April 28, 2009 / 4:25 PM / 10 years ago

Reuters Summit-Regulatory heat turned up on hedge funds

LONDON (Reuters) - Slashing the time it takes to settle a trade would largely curb short-selling, a top European Union market regulator said on Tuesday as supervisors turn up the heat on the $1.4 trillion (959 billion pounds) hedge fund sector.

Short selling has been blamed for accelerating slides in bank shares and the practice, a favourite strategy for many hedge funds, has already been curbed in some EU states.

Share trades in the European Union are typically settled within three days, or T+3, but a top regulator said technology should allow near instantaneous settlement.

“It would reduce the possibility to trade within the settlement cycle,” said Eddy Wymeersch, chairman of the Committee of European Securities Regulators.

“I am amazed that with all the technology that we have today that we could not settle in T+0 and that would largely enable us to eliminate short selling,” Wymeersch said speaking at the Reuters Financial Regulation Summit.

“Are there sufficient technical arguments not to move to real time settlement? Can we not move to a little bit more efficiency. I want to launch a discussion,” Wymeersch said.

The United States considered a very short settlement time a few years ago but gave up as banks said it would be too costly.

CESR was criticised last September when national regulators introduced curbs on short-selling in an uncoordinated way.

The committee is now studying a possible memorandum of understanding to coordinate any future curbs.

“I see some possibility to find agreement on disclosure rules,” Wymeersch said, adding that the target was naked short-selling or shares sold without borrowing arrangements.

Hedge funds face closes scrutiny in other ways.

REGISTRATION AND DISCLOSURE

The G20 group of industrialised and emerging market nations have agreed on registration and disclosure by funds.

The sector represents a small part of the global market but regulators worry some funds present risks that could damage the wider market.

The European Commission will present a draft law on mandatory registration and disclosure on Wednesday which is expected to target fund managers, as many of the funds themselves are located offshore.

Stretching the EU regulatory arm to such locations to impose capital requirements would be a “little bit too long” for the bloc’s regulators, Wymeersch said.

“Hedge funds have not been at the root of the present crisis but in some cases they are a point of preoccupation, they can disturb the systemic balance,” Wymeersch said.

CESR is also looking at whether action is needed to better protect investors as more hedge funds register as mutual funds.

“There are a lot of hedge funds now moving into the UCITS field, we have seen that,” Wymeersch said.

UCITS is an EU legal framework for mutual funds that can be offered to retail investors anywhere in the bloc, if combined with strong consumer protections.

UCITS make up the bulk of mutual funds in the EU with assets worth about 6 trillion euros (5.3 trillion pounds) and are considered a gold standard, with several non-EU countries emulating the framework locally.

The mutual fund industry itself is watchful of any developments that may harm the UCITS brand, and small investors in some countries are banned from investing in hedge funds as they are seen as too risky.

“The question is what are the consequences of this and we don’t have a clear view. If they move into the UCITS regime, to what extent can they comply with the UCITS regime and offer their securities to the public at large,” Wymeersch said.

“There we always have the risk that they expose retail investors to hedge funds. It’s a concern. This is being followed at CESR level. We are looking at this. I don’t know what it means or what the consequences are,” Wymeersch said.

Securities markets are showing signs of improvement.

“It’s very dangerous to say that we are out of the problems but we see some positive signs. The most important one is that the interest rates in the interbank market have come down to absolutely normal conditions and it seems the interbank market has started again,” Wymeersch.

“We also see new inflows into UCITS, it’s quite significant,” Wymeersh said.

Reporting by Huw Jones; Editing by Simon Jessop and Jon Loades-Carter

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