International standard-setting and the regulation of hedge funds: Part II

Financial services regulation is becoming increasingly globalised in response to the global nature of the industry. Firms, including hedge funds, are highly mobile. Each regulator must take into account global regulatory standards: if local regulation is below or above the international standard this can have a great impact on the local market, either pushing firms offshore or encouraging disreputable firms to operate here. Part I of the article, published in the August 2010 part of the Journal, explained why globalisation is a key issue for the regulation of hedge funds. It introduced the current literature on globalisation and regulatory theory. Part II builds on this, reviewing the current literature on standard-setting and international regulatory cooperation. This is applied to three case studies to demonstrate and validate. This Part then applies the theory in more detail to the regulation of hedge funds to show the rationale for international standards in this area and to give some insight into what standards are likely to develop, how and where. Major regulators should maintain their regulatory regimes at or close to the international standard. This Part reviews the emerging international standards. Astute regulators can be truly proactive and influence the emerging international standards. In the light of their other responsibilities and taxpayer-funded status, regulators should influence these standards in the most efficient and effective way. This requires thoughtful policy development and effective negotiation.