CFTC and SEC Propose Changes to Reporting Crypto Exposure for Hedge Funds
SEC and CFTC have proposed to require advisers who work with hedge funds to report their exposure to digital assets. Among the factors cited by the two U.S. financial regulators to justify the proposed change is the growth of the hedge fund industry, in part due to the growing popularity of digital assets investments.
As part of the Securities and Exchange Commission proposal, large hedge funds would be required to file a confidential Form PF to report their cryptocurrency exposures. Form PF was developed after the 2008 financial crisis to help regulators identify bubbles and stability risks in a private fund industry that is otherwise opaque.
After the financial crisis, regulators began imposing more stringent regulations on the banking sector, which slowed the growth of private funds' assets.
In his statement, Gary Gensler, chair of the SEC, said, “In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds.”
He added, “Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity [...] If adopted, this would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers.”
Gensler, who was appointed by President Biden, has frequently emphasized the importance of investor protections in the cryptocurrency market and compared cryptocurrencies to the Wild West. During a virtual press conference, he said regulators are not aware enough of hedge funds' crypto exposure.
Based on data from Coin Gecko, the total value of the crypto market has fallen from nearly $3.1 trillion in November to around $1.2 trillion recently.
The Wednesday proposal also contains provisions requiring hedge funds with net assets over $500 million to report more information on Form PF about investment exposures and portfolio concentrations.
CBW - External Analyst