18th April 2011 - News:

Hedge funds: Preparing for Dodd-Frank

Hedge funds are regulators' favourite bogeymen. Perhaps their reputation for taking risks and the aura around some managers' rock star lifestyles, makes hedge funds an easy target for regulators seeking to explain market booms and busts.

Now the Dodd-Frank Act requires all hedge funds with assets over $150 million to register with the US Securities and Exchange Commission as regulators try to get a handle on systemic risk. The SEC will require these larger funds to keep extensive records regarding trading activities and those without a compliance officer will be forced to hire one. The SEC also has been empowered to expand its regulation of funds as it sees fit.

For fund managers, registration and the prospect of greater scrutiny of their trading activity will be onerous. It’s no surprise that funds haven’t been lining up at the SEC to sign in. Over a third of the $1 billion plus fund managers have yet to register—that includes George Soros’s funds and King Street Capital. It seems some funds are waiting to see what the competition is doing before they rush in with their paperwork.

It also looks like the SEC may be swamped by the registration process. The US regulator recently sent out a letter indicating it could push out the registration deadline from 21 July to the first quarter of 2012. Funds might have more time, but some lawyers advise using the extension wisely. Fund managers need to start building their compliance and reporting regimes now to avoid problems in the future.

22nd March 2011 - News:

Regulation to remain big challenge in 2011

Meeting the demands of new and changing regulation remains perhaps the key challenge to the financial services industry in 2011. The scale of regulatory change truly is unprecedented and more than ever, financial firms of all kinds will struggle to comply with new regulations and stay profitable.

Global regulatory efforts are designed to ensure the financial services sector is more stable and conservative. What is more, regulators want to make sure firms do not become too big to fail as the appetite for state-sponsored bank bailouts has evaporated. Banks recognise the challenges – but the scale of regulatory reform is daunting.

Lower profits are recognised as one potential outcome of increased regulation, according to a recent study from KPMG. While most banks have returned to profitability following two or more years of heavy losses due to the economic crisis, the signs are that regulatory developments could usher in an era of permanently lower profitability. Overall the cost of compliance is set to rise and new regulation is certain to make some business lines—like credit trading—less profitable.

Dodd-Frank Act

New regulations will touch every corner of the global financial services industry, with the United States’ Dodd-Frank Act being the most high-profile piece of legislation to emerge from the financial crisis. Dodd-Frank’s implications will be wide ranging and ultimately will create at least 243 new rules. While the core of the Act is aimed at promoting financial stability and transparency by reining in the over-the-counter (OTC) derivatives market, it also speaks to predatory lending practices and the mortgage industry.

Keeping up with developments for Dodd-Frank alone has become a full-time job for some compliance officers and risk managers. With many aspects of the Act still to be determined, such as exactly which OTC derivatives must be transacted using a clearinghouse, it’s crucial that financial services professionals understand all its implications for their business lines. Once the Act is implemented in full, there also will be a number of important new reporting requirements for firms to understand in detail.

Hedge fund regulation

It’s not just derivatives and mortgage lending that have come under scrutiny. The Madoff fraud has increased regulators’ attention on hedge funds. The European Commission has produced its Directive on Alternative Investment Fund Managers (AIFM) and in the US, the Securities and Exchange Commission is setting out new rules for hedge funds as specified by Dodd-Frank. In addition, local regulators will be setting out their own national rules governing the conduct of hedge funds under their jurisdiction. Again, the impact of these regulations will be significant, requiring thorough understanding by hedge fund marketers and compliance officers.