Friday, June 24, 2005
UK FSA Concerns on "Megamanagers"
U.K. Markets Regulator
Warns of Hedge-Fund Dangers
By DAVID REILLY
Staff Reporter of THE WALL STREET JOURNAL
June 24, 2005; Page C1
The United Kingdom's financial-markets watchdog warned that "some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation."
As a result, the Financial Services Authority plans to take a more proactive stance toward hedge funds, in particular the so-called megamanagers who run billions of dollars in investments, the agency said in two papers released yesterday. The U.K.'s regulatory approach to the industry is particularly important as London is home to the vast majority of European hedge funds, lightly regulated investment pools open to institutional and wealthy individual investors. The papers will spark a debate in Europe's most important market as to whether there is a need for more stringent regulation. The FSA added that it was also concerned that the hefty fees hedge funds pay to investment banks could induce others "to commit market abuse."
The moves come as regulators around the world, including the Securities and Exchange Commission, are looking to step up their oversight of the funds, which now manage more than $1 trillion globally. In Europe, German Chancellor Gerhard Schroeder plans to call for global regulation of hedge funds at next month's U.K. summit of the leaders of the world's eight leading nations. (See related article1.)
In the two discussion papers that examine hedge funds and their impact on U.K. financial markets, the FSA didn't go so far as to propose new rules for hedge funds. The agency also noted that hedge funds play an important role in providing liquidity to markets and are an important part of the financial landscape. Hedge funds, for example, now account for between 30% and 40% of trading on the London Stock Exchange, Europe's biggest stock market, according to recent remarks by LSE Chief Executive Clara Furse.
But the FSA said that given potential risks posed by hedge funds, it plans to create a new unit that will focus specifically on them, while also undertaking "increased proactive surveillance" of both hedge funds and the banks that help them manage trading activities.
Some see tighter regulation ahead. "There's undoubtedly a risk that the ultimate effect will be a more intrusive regime for hedge-fund managers," said Peter Astleford, partner and co-head of the financial-services group at law firm Dechert LLP in London.
Although the FSA flagged potential abuses by hedge funds and investment banks, it didn't provide any direct evidence of wrongdoing or cite any firms. The agency currently is investigating trades at several hedge funds over potential abuses stemming from so-called premarketing by investment banks of sales of large blocks of stock or convertible bonds. It has yet to take any enforcement action on the issue.
Nor did the agency find that hedge funds pose an inherent, systemic risk to financial markets. It said there are risks from a potential blow-up of one large hedge fund, or from "a cluster of medium-sized hedge funds with significant and concentrated exposures." However, "the probability of an event on a scale that could significantly affect U.K. financial stability is relatively low," the agency said.
Write to David Reilly at david.reilly@wsj.com2
URL for this article:
http://online.wsj.com/article/0,,SB111956208657468015,00.html
Hyperlinks in this Article:
(1) http://online.wsj.com/article/0,,SB111957166538168279,00.html
(2) mailto:david.reilly@wsj.com
Warns of Hedge-Fund Dangers
By DAVID REILLY
Staff Reporter of THE WALL STREET JOURNAL
June 24, 2005; Page C1
The United Kingdom's financial-markets watchdog warned that "some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation."
As a result, the Financial Services Authority plans to take a more proactive stance toward hedge funds, in particular the so-called megamanagers who run billions of dollars in investments, the agency said in two papers released yesterday. The U.K.'s regulatory approach to the industry is particularly important as London is home to the vast majority of European hedge funds, lightly regulated investment pools open to institutional and wealthy individual investors. The papers will spark a debate in Europe's most important market as to whether there is a need for more stringent regulation. The FSA added that it was also concerned that the hefty fees hedge funds pay to investment banks could induce others "to commit market abuse."
The moves come as regulators around the world, including the Securities and Exchange Commission, are looking to step up their oversight of the funds, which now manage more than $1 trillion globally. In Europe, German Chancellor Gerhard Schroeder plans to call for global regulation of hedge funds at next month's U.K. summit of the leaders of the world's eight leading nations. (See related article1.)
In the two discussion papers that examine hedge funds and their impact on U.K. financial markets, the FSA didn't go so far as to propose new rules for hedge funds. The agency also noted that hedge funds play an important role in providing liquidity to markets and are an important part of the financial landscape. Hedge funds, for example, now account for between 30% and 40% of trading on the London Stock Exchange, Europe's biggest stock market, according to recent remarks by LSE Chief Executive Clara Furse.
But the FSA said that given potential risks posed by hedge funds, it plans to create a new unit that will focus specifically on them, while also undertaking "increased proactive surveillance" of both hedge funds and the banks that help them manage trading activities.
Some see tighter regulation ahead. "There's undoubtedly a risk that the ultimate effect will be a more intrusive regime for hedge-fund managers," said Peter Astleford, partner and co-head of the financial-services group at law firm Dechert LLP in London.
Although the FSA flagged potential abuses by hedge funds and investment banks, it didn't provide any direct evidence of wrongdoing or cite any firms. The agency currently is investigating trades at several hedge funds over potential abuses stemming from so-called premarketing by investment banks of sales of large blocks of stock or convertible bonds. It has yet to take any enforcement action on the issue.
Nor did the agency find that hedge funds pose an inherent, systemic risk to financial markets. It said there are risks from a potential blow-up of one large hedge fund, or from "a cluster of medium-sized hedge funds with significant and concentrated exposures." However, "the probability of an event on a scale that could significantly affect U.K. financial stability is relatively low," the agency said.
Write to David Reilly at david.reilly@wsj.com2
URL for this article:
http://online.wsj.com/article/0,,SB111956208657468015,00.html
Hyperlinks in this Article:
(1) http://online.wsj.com/article/0,,SB111957166538168279,00.html
(2) mailto:david.reilly@wsj.com
# posted by Tom @ 4:35 PM 
