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The Role of Alternative Investments in Today’s Capital Markets A White Paper by Managed Funds Association Second Edition. Fall 2018

Managed Funds Assocation

the voiCe oF the Global alternative investment inDustry MFA is is the the leading leading voice voice of of the the global global alternative alternative investment investment industry and its its investors investors –– the the public public and and private private pension pension funds, funds, charitable charitable foundations, foundations, university endowments and other institutional investors that comprise university endowments and other institutional investors that comprisenearly more 60 percent of our industry’s assets. Collectively, MFA Members manage more than 65 percent of our industry’s assets. Collectively, MFA Members manage assets than than any other hedge fund trade association. more assets any other hedge fund trade association.Our Ourglobal global network network spans six continents and includes more than 13,000 individuals. spans six continents and includes more than 13,000 individuals. ADVOCATE - We promote public policies that foster efficient, transparent and fair capital markets. With the strategic input of our Members, we work directly with legislators, regulators and key stakeholders in the U.S., EU and around the world. EDUCATE - Each year we hold more than 100 conferences, forums and other events that give our Members the tools and information they need to thrive in an evolving global regulatory landscape. Our expertise has additionally been recognized by policymakers, who consistently reach out to our team for insight and guidance. COMMUNICATE - We tell the story of an industry that creates opportunities and economic growth. Through outreach to journalists and thought leaders, we inform coverage of our industry and highlight the work our Members do to provide retirement security for workers, capital for businesses, and increased resources for endowments and foundations. To learn more about us, visit

table oF Contents I.

Foreword ............................................................................ 2


executIve Summary ............................................................. 3


InduStry overvIew .............................................................. 5


the role oF alternatIveS In capItal marketS ................... 6


IncreaSed tranSparency...................................................... 7


Improved rISk management ................................................ 8


concluSIon ......................................................................... 10

vIII. addendum: calendar oF key eventS ................................. 11

managed FundS aSSocIatIon | 1

the R role of oF A alternative Iinvestments in T today oDay’s Capital M markets T i. I. ForeworD oreword

by Richard H. Baker

MFA firstbeen issued this white in the summer of 2016, It has more than paper five years since Congress five years the passage of the Dodd-Frank Act. passed theafter Dodd-Frank Act, a sweeping set of reforms Now, ten years after the financial crisis that led to the intended to modernize the framework of law’s enactment, the work ofregulatory implementation is largely complete. the U.S. financial system and give regulators new tools to help make future crises less likely and less The hedge fund industry of today continues to provide damaging. While not the every aspect of thethe landmark value to investors across globe. As a whole, industry manages a record $3.6 trillion initassets, to law has been fully implemented, has hadaccording a profound independent datamarkets providerand Preqin. Nearly 60 percent effect on capital market participants.

of those assets are from large institutional investors like pensions, charitable endowments, and universities, which rely on hedge funds to manage risk and volatility As the leading voice for the alternative investment industry, Managed Fundsreturns Association played a meaningful role in their portfolios while earning reliable, risk-adjusted over time. throughout the legislative process by providing constructive feedback to policymakers on ways to ensure a safer, more stable and moreistransparent post-crisis and financial system. MFA continued to engage policymakers since the passage of The industry also more regulated transparent than has it has ever been. the Dodd-Frank Act to accomplish those shared goals while also advocating for the alternative investment and broader asset management communities.

In the U.S., the Dodd-Frank Act gave the SEC and CFTC expanded regulatory authority over private fund managers and provided regulators with further oversight of the hedge fund industry as well as a wealth of MFA’s leadership – our Board of Directors, the members of MFA’s Founders Council and the leaders of our various information about managers’ activities. Large managers must also file detailed reports on holdings, size, liquidity, substantive policy committees – has always been clear: Our role is to be a constructive advocate for fair, efficient and liquid tradingmarkets, activities, theas use of any leverage, among otheritssensitive, proprietary capital andand serve a policy steward for our industry, professionals and the information. investors they serve. This is why MFA has embraced many financial market reforms contained in the Dodd-Frank Act.

Getting to this juncture required extensive engagement with stakeholders. It is a record of thoughtful advocacy of which no I am tremendously proud. As policymakers evaluate the current the financial we will Although hedge fund required a government bailout during the recent – or anystate past of – financial crisis, system, the industry has evolved its to business to adapt to recent what is mandated by do law.not, Today, industry continue work practices with them to keep intactreforms, policiesoften that going work beyond well, fine-tune those that andthe make sure isnew partones of the globally the regulated andfirms. is more transparent than it has ever been. Furthermore, firms recognize uniquefinancial nature mainstream of investment across the industry have vastly improved their ability to manage risks for their firms and on behalf of their investors.

When we first released this paper my foreword referenced the “active and dynamic part” hedge funds play in our

Despite changes to theour industry and financial regulation, many people still hold antiquated and inaccurate views of what capital markets and economy as a whole. the alternative investment community does and the role the industry and its professionals play in the financial ecosystem. It is for that reason that I am pleased to present The Role of Alternative Investments in Today’s Capital Markets. As the While much has changed in our industry, I am pleased to say that phrase remains as true as ever. paper details, today’s well-regulated hedge fund industry plays an active and dynamic part in capital markets as well as a critical role in the global economy.

2 | the role oF alternatIve InveStmentS In today’S capItal marketS

ii. E executive xeCutive S summary II.

This report provides an examination of the regulatory framework that has been implemented in the U.S. since the global financial crisis. It also discusses the important role alternative investments like hedge funds play in this new, tightly-regulated, post-crisis economy.

While While special special attention attention will be given to the changes brought about about by by the the Dodd-Frank Act, it is important to note that other other jurisdictions jurisdictions have similarly adopted robust regulatory regimes regimes for for alternative investment and private fund managers, managers, including including the European Union’s (EU) adoption of of revisions revisions to to the Markets in Financial Instruments Directive (MiFID), Directive (MiFID), the Alternative Investment Fund Managers Managers Directive Directive (AIFMD) and the European Market Infrastructure Infrastructure Regulation Regulation (EMIR). (EMIR). Combined, these new laws and regulations reach every corner of our global economy. Large banks now face new risk retention rules for securitization, capital rules and new mortgage requirements. This has, in many cases, contracted bank lending. Alternative investments have started to fill that vacuum in the U.S., EU, and most recently, in Asia. The emergence of alternatives in capital markets highlights the important and expanding role private funds play in the global economy. This paper explores how funds operate in this new role, focusing on the tools used by fund managers to manage risk, provide reliable returns over time and offer portfolio diversification. Importantly, the paper also explains how funds do this without posing systemic risk to the broader financial system or investors. assets With approximately approximately$3.6 $3 trillion trillion dollars dollarsininglobal global assets relatively under management, management, the thehedge hedgefund fundindustry industryis is relatively andand scale of the small in in size sizewhen whencompared comparedtotothethesizesize scale of the significantly overall financial financial system. system.The Theindustry industryis isalso also significantly less concentrated than than other otherparts partsofofthe thefinancial financialservices services industry and its transparency is at an all-time high.

