FSA “no light touch” on hedge funds, says Sants
FSA chief executive Hector Sants outlines his approach to hedge fund regulation
LONDON – Hector Sants, chief executive of the Financial Services Authority (FSA), has defended the UK regulator from assertions it is “a light touch”, in his speech outlining the FSA’s regulatory stance on hedge fund managers at a London conference.
Sants described the FSA’s regulatory role as risk-based and proportionate, adding it did not run a no-fail regime to protect the fortunes of irresponsible investment behaviour, but rather a philosophy of orderly and controlled financial stability.
Speaking on the effectiveness of existing safeguards, Sants said: “We recognise that a six-monthly survey has its limits as a regulatory tool and indeed some moral hazard.”
Sants said such tests represent a useful part of the FSA’s toolkit, but that the summer’s unexpected credit crisis “reinforces the view that managers must ensure their stress testing seeks to model the implausible”.
“Undeniably, recent events strengthened the case for ensuring the industry has effective risk scenario planning and stress testing. I believe the Northern Rock experience is of direct relevance to this observation,” he added.
Sants went on to single out the 35 largest hedge fund managers – for which the FSA has a relationship management team – adding that, as these firms manage over half the funds in the UK, “it is entirely consistent with our risk-based approach that we devote more intensive regulatory attention to them”.
“I believe this two-pronged approach – monitoring the activities of the fund managers themselves and also the transmission mechanism to the prime brokers – provides us with an appropriate means of discharging our systemic risk agenda,” said Sants.
Sants also said the FSA sees contracts for difference (CFDs) and other opaque derivatives instruments – which have come under considerable criticism after the credit crunch – as “a useful market tool and does not seek to constrain their proper use”.
He said CFDs have been used to circumvent proper disclosure obligations and that the FSA’s recent consultancy paper included measures to increase CFD transparency, but added that industry feedback was crucial to the process.
Sants highlighted the importance of the Hedge Fund Working Group – formed at the request of the Financial Stability Forum under the chairmanship of Sir Andrew Large – as an industry-wide initiative.
“We are pleased UK hedge fund managers have taken this initiative to demonstrate to their critics that the sector is alive to areas where it needs to improve, and committed to constant improvement in its practices,” said Sants. He added industry-wide support was needed to ensure the initiative’s success.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Cyber insurance premiums dropped unexpectedly in 2025
Competition among carriers drives down premiums, despite increasing frequency and severity of attacks
Op risk data: Kaiser will helm half-billion-dollar payout for faking illness
Also: Loan collusion clobbers South Korean banks; AML fails at Saxo Bank and Santander. Data by ORX News
Market doesn’t share FSB concerns over basis trade
Industry warns tougher haircut regulation could restrict market capacity as debt issuance rises
CGB repo clearing is coming to Hong Kong … but not yet
Market wants at least five years to build infrastructure before regulators consider mandate
Rethinking model validation for GenAI governance
A US model risk leader outlines how banks can recalibrate existing supervisory standards
FCMs warn of regulatory gaps in crypto clearing
CFTC request for comment uncovers concerns over customer protection and unchecked advertising
UK clearing houses face tougher capital regime than EU peers
Ice resists BoE plan to move second skin in the game higher up capital stack, but members approve
The changing shape of variation margin collateral
Financial firms are open to using a wider variety of collateral when posting VM on uncleared derivatives, but concerns are slowing efforts to use more non-cash alternatives