The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Systemic Risk

  • From Vol. 9 No.36 (Sep. 15, 2016)

    ESMA Report Highlights Funds’ Rising Use – and Potential Impact on Market Stability – of Synthetic Leverage From Derivative Instruments

    Synthetic leverage – the use of derivative instruments, rather than direct borrowing, to gain exposure in financial markets – has grown in popularity with investment funds. The rising prominence of this practice has attracted a correspondingly greater level of attention from regulators, making it critically important for hedge fund managers to be aware of the risks it poses to financial stability and how regulators may respond to its use. See “European Central Bank Official Regards Hedge Fund Leverage As Risk to Financial System” (Mar. 24, 2016). A recent report published by the European Securities and Markets Authority contains a section devoted to analyzing these risks in a regulatory enforcement context. This article highlights the key takeaways most relevant to hedge fund managers deploying, or considering using, synthetic leverage. For more on alternative methods by which hedge funds obtain leverage, see our three-part series on subscription credit and other financing facilities: “Needed Liquidity and Advance Planning” (Jun. 2, 2016); “Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges” (Jun. 16, 2016). 

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  • From Vol. 9 No.33 (Aug. 25, 2016)

    FSB Recommends Essential Risk Mitigation Requirements for Asset Managers 

    In September 2015, the Financial Stability Board (FSB), an international organization with a mandate to promote global financial stability, identified five areas in the asset management industry that pose risks to financial stability: mutual fund liquidity mismatches; fund leverage; operational risks; securities lending; and potential vulnerabilities of sovereign wealth funds and pensions. The FSB’s concerns are similar to those raised earlier this year by the Financial Stability Oversight Council. See “FSOC Report Focuses on Liquidity, Leverage and Other Risks Facing Hedge Fund and Asset Managers” (Apr. 28, 2016). The FSB stated that these risks should be addressed statutorily and recently issued a consultative document (Consultative Document) focusing on the first four of those potential risks, offering policy recommendations and soliciting comments on them. After considering responses to the Consultative Document, the FSB plans to issue final policy recommendations by the end of 2016, some of which could be implemented by FSB working groups and various regulatory authorities. This article summarizes the key takeaways from the Consultative Document. 

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    FSOC Report Focuses on Liquidity, Leverage and Other Risks Facing Hedge Fund and Asset Managers

    The Financial Stability Oversight Council (FSOC) recently issued a report focusing on potential systemic risks posed by hedge funds and others in the asset management industry. The report considers potential risks caused by liquidity and redemption; leverage; operational functions; securities lending; and transition planning and resolution. This article summarizes FSOC’s findings and recommendations for evaluating and mitigating those risks. In a public statement, SEC Chair Mary Jo White commended FSOC’s work on the report, noting the significant overlap between FSOC’s work and rules proposed by the SEC in 2015. See “Current and Former Directors of SEC Division of Investment Management Discuss Hot Topics Under the Investment Company Act” (Mar. 10, 2016). She cautioned, however, that the FSOC report “should not be read as an indication of the direction that the SEC’s final asset management rules may take.” See also “SEC Chair Highlights Two Types of Risks Hedge Fund Managers Must Consider” (Oct. 29, 2015). For analysis of the ongoing debate in the U.K. about the systemic risk posed by hedge funds and other asset managers, see “Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director” (Mar. 31, 2016); and “European Central Bank Official Regards Hedge Fund Leverage As Risk to Financial System” (Mar. 24, 2016).

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  • From Vol. 9 No.13 (Mar. 31, 2016)

    Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director

    David Lawton, Director of Markets Policy and International at the U.K. Financial Conduct Authority (FCA), has added his voice to the ongoing debate about the systemic risk posed by hedge funds and other investment funds. See “European Central Bank Official Regards Hedge Fund Leverage As Risk to Financial System” (Mar. 24, 2016). In a speech at The 9th Financial Risk International Forum in Paris, Lawton provided some background to the debate; discussed market and fund liquidity, along with regulatory work that has been undertaken by the FCA and others; and addressed investor concerns. For additional insight from Lawton, see “FCA Director Summarizes 2015 Regulatory Initiatives Applicable to Hedge Fund Managers and Financial Markets” (Jan. 7, 2016); and “FCA Urges Hedge Fund Managers to Prepare for MiFID II” (Oct. 29, 2015).

