Dubai Issues Draft Hedge Fund Code

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

09 July 2007

The Dubai Financial Services Authority (DFSA) last week issued a draft Hedge Fund Code for public comment.

The consultation paper seeks comment on the DFSA’s proposals to introduce best practice standards for the Hedge Fund industry in the DIFC under 9 high level principles. This delivers on a promise made by the DFSA to develop such a Code in consultation with the industry after the first year of operation of the Collective Investment Funds regime.

Ian Johnston, Managing Director, Policy and Legal Services at the DFSA, explained that: “We thought it appropriate to develop best practice standards under high level principles, rather than detailed rules. We selected 9 areas of risk which are more specific to Hedge Fund operations than to other types of Collective Investment Funds. This approach is consistent with the DFSA’s risk-based approach to regulation and gives the industry the flexibility to develop their own practices within the framework set by the principles.”

The Code builds upon the legal requirements applicable to all Collective Investment Funds in the DIFC.

By developing these proposals in line with international best practice, the DFSA stated that it is furthering its regulatory objective of ensuring that the DIFC is a well regulated and internationally competitive financial market.

The comment period on the Code closes on 4 October 2007. Subject to any changes resulting from public consultation, the DFSA hopes to introduce the Code in the first quarter of 2008.

The nine high level principles are as follows:

Principle 1 – An Operator of a Hedge Fund should have, or have access to, appropriate skills and resources to conduct the operations of the Fund.

Principle 2 – An Operator of a Hedge Fund should develop and implement a robust and flexible investment process to suit the objectives and risk profile of its investment strategies.

Principle 3 – An Operator of a Hedge Fund should have systems and controls to mitigate trading related risks such as price overrides and failed trades.

Principle 4 – An Operator of a Hedge Fund should have adequate back-office systems and controls to avoid backlogs in trade confirmations.

Principle 5 – An Operator of a Hedge Fund should have appropriate measures to identify and manage portfolio risks.

Principle 6 – An Operator of a Hedge Fund should have adequate valuation policies and procedures to ensure integrity, accuracy and timeliness of the valuation process.

Principle 7 – An Operator of a Hedge Fund should not have arrangements under which any material benefits or concessions are provided to some investors where it would be unfair to any other investors in the Fund.

Principle 8 – An Operator of a Hedge Fund should have adequate systems and controls to deal with market sensitive information.

Principle 9 – An Operator of a Hedge Fund should not invest in an underlying Hedge Fund without appropriate due diligence.

Recommended