INTERNATIONAL: IOSCO Consults on International Regulatory Standards for FoHFs

Wednesday October 8 2008

IOSCO has published a consultation document in regards to Proposed Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices.

The document is open for comments from the international financial community pursuant to previous publications on this matter and the key features are in respect of Liquidity Risk and Due Diligence as set out below:

In February 2003, IOSCO’s Technical Committee (TC) considered the particular regulatory issues arising from the investment of retail investors into hedge funds and described measures to be taken in order to address the consequeces of such issues upon retail investors.

In February 2007, the TC acting in response to an increase in the volume of traded funds of hedge funds and the developments in various jurisdictions, decided to conduct further work with a view to assess whether the regulatory principles provided in the 2003 report needed to be amended and or completed and, further consulted member jurisdictions on the key features of their regulatory framework, and the international financial community.

In June 2008 the TC issued a Report on Funds of Hedge Funds with proposals to develop guidelines in the two particular areas where it had identified additional investor protection regulatory issues namely:

(i) The methods by which funds of hedge funds’ managers deal with liquidity risk; and

(ii) The nature and the conditions of the due diligence process to be carried out by funds of hedge funds’ managers prior to and during investment.

Following to the above developments, the TC has developed the elements of international regulatory standards, the overview of which is below:

Liquidity Risk:

The fund of hedge funds’ manager should make reasonable enquiries to enable it to consider whether the fund of hedge funds’ liquidity and that of the underlying hedge funds are consistent.

The fund of hedge funds’ manager must at all times act according to the aims and objectives of the fund of hedge fund in the event of implementing limited redemption arrangements for the purpose ensuring appropriate and consistent liquidity levels.

The fund of hedge funds’ manager must all times consider whether conflicts of interest may arise between any underlying hedge fund and any relevant other parties.

Due Diligence:

The fund of hedge funds’ manager must at all times by making reasonable enquiries take into consideration the specific legal, accounting and disclosure requirements as required in the hedge fund’s jurisdiction.

Click on the above link to download the full proposal and details for sending your comments.