The impact of the October 1 shutdown of the federal government on hedge funds is now playing out in slow motion. While the SEC remains open due to its ability to self-fund for a few weeks, its sister agency, the CFTC has shut down. These are the agencies that provide oversight to the securities and commodities markets that hedge funds trade in. Additionally, these agencies support the rule-making, registration and examination systems that are backbone to the integrity of the hedge fund industry.
The CFTC closure is particularly unfortunate because the CFTC was just at the critical inflection point of putting in place a large number of the Dodd-Frank mandates, including most importantly, the set up of the swap execution facilities for derivatives trading (SEFs). While the CFTC had granted several short-term deadline exemptions and relief provisions at the end of September, the SEF’s that are being set up at exactly this time will have to do so without the support of the CFTC.
Some of the registration and examination functions that the CFTC provides to the industry are done through its self-regulatory organization, the National Future Association (NFA), which remains open.
If the shutdown drags on and the SEC runs out of funding, its closure would plunge the industry into unknown territory. During previous government shutdowns, hedge funds had little regulation or oversight, which is certainly not the case today. While the SEC closure plan apparently calls for the agency to continue its market monitoring and emergency surveillance activities, the largely routine functions of investment adviser registrations and approval of filings would be gone.
It should also be kept in mind that the SEC doesn’t operate in a vacuum, and therefore right now, to the extent the rest of the government is closed, the SEC’s operations are necessarily going to be slowed down due to the other closures.
The shutdown’s most immediate effect on hedge funds relates to its impact on derivatives trading, and a general slowing of any operational issues that have a regulatory aspect to them. In the long term, the shutdown can leave lasting effects from a general sense of loss of integrity, as well as opportunities missed or delayed.
Read more articles about the hedge fund industry and related legal issues at Hedge Rows, a blog by Judith Gross.
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