SEC/CFTC May Require Hedge Funds To Provide More Information On Crypto Exposure

Crypto has made its way into Wall Street and major financial entities in the legacy financial system, demanding a change in old regulatory structures. A document from the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) hints at how these structures might be starting to shift.

Posted on the SEC’s official website, the regulators are proposing an amendment to the reporting form for Private Funds (PF). These reforms are allegedly aimed at adapting to the new strategies and assets, such as crypto, adopted by these entities and “enhancing reporting”.

According to the document, the Form PF was implemented in 2011, when crypto was still far from becoming a global market and Bitcoin was about two years old. This form provides regulators with key information that enables them to “assess risk” and monitor operations and strategies.

The regulators classified hedge funds, private equity funds, and liquidity funds, as entities under Form PF. The document stated the following on how the regulatory and reporting landscape has changed since the implementation of this tool:

The private fund industry’s business practices, complexity of fund structures, and investment strategies and exposures also have evolved. Certain investment strategies, including credit, digital asset, litigation finance, and real estate strategies, have become more common.

Data provided by the SEC claims that private funds, hedge funds, and others, have increased by almost 55%. These entities have become wealthier since 2011 with their net assets increasing by two-fold as of 2021.

The upcoming amendments will affect “larger” hedge funds with assets under management of at least $500 million. These entities would need to provide regulators with information on investment exposures, borrowing, and counterparty exposure, market factor effects, currency exposure, and even country and industry exposure with risk metrics and other metrics.

Crypto Contagion Set Alerts For U.S. Regulators?

The document never mentions the events related to the Terra ecosystem collapse, and how some of the biggest entities in crypto were negatively impacted for having exposure to the underlying digital assets: LUNA and UST.

However, many in the space have warned about the potential regulatory implications of these events. As Bitcoinist has been reporting, the Terra collapse led to the insolvency of hedge fund Three Arrows Capital, lending firm Celsius, and other companies which have amounted to billions defaulted from investors.

In that sense, U.S. regulators might be taking additional measures to prevent similar events to impact companies under their oversight by forcing them to report “complex structures”. The document claims:

The proposal would require advisers to report additional information about themselves and their private funds, including identifying information, assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, base currency, borrowings and types of creditors, fair value hierarchy, beneficial ownership, and fund performance.