In 2013, AIMA published a new statement of policy principles in a paper entitled ‘Regulating Capital Markets: AIMA’s Policy Principles’. The paper builds on the AIMA Policy Platform, the landmark 2009 document in which AIMA offered its support for improved transparency, unified global standards, manager authorisation and supervision, aggregated short position disclosure to regulators and new policies to reduce settlement failure. The enhanced principles enshrine AIMA’s core set of beliefs in the broad areas of investor protection, regulatory consistency, systemic risk and market integrity.
In February 2009, we announced the AIMA policy platform, a series of new policy positions. AIMA wished to voice its support for the global regulatory efforts, offer active cooperation with the policy making and regulatory community and provide leadership on behalf of the industry. The policies that were supported in the AIMA 2009 policy platform included:
- Regular reporting and increased transparency of positions and risk exposures by managers of large hedge funds to their national regulators.
- An aggregated short position disclosure regime to national regulators.
- Support for new policies to reduce settlement failure (including in the area of naked short selling).
- Support for a global manager-authorisation and supervision template.
- A call for unified global standards for the industry based on the convergence of existing industry standards work.
Much has changed since 2009 as many of the policies initially put forward at the G20, IOSCO and FSB levels have been introduced into national legislation and then percolated through the various government agencies in the form of detailed implementing rules and regulations. We are now reaching a new stage in the process with policy makers and the industry facing some perennial challenges while new issues surface as the global financial crisis changes its character.
Capital markets are crucial in the financing of the economy and the hedge fund industry plays an ever increasing role in the entire chain of investing and financial intermediation, contributing to market depth, sophistication, transparency and thus capital markets’ ability to support growth.
AIMA therefore wishes to participate actively in the elaboration of policies in the areas of asset management and financial markets regulation with the aim of improving investor protection, market transparency and financial stability overall. It is in the deepest interests of our membership that the financial markets on which it operates are well-functioning.
This is why we have worked to develop our 2009 platform further, also addressing areas which have not been treated previously. This document therefore builds on the 2009 platform by presenting an enhanced list of principles which AIMA supports as part of its overall policy on key issues facing the global hedge funds industry and financial markets in general. It endeavours to explain, not only to the government and the official sector, but also to our members and prospective members, what AIMA stands for.
Improving investor protection
- Protecting shareholder and creditor rights: Investor protection should be one of the primary goals of financial services industry regulation. AIMA supports policies and regulations designed to maintain and enhance sound legislative and regulatory structures which protect and enforce investors’ property, shareholder and creditor rights in a fair, equitable and proportionate manner.
- Sound due diligence practices: AIMA encourages investors in hedge funds to undertake a thorough due diligence process prior to making any investment and to continually evaluate and review any investments made. The due diligence procedure should be a continual process of evaluation and review. To that end, AIMA has developed and continues to enhance standardised due diligence questionnaires (DDQs) to assist both investors and hedge fund managers in the due diligence exercise.
- Transparent and fair treatment of investors: Hedge fund investors should be treated fairly. A hedge fund investor should be able to request the level of information reasonably appropriate to evaluate and understand the risks to which it is exposed. Hedge fund managers should provide the information that investors need to make a decision whether or not to invest in a fund or to remain invested in that fund. A hedge fund manager should identify, manage and monitor conflicts of interest to keep them from adversely affecting the interests of the hedge funds they manage and the investors in those funds.
- Differentiation between retail and professional investors: Retail investors need more statutory protection than sophisticated investors. Investments in hedge funds are typically made by sophisticated investors who possess or can access expertise allowing them to select and monitor their hedge fund investments. Hedge fund regulations should reflect this differentiation by introducing greater protection or higher levels of prescription only on products which are, or may be, distributed to retail investors.
- Asset segregation and safe custody rules: AIMA encourages development of sound regulation dealing with the safe-keeping of assets. Hedge funds do not hold the assets in which they invest and have to rely on the services of banks or other specialised service providers to keep custody of their assets. Robust rules around the segregation and protection of investor assets and collateral are necessary to maintain investor confidence and to protect against the loss or misuse of those assets.
- Strong corporate governance: AIMA supports the implementation of robust and proportionate corporate governance structures in the financial services industry.
Enhancing consistency of regulation and maintaining global markets
- Supporting regulation and supervision of all sectors of the financial markets: All financial markets participants should be regulated in an appropriate and proportionate manner. Consistent and effective regulation of the financial sector, and the hedge fund industry in particular, should reflect the value of the industry to market liquidity and efficiency, the interests of its investors and the economy at large.
- Global consistency of financial services legislation: Policymakers globally should continue to seek a coordinated international framework which preserves the cross-border nature of financial markets. Extraterritoriality and regulatory overlap can lead to market fragmentation along geographical boundaries as well as regulatory arbitrage. Lawmakers and regulators need to find mechanisms which avoid imposition of conflicting rules and which lead to effective recognition of their respective regulatory regimes or the introduction of substituted compliance by means of outcomes-based equivalence or comparability assessments.
Understanding and mitigation of systemic risk
- Maintaining diversity of participants and investment strategies:Developing capital markets as strong and significant sources for the financing of the real economy requires the existence of specialists. A critical feature of a stable financial system is the diversity of its key participants as well as the difference in their capacity to take on particular risks. Micro prudential regulation which does not recognise the different risk-bearing capacity of various financial actors could increase homogeneity of participants in the market. Rules which produce the same responses to economic shocks will aggravate those shocks.
- Developing better detection and assessment of systemic risk:Regular and transparent reporting to competent authorities contributes to better detection and assessment of systemic risk. Regulatory authorities should be able to aggregate information across participants, market sectors and borders. This is why AIMA supports efforts to establish common global definitions and templates for regulatory reporting.
- Ending too-big-to-fail: Each type of financial services related entity poses its own types of financial and, potentially, systemic risks. Those risks should be adequately addressed in order to ensure that financial institutions are capable of failing without endangering public finances and the economy.
- Promoting sound practices in risk management: AIMA seeks to promote a better understanding of risk management and, as part of its sound practice guides, has encouraged investment managers to introduce and maintain a defined risk management process, which is both realistic and regularly used by investment managers to enhance performance in addition to monitoring and managing risk.
Encouraging improvement in market integrity
- Combating market abuse: Fighting market abuse is crucial for sustaining the integrity of markets. Market abuse should be clearly defined and those definitions should be internationally harmonised.
- Imposing sanctions against market abuse: Regulatory authorities need supervisory and enforcement tools that can detect and punish abusive behaviour when it occurs. Effective and dissuasive sanctions against individuals and entities that have engaged in market abuse are key, including, where appropriate, administrative or criminal sanctions.
- Enforcing market abuse rules rather than inhibiting legitimate activity: The most effective way to combat market abuse is to target the actual abusive behaviours, not to restrict legitimate activities or the use of certain technologies wrongly seen as proxies for market abuse. AIMA supports regulatory efforts to ensure that trading venues maintain appropriate measures to avoid trading disruption and maintain orderly price discovery with the purpose of limiting market manipulation.