Looking Ahead to 2016: Hedge Fund Regulation
2015 has been a busy year for financial services regulation and legislation, and 2016 is shaping up to be no different. As a result, hedge funds and the wider alternative investment sector need to be aware of what is coming and how to prepare themselves for increased scrutiny and regulatory pressures. In today’s post, we discuss the hedge fund regulation that will be most challenging in 2016, and how firms can prepare adequately. Read on to learn RFA’s top tips for hedge funds that want to stay ahead of the compliance curve.
The removal of Safe Harbor, which is the exception to international data protection regulations between the US and the UK, will see an added technology burden on many firms in the short term. Hedge funds and investment managers with an international presence will need to encrypt data, or make sure it stays in the country of origin. As a result, a locally situated, cloud-based, multi-tenanted data center would be an ideal option for firms facing this challenge. Alternatively, hedge funds should also ensure that they have explicit permission from customers that they can store, transfer and process data in another country.
European Market Infrastructure Regulation (EMIR)
EMIR follows the G20 commitment to clear all standardized OTC derivative contracts where appropriate, through central counter parties, and will bring a significant administrative burden to
hedge funds. While this regulation in itself may not require technological change, it will still be critical for firms to streamline as many back and middle office processes as possible in order to to make them as efficient and as competitive as possible.
Despite the recent postponement of MiFID II compliance deadlines, the majority of hedge funds in the UK still face an immense amount of work in order to ensure their IT systems will adhere with the new regulation. Hedge funds that will be affected by MiFID should begin implementing technology solutions that ensure all communications are recorded and accessible.
In the US, the SEC will continue to target hedge funds and investment advisory firms with weak cybersecurity policies and procedures. The SEC will be closely scrutinizing firms’ practices to identify and penalize those with weak cybersecurity defenses. SEC regulations already state that investment firms must take adequate steps to secure clients’ personal information. If firms do not take the appropriate steps to secure data, they can face SEC fines.
Basel III impacts risk management departments and requires financial firms to perform additional calculations and submit an increased amount of data to regulators. In response, these firms should consider implementing enterprise wide risk management strategies. At the very least, firms should review current risk management strategies and introduce stress testing, as robust IT systems serve as the foundational layer to this increased activity.
Takeaways for 2016
Hedge funds and investment management firms should begin preparing for these regulations by ensuring that they are cyber secure as soon as possible. In addition to the regulations outlined above, 2016 will likely see additional pieces of legislation coming down the line. Firms should also streamline as many processes as possible, in order to make time to revise strategies and comply with enhanced reporting.
Before undertaking any strategy review, always consult with a trusted technology partner that will guide you through the process and ensure that your firm is in complete compliance with regulations.