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- Additional regulatory regime for Dubai hedge funds
- Principles-based approach comes into force early 2008
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The Dubai Financial Services Authority (DFSA) is developing a new code of practice for hedge funds operating in the country’s International Financial Centre (DIFC). The new code, which will operate in tandem with the country’s existing Collective Investment Fund (CIF) regime, is expected to be in force early in 2008. Compliance with the code is not intended to be a substitute for compliance with the full CIF regime.
The Code adopts a principles-based approach to regulation and sets out nine principles that are designed to address the specific risks attached to hedge funds. The DFSA argues that hedge funds require “increased regulatory attention,” because of the “significant” adverse impact on market integrity and confidence that may occur if funds are not “properly managed.”
Principles 1 to 4 cover the operational risks, with specific rules governing arrangements with prime brokers, evaluation of risk for each investment strategy, dealing procedures and back-office systems. Principle 5 establishes rules on market, liquidity and counterparty risk, leverage and derivatives. Principles 6 to 9 cover fund valuation, side letters, market abuse and funds of hedge funds.
Side letters are not prohibited but the Code warns that hedge fund operators will need to “consider carefully” any such arrangements, or will risk exposing themselves to conflicts of interest. The code also stresses the need for “clear” procedures for handling market and price sensitive information among employees and third-party service providers, and the use of Chinese Walls to restrict information flows, if necessary.
A consultation on the draft Code ended on 4 October. To read the draft version, click here: Hedge Fund Code of Practice.
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