Regulatory Overhaul Could Hit Hedge Funds

Jun 15 2009 | 10:54am ET

President Barack Obama will on Wednesday unveil his plan to restructure the U.S. financial regulatory system, with both direct and indirect effect on the hedge fund industry.

As expected, hedge funds would be forced to register under the president’s plan, The Wall Street Journal reports. Legislation to that effect is already making its way through both houses of Congress. But Obama’s proposal would give the Federal Reserve greater oversight powers, and give the government the power to unwind systematically-important financial institutions—including, potentially, hedge funds.

“Considerations of stability, safety and systemic risk have to loom larger in the planning, thinking and strategizing of every financial institution going forward than they have in the past,” Lawrence Summers, the White House National Economic Council director, said on Friday.

The plan is somewhat less sweeping that some expected: It does not replace the U.S.’s patchwork of regulatory agencies with a single, overarching regulator. The Securities and Exchange Commission and Commodity Futures Trading Commission would not be merged, as some have called for. Indeed, Obama’s proposal would eliminate just one regulator, the Office of Thrift Supervision, but would add one, as well, overseeing consumer-oriented financial products, the Journal reports. It would also create a council of regulators that would monitor systemic risk.

Stronger and more wide-reaching powers for the Fed are the centerpiece of the plan. The central bank would be able to set capital and liquidity requirements for the largest financial firms, including hedge funds, as well as force such firms to open up their books.

The proposals won’t just hit hedge funds directly. They also could revolutionize the world in which hedge funds operate. Leverage limits could affect large bank’s prime brokerage business and their willingness to offer leverage to hedge funds. It will seek to remake how mortgages are underwritten, as well as requiring greater transparency for the derivatives traded by many hedge funds.

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