By Jay B. Gould, Partner at Pillsbury Winthrop Shaw Pittman LLP:
Securities regulators have agreed to an IOSCO-endorsed approach for hedge fund disclosure to assist in determining systemic risks regarding private pools of capital. The template, which is attached, was developed by the Task Force on Unregulated Entities following requests from the Financial Stability Board, as well as from IOSCO members. SEC Commissioner Kathleen Casey, Chair of the IOSCO Technical Committee, said that the disclosure template is designed to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements. The Commissioner recognizes that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector.
The template is not a comprehensive list of all types of information and data that regulators might want, and regulators in each country are not restricted from requiring additional information within their own jurisdiction.
Pursuant to the IOSCO approach, hedge funds would disclose the principals, registered address, number of employees, number of funds, name of compliance officer, overseas offices, regulatory status, related affiliates, equity owners, relevant information about the financial health of the asset management company including, if applicable, any guarantees or agreements with parent companies. The fund should also disclose its key service providers, including, custodians, auditor, and fund administrator.
The funds would also disclose recent performance details and recent investor redemptions, as well as group wide assets under management. Product exposures also need to be disclosed. Disclosure for securities positions would include, the value of long and short positions in equities, corporate bonds, sovereign bonds, and securitized credit products and other structured products. Disclosure for derivatives positions would include, the long and short credit default swaps positions and other derivatives. There would also be disclosure of derivative clearing mechanisms, whether they are central counterparties or bilateral.
Finally, hedge funds would also be required to disclose net credit counterparty risk, identifying primary counterparties and identities and locations of those counterparties. Funds would also disclose the extent of rehypothecation, the percentage of net equity rehypothecated and contractual limits to rehypothecation.
It remains to be seen whether and to what extent any legislation that ultimately is passed by the U.S. Congress will include these requirements, or whether such legislation will permit, require or prohibit the Securities and Exchange Commission from adopting the IOSCO approach by rulemaking.