Hedge Funds Will Need To Reveal Their Crypto Exposure
- The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) aim to mandate hedge funds to reveal their crypto exposure.
- The regulators want funds with assets under management of greater than $500 million to reveal more information regarding their assets.
Regulators in the United States are attempting to comprehend the risks that digital assets may present to the larger economy amid the extremely volatile conditions in the crypto market. They could soon enlist hedge funds in their efforts.
On Wednesday, the Securities and Exchange Commission (SEC) released a proposal that aims to mandate that sizable hedge funds disclose their crypto exposure through a private filing called Form PF.
The SEC and the Commodity Futures Trading Commission (CFTC), are currently considering a broader set of amendments to broaden the scope of Form PF, including the potential addition of crypto-related data to the reporting standards for hedge funds. After discussing potential threats to financial stability in the private industry with the U.S. Treasury Department and Federal Reserve, the two agencies decided on the changes as Gensler said that the regulators do not have enough visibility into hedge funds’ exposure to crypto.
The Wednesday-proposed would define “digital assets” and add them as a new asset class on Form PF. It asks for comments on whether funds should disclose specific information about the cryptocurrencies they own, like pointing them out by name or outlining their features.
The SEC highlighted that several new hedge funds have been established recently to invest in cryptocurrency, while some existing hedge funds have started adding it to their portfolios. Moreover, Gensler believes that the immense growth of the crypto industry “is about to overtake the entire commercial banking system.”
Notably, the Form PF, which was initially developed in the wake of the 2008 financial crisis, attempts to help regulators identify bubbles and other possible stability risks in the otherwise opaque ecosystem of private funds that manage funds for wealthy people and institutions.
The collapse of the LUNA/UST model by Terraform Labs earlier this summer set off a domino effect that forced a number of crypto companies to free fall. According to our data, the overall market value of cryptocurrencies lately hovered at about $1.2 trillion, down from a peak of almost $3.1 trillion in November.
Regulators around the world are concerned about the unclear legislation and losing control over the cryptocurrency business as the price of cryptocurrencies plummets, causing investors to lose the majority of their money and companies to file for bankruptcy.
Reporting additional information
However, in addition to cryptocurrencies, the recent proposal would mandate all hedge funds with more than $500 million in net assets report additional information on Form PF regarding their investment exposures, portfolio concentrations, and borrowing arrangements.
“Gathering such information would help the commissions and [financial-stability regulators] better to observe how large hedge funds interconnect with the broader financial services industry,”Gensler stated.