The Securities and Exchange Commission has launched a crackdown on trading in credit default swaps, and hinted that it wants tighter control of hedge funds.
The SEC has come under fire in this financial crisis for lacking expertise in the more exotic financial instruments, and of turning a blind eye to some dubious practices. Tuesday, the Commission announced that for the first time it will take action in a case of alleged insider trading in credit default swaps – one of the investments that’s at the heart of some of the worst financial failures of recent months. It has brought a civil case in US District Court against a salesman for Deutsche Bank and a trader for the hedge fund Millenium Partners who are said to have illegally shared information.
Meanwhile, new SEC chief Mary Schapiro has said she wants broader authority to regulate hedge funds. The Obama administration has proposed that funds be required to register with the SEC, but Schapiro told Bloomberg Television that would just be a start.
“Well, it’s probably not enough just to register hedge funds. The SEC will need the authority to inspect them, look at their books and records, understand how they’re doing business. Perhaps prescribe some other requirements for how they operate.”
Schapiro also said it could be possible for the SEC to require hedge funds to disclose short sale positions, and impose restrictions on leverage. One third of US hedge funds are headquartered in Connecticut.