Earlier this week, the Financial Stability Oversight Council took a step towards mandating stricter regulation on non-bank financial institutions, as part of the Dodd-Frank Act.The committee approved a proposal of guidelines on how to designate firms as “systematically important,” which will then put them under Federal Reserve oversight, according to The Wall Street Journal.
Some well-known hedge funds may fall on the list if the proposed criteria pass.
- Have more than $30 billion in outstanding credit default swaps
- Have more than $3.5 billion in derivative liabilities
- Have more than $20 billion in total debt (outstanding loans and bonds)
- Have a leverage ratio of more than 15 to 1 in assets to equity
- Have a short-term debt to asset ratio of 10%
This means some of the biggest hedge funds could be regulated by the Federal Reserve.
Bridgewater ($70.3 billion AUM) and J.P. Morgan Asset Management’s hedge fund arm ($52.5 billion AUM) would certainly meet the $50 billion criteria, though it is harder to discern if they would meet one of the additional guidelines because of the privacy and secrecy that surrounds most hedge funds’ operations.
It’s not clear how large funds in the United Kingdom, like Man Group ($65 billion AUM), which has offices in America, will be affected by the regulation.
The New York Times also noted John Paulson’s Paulson & Co. and Citadel would be among the qualified companies, though Paulson’s fund only had $35.2 billion AUM in the beginning of this year.
Still, it appears that whether a company will be further regulated or not is at the discretion of council members, as not every company that meets the criteria may be deemed risky, according to the FT. Council members also support the creation of an initial short list of companies they want to regulate — names like American International Group and General Electric are being thrown around for the list.
The creation of an official list could take months if the proposal even passes, but hedge funds aren’t out of the clear yet. The SEC will vote next year on whether they will require all hedge funds with greater than $100 million AUM to register with them.
Don’t forget to check out the 10 biggest hedge funds in America, if you’re curious.