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Compliance

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FSA Dives into Hedge Funds and Sets Out Guidelines to Prevent Market Abuse

The UK's FSA is launching a formal assessment of the systems hedge fund managers have in place to prevent market abuse, after being "disappointed" by the controls at firms it visited.

The UK's Financial Services Authority (FSA) is launching a formal assessment of the systems hedge fund managers have in place to prevent market abuse, after being "disappointed" by the controls at firms it visited.The regulator said it had found varying levels of controls at the firms. Some showed "a high level of awareness and appropriate controls in place", the regulator said in its Market Watch newsletter. But others "had fewer controls and demonstrated a complacent attitude to the risks," the agency said. "We are disappointed by some of what we saw."

As a result, the FSA said it would be following up with the firms it had visited and would review a broader cross-section of hedge fund managers (HFMs) over coming months.

The UK's hedge fund industry is valued at $361bn, making it the second largest after the U.S.

The FSA said hedge fund managers should maintain a list of all securities on which they have received inside information and in which, therefore, trading is restricted.

The FSA said some firms have implemented relevant controls in to their computer systems, such as restricting access to systems drives and prompts which indicate if a trade is about to be executed in a security listed on the restricted list.

"We would encourage the development of these types of in-built controls which lessen the need for human intervention," the FSA said.

The regulator said it had noted a move at some HFMs towards the receipt of inside information via one named individual rather than through a range of individuals.

"We also noted that some HFMs consider causal links between different securities and where a correlation exists, the list of securities on the list is expanded. We support both these developments as good practice," the agency said.

The FSA itself recently started using Progress Apama's complex event processing platform, which streams massive amounts of data and detects in real-time complex patterns among many events and relationships between events, such as causality and timing. The platform enables the FSA to detect insider trading and other market abuses as they occur. Meanwhile, the FSA said every hedge fund should have a system of independent monitoring of its controls and procedures, either in-house or externally.

But it is important that any monitoring is appropriate to the individual firm, the FSA said.

"'Box-ticking' type checks, which we witnessed at some HFMs, are of limited benefit and do not meet the appropriate standard," the FSA said.

Meanwhile, the regulator said it was "particularly disappointed" by the poor quality of staff training at some firms. "We do not believe that it is acceptable to rely on training provided to staff by previous employers," it said.The UK's FSA is launching a formal assessment of the systems hedge fund managers have in place to prevent market abuse, after being "disappointed" by the controls at firms it visited. Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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