Hedge Fund Regulation Part of Obama Agenda

March 26, 2009 (PLANSPONSOR.com) - The Obama administration is proposing big changes to the way the U.S. financial system is regulated with the intention to clamp down broadly on hedge funds, private equity firms, derivatives and credit default swap markets, administration officials said, according to Reuters.

The administration will recommend that all advisers to hedge funds, private equity funds and venture capital funds, whose assets under management exceed a not-yet-determined amount, must register with the U.S. Securities and Exchange Commission (SEC), the news report said. The recommendation will call for funds advised by an SEC-registered investment adviser to heed investor and counterparty disclosure requirements.

Under the initiative, funds would have to report information needed to assess whether a fund is so large or highly leveraged that it poses a threat to financial stability. The SEC would share the reports it gets from funds with the systemic risk regulator, which would decide whether any hedge fund poses a systemic threat and should be subjected to the higher standards for systemically important firms, according to Reuters.

Legislation to require hedge funds to register with the SEC has previously been introduced in the Senate (see Grassley to Reintroduce Hedge Fund Legislation ).

Derivatives Contracts and Mutual Funds

Under the administration’s proposals, the government would for the first time regulate markets for credit default swaps and over-the-counter derivatives, officials said. All dealers in OTC derivative markets would be subjected to oversight as systemically important firms.

All standard OTC derivative contracts would have to be cleared through central counterparties, themselves under supervision and oversight. All non-standardized derivatives contracts would have to report to trade repositories and be subject to record-keeping standards and other standard practice requirements.

Central counterparties and trade repositories would have to disclose aggregate data on trading volumes and positions and make individual counterparty trade and position data available on a confidential basis to appropriate federal regulators.

The administration also said it will urge the SEC to strengthen regulations around mutual funds, the officials said, according to Reuters.