“The Dodd-Frank Act, combined with financial regulations in the EU, has changed the way our financial and capital markets function and brought forth a new economy that is more regulated, more transparent, and more reliant on alternative investment vehicles like hedge funds to provide capital.�

Hedge funds have become part of the financially regulated mainstream. In the U.S., Europe and beyond, regulators now have extensive oversight of hedge fund managers and an array of information about their activities. In the U.S., large managers must register with the Securities and Exchange Commission and the Commodity Futures Trading Commission. They also file extensive reports about their portfolios and counterparty exposures with those agencies. Small fund managers are subject to state registration, examination and reporting requirements.

managed FundS aSSocIatIon | 3

The market activities of every U.S.-based hedge fund are subject to U.S. securities and commodities laws. In addition, hedge funds execute trades and obtain other services from prime brokers (banks), which are also subject to extensive regulation that indirectly affects hedge fund activities. The Dodd-Frank Act, combined with financial regulations in the EU, has changed the way our financial and capital markets function. These reforms have brought forth a new economy that is more regulated, more transparent and increasingly reliant on alternative investment vehicles like hedge funds to provide capital to businesses and liquidity to markets.

Key Takeaways Takeaways This report examines the role hedge funds play in a post-crisis global economy. The following key takeaways provide a more detailed understanding of the hedge fund industry and its investors, as well as clarify several common misunderstandings. • Hedge funds are no longer just tools for high-net worth individuals. Today, institutional investors now represent nearly 60 percent of of the the industry’s industry’s assets assets under management. Fund managers are trusted partners of pension funds, two-thirds charitable foundations and university endowments that help these organizations fulfill their fiduciary obligations and meet financial goals. • Hedge funds are part of the financially regulated mainstream. Fund managers and their activities are monitored by the SEC and CFTC in the U.S. and well-regulated by several EU regulatory laws and individual Member State authorities. • The hedge fund industry is more transparent than ever before. Fund managers report detailed information about their funds to regulators and investors. • As new regulations have constrained the lending capabilities of banks, hedge funds have stepped in to provide capital for local communities and businesses working to expand and create jobs. • The U.S. systemic risk regulator, FSOC, has acknowledged that “asset management firms and investment vehicles have closed without presenting a threat to financial stability.” In fact, the very nature of the industry prevents it from posing a systemic risk for the following reasons: approximately $3.5 $3.6 trillion trillionininAUM AUMrepresents representsaafraction fractionofofbroader broadermarkets. markets. ű 0 Relative Size: Hedge funds’ approximately ű Concentration: The The hedge hedge fund fund industry industry isis far far less less concentrated concentrated than than other other parts of the financial services 0 Less Concentration: industry, making it unlikely that the closing of any one fund would cause a systemic risk. Only a few hedge fund firms have more and nono hedge fund hashas more than 10 more than than aaone onepercent percentmarket marketshare shareofofthe theindustry’s industry’stotal totalAUM, AUM, and hedge fund more than percent – small percentages when compared to other members of the financial system. 10 percent – small percentages when compared to other members of the financial system. ű InvestmentStrategies: Strategies:Hedge Hedgefunds fundspursue pursuea atremendous tremendousdiversity diversityofofinvestment investmentstrategies strategiesand andinvest investinina 0 Diverse Investment awide widerange rangeofofasset assetclasses classesthat thatareareoften oftennot notcorrelated correlatedtotothe thebroader broadermarkets marketsororeach eachother. other. ű Leverage: Data Data shows shows that that hedge hedge funds funds are are less less leveraged leveraged than than many many other other types types of of financial financial institutions. institutions. 0 Less Leverage:

oF A alternative lternatIve Investments nveStmentS in In T today’sS C capital apItal M markets arketS 4 | Tthe Rrole of

iii. Iindustry nDustry O overview III.

The investor makeup of the the hedge hedge fund fund industry industry has has evolved in recent years. In In the the 1980s, 1980s, institutions institutions of of higher higher learning began partnering with funds funds as as aa way way to to help help fund scholarships, cutting-edge cutting-edge research research and and infrastructure infrastructure upgrades. This institutional institutional partnership partnership expanded expanded in in to include include public public and and private private the 1990s and early-2000s to Now, philanthropic philanthropic foundations foundations also also pension funds. Now, partner with hedge funds to help achieve their missions. Today approximately 65 percent of all hedge fund under assets nearly 60 percent of all hedge fund assets under management from these institutional investors. management come come from these institutional investors.

the hedge hedge fund fund industry industry has hasapproximately more than $3.6 Globally, the $3 percent of trillion in assets under management.1 Nearly 60 two-thirds 5,200 institutional this capital belongs to the more than 4,800 investors who depend on hedge funds as a tool to diversify their portfolio, protect against market fluctuations, and reliable, risk-adjusted returns time. In fact, In fact, 802 percent provide risk-adjusted returns over time.2over 65 percent of institutional investors consider diversification of investors believe their portfolio risk would increase if amongfunds the top three reasonsfrom theytheir invest with hedge funds.3 hedge were removed portfolios, according 3 Preqin, a leading research founda that institutional to one independent survey.firm, Preqin, leading research satisfaction funds is high. Those surveyed even firm, foundwith thathedge institutional investor satisfaction with indicated that they plan to maintain or increase existing hedge funds is high. Those surveyed even indicated that allocations. they plan to maintain or increase existing allocations. While hedge funds have grown in popularity, they represent thethe asset management industry. For a relatively relatively small smallpart partofof asset management industry. example, the hedge fundfund industry is lessisthan tentha of the For example, the hedge industry less athan tenth size of the global mutual fund industry, which managed of the size of the global mutual fund industry, which 4 more thanmore $50 trillion as of the first quarter In managed than $31 trillion at the end of 2018. the 2014 4 addition, are four U.S. that fiscal year.there In addition, therebank are holding five U.S.companies bank holding each individually haveindividually assets equalhave to 50assets percent or to more companies that each equal 50 5 of the entire U.S. hedge fund industry’s AUM. percent or more of the entire U.S. hedge fund industry’s AUM.5 The hedge fund industry is also not concentrated by any measure. few firmsishave than a one percent The hedgeOnly funda industry also more not concentrated by any market share of the industry’s total AUM, every firm measure. Only a few firms have more thanand a one percent is well below 10the percent. market share of industry’s total AUM, and every firm is well below 10 percent. In fact, it takes 100 firms together to reach approximately 50 percent of the total AUM managed by the industry. Amidst changes in size and industry makeup, several facets about hedge funds remain the same – including limits on who can invest in them and how they are structured. 1 HFR, “Global Hedge Fund Industry Report, First Quarter 2015,” Estimated Annual Growth of Assets / Net Asset Flow, April 2015 21. Preqin, Preqin, “Q2 “2015 Preqin Global Hedge Report,” Investors 2018 Hedge Fund AssetFund Flows,” August 2018. & Gatekeepers, February 2 Preqin,2015 “Hedge Fund Spotlight,” June 2018 3 Preqin, “Special Report: The RealInvestor Value ofSurvey.” Hedge Fund Investments,” June JP Morgan. “2018 Institutional 2014 4 Investment Company Institute, worldwide Mutual Fund Assets and Flows 4Third Investment Company Institute, worldwide Mutual Fund Assets and Flows Quarter 2014, December 2014 Third QuarterInformation 2014, December 2014Holding Companies with Assets Greater 5 National Center, 5than National Information Holding Companies with Assets Greater than $10 Billion, Federal Center, Financial Institutions Examinati on Council, March $10 2018Billion, Federal Financial Institutions Examination Council, March 2015

