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Hedge-Fund Group Says EU Derivatives-Trading Reforms Should Move Forward

Date: Thursday, August 19, 2010
Author: Nandini Sukumar, Bloomberg

The largest trade group representing hedge funds called on the European Union to move ahead with reforms of the over-the-counter derivatives market saying “the benefits will outweigh increased costs.”

Hedge fund managers support them in spite of “significant costs associated with administrative and operational changes the reforms would require,” The Alternative Investment Management Association said. The Group of 20 proposals to report OTC derivative contracts to trade repositories and clear trades of standard contracts through central clearinghouses would reduce systemic risk, the trade group said.

“Managers recognize the need for such reforms,” Andrew Baker, chief executive officer of AIMA said in a statement. They will “work closely with policy makers to ensure that reforms and new regulations are well thought-out, coordinated and give due consideration to all the parties active in the OTC derivatives market.”

Clearinghouses, capitalized by their members, are intended to lessen the effects of a bank default by guaranteeing counterparty payment. Regulators in the U.S. and Europe are pushing swaps users to process standardized contracts through clearinghouses after the unregulated market complicated efforts to resolve the financial crisis when it couldn’t easily be determined how interconnected banks had become.

Futures, Hedge Funds

AIMA’s members include futures-market and clearinghouse operator CME Group Inc., fund-of-hedge-funds firm Fauchier Partners, and Man Group Plc, the biggest publicly traded hedge- fund firm. Its comments were in response to a European Commission consultation document on Derivatives and Market Infrastructures.

The U.S. Congress has completed negotiations to regulate the $615 trillion over-the-counter derivatives market for the first time in its 30-year history. Clearinghouses operate as central counterparties for every buy and sell order executed by their members, reducing the risk of a trader defaulting.

The commission will make formal proposals for rules on over-the-counter derivatives and credit-default swaps in September. Legislation must be approved by governments and lawmakers in the EU Parliament before it can enter into force, a process that can take more than a year.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net.