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Abstract
In July 2008, a task force of the Independent Directors Council published the report, Board Oversight of Derivatives, to support fund boards in fulfilling their responsibilities for overseeing derivatives investments. This article is an excerpt of the full report, which discusses board oversight responsibilities; definitions and primary categories of derivatives; portfolio management applications, risks, and controls; operational and regulatory considerations; and board practices and resources. Derivatives have become an integral tool in modern financial management. A fund board's oversight responsibilities with respect to derivatives generally are the same as for other portfolio investments. Board oversight may entail discussions with the adviser about the operational resources, internal controls, and organizational structures of the adviser and service providers, and the policies and procedures designed to identify, assess, document, and control risks associated with derivatives investments. Fund boards should continue to work with their advisers to stay informed about derivatives used by the funds they oversee, their potential benefits in achieving the fund's investment objectives, and the potential added risks, controls, and resource requirements.