65% 80%

of institutional investors consider among top 3 reasons ofdiversification investors believe their the portfolio they invest with hedge funds risk would increase if hedge funds were removed from their portfolios, according to a recent survey. Unsure of the Effect

Largest Foundations by Current HF Allocation Decrease Risks (Preqin) 9%



Wellcome Trust


Allocation (bn)



Kaiser Permanente



Trinity Health



Robert Wood Johnson Increase Risks Foundation

US 80%


Mayo Clinic



65% 60% Nearly

of hedge fund industry capital comes from of hedge fund industry institutional investors capital comes from institutional investors

Among Recently Surveyed Investors

26% 85% 58% 74% 16%

Among institutional investors

Increase allocation to hedge funds Intend to maintain or increase their allocations funds No change to to hedge allocation hedge funds Said hedge funds met or exceeded their expectations in 2017 Decrease in allocation to hedge funds

It takes The five largest bank holding companies oversee nearly

100 50% 50%

firms together to reach approximately of that industry's total AUM of the managed Thetotal fiveAUM largest hedge by industry funds the manage less than


of the industry's total AUM

managed Funds undS A association SSocIatIon | 5 M

U.S. regulations generally limit investment in hedge funds to “accredited investors” or “qualified purchasers.” The former is individuals with with aanet networth worthofofatatleast least$1 $1million, million,not notincluding includingthe theindividual’s individual’s primary residence, income defined as individuals primary residence, or or income of of least at least $200,000 in the years institutions with more than million in assets. latter refers to individat $200,000 in the lastlast twotwo years andand institutions with more than $5 $5 million in assets. TheThe latter refers to individuals uals with at least $5 million in investments or institutions at least million in investments. with at least $5 million in investments or institutions withwith at least $25 $25 million in investments. Hedge funds are generally structured as partnerships, limited liability companies, or similar entities where investors hold a percentage of shares in the fund along with the manager who also invests in the fund. Since managers are invested in their fund, he or she has a significant amount of money at stake with every investment decision. This is often referred to as “skin-in-the game.”


S&P 500 and other public indices are commonly seen as irrelevant - just a fifth compare hedge funds to these benchmarks benchmarks these

Investors commonly use strategyspecific specific hedge hedge fund fund indices indices to to measure measure portfolio portfolio performance. performance.

55 – 50 – 45 – 40 – 35 – 30 – 25 – 20 – 15 – 10 – 5–

$50 $31


$15 $19


$3 $3.6

TRILLION Global Hedge Fund Industry AUM

Global Mutual Fund Industry AUM

Large U.S. Bank Holding Company Assets

IV. iv. T the R role of oF A alternatives in Capital M markets

Since the financial crisis, government regulations have brought hedge funds into the financial mainstream. Increasingly, pension funds, college endowments, and non-profit foundations use hedge funds as tools to fulfill their fiduciary obligations or help meet their financial goals. Endowments, Endowments, to a large degree, led the way for institutional investors investors to begin begin making making hedge hedge fund fund allocations. allocations. Public Public pension funds and hand, they now account for of theintop hedge North America. The of other two five are funds, followed on the other are relatively newthree investors thefive hedge fundfund assetinvestors class, butinnow account for four the top ahedge private pension planinand a state-run endowment plan.6 fund investors North A state-run university endowment plan completes that list.6 U.S. based endowments, ofof thethe global toptop fivefive listlist of endowments,foundations foundationsand andprivate privatesector sectorpension pensionplans plansalso alsoaccount accountforforthe themajority majority global hedge fund investors in their respective categories. of hedge fund investors in their respective categories.

More than of 60investment percent of officers investorsatreport they are most focused on funds risk management capabilities returns when selecting hedge A plurality these institutions look to hedge to provide risk-adjusted over time. Nearly 7 funds for their portfolios. 40 percent report depending on their hedge fund allocations to dampen market volatility and provide returns uncorrelated to equity markets.7 Institutional investors, however, are not the only entities that use hedge funds as a tool to meet their financial objectives. Since banks have seen their lending limits and liquidity under Dodd-Frank Act8 Institutional investors, however, are constrained not the onlythrough entitiesnew thatcapital use hedge funds as requirements a tool to meet theirthe financial objectives. and IIIhave requirements, many small and medium-size businesses are turning to hedgerequirements funds to provide lending SinceBasel banks seen their lending limits constrained through new capital and liquidity underalternative the Dodd-Frank 8 options. This type of financing specifically helps small and medium-sized enterprises get off the ground by efficiently and effectively Act and Basel III requirements, many small and medium-size businesses are turning to hedge funds to provide alternative allocating capital,This providing to financing, creating and broadening the taxget base. lending options. type ofbusinesses financingaccess specifically helps small andjobs medium-sized enterprises off the ground by efficiently and effectively allocating capital, providing businesses access to financing, creating jobs and broadening the tax base. The private debt industry globally has an estimated $236 billion in committed capital ready to be invested, according to one research group, andglobally has a total AUM of nearly billion. 90 percent of investors to maintain ortoincrease their The private debt industry has an estimated $154$640 billion in committed capital ready to beplan invested, according one research allocation funds in the next year. group, andto hasprivate a totaldebt AUM of $500 billion. This 9type of investing increased 23 percent from 2013 to 2014 in Europe alone.9 6 Hedge Preqin,Fund “2015Alert, Global Hedge Fund Report,” Investorsin&Hedge Gatekeepers, 20152018. 6. “Top 20 Institutional Investors Funds,”February November, 7 Credit Preqin,Suisse, “2015 “2018 GlobalGlobal HedgeHedge Fund Report,” Investors & Gatekeepers, February 2015 7. Fund Activity Survey,” March 2018. ofof the Currency, 12 12 CFTCFT Parts 32,32, 159159 andand 160,160, Docket ID OCC-2012-0007, RIN 1557-AD59, Lending Limits, 8 Department Departmentof ofthe theTreasury TreasuryOffice Officeofofthe theComptroller Comptroller the Currency, Parts Docket ID OCC-2012-0007, RIN 1557-AD59, Lending Limits, June 2013 March 9 Preqin, Preqin,“2015 “2018Global GlobalPrivate PrivateDebt DebtReport,” Report,” 2018.2015

