Giving a keynote address to the recent EDHEC Hedge Fund Summit, FSA Chief Executive Hector Sants outlined what he described as a two-pronged approach to hedge fund regulation in the United Kingdom.
One aspect of this regulation, said Sants, consists of monitoring the relationship between hedge fund and prime brokers and ensuring this relationship is “orderly and controlled.” To achieve this, the FSA recently introduced a six-monthly survey of prime brokers’ hedge fund exposures. The FSA survey examines prime brokerage exposures of the 15 institutions which have the largest exposure to hedge funds.
The aim of this system is to increase FSA understanding of hedge funds and also encourage hedge funds to focus on the “risks inherent in the prime brokerage relationship.”
The second facet of its regulatory approach, said Sants, is monitoring the activities of hedge fund managers themselves. He revealed that the FSA has a relationship management team for the 35 largest hedge fund managers to whom it devotes the most intensive regulatory attention. Each fund receives “detailed supervision” of its controls, including arrangements for managing conflicts of interest and compliance. At each of these funds, each manager has a specific supervisory contact in the FSA Alternative Investments Team.
Sants outlined the FSA’s agenda for tackling market abuse among hedge funds. The first strand of this is continuing to invest in new infrastructure to enable greater transaction analysis. (An FSA report published last year found “unusual share price movement” in nearly one in three public takeovers.) Secondly, Sants said, the FSA will be increasing visits to hedge funds and will be increasing its use of sanctions–both fines, and where necessary, “criminal powers.” Finally, said Sants, the FSA is proposing greater transparency of contracts for difference and other derivative instruments.
Sants also observed that the recent subprime collapse was not caused by hedge fund activities and that, in fact, the subsequent behaviour of hedge funds validated the FSA’s “principled and outcome-focused” approach to regulation.
To read the full speech, click here: Hedge Funds—Lessons from the Recent Market Turmoil, a Supervisor’s Perspective.
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