Update on Wall Street Reform; Shining a Light into the Dark Corners of Our Financial System
Published: November 2, 2011
For the first time ever, approximately 3,500 hedge funds and other private fund advisers will report a broad range of information about their funds to government regulators. A new reporting form, known as Form PF, recently approved by the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”), will enable regulators to obtain and analyze new information for purposes of monitoring systemic risk.
The adoption of Form PF is a milestone in Wall Street Reform implementation and highlights important progress that has been made in increasing transparency in the financial system and facilitating interagency coordination.
Shining a Light into the Dark Corners of Our Financial System.
Hedge fund and other private fund reporting brings greater transparency to our financial system, including to financial companies that operate outside a framework of prudential oversight and supervision. Until now, regulators generally have had only the most rudimentary information about private funds. Form PF gives regulators data about a wide range of issues, including private funds’ exposure to different asset classes, use of leverage and vulnerability to liquidity pressures. Equipped with these data, regulators will be in a better position to determine if any fund or set of funds could pose a risk to financial stability. The availability of more information from private fund advisers will complement other key provisions of Wall Street Reform, such as central clearing and trade reporting requirements for over-the-counter derivatives, which increase transparency and reduce risk outside the traditional banking system.
Regulatory Coordination that Enhances the Usefulness of Data.
The process leading to the adoption of Form PF shows how the SEC, CFTC and other members of the Financial Stability Oversight Council (“FSOC”) can work together to strengthen Wall Street Reform implementation. The SEC and CFTC worked collaboratively with the FSOC to harmonize Form PF and a related CFTC form to increase transparency for certain participants in the commodities market. Because of this alignment, the FSOC will be in a better position to aggregate the information gathered from private fund advisers and these commodity market participants for use in assessing systemic risk.
Richard Berner is Counselor to the Secretary of the Treasury.