role of oF A alternative lternatIve Investments nveStmentS in In T today’sS C capital apItal M markets arketS 6 | Tthe R

V. v. Iincreased nCreaseD T transparency ransparenCy

The alternative investments industry has become considerably more transparent to regulators since the financial crisis. Title ofthe theDodd-Frank Dodd-FrankAct Actspecifically specifically addresses regulaIV of addresses thethe regulation tion of hedge advisers other private managers. of hedge fundfund advisers and and other private fundfund managers. As a result, hedgefunds fundsprovide providedetailed detailedinformation information directly aAsresult, hedge to the SEC and CFTC. That information is also available to FSOC and the Office of Financial Research (OFR), both created by the Dodd-Frank Act.

unlimited the authority authority unlimited information information and and data, regulators have the to analyze the entire hedge fund industry and all aspects of a particular investment activities, activities, including including market market particular hedge hedge fund’s investment and counterparty counterpartyexposure. exposure. Lastly, small fund managers are subject to state registration, examination, and reporting reporting requirements. requirements. The market activities of every U.S.-based hedge fund are subject to U.S. securities securities and andcommodities commoditieslaws. laws.

The Dodd-Frank Act created multiple thresholds for adviser registration and regulatory examinations at the national registration significant threshold for private and state levels. The most significant fund advisers is $150 million in AUM, which requires the adviser to register with the SEC. Advisers with less than $100 million in AUM generally are required to register with state regulatory agencies. Many advisers to private funds commodity trading also must register with the CFTC as commodity advisors (CTAs) (CTAs) or or commodity commoditypool pooloperators operators(CPOs). (CPOs). All SEC-registered advisers report firm-specific information to the SEC with annual Form ADV filings. The first part of the ADV form collects information on ownership, clients, employees, business practices, and affiliations. Managers report information like fee structures, types of services offered, and potential conflicts of interest on the second part of the form. The completed forms, forms10which are available on the 95 percent of 10 Investment Adviser Disclosure investors report theyPublic plan to review, website. are available on the Investment Adviser Public Disclosure website. The SEC also requires the filing of Form PF, which requires advisers withrequires at leastthe $1.5 billion in hedge fundrequires AUM The SEC also filing of Form PF, which to comply substantial SEC inregulatory reporting advisers withwith at least $1.5 billion hedge fund AUM requirements. The substantial CFTC requires and reporting CTAs to to comply with SEC CPOs regulatory submit Form CPO-PQR and Form CTA-PR to the requirements. The CFTC requires CPOs and CTAs to 11 NationalForm FuturesCPO-PQR Associationand (NFA). submit Form CTA-PR to the National Futures Association (NFA).11 For large firms, these forms are required on a quarterly basis.large Taken together, the forms help regulators monitor For firms, these forms are required on a quarterly fund holdings and strategies in order evaluate the use of basis. Taken together, the forms helpto regulators monitor leverage and review asset/liability and liquidity matching. fund holdings and strategies in order to evaluate the use of leverage and review asset/liability and liquidity matching. The Dodd-Frank Act gives FSOC and OFR access to all reports andDodd-Frank information Act filedgives withFSOC or provided to the SECtoinallorder to The and OFR access reports assess systemic risk. Moreover, the Dodd-Frank Act gives the and information filed with or provided to the SEC in order to 12 Director of therisk. OFRMoreover, subpoenathe power to obtain assess systemic Dodd-Frank Act from gives any the 12hedge funds, any data bank or non-bank institution, including Director of the OFR subpoena power to obtain from any needed carry outinstitution, the functions of the hedge office.funds, With access to bank or to non-bank including any data needed to carry out the functions of the office. With access to

“The market activities of every U.S.-based hedge fund are subject to U.S. securities and commodities laws.”

10 Deutsche Bank Global Prime Finance, Third Annual Operational Due Diligence Survey, Summer 2014 11 NFA was founded in 1982 as a self-regulatory organization for the U.S. derivatives industry with mandatory membership. 12 H.R. 4173, Sec. 153 (f)

