The Financial Services Authority in the United Kingdom published two reports Thursday calling for the consideration of tighter regulations over up to 25 leading London-based hedge funds.
The proposal for discussion comes as the FSA warned that some investment banks may be engaging in insider trading when trying to sell convertible arbitrage bonds to hedge funds.
In the UK and across Europe, the $1 trillion worldwide hedge fund industry enjoys little regulation. FSA currently requires the funds to register while providing only limited data. But as concerns rise about hedge funds taking over or restructuring companies and engaging in illegal behaviour, some politicians are rallying for change.
In early May, German Chancellor Gerhard Schroeder called for a three-ministry panel to look into a the possibility limiting hedge fund shareholders’ voting rights after British-based fund TCI fuelled the ousting of the head of stock market operator Deutche Borse. But in June the panel recommended that creating new regulations in Germany alone would only push the business to less-regulated countries, causing Schroeder to pull back on talks of tighter control.
Instead, Schroeder appealed to U.S. and UK regulators and urged the creation of international controls. U.S. and UK officials were sceptical and said they wanted to use caution when considering regulations.
In one FSA report, officials said, “Some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation and, given their payment of significant commissions and close relations with counterparties, create incentives for others to commit market abuse.”
The FSA is concerned that major custodian banks are illegally making pre-market calls to potential investors – typically hedge funds – to purchase convertible bonds.
Although in a news release, the market regulator insists that it regards hedge funds as a “significant, useful and growing asset class,” it said the funds pose risks to the UK’s financial markets and the work of the FSA.
Hector Sants, the FSA’s wholesale marketing and institutions director, said, “We are mindful of the danger of regulatory arbitrage and have no desire to cause the hedge fund management industry to migrate to more lightly regulated offshore centers as a result of regulatory action.”
But Simon Gleeson, a regulatory expert and partner at the Allen & Overy law firm in London, told the Financial Times Friday that FSA has a history of releasing discussion papers that recommend minimal regulatory response, but “over time grown into substantial, complex and usually inappropriate new regulations.”