Hedge Fund Reader : Electronic settlement systems suggested for Hedge Funds

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September 17, 2005

Electronic settlement systems suggested for Hedge Funds

It is an unsaid fact that Hedge Funds have been clumsy with the kind of paper work required by them to be done. There are mounting backlogs of unconfirmed trades and therefore Investment banks have threatened to close down credit derivatives with hedge funds who fail to clean up their back-office processes. This has been based on the meeting hosted this week between the leading industry bankers and the regulators at a meeting hosted by the New York Federal Reserve. The regulators have asked the banks to probe into a closer regulatory scrutiny. However, the bankers say shifting to improved settlement procedures and switching to electronic systems from the traditional settlements like fax would be costly for hedge funds to enter into the credit derivatives market. Since hedge funds often deal in a stock one day, then “assign,” or sell, their interest to a third party the next, thereby puzzling the back-office staff of the original counterparty tracking a paper trail. Although it is still to be calculated any such impact on the hedge funds, but whatever it may be it may be a step towards regulating these light regulated funds in the future. FT.com Reports:

Regulators encouraged the banks to take action in order to head off the threat of closer regulatory scrutiny. At the meeting, bankers suggested that improving settlement procedures and switching to electronic systems could become hedge funds’ cost of entry to the credit derivatives market. Many credit derivative transactions are bespoke, which has made it difficult to automate the settlement process as has been done in more standardised assets such as stocks and bonds. As a result, trades are still frequently settled by fax.

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September 17, 2005 in Regulation | Permalink