managed Funds undS A association SSocIatIon | 7 M

VI. vi. Iimproved mproveD R risk M management anaGement

Hedge Hedge funds funds rely rely on on investor investor contributions contributions and and borrowed borrowed funds funds to to create create their their overall overall portfolio. portfolio. Managers Managers work work to to match match investor investor contributions contributions and and borrowed borrowed funds funds to to the the liquidity liquidity of of the the assets assets and and overall overall investment investment portfolio. portfolio. This This isis intended intended to to ensure ensure that that market market volatility volatility does does not not put put the the fund fund or or its its investors investors at at risk. risk. The industryhas hasdeveloped developed practices to manage liquidity those practices is using generally using secured The industry practices to manage liquidity risks.13risks. One13ofOne thoseofpractices is generally secured borrowings borrowings instead of relying on unsecured, short-term financing. With secured borrowing, funds pledge collateral of instead of relying on unsecured, short-term financing. With secured borrowing, funds pledge collateral of cash or securities cash that are marked-to-market that or aresecurities marked-to-market on a daily basis. on a daily basis. The U.K. Financial Conduct Authority’s Hedge Fund Survey released in 2014 and the SEC staff’s 2013 Form PF report confirmed these practices. Many of the largest hedge funds invest primarily in highly liquid, exchange-traded equities, debt, futures, and other Many of the For largest investor primarily in highly liquid, exchange-traded equities, debt, instruments. thesehedge funds,funds monthly quarterly redemption does not pose significant liquidity risk.futures, Private and fundsother that instruments. For in these funds, monthly quarterly redemption notand pose significant liquidity risk. Private that invest primarily fairly illiquid assets or (for example, high yielddoes bonds senior debt securities) manage theirfunds liquidity invest in fairly illiquid assetscontractual (for example, high yield bonds and senior securities)tools manage their to liquidity risk by,primarily among other things, utilizing redemption restrictions and otherdebt management available them. risk by, among other things, utilizing contractual redemption restrictions and other management tools available to them. Funds conduct regular liquidity stress tests to verify their portfolios can meet investor obligations as well as to respond to Funds conduct regularand liquidity tests to verify their portfolios can meet investor obligations as well as to respond to financing obligations marketstress conditions. financing obligations and market conditions. Another unique aspect of hedge funds is that they are not subject to mandatory redemption requirements under any Another aspect of hedge funds is documents that they are not subject to certain mandatory requirements under their any statute orunique regulation. Their organizational generally impose limitsredemption on investors’ ability to redeem statute or regulation. Their organizational documents generally impose certain limits on investors’ ability to redeem their interests. This gives managers the ability to ensure that liquidity of the fund’s portfolio is consistent with their funds’ 14 interests. This gives managers the ability to ensure that liquidity of the fund’s portfolio is consistent with their funds’ redemption obligations. 14 redemption obligations. As noted earlier, hedge funds utilize borrowed funds to complement investor assets. This practice has led some to reach the As noted earlier, hedge funds funds utilizeare borrowed funds to complement investor assets. This less practice has led some to reach the false assumption that hedge highly leveraged. Funds are, in fact, often much leveraged than other financial false assumption hedge funds are highlyratios leveraged. Funds are, in 2004 fact, often much less leveraged than other financial institutions. Onethat study examining leverage between December and October 2009, a period encompassing the 15 institutions. study examining ratiosleverage betweenratio December 2004 andcompares October to 2009, a period the height of theOne economic crisis, foundleverage the average was 2.1x. This average ratiosencompassing of approximately 16 the average leverage ratio was 2.1x.15 This height theU.S. economic crisis, found compares average ratios of approximately 13x forofthe banking industry and 11.8x for the insurance industry17 over the sametotimeframe. 16 17 13x for the U.S. banking industry and 11.8x for the insurance industry over the same timeframe. All funds have unique leverage ratios to achieve their investment strategies and some use greater leverage than others, but All funds have engage unique in leverage ratios to achieve that theirrequires investment and some use that greater leverage than funds typically collateralized financing daily strategies margining. This means if a fund closes or others, experibut typically engage in collateralized financing that requires dailyrights margining. fund closes encesfunds significant losses, its creditors are protected because they have legal to seize This fund means assets. Itthat alsoifisaimportant to or experiences significant losses, itsas creditors are protected because they portfolio. have legal rights to seize fund assets. It also is realize that funds can use leverage a tool to mitigate risks to the overall 13 MFA, Sound Practices Practicesfor forHedge HedgeFund FundManagers, Managers,2009 2009 14 Office of Financial Financial Research, Research,Annual AnnualReport, Report,2013 2013 15 Andrew And, el ofof Economic Research, Working Paper No.No. 16801, 20112011 el al., al.,Hedge HedgeFund FundLeverage, Leverage,National NationalBureau Bureau Economic Research, Working Paper 16801, 16 Sebnem Kalemli-Ozcan Banks and Countries, National Bureau of Economic Research, Working Paper 17354, 2011 2011 Kalemli-Ozcanet etal., al.,Leverage LeverageAcross AcrossFirms, Firms, Banks and Countries, National Bureau of Economic Research, Working Paper 17354, 17 Federal Insurance June 2013 Insurance Office, Office,Annual AnnualReport Reporton onthe theInsurance InsuranceIndustry, Industry, June 2013

Average Leverage Leverage Ratios Ratios between between December December 2004-October 2004-October 2009 2009 Average


Hedge Funds Funds Hedge

11.8x Insurance Insurance Industry Industry

role of oF A alternative lternatIve Investments nveStmentS in In T today’sS C capital apItal M markets arketS 8 | Tthe R


U.S.Banking Banking U.S. Industry Industry

These safeguards arethat ultimately tested times each important to realize funds can use multiple leverage as a tool to year when funds close for portfolio. reasons ranging from extended mitigate risks to the overall poor performance, the retirement or departure of senior personnel, or a changed market environment. In eachtimes case, These safeguards are ultimately tested multiple the fund’s is wound by the manager, each year portfolio when funds closedown for reasons ranging somefrom times gradually over many months and less frequently in extended poor performance, the retirement or departure aof“liquidation” by the prime brokers or other market parsenior personnel, or a changed market environment. ticipants that the holdfund’s the fund’s collateral. But, down compared to In each case, portfolio is wound by the other types of financial institutions, hedge fund managers manager, sometimes gradually over many months and generally operateinstraightforward with brokers limited exless frequently a “liquidation”businesses by the prime or posure to other financial institutions. Because of their simother market participants that hold the fund’s collateral. ple legal structure, wound down and But, compared to hedge other funds typesare of easily financial institutions, liquidated under existing bankruptcy laws, limiting losses hedge fund managers generally operate straightforward to the fund’s investors and generally not creditors or counbusinesses with limited exposure to other financial terparties. institutions. Because of their simple legal structure, hedge funds are easily wound down and liquidated under This happened duringlaws, the financial without govexisting bankruptcy limitingcrisis losses to theany fund’s ernment intervention. has even or recognized that “asinvestors and generallyFSOC not creditors counterparties. set management firms and investment vehicles have closed 18 without presenting a threat financial stability.” This happened during thetofinancial crisis without any government intervention. FSOC has even recognized that Threatsmanagement to fund sustainability are investment not limited to markethave fac“asset firms and vehicles 18 tors. Managers must also deal with operational risks the same closed without presenting a threat to financial stability.”

