Report spells out new regulations for Hedge Funds

(CNS): Mandatory registration and scrutiny of fund managers and the financial institutions that provide the money, as well as international information sharing on the industry are just some of the recommendations the International Organization of Securities Commissions’ (IOSCO) Technical Committee has made in a report published today (22 June). With 9000 funds registered in the Cayman Islands local experts say Cayman may need to make some changes to adapt to the new international regulations that will emerge but is already adhering to many of the recommendaitons and this is good news for the sector in general.

Kathleen Casey, Chair of the committee that authored the report, said that while the hedge fund industry did not cause the financial crisis but it presented an opportunity to assess the potential regulatory risk they pose. “Securities regulators recognise that the current crisis in financial markets is not a hedge fund driven event. Hedge funds contribute to market liquidity, price efficiency, risk distribution and global market integration. Nevertheless the crisis has given regulators the opportunity to consider the systemic role hedge funds may play and the way in which we deal with the regulatory risks they may pose to the oversight of markets and protection of investors,” she added.

The Cayman Islands plays a significant role in the Hedge Fund industry and the Cayman Islands Monetary Authority told CNS that as the current leader it does not foresee any problems arising from the IOSCO report.  "We are currently doing our own review and where change is necessary, will develop a plan to bring CIMA into compliance with IOSCO standards. CIMA already has in place a number of the measures suggested in the report,  which reaffirms that the Cayman Islands are a leader in transparency and regulatory best practices," said Managing Director Cindy Scotland. "IOSCO is recognized as the international standard setters for the securities market and our recent membership demonstrates our commitment to meet these standards as well as provide input to the future of the hedge fund market."

Former Chair of CIMA Tim Ridley noted that there will need to be careful consideration of the recommendations but agreed the jurisdiction is already following the spirit of most of them.

“The IOSCO Report requires careful study by CIMA and the industry as the devil is always in the details. But on first review, the Report seems to pose no significant issues for the industry in Cayman. Indeed, Cayman already substantially implements the spirit of the principles described in the Report,” Ridley explained. “There are nevertheless some technical issues that the Government, CIMA and the industry need to address to complete the implementation. I would not anticipate these being overly difficult to achieve, and some of these are already underway, but timeliness in so doing is essential".

Mark Lewis of Walkers (Cayman’s leading hedge fund law firm) said that the introduction of global regulations will be good news for the Cayman Islands and the industry as a whole as it will help to restore confidence in the business. “This is good news as it recognises that Hedge Funds are an important tool in global finance and that they have a legitimate part to play,” he said noting that most of the recommendations affect the onshore part of the business.

“Cayman already has many of the recommendations in place, funds are already registered here and to the extent that this touches Cayman, CIMA can feel vindicated for the regulation they have already implemented.”  Lewis added that this is another example of where Cayman leads the way when it comes to setting standards and improving regulation.

The report Hedge Funds Oversight contains six high level principles that aim to assist regulators to address the regulatory and systemic risks posed by hedge funds in their own jurisdictions while supporting a globally consistent approach.

They include the recommendation that hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration; that hedge fund managers/advisers which are required to register should also be subject to appropriate ongoing regulatory requirements relating to standards, conflicts of interest, disclosure to investors; the banks which provide funding to hedge funds should be subject to mandatory registration/regulation and supervision; hedge fund managers and prime brokers should provide information for systemic risk purposes; regulators should encourage and take account of the development, implementation and convergence of industry good practices and share information, where appropriate to help identify systemic risks, market integrity and other risks.

“The application of these principles, in a collective, cooperative and efficient way, can provide regulators with the tools to obtain sufficient, relevant information in order to address the regulatory and systemic risks posed by hedge funds,” said Casey.