proposal would update the Form PF general instructions to
revise how all private fund advisers satisfy certain requirements on
Form PF, it would issue a series of amendments to enhance data quality,
and it would lastly issue a series of additional amendments.\287\ There
are five categories of such proposals.
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    \287\ See supra section II.A, II.D, II.E.
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    First, the proposal would amend the general instructions for
reporting of master-feeder arrangements and parallel fund
structures.\288\ These revisions to the general instructions would
improve consistency of reporting associated with measuring private fund
interconnectedness and investment in other private funds by revising
instructions for reporting of ownership structures and revising
instructions that were previously ambiguous and resulted in reporting
errors and issues of data quality across advisers. For example, as
discussed above, Form PF currently provides advisers with flexibility
to respond to questions regarding master-feeder arrangements, parallel
fund structures, and use of funds of funds either in the aggregate or
separately, as long as they do so consistently throughout Form PF. The
revised instructions would specify how to respond to these questions to
prevent some advisers from responding in the aggregate and some
advisers from responding separately.\289\ The proposal would also
require reporting on the total value of parallel managed accounts.\290\
The SEC anticipates these improved data would assist the SEC and FSOC
in assessing potential risks to financial stability resulting from
increasingly complex ownership and investment structures of private
funds. While master-feeder arrangements, parallel fund structures, and
use of funds of funds all allow private funds to benefit from larger
pools of capital, diversify risk, and enjoy shared returns,\291\ these
same features have inherent risks of

spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well.
Complex ownership structures may also create conflicts of interest when
the same individuals serve as directors on boards of both master and
feeder funds under a single owner,\292\ and may also mask instances of
fraud and a private fund's methods for committing fraud.\293\ Investor
protection efforts would therefore benefit from more consistent data
providing connections from master funds to feeder funds and other
ownership information.
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    \288\ See supra section II.A.1. However, an adviser would
continue to aggregate these structures for purposes of determining
whether the adviser meets a reporting threshold.
    \289\ Similar benefits would be obtained from proposed revisions
to Instruction 7, which address that advisers to funds of funds
currently have flexibility to choose whether to disregard a private
fund's equity investments in other private funds for all Form PF
purposes so long as they do so consistently throughout Form PF.
Other proposed revisions could also provide benefits associated with
consistency of reporting by revising instructions to avoid error
across filers, such as the revisions to Instruction 8 that the
instruction on which investments to include in determining reporting
thresholds and responding to questions applies only to investments
in funds that are not private funds, and to provide that advisers
would not be required to look through a reporting fund's investments
in any other fund that is not a private fund, other than a trading
vehicle. See supra section II.A.2. Similar benefits would also be