FSOC: “Asset Management Firms and Investment Vehicles Have Closed Without Presenting a Threat to Financial Stability.” as other businesses. These risks include natural Threats to fund sustainability are nothuman limitederror, to market disasters,Managers counterparty andwith theoperational increasing risks threatthe of factors. must failure also deal cyberattack. rules require adopterror, busisame as otherSEC businesses. Theseeach risksmanager include to human ness continuity to address failure risks that the natural disasters,plans counterparty andcould the impact increasing manager’s ability to manage clients’ money. Successful threat of cyberattack. SEC rules require each managerfund to managers are constantly evaluating adopting procedures adopt business continuity plans to and address risks that could to address impact thevulnerabilities. manager’s ability to manage clients’ money. Successful fund managers are constantly evaluating and Investors procedures themselves,tohowever, are perhaps the most imadopting address vulnerabilities. portant risk management factor for hedge fund managers. Pursuant themselves, to federal however, securitiesare laws, hedge Investors perhaps thefund most allocations important are available onlyfactor to large high-net worth risk management for institutions hedge fund and managers. Pursuant investors. These professionals have allocations long-termare investment to federal securities laws, hedge fund available horizons andinstitutions do not view hedgeworth fundinvestors. investments only to large andtheir high-net Theseas temporary placements requiring immediate access. These inprofessionals have long-term investment horizons and do not vestors typically in hedge funds to diversify portfolio view their hedge invest fund investments as temporary placements risk and toimmediate minimize access. exposure to market fluctuations – and requiring These investors typically invest they pay close to fund managers’ risk management in hedge fundsattention to diversify portfolio risk and to minimize and operational practices. exposure to market fluctuations – and they pay close attention to fund managers’ risk management and operational practices. Investors and third-party consultants spend considerable and Activi18 FSOC Notice Seeking SeekingComment Commenton onAsset AssetManagement ManagementProducts Products and ties, Docket No. FSOC-2014-0001 Activities, Docket No. FSOC-2014-0001

time before Thisconsultants due diligence process typically Investors andinvesting. third-party spend considerable takes months complete.19 Detailed time before toinvesting. This due diligence diligence questionprocess 19 naires, in-person interviews, and third-party background typically takes months to complete. Detailed diligence and reference checks are all used to examine operquestionnaires, in-person interviews, andbusiness third-party ations and risk often before invest background andpractices reference checks areany all decision used to to examine in a hedgeoperations fund is made. business and risk practices often before any decision to invest in a hedge fund is made. Investors and consultants continue to focus on these issues as part of and ongoing due diligence, even Investors consultants continue to after focusanoninitial theseinvestissues ment is completed. as part of ongoing due diligence, even after an initial investment is completed.

Is the Near-Failure of Long-Term Capital Management (LTCM) in 1998 a Useful Case Study for Financial Regulators Exploring Systemic Risk? In light regulatory andand market changes over lightofofthe themany many regulatory market changes the last an outdated outdated over the several last 15 years, years, the the LTCM event isis an example of hedge fund risk. extensively documented, documented, LTCM’s LTCM’sexcessive excessive As has been extensively leverage, along along with with its itscounterparties’ counterparties’ position size and leverage, were were the primary underlyinadequate risk riskmanagement, management, the primary ing causes ofcauses LTCM’sofclosing. Theclosing. seminal analysis of the underlying LTCM’s The seminal matter, conducted by theconducted President’s Working Group on analysis of the matter, by the President’s Financial Markets, found that LTCM, as offound January Working Group on Financial Markets, that1, 1998, was leveraged more than 25-to-1 and that LTCM LTCM, as of January 1, 1998, was leveraged more than was ableand to get leverage its counterparties 25-to-1 thatsuch LTCM was because able to get such leverage did not require LTCM to post margin on its overbecause its counterparties didinitial not require LTCM to the-counter derivatives trades. derivatives post initial margin on or its “OTC” over-the-counter or “OTC” trades. Prior to the 2008 financial crisis, counterparties generally revised policies to require of initial Prior to thetheir 2008 financial crisis,posting counterparties margin onrevised OTC trades, a practice Dodd-Frank generally their policies to the require posting Act of codifies.margin on OTC trades, a practice the Doddinitial Frank Act codifies. Finally, despite initial concern from regulators, there was no actualdespite impactinitial on taxpayers retail investors there from Finally, concern or from regulators, the LTCM closure. While was no actual impact on Federal taxpayersregulators or retailcoordinatinvestors ed a private sector solution, importantly, was no from the LTCM closure. While Federalthere regulators taxpayer bailout of LTCM. coordinated a private sector solution, importantly, there was no taxpayer bailout of LTCM.

19 Deutsche Global Prime PrimeFinance, Finance,Third ThirdAnnual AnnualOperational Operational Due Deutsche Bank Global Due DiliDiligence Survey, Summer gence Survey, Summer 20142014

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VII. ConClusion onclusion vii.

This paper paper has hasexamined examinedthe therole rolealternative alternative investments broadly in investments playplay broadly in our our economy andspecifically has specifically focused on the regulatory newnew economy and has focused on the regulatory changeschanges brought brought about intoresponse to the crisis. Now, morefrom thanthe a about in response the financial Now, several years removed decade from financial and eight into the Doddcrisis andremoved more than fivethe years into thecrisis Dodd-Frank Act,years economic recovery is Frank Act,to the economy expanded and markets have rebounded. beginning take hold in has the U.S. Looking back, it is important to note that while funds have, at times, liquidated their assets and wound down for various reasons, no hedge fund has required a taxpayer bailout and the industry has never required a government program such as the Troubled Asset Relief Program or similar government backstop. and is vastly different than it was when The hedge fund fund industry industryinstead insteadadvocated advocatedfor forand andembraced embracedbroad broadmarket marketreforms reforms and is vastly different than it was in the financial crisis began crisis more began. than a decade ago. 2007 when the financial Significant regulatory changes have been implemented and market practices have fundamentally changed the way funds invest and manage risk. Hedge funds are more transparent than ever before. Managers have accepted increased regulatory oversight through registration and reporting requirements. and government regulations by developing extensive operational risk Fund managers managers have haveresponded respondedtotoinvestor investordemands demands and government regulations by developing extensive operational management processes and controls, including systemssystems that arethat designed to addresstocybersecurity risks and ensure continuity risk management processes and controls, including are designed address cybersecurity risks and ensure of business of operations, and are alsoand more tosensitive risks associated the activities counterparties. continuity business operations, aresensitive also more to risks with associated with theofactivities of counterparties. While hedge funds did not pose a risk to financial stability when the financial crisis hit and do not pose such risk today, the end result of the regulations the industry has implemented have made our markets – and hedge funds – safer and more resilient. In fact, funds have adapted by helping provide capital to businesses and local communities as new regulations have limited banks’ lending capabilities. MFA supports policymakers’ efforts to collect the information necessary to provide effective, smart oversight markets The U.S. financial markets do not operate in a vacuum. As economies function on a global scale, policymakers andofregulators and to work to with to implement that address systemic holistically. mustwill paycontinue careful attention theregulators impact implementing or policies changing regulations will haverisk globally. This new, global economy requires harmonization among regulatory regimes, especially those governing U.S. and EU financial markets. The U.S. financial markets do not operate in a vacuum. As economies function on a global scale, policymakers and regulators must attention to across the impact implementing or changing have globally. This new, global economy MFA pay andcareful its members work geopolitical boundaries and willregulations continue towill advocate for efficient, fair and transparent requires harmonization among regulatory regimes, especially those governing U.S. and EU financial markets. global markets that benefit all investors. MFA and its members work across geopolitical boundaries and will continue to advocate for liquid, transparent and wellfunctioning global markets that benefit all investors.

