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The paper contains preliminary findings and recommended regulatory approaches to mitigate risks associated with the trading and traditional lack of transparency of hedge funds.
“The approach to the oversight of hedge funds and the mitigation of the associated risks varies greatly across jurisdictions”, Kathleen Casey, Chairman of the Technical Committee said. “IOSCO believes that concerted, global regulatory action is required to appropriately and effectively mitigate the risks associated with hedge funds, along with stronger co-operation and information sharing arrangements between regulators.”
The Task Force recommends that prime brokers and banks should have strong risk management controls over their exposures to hedge funds and an ability to obtain sufficient information from hedge funds to properly evaluate their risks on an ongoing basis.
Also, securities regulators should support obtaining non-public reporting of information on the prime brokers‘ and banks‘ most systemically significant and/or higher risk hedge fund counterparties.
Also, the paper proposes to require hedge fund managers to meet several key requirements on an ongoing basis.
The consultation document requests comments on whether hedge funds and hedge fund managers should be subject to direct regulation. The Task Force recommends regulatory oversight should be risk-based, and some Task Force members would favour the introduction of regulatory requirements at the level of the (underlying) hedge funds to get an overall picture of the risks posed by the funds themselves.
Deadline for consultation is 30 April 2009.