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FCA Sharpens Focus on Hedge Funds

Wednesday, 4 December 2013

The Financial Conduct Authority (FCA) is increasingly taking a prevention-is-better-than-cure approach to regulating financial institutions.

There is a widening belief that the FCA is showing greater concern for the UK’s financial system than its predecessor the Financial Services Authority.

The latest firms to be probed for greater transparency are hedge funds.

Hedge Fund Exposure to Interest Rates

Reinforcing the view that the FCA is flexing its regulatory muscle in all areas, it recently quizzed hedge funds about their exposure to rising interest rates.

The FCA’s increased concern about hedge fund regulation highlights the fact that hedge fund regulation has not previously required substantial reporting obligations for large parts of the sector.

The FSA only used to focus on the UK’s 35 largest hedge fund managers, where as FCA plans to view firms irrespective of their sizes demonstrating that it has greatly extended its scrutiny of hedge funds.

Interest Rates and Market Stability

Changes in interest rates markets in June 2013 caused some alarm for market stability. It also prompted the FCA to cast an eye over its regulation of hedge funds and triggered it to send letters to several large hedge funds asking for information on their exposure to fluctuations in interest rates.

The FCA’s request for this information is certainly a change from the previous approach of regulators and has caused some concerns for those in the industry. This type of information may reveal sensitive strategic details by pointing to the heart of individual funds’ positioning.

Higher Levels of Regulation Inevitable

The financial crisis has increased demands by investors, politicians and other stakeholders for higher levels of financial regulation though it is widely accepted that hedge funds were not major contributors to the 2008 financial crisis.

Several factors make hedge funds likely targets for greater scrutiny, in particular their perceived lack of transparency and the high levels of leverage present in some funds. The potential for excessive leverage to negatively affect the stability of the financial system means that greater regulation was only a matter of time for hedge funds.

Comment

Many of the recipients have seen this as a reasonable and sensible approach to the way hedge fund regulation is carried out. But at the same time the sensitivity of the information that these types of detailed inquiries focuses upon and the potential for that information to leak in the market has unnerved some.

For specialist advice contact James Crighton jcrighton@rollingsons.co.uk or telephone 0207 611 4848.

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