AIMA

The Basel Accords seek to create an international standard of banking regulation including capital and liquidity requirements, risk management and reporting.

The most recent version (Basel III) aims to:

• ensure that capital allocation is more risk sensitive;
• introduce minimum liquidity requirements;
• enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution;
• ensure that credit risk, operational risk and market risk are quantified based on data and formal techniques;
• align economic and regulatory capital more closely in order to reduce the scope for regulatory arbitrage.

While primarily aimed at banks, such provisions have an impact on hedge fund managers not only because they affect the amount of capital a bank may need to set aside when investing in funds but also because, within the European Union, certain provisions of the Capital Requirements Directives apply also to portfolio managers.