Advocate for simplified systemic risk reporting forms, regulatory coordination between the SEC and CFTC, and an appropriately tailored approach to leverage by prudential regulators
Alternative credit, also known as private credit, is a term used to refer to capital that private funds loan to businesses through direct lending or structured finance arrangements. Borrowers are typically small and mid-sized businesses that lack credit ratings and do not issue securities traded on public markets.
Private credit provides much-needed capital to small and mid-sized companies, enabling business owners and entrepreneurs to hire and retain talent, invest in long-term projects, conduct research and development, and build facilities. This also serves as a stabilizing force for the U.S. economy, aiding businesses in all market environments. This is in contrast to banks and other traditional lending institutions, which historically have withdrawn or ceased to issue financing during periods of market stress, such as the onset of the COVID-19 pandemic or the Global Financial Crisis.
As an example, following the Global Financial Crisis, changes in bank capital requirements caused many banks to significantly reduce lending to small and mid-sized businesses throughout the country. Alternative credit funds provided a lifeline to U.S. businesses by filling this gap. Today, the $1.5 trillion private credit market provides capital to businesses of all sizes in every industry.
The income generated by private credit funds helps the pensions, endowments, and foundations that invest in these funds to support beneficiary retirement plans, academic scholarships, and numerous charitable causes, respectively.
Alternative credit has supported job creation, research and development, and economic growth in all 50 states.
Advisers to private credit funds are registered with and regulated by government agencies, such as the Securities and Exchange Commission (SEC) in the U.S. These funds and their managers are held to the same robust disclosure and reporting regulations as other alternative asset managers, preventing fraud and mitigating systemic risk.
Alternative credit providers are not subject to liquidity risk. Credit funds receive capital from sophisticated investors who commit their capital to the funds for multi-year holding periods. The long capital commitment periods – reflected in fund partnership agreements – prevent runs on a fund and provide long-term stability for the fund and its borrowers.
Private credit funds are not implicitly or explicitly backstopped by the federal government. Therefore, taxpayers are not liable in times of stress.
Alternative credit presents no risk of contagion to other funds or the economy. If a credit fund fails, the losses are borne by that specific fund’s manager and investors. Further, the losses do not impact investments in other funds or otherwise ripple across the broader financial system.
A May 2023 Fed Financial Stability Report found that private funds’ lending activities have not threatened financial stability. These findings mirrored those in a 2020 Government Accountability Office report. Private credit default rates are generally limited due to the strong debt structure, contractual provisions that minimize default, and underwriting that protects the fund, as lender, and the sophisticated institutions that are invested in the fund.
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MFA opposes burdensome regulations that unnecessarily impede market participants from engaging in hedging and risk management activities. MFA seeks to work constructively with the CFTC to develop a practical and effective position limits framework that will continue to allow market participants to use the derivatives markets for rik management purposes without undue burden.