We have received a number of recent inquiries regarding GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, and would like to share with you our understanding of the required disclosures as it relates to your investment in Commonfund funds. As always, you should consult with your accounting and tax advisors to ensure that your disclosures are appropriate for your individual circumstances.
Based on our interpretation of GASB 53, previous experience with GASB statements and consultation with our accounting professionals, we believe that the disclosures related to derivatives positions required under GASB 53 apply only to those derivative instruments held directly by the institution and not those held within commingled fund investments. Although there are derivative positions within certain Commonfund funds you own, you are a shareholder of the fund and do not have direct ownership of the underlying securities. Our understanding is that there is no “look-through” requirement for reporting individual positions held within a fund investment under the GASB guidelines. Investors, in consultation with their audit firms, may wish to consider a more general disclosure in the notes to their financial statements pertaining to the objective and risks associated with derivate positions held within their fund investments.
We are therefore providing the following example of derivative disclosures contained in our funds’ audited financial statement that you may use as a reference for drafting a general disclosure surrounding derivatives should you wish to do so.
Sub-advisors utilized by the funds may transact in derivative financial instruments including forwards, futures, swaps, and options. The Investment Manager, to a limited extent, may also transact directly in these instruments on behalf of certain funds. These are instruments whose values are based, in part, upon underlying assets, indices, or reference rates or a combination of these factors, and generally represent future commitments to exchange cash flows, or to purchase or sell other financial instruments at specified future dates. A derivative financial instrument may be traded on an exchange or OTC. Exchange-traded derivative financial instruments are standardized and include futures and certain options contracts. OTC derivative financial instruments are negotiated between contracting parties and may include forwards, swaps and certain options contracts.
Derivative financial instruments are subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. Derivative financial instruments are typically also subject to certain additional risks, such as those resulting from leverage and less liquidity than in the underlying financial instruments. The funds may use derivative financial instruments in the normal course of business to take speculative investment positions as well as for risk management purposes. The funds’ derivative financial instrument risks should not be viewed in isolation, but should be considered on an aggregate basis along with the funds’ other investing activities.