AsianInvestor's regulatory round-up, May 13

SFC recovers $191m for investors; Singapore retail market opens up; Algo trading put under the microscope; Saudi restricts foreign buying to 10%; and hedge funds urged to upgrade cyber security.
AsianInvestor's regulatory round-up, May 13

Hong Kong: SFC recovers HK$191m from hedge fund
The city’s Securities and Futures Commission (SFC) has recovered $191 million for 340 overseas investors who lost money in a failed hedge fund, the regulator announced.

In April 2009, the SFC froze hedge fund Descartes Athena Fund SPC’s assets to protect its investors, following allegations that fund managers committed fraud. The SFC claimed investors were issued with false documents, purportedly from a major accounting firm, and were sent false statements of account and subscription contracts. The regulator also said that the assets of the Athena Fund had been dissipated.

The SFC’s executive director of enforcement Mark Steward said: “The SFC alleges the Athena Fund was an outright fraud. Our action to have the assets frozen prevented them from disappearing into the perpetrators’ pockets and will enable most investors to recover a substantial portion of their investments.”

Singapore: Retail gains access to more complex products
Retail investors in the city-state have been given access to a wider range of investment funds with elements of derivatives, with effect from April 29.

Previously, all investment funds which used derivatives were classified as specified investment products, which could only be sold to retail investors who showed they had investment knowledge or experience.

But the Monetary Authority of Singapore has now taken on board industry feedback that funds which make limited use of derivatives are relatively less complex and should be made more accessible to retail investors.  These are funds which invest only in simple products such as shares or gold, but may use derivatives for efficient portfolio management including the hedging of risks.

Fund managers will now be able to reclassify such investment funds as excluded investment products (EIPs). Retail investors can then more easily access these investment funds which have been reclassified as EIPs as they will no longer need to be assessed on their investment knowledge or experience.

US: Algo trading under global regulatory scrutiny
Global regulators have put banks and other financial institutions under the microscope regarding their risk-control systems for high-speed trading and other algorithm-based trading strategies.

The Senior Supervisors Group, which represents 10 global regulators including Europe’s ECB Banking Supervision, the Japanese Financial Services Agency and the US Securities and Exchange Commission, noted that systemic risk, created even by a small algo trading group, can be amplified throughout the market and create a sizeable impact when other algorithms react to the error.

Other key risks highlighted include the lack of intraday transparency and risk controls which algorithmic trading desks may face, and the lack of adequate controls to limit losses from accumulating and spreading rapidly.

Middle East: Foreign buyers in Saudi market capped at 10%
Foreign ownership of Saudi Arabia-listed companies will be capped at 10% of a stock’s market capitalisation, according to finalised rules set out by the country’s regulator this month.

The rules will come into effect on June 1, well before the June 15 official opening for foreigners. Certain requirements will need to be met before foreigners can tap into the market, such as being licensed as a bank, brokerage, fund manager or insurance company from its home jurisdiction if it is not from a Gulf Cooperation Council country.

Institutions would also need to meet other quantitative requirements, such as having an AUM exceeding SR18.75 billion ($5 billion) in AUM, as well as having been in the related business for at least five years.

US: Hedge funds urged to upgrade IT against cyber attacks
Hedge funds in the US need to upgrade their systems to prevent exploitation from hackers and terrorists, the US Department of Justice said.

Speaking to the Financial Times, assistant attorney general for national security John Carlin said that managers should share more information with the government when hackers attempt to penetrate their systems.

The warning comes after a wave of high-profile cyber attacks on banks in recent years. An attack on JP Morgan last year saw 76 million customers’ personal information being compromised.

However, hedge funds have so far yet to receive the attention of larger financial institutions, despite holding large amounts of proprietary information and valuable algorithms.

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