By James Hamilton, J.D., LL.M.
The UK Minister for the financial sector flatly rejected a proposal to require the disclosure of hedge fund portfolio positions to regulators in some sort of central register. Calling the proposal counterproductive, Economic Secretary Ed Balls, MP said it was not clear what regulators could usefully do with that information. In addition, it risks giving the false impression that regulators are overseeing specific investment decisions, creating a further risk of moral hazard. Further, were such information to be made public, the Minister feared that it could seriously compromise the working of the market, raising risks to financial stability.
Given the international nature of hedge funds activity, however, the senior official believes that there is a role for international monitoring and appropriate action. He emphasized that regulators must ensure that any steps taken are proportionate, risk-based, evidence-based, and properly designed so that they achieve the desired outcomes. In that respect, the Minister awaits with interest the results of the work of the Financial Stability Forum and fully supports the IOSCO work on operational issues such as valuation.
The Minister also set forth a proposal to expand the Financial Services Authority’s six-month collection of data on banks’ exposures to hedge funds through derivatives and prime brokerage to all major counterparties. Similarly, the six-month surveys would be broadened to include other major regulators.
Following discussion with the FSA, the Minister believes that the quality of prudential supervision of hedge fund activity would be enhanced if there were greater co-operation between the key regulators in monitoring the main counterparties' exposures to hedge funds and pooling that information. He said that the proposal will be discussed among international regulators in the run-up to the impending G8 Finance Ministers meeting.