The International Organisation of Securities Commissions (Iosco) has joined calls for new capital rules to enforce transparency on offshore financial centres.
In a list of proposals for hedge fund regulation published today, Iosco cited "regulatory concerns... about the role of offshore financial centres", and urged offshore regulators to compel fund managers and brokers registered offshore to reveal their trading positions, risk management methods and investment strategies.
"Hedge fund managers should be able to obtain all the necessary information from their underlying funds - irrespective of location of those funds... If they cannot get the necessary information they should consider limiting the risks they are taking."
The proposal follows the recommendation in the European Commission's de Larosiere report for higher capital requirements associated with investments in offshore entities. "Efforts to reduce the risks to financial stability are in danger of being undermined by systemically relevant jurisdictions that refuse to use internationally agreed standards. The international community therefore has to deal with jurisdictions that have weak regulatory and governance standards, lack transparency or are not co-operating in exchanging information, like certain offshore financial centres," de Larosiere wrote.
He suggested EU supervisors should consider banning institutions they regulate from investing in "poorly regulated and in some cases unco-operative financial centres, adding they already had the legal power to raise capital requirements for such investments. "Where necessary, these existing powers should be used to the full," he wrote.
Iosco also called for greater transparency from hedge fund managers in general, who, it said, should be prepared to release details of their assets, strategies and risk management approaches to help regulators build up a picture of systemic risks. Though hedge funds have not been central to the current financial crisis, the recent discovery of large-scale frauds has discouraged investors, Iosco said; hedge funds are also inherently opaque and can involve conflicts of interest between their well-paid managers and other fund investors, raising the danger of systemic risk and undetected fraud.
See also: FSA plans new capital formula for banks
Fed delays capital requirements rules for bank holding companies
Speculation over regulation mounts as Madoff lawsuits rack up
De Larosiere calls for ECB to lead European macro supervision
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