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VIII. a ADDenDum ddendum: CalenDar alendar oF of k Key e Events viii.

First Five Years of Dodd-Frank Act Implementation Major Actions Actions During Duringthe Dodd-Frank Act Implementation 2010 JULY 21 • The Dodd-Frank

Wall Street Reform and Consumer Protection Act is signed into law by President Barack Obama.


CFTC released final rules relating to Form PF. Form PF will enable the Financial Stability Oversight Council to obtain data that will facilitate the monitoring of risk in U.S. financial markets. The frequency and content of the required filing is based on the type and size of the adviser.

2011 JANUARY • The SEC adopted final rules implementing

Section 943, requiring nationally recognized statistical rating organizations and issuers of asset-backed securities to provide certain disclosures on the use of representations and warranties in the market for asset-backed securities.

The SEC also adopted rules to implement Section 945, requiring asset-backed securities issuers whose offerings are registered under the Securities Act to conduct a review of the assets underlying those securities and make certain disclosures about those reviews. The SEC also has adopted rules relating to the ongoing reporting of asset-backed issuers under the Exchange Act. The SEC adopted rules concerning shareholder approval of executive compensation and “golden parachute” compensation arrangements to implement Section 951 of the Dodd-Frank Act.

APRIL • The Financial

Stability Oversight Council published its process for reviewing nonbank financial companies for potential designation in its final rule and interpretive guidance.

JUNE • The SEC adopted rules that require advisers

to hedge funds and other private funds to register with the SEC, establish new exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility for advisers between the SEC and states. In addition, the SEC amended rules to expand disclosure by investment advisers, particularly about the private funds they manage, and revised the Commission’s payto-play rule.

JULY • The SEC granted temporary exemptive relief

from clearing clearing agency agency registration registration under from Section 17A(b) of the Exchange Act to entities that perform certain clearing services for security-based swaps. To qualify for the temporary exemption from registration,

for which the Federal Reserve is the primary federal financial regulator. Nonbank financial companies designated by FSOC will also be subject to certain stress testing requirements contained in the rules. These final rules revise portions of proposed stress testing requirements contained in the Board’s proposed rule to implement enhanced prudential standards issued for comment on December 20, 2011. The Federal Reserve coordinated closely with the FDIC and OCC to ensure consistency and comparability.

market participants were required to provide identifying information to the SEC about their organization and its activities.


JANUARY • The CFTC adopted final rules to implement

a framework for the real-time public reporting of swap transaction and pricing data for all swap transactions.


The SEC adopted a final rule establishing minimum standards for the operation, governance, and risk management practices of registered clearing agencies, including clearing agencies designated as systemically important.


adopted a final rule relating to mandatory clearing of security-based swaps that establish a process for clearing agencies to provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing.

MARCH • The SEC issued Release No. 34-69013[16]

The SEC adopted rules directing the national securities exchanges to adopt certain listing standards related to the compensation committee committee of a company’s board of directors as well as its compensation advisers, as required by Section 952 of the Dodd-Frank Act. These standards were approved in January January 2013. 2013.

APRIL • The Fed

JULY • The

CFTC adopted rules establishing a schedule to phase in compliance with the clearing requirement under a new section of the Commodity Exchange Act (CEA), enacted under Title VII of the Dodd-Frank Act. The compliance schedule is based on the type of market participants entering into a swap subject to the CFTC’s clearing requirement.


and the SEC adopted joint final rules and interpretations that define the terms swap, security-based swap, and security-based swap agreement, and that provide for joint regulation of mixed swaps.

to request information for a cost-benefit analysis to determine the anticipated economic impacts of moving forward with uniform fiduciary standard rulemaking.

issued a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.” The requirements will be used by FSOC when it considers the potential designation of a nonbank financial company for consolidated supervision by the Federal Reserve.


adopted final rules on core principles and other requirements for swap execution facilities (SEFs). The final rules implement the SEF registration requirements and establish the execution methods for swaps that are subject to the CFTC’s trade execution requirement.

The CFTC adopted rules on the process for a designated contract market or SEF to make subject a swap “available to trade,” and thus subject to the CFTC’s CFTC’s trade trade execution execution requirement requirement The rules rules also also establish establish under the CEA. The CFTC’s trade a schedule to phase in the CFTC’s execution requirement. requirement.

OCTOBER • The Fed issued

two final rules on stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies

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AUGUST • The Fed issued

final rule rule establishing establishing a final its supervision supervision annual assessment fees for its large financial financial companies. companies. and regulation of large applicable to companies companies with $50 The rule is applicable total consolidated consolidated assets and billion or more in total nonbank nonbank financial financial companies companies designated by the Financial Stability Oversight Council for supervision by by the the Federal FederalReserve. Reserve.

SEPTEMBER • The Fed issued

two interim final rules to clarify application of Basel III regulatory capital reforms into capital and business projections for company-conducted stress tests for banking organizations with $50 billion or more in total consolidated assets and to provide a one-year transition period when conducting initial company-run stress tests for most banking organizations with total consolidated assets between $10 billion and $50 billion.

The Fed issued a final rule clarifying the treatment of uninsured U.S. branches and agencies of foreign banks, commonly known as the swaps push out provision, which adopts without change an interim final rule issued on June 5, 2013.

the oversight of systemically-important clearing agencies or those that engage in complex transactions, such as security-based swaps.

a final rule to strengthen supervision and regulation of large U.S. bank holding companies (BHCs) and foreign banking organizations (FBOs). The enhanced prudential standards include liquidity, risk management, and capital.

The Fed, FDIC and OCC issued final guidance describing supervisory expectations for stress tests conducted by financial companies with total consolidated assets between $10 billion and $50 billion.

Fed issued final rules repealing its Regulation DD (Truth in Savings) and Regulation P (Privacy of Consumer Financial Information), as the Dodd-Frank Act transferred rulemaking authority for these areas to the Consumer Financial Protection Bureau (CFPB) and the CFPB has already issued interim final rules substantially identical to them. The Board also issued a final rule amending provisions of its Regulation V (Fair Credit Reporting) that require financial institutions and creditors to implement identity theft prevention programs.


and OCC issued a final rule that creates a standardized minimum liquidity requirement for large and internationally active banking organizations.

