US Treasury Will Move on Blueprint Affecting Hedge Funds
Against the backdrop of the President Working Group on Financial Markets best practices for hedge fund managers, a senior Treasury official said there is also a need to move on a longer-term, strategic basis based on the Blueprint for Financial Regulatory Reform. Acting Under Secretary for Domestic Finance Anthony Ryan told a group of asset managers in Boston that the current U.S. regulatory structure is not optimally positioned to address the modern financial system with its diversity of market participants, complex financial instruments, convergence of financial intermediaries and trading platforms, and global integration. The official also said that, along with improvement to risk management at financial institutions, investors must practice their own form of risk management when confronted with complex securitized products.
The official urged hedge fund managers to play a special role as reform efforts advance. Referencing the PWG principles and guidelines regarding private pools, he said that, while private pools of capital bring many advantages to the capital markets, they also pose challenges, including systemic risk and investor protection. It will take a combination of strong market discipline and regulatory policies to address these risks.
The PWG has also formed two private-sector committees to develop best practices for asset managers and investors. Their draft practices were released for public comment in April, and the groups will release their final reports this summer. The draft calls on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, and conflicts of interest. The report recommended innovative and far-reaching practices that exceed existing industry standards, and calls for increased accountability for hedge fund managers.
A draft Fiduciary's Guide for investors provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. The senior official emphasized that these best practices offer a guide for responsible investment in hedge funds and, as such, it is critical that they be implemented.
But this is not enough. On a long-term basis, he noted, Treasury’s blueprint for reform provides a framework for market stability centered on a regulator with broad powers focusing on the overall financial system. The market stability regulator would have the ability to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability.
To do this effectively, the market stability regulator would have the ability to collect information from commercial and investment banks, and hedge funds. Rather than focusing on the health of a particular organization, the market stability regulator would focus on whether a firm's practices threaten overall financial stability. The regulator would have broad powers and the necessary corrective authorities to deal with eficiencies that pose threats to financial stability.