Seven years removed from the financial crisis, the recovery has finally taken hold in the U.S. and, to varying degrees, around the world. At the same time, U.S. and global regulators have implemented robust reforms to help safeguard and strengthen our financial system. This has set a solid foundation for stability and growth.
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Traders work on the floor of the New York Stock Exchange.
But this next mile of reform is among the most critical to investors and the future of our markets. This is because the work yet to be completed goes right to the heart of what every investor deserves when they make an investment — a well-functioning marketplace that is efficient, liquid and transparent.
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As some of the largest and most active investors in the world, hedge funds have an important perspective on where reform goes from here. Today, more than 4,800 institutional investors use hedge funds as a tool to manage risk and provide financial security for millions of retirees, scholarships for students and grants for communities across the country. Institutional investors now comprise about 65 percent of the $3 trillion managed by the hedge fund industry.
These investors, like us, understand the need for efficient, liquid and transparent capital markets. Specifically, we believe four key investor-driven principles are critical to preserving and strengthening the resiliency of our markets and investor protections today – and for the next generation:
Enhance market transparency and promote meaningful disclosure. Information is the lifeblood of a well-functioning market, and more can be done to improve the flow of timely information to investors. For example, the Securities and Exchange Commission's (SEC) current work on market structure reform is an opportunity to develop and implement sound, sensible transparency rules, including more detailed disclosure of order reporting and ways to give investors a better understanding of how entities like alternative trading systems operate.
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As regulators tackle these and other market issues, they should also review the post-Dodd-Frank reporting regime to ensure it is producing meaningful information that aids regulators' abilities to properly oversee markets. Reporting for reporting's sake serves no one.
Give all investors impartial access to newly mandated trading platforms. Buy-side investors often face hurdles to swap execution facilities (SEFs), which were created in the Dodd-Frank Act to provide oversight to derivatives trading markets. Congress intended that all qualified persons could participate and have direct access to these platforms, thus eliminating the need to trade through a "middleman." Unfortunately some artificial barriers are preventing that open access. Certain name disclosure protocols, for example, may have served a worthy goal at one point, but are not needed now because traders must pass credit checks before trading on cleared swap SEFs. Continuing this practice could be used to harm investors shopping for the best price. Addressing this and other barriers, like the required use of outdated record-keeping technology, would help ensure a level and efficient playing field for all investors trading on SEFs.
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Continue strengthening investor protections in the marketplace. The collapses of MF Global and Peregrine Financial Group showed that additional investor safeguards are needed. First, customers should be allowed to shield assets from the failure of big banks and other market participants by holding their assets in individual accounts. Investors similarly should not be on the hook for the failure of clearinghouses – its owners and clearing members should provide extra capital to prevent defaults. Further, regulators should avoid adopting punitive margin rules that would harm investors by unduly tying up their assets.
Global harmonization of new rules. Levels of coordination and communication among global regulators have not kept pace with the accelerated integration of our financial markets. The Capital Markets Union currently being discussed in the European Union is a good example of the need for a more streamlined framework for markets and regulation. Focused efforts to harmonize rules where appropriate will greatly improve the flow of capital across borders, allow markets to operate more efficiently and provide greater consistency and confidence for investors.
Each of these principles has a specific application, but they all serve a greater purpose: to ensure investors have access to capital markets that are efficient, fair and liquid. While market fluctuations will always occur, taking these steps will help ensure that even in times of financial stress our capital markets will function well and serve investors' needs.
Commentary by Richard H. Baker, president and Chief Executive Officer of the Managed Funds Association, which represents the global alternative investment industry and its investors by advocating for sound industry practices and public policies that foster efficient, transparent, and fair capital markets. Follow MFA on Twitter @MFAUpdates.