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Hedge Funds Association Opposes Contributions To Systemic Risks Fund

by Leroy Baker,, New York

04 December 2009

In an open letter to House Financial Services Committee Chairman Barney Frank (D-MA) and all other Members of the Financial Services Committee, the Managed Funds Association (MFA) has raised significant objections to the proposed Financial Stability Improvement Act of 2009, most especially to the assessment mechanism behind the Systemic Resolution Fund and a last minute amendment to force contributions from Hedge Funds.

The letter outlined:

  • The MFA's views regarding the “Financial Stability Improvement Act of 2009”, the systemic risk and resolution authority legislation currently being considered by the Committee;
  • The MFA's significant concern with the assessment mechanism being proposed to finance the new Systemic Resolution Fund; and
  • In particular, a specific objection to the recent adoption of an amendment, offered by Representative Brad Sherman (D-CA), that would ‘carve-in’ hedge funds, making them subject to the assessment at an asset threshold lower than that which would apply to other financial institutions, including those which may be systemically relevant.

The MFA argued that the hedge fund industry’s relatively modest size and low leverage, coupled with its expertise at managing financial risk, meant that the industry had not been the cause of the difficulties experienced by the average investor or the recipients of any taxpayer bailout funds.

Consistent with Federal Reserve Chairman Ben Bernanke’s statement that no individual hedge fund was likely to be systemically relevant, the Financial Stability Board’s list of thirty financial institutions to be subject to cross-border supervision exercises because of their potential to pose systemic risks did not include any hedge funds or hedge fund advisers, wrote the MFA.

With regard to the Resolution Fund, the MFA stated that those 'systemically relevant' firms that benefited from the Resolution Authority should bear the costs. Firms that were not systemically relevant and did not receive competitive benefits such as implicit or explicit government guarantees or 'access to the Fed’s discount window', should not be required to subsidize those firms that did receive these benefits, according to the MFA.

As previously stated, the MFA revealed that it was extremely troubled by the punitive hedge fund “carve in” - language added during the Thursday, November 19, 2009 markup of the Bill as part of the amendment offered by Rep. Brad Sherman.

Far from recognizing that hedge funds had no adverse impact on the financial crisis, the MFA stated that the Bill now perversely singled out hedge funds for a disproportionate share of the proposed assessment without any articulated policy rationale.

The MFA presumed that the raising of the asset threshold for those financial institutions required to contribute to the Resolution Fund from USD10bn to USD50bn by the Sherman amendment was based on the view that firms of smaller size did not pose systemic risks and were not likely to be bailed out in the future by the Resolution Fund.

However, the amendment specifically “carved in” hedge funds with assets under management on a consolidated basis of more than USD10bn, rendering them the only market participants with either assets or assets under management of less than USD50bn that would be required to pay an assessment. The MFA expressed concerns regarding this singular treatment and the lack of supporting rationale or evidence behind it.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at

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