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The Financial Times
Singapore’s central bank is consulting hedge fund executives on ways to tighten the regulatory regime for the state’s burgeoning alternative investment industry.
The informal talks reflect the Monetary Authority of Singapore’s determination to demonstrate effective oversight of the financial services industry in the light of political concerns in Europe and the US about the role of lightly regulated sectors in the global financial crisis.
Industry executives believe the informal talks will be followed by a formal consultation paper paving the way for fresh legislation governing the exempt sector, which accounts for the vast majority of Singapore hedge funds.
The exempt regime allows companies with 30 or fewer financially sophisticated clients to avoid continuous regulation under a full capital markets licence.
However, they are subject to money laundering regulations and rules that require them to ensure they understand the level of financial awareness of their clients.
One exempt manager said: “I would not be surprised to see the exemption regime modified because there has been a perception that Singapore offers regulatory arbitrage”. “The accusation has been that it has sucked business from elsewhere because of the no-regulation option.
“In an environment where everybody else is clearly tightening the regulatory environment and producing new regulations, that gap risks looking way too large and I suspect the MAS is under a certain amount of pressure to be seen to be tightening.”
The exemption option has promoted rapid growth in the industry, with some hedge funds putting the cost of operations at about half the level of Hong Kong, or a third that of London. The MAS said in its last asset management survey that there were 350 hedge funds in Singapore at the end of last year, with about $42bn under management.
Singapore has previously defended the exempt option, arguing that light regulation is appropriate for funds whose clients are largely businesses rather than potentially vulnerable retail investors.
However, executives say the regulator’s growing concerns became clear during an unpublicised sweep by officials seeking information on a range of issues, including assets under management, staffing levels, working practices and relations with overseas associate companies.
The MAS refused to comment. But hedge fund executives say possibilities being mentioned in the talks include the introduction of minimum requirements for asset size, professionally qualified staff, working capital and professional indemnity arrangements.
Hedge fund executives said the industry was likely to oppose any regulatory changes that seriously increased costs, but they added that they expected the changes to be manageable.
One executive said: “Obviously it depends on what they do,”. “But it would be out of character for the MAS to introduce regulations or sponsor legislation which harmed the industry.”
“Singapore is good at having sensible people set about this stuff sensibly, and at consulting the industry. If they came out with something that was clearly silly they would fix it quickly.”