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  • From Vol. 5 No.15 (Apr. 12, 2012)

    IOSCO Announces Intention to Conduct Annual Surveys of Hedge Fund Managers Based on Updated Systemic Risk Data Categories

    On March 22, 2012, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published an updated list of categories of data to be used in connection with annual surveys of hedge fund managers by IOSCO’s Task Force on Unregulated Financial Entities.  IOSCO conducted its first hedge fund survey in September 2010, soliciting information in categories publicly identified in February 2010.  See “Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?,” The Hedge Fund Law Report, Vol. 3, No. 15 (Apr. 16, 2010).  IOSCO intends to conduct its second hedge fund survey in September 2012, and to conduct such surveys annually thereafter, each September.  The September 2012 hedge fund survey will solicit information from hedge fund managers in at least the updated data categories.  According to a press release, those categories incorporate “lessons learned [since February 2010] and recent legislative developments in the U.S. and Europe.”  The stated purpose of the annual surveys is to “enable the collection of internationally consistent data which can be shared to facilitate international supervisory cooperation.”  This article describes the ten categories of information in which IOSCO will solicit information, discusses the context and limits of the annual surveys and highlights questions raised by IOSCO’s announcement to conduct annual surveys.

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  • From Vol. 5 No.11 (Mar. 16, 2012)

    U.K.’s FSA Issues Latest Biannual Report Assessing Possible Sources of Systemic Risk from Hedge Funds

    On February 29, 2012, the U.K. Financial Services Authority (FSA) released its latest biannual report entitled “Assessing the possible sources of systemic risk from hedge funds” (Report).  The Report detailed the results of two separate surveys conducted by the FSA in September 2011 and October 2011: the Hedge Fund Survey (HFS) and the Hedge Funds as Counterparties Survey (HFACS).  These surveys were designed to “assess potential systemic risks to financial stability from hedge funds including the nature of bank and prime broker interactions with this segment of the financial system.”  Among other things, the surveys assessed the gross exposures of hedge funds in the markets in which they trade as well as their use of different types of leverage in their trading activities.  Importantly, the FSA is likely to share the results of such surveys with other global regulatory authorities that oversee the activities of hedge fund managers, and such results may ultimately impact the type and amount of disclosures that hedge fund managers are required to make with respect to their hedge funds, including disclosures required by Form PF and pursuant to the EU Alternative Investment Fund Managers Directive.  This article highlights the key findings of the Report.

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  • From Vol. 4 No.37 (Oct. 21, 2011)

    Technical and Operational Considerations for Hedge Fund Managers in Connection with Preparing, Filing and Updating Form PF

    The Financial Stability Oversight Council (FSOC) recently approved a proposed rule and guidance setting out the metrics and process it would use to designate a nonbank financial company as systemically important under the Dodd-Frank Act.  In that proposed rule, the FSOC noted that “[w]ith respect to hedge funds and private equity firms . . . less [systemic risk related] data is generally available about these companies than about certain other types of nonbank financial companies.”  Accordingly, “[b]eginning in 2012, advisers to hedge funds and private equity firms and commodity pool operators and commodity trading advisors will be required to file Form PF with the Securities and Exchange Commission or the Commodity Futures Trading Commission, as applicable, on which form such companies will make certain financial disclosures.  Using these and other data, the [FSOC] will consider whether to establish an additional set of metrics or thresholds tailored to evaluate hedge funds and private equity firms and their advisers.”  In its proposed form, Form PF calls for voluminous and detailed disclosure of financial, risk, counterparty and other information by hedge fund managers.  Understanding the scope of required information presents complicated legal challenges, and complying with the anticipated disclosure obligations presents unique operational challenges.  Accordingly, on October 25, 2011 – Tuesday of next week – Advise Technologies and The Hedge Fund Law Report will be co-sponsoring a seminar on legal and operational considerations for hedge fund managers in connection with completing, filing and updating Form PF.  The seminar will take place from 8:00 a.m. to 10:00 a.m. at the Helmsley Hotel at 212 East 42nd Street in Manhattan.  To register, click here or call 212-576-1170.  In anticipation of the seminar, The Hedge Fund Law Report interviewed Stephen Casner, CEO of HazelTree Fund Services, on how hedge fund managers can negotiate some of the more complex operational challenges presented by Form PF.  The full text of our interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    Committee on Capital Markets Regulation Releases Report on How to Reduce Systemic Risk in the American Financial System

    On May 26, 2009, the Committee on Capital Markets Regulation, an independent and nonpartisan research organization made up of 25 industry leaders, released a report entitled, “The Global Financial Crisis: A Plan for Regulatory Reform.”  The report outlines the committee’s plans for creating a more effective and more investor-friendly American financial regulatory structure.  The Committee posits that the most effective system of regulation must achieve four critical objectives: (1) reduced systemic risk; (2) increased investor protection through greater transparency; (3) a unified financial regulatory system with greater accountability; and (4) a coordinated international approach based on globally coordinated rules.  We offered a detailed synopsis of the report.

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