Hedge Funds Should Be Regulated Worldwide, IOSCO Says

Hedge funds should be required to register and disclose data to regulators to guard against their trading destabilizing financial markets, according to the International Organization of Securities Commissions.

Financial watchdogs worldwide should be able to demand information on funds’ risk management and have authority to work together and share data to track “globally active” funds and managers, Madrid-based IOSCO said in guidelines that seek to address gaps in oversight that contributed to the global financial crisis.

The guidelines come in response to calls for stricter oversight by world leaders, including the Group of 20 countries that make up most of the world’s economy. The proposals add to European Union and U.S. plans for hedge funds and may be a step toward tighter and more sweeping regulation of the pools of private capital.

“The crisis has given regulators the opportunity to consider the systemic role hedge funds may play and the way in which we deal with the regulatory risks they may pose to the oversight of markets and protection of investors,” Kathleen Casey, a U.S. Securities and Exchange Commission member and chairwoman of IOSCO’s main working body, the 13-country Technical Committee, said in a statement.

The guidelines, which also encompass hedge-fund advisors and managers and banks that provide funding, were written by regulators on IOSCO’s task force on “unregulated entities.” The task force was set up in November to support efforts by the G-20 to restore global growth and reform the world’s financial systems.

However, Andrew Baker, chairman of the Alternative Investment Management Association in London, said his group had a “few notes of caution” on the IOSCO plan.

“We would stress that it is hedge fund managers, rather than the funds themselves, that should registered,” said Baker. “It is also mentioned that hedge funds use derivatives for speculative purposes without stating that exchange-traded and over-the-counter derivatives are principally used by the relevant market participants for risk management purposes.”

The plan may lead regulators to seek “quantity rather than quality of data,” Baker said. Regulators must have the expertise and resources to deal with the data they receive, he said.

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