Supervision of hedge funds has become a political hot potato which shows no sign of abating, particularly if the French have anything to do with it. As recently as Tuesday of this week, Christine Lagarde, France’s Finance Minister, insisted that EU governments should impose much tougher rules for hedge funds than those proposed last week by the European Commission. The opposing camp, represented most vocally by Sweden and UK believes that the proposals are too far reaching. This current battle epitomises the ongoing dichotomy between the light touch approach towards financial markets favoured by the Anglo Saxons and the more interventionist model preferred by the Europeans.
Once again, I implore policymakers not to get distracted by punishing a certain type of investment vehicle, but to remain focused on the overarching issue that needs to be addressed in the aftermath of the credit crisis – better risk management. This in my opinion is best achieved through the application of principles which should be implemented by the whole financial community – buy-side and sell-side alike. As I’ve said before, the most effective route to better supervision of the financial community is through transparency and better information. It is clear that an information gap exists in Europe regarding the structural ability of regulators to quantify the numbers of securities market trades and their value.
It has been widely agreed, for example, that the number of participants, number of transactions and notional value in the CDS market was not well known in the lead up to the financial crisis. This lack of data contributed to systemic risk. Possession of accurate data on positions and transactions, across all asset classes, could significantly improve transparency and regulatory insight.
The vast majority of Omgeo hedge-fund clients in Europe are regulated, and therefore subject to transaction reporting rules specified by MIFID. The application and scope of these rules across European member states is inconsistent – and not joined-up. We believe that standardised transaction reporting (which can be a by-product of the trade confirmation process) by all market participants in all markets in all asset classes can facilitate higher transparency. This will require a shared data framework, on a pan-European basis, that does not exist today.