OCTOBER • The Fed issued a final rule that amends the

Regulation HH risk-management standards for FMUs that have been designated as systemically important and to make related revisions to part I of the Federal Reserve Policy on Payment System Risk, which is applicable to financial market infrastructures more generally. Both sets of revisions are based on and generally consistent with the April 2012 Principles for Financial Market Infrastructures developed jointly by international standard-setting bodies.

JANUARY • The CFTC adopted a final rule addressing

FEBRUARY • The Fed issued

a final rule that generally prohibits a financial company from combining with another company if the ratio of the resulting company’s liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.

2015 FEBRUARY • The SEC proposed rules regarding hedging

disclosure to implement Section 955 of the Dodd-Frank Act.


adopted rules governing the security-based swap data repository registration process, duties, and core principles.

MAY • The

2014 prohibitions and restrictions on the ability of a banking entity and nonbank financial company supervised by the Fed to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund.

NOVEMBER • The Fed issued

MARCH • The SEC voted to propose rules to enhance


FDIC, OCC, and SEC, issued final rules to prohibit insured depository institutions and companies affiliated with insured depository institutions from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account (known as the “Volcker rule”). The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds.

The CFTC announced the deemed certification of the first “Made Available-toTrade” (MAT) determination of a SEF for certain fixed-to-floating rate swaps.

The Fed, FDIC, FHFA, HUD, OCC, and SEC issued a final rule requiring sponsors of securitization transactions to retain risk in those transactions.

SEC ,Federal From SEC, Federal Reserve Board, Financial Stability Oversight Council, Department of Treasury Treasury and and CFTC CFTC

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The SEC adopted final rules in Regulation SBSR that establishes a framework for regulatory reporting and dissemination of security-based swap information, and proposed a phase-in compliance schedule.


proposed rules regarding pay for performance disclosure to implement Section 953 of the Dodd-Frank Act.

JUNE • Medium-sized

financial institutions with total consolidated assets between $10 billion and $50 billion are required to release internal stress test results for the first time.

NOVEMBER • The Office of

the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; Farm Credit Administration; and the Federal Housing Finance Agency (each, a Prudential Regulator) adopted a final joint rule on margin and capital requirements on all uncleared swaps and uncleared security-based swaps of registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants that have a Prudential Regulator.

DECEMBER • As part of its integration

of existing rules into the Dodd-Frank framework, the CFTC adopted a final rule amending recordkeeping rule 1.35(a) to exclude commodity trading advisors (CTAs) that are members of a designated contract market (DCM) or a swap execution facility (SEF) from the requirement to record and keep records of oral pre-trade communications.

2016 JANUARY • The CFTC adopted a final rule on margin requirements for uncleared swaps of registered swap dealers and major swap participants that do not have a Prudential Regulator.

APRIL • Federal

banking regulators and the SEC jointly released a re-proposed rule on Incentive Compensation Arrangements under section 956 of Dodd-Frank. The rule release contained clarifying language regarding the calculation of an adviser’s assets for purposes of the thresholds that determine which asset managers are subject to the rules, which was a key issue raised in MFA’s letter to the SEC on the original rule proposal.

OCTOBER • The CFTC adopted

a final rule to require that interest rate swaps denominated in certain currencies and having certain termination dates be submitted for clearing to a derivatives clearing organization.

DECEMBER • The CFTC adopted

Final Aggregation Rules and reproposed its position limits rule. The final aggregation rules amended part 150 with respect to the aggregation policy for position limits for futures and option contracts on nine agricultural commodities; the reproposed position limits rule established position limits for 25 exempt and agricultural commodity futures and option contracts, and physical commodity swaps that are “economically equivalent” to such contracts.

MAY • The

CFTC adopted a final rule on the cross-border application of the margin requirements for uncleared swaps.


adopted a final rule to amend swap data recordkeeping and reporting requirements for cleared swaps. The amended final rule eliminated a redundant requirement that a swap dealer or major swap participant reporting counterparty report daily valuation data for cleared swaps, and explicitly established the derivatives clearing organization (DCO) as the reporting party with related reporting obligations for clearing swaps.

JULY • The

SEC proposed two new rules and additional guidance to increase order execution transparency and enhance transparency in the security-based swap market.

AUGUST • The SEC adopted

amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to enhance the reporting and disclosure of information by investment advisers.

SEPTEMBER • The Federal Reserve

adopted a final rule restricting market participants’ ability to exercise certain default right in qualified financial contracts (QFCs) during the orderly liquidation or insolvency of certain systemically important financial institutions (SIFIs). The FDIC and Office of the Comptroller of the Currency subsequently finalized similar rules addressing QFCs of FDIC-supervised and OCC-regulated institutions, respectively.

The SEC adopted a final rule to enhance standards for the operation and governance of SEC-registered clearing agencies.

The Federal Reserve adopted a final rule on the total loss absorbing capacity of systemically important U.S. banking organizations, which was intended to improve the resolvability and resiliency of large, interconnected U.S. bank holding companies pursuant to section 165 of DoddFrank.

2018 JANUARY • The SEC published

a Comment Request on the collection of information for Form PF. The SEC requested feedback on the information collected and the burden it imposed on firms.

APRIL • The SEC released three proposals regarding

the standards of conduct for broker-dealers and investment advisers, two of which primarily relate to their obligations with respect to retail customers. The third release proposes guidance on what the SEC views as investment advisers’ existing fiduciary duties to all clients under the Investment Advisers Act of 1940, and proposes the SEC consider three new obligations for advisers, based on existing rules for broker-dealers that do not currently apply to advisers.

MAY • President

Donald Trump signed into law the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” legislation intended to reform certain parts of the Dodd-Frank Act by offering relief on a range of financial services regulations and changing the $50 billion SIFI threshold.

2017 APRIL • President

Trump signed two Presidential Memoranda directing the Secretary of the Treasury to conduct a thorough review of the FSOC determination and designation processes under the Dodd-Frank Act and directing the Secretary of the Treasury to undertake a review of the Orderly Liquidation Authority Orderly Liquidation Authority.

AUGUST • The Federal

Reserve proposed a rule to amend FR-Y-15 reporting instructions for calculating the U.S. systemically important bank (GSIB) surcharge, which would expand the types of derivatives clearing transaction structures that are captured.

OCTOBER • The U.S. Treasury released its second report

on improving the financial regulatory systemin response to President Trump’s EO directing the Secretary to review all financial services regulations. This report focused on capital markets and touched on several issues that impact the hedge fund industry.

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MANAGED FUNDS ASSOCIATION 600 14th Street, N.W., Suite 900 | Washington, DC 20005 | 202.730.2600 546 Fifth Avenue, 12th Floor | New York, NY 10036 | 212.542.8460 | @MFAUpdates

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