HOW TO BALANCE REGULATIONS IN AN INDUSTRY WHERE PROPRIETARY ISSUES ARE CRITICAL - UPDATED AND AMENDED 12/31/2013 as well as 1/12, 1/21, 6/6, 8/1, 8/11, 8/19, 9/1, 9/27, 9/29 & 10/4/2014

Introduction:
Hedge Fund Managers were concerned when the proposed new rules were introduced in January 2011 that would require them to turn over details about their “intimate” trading positions to Regulators who are concerned with monitoring systemic risk areas such as their industry that was previously lightly regulated but with the potential to exert unseen influence in the markets. This is not an easy area because most of those involved would prefer to keep their innermost trading positions very private, and therein lays the dilemma.

Here are Some of the Background Details:

The February 3, 2011 edition of that Business Street Daily/Weekend Publication (C3), discusses these issues in their article, which indicated that Regulators were requesting more data about their trading positions that they would then in turn be required to keep confidential. Needless-to-say the Fund Manager were “up in arms” concerned that the Regulatory Agency would be unable to provide the level of security needed to protect proprietary “working” trading information and rightly so.
The basic conditions associated with scenario are as follows:

1. hedge funds as of the article’s issuance had approximately $1,92 trillion in assets under managements with
2. some of the biggest fund Managers individually controlling funds of $20 to $30 billion.
3. The previous rules only required quarterly disclosure of long equity (or trading) positions in public securities.
4. The new rules on the other hand would require a much greater level of disclosure about trading positions in addition to applicable supporting data aimed at determining trends.

The primary concern of Traders is about Regulators ability to address confidentiality issues and prevent leaks, which even in the best of circumstances occur. The Traders’ concerns are legitimate and they should be addressed fairly as introduced in the title of this post, namely balancing regulatory concerns in a very competitive industry where the control of proprietary data is critical for successful trading and with this backdrop, the below section makes a case for examining both sides of this issue.

The implications/Quality Control Issues and Possibilities:
There are a number of potential avenues through, which concern can be approached, namely via the examining of “macro” picture issues, especially when financial amounts of the types being regulated are involved and one method for achieving the desired objective, namely the early identification of  market trends with the potential for causing significant disruptions to financial institutions specifically and the overall system generally. The avenue proposed and most likely settled as determined from the March 27, 2009 edition of the referenced Publication as originally proposed, is;

• Hedge Fund registration by first
• requiring all funds above a certain size to submit their “intimate” trading positions to determine, which held portfolios that could pose a threat to the economy.

This is quite a broad “intrusive” net to cast in my opinion because simply put the more Regulators become involved in “micro” picture issues, the greater the complications and the potential for data losses to occur. This is largely due to the fact that when additional “hands” are involved in an industry’s “closely held” operating data, greater quality controls are required to be enacted in order to prevent breaches. This is quite an undertaking as well as a significant responsibility for any Agency to shoulder and much caution should be exercised to tread carefully when wading into “waters” such as these.

Potential alternatives to this broad and intrusive approach in my opinion would be the following:

Requiring regulators to:

• Establish specific industries considered critical to the economy, which requires more upfront deterministic details to be outlined by regulators, but such once completed and published would established critical-to-the-economy type information to be made known because holding trading positions in widget production would not be as critical to the economy as holding trading positions in a financial holding company with broad tentacles in all sectors of the Nation's economy and this type of information is already available since purchasers of significant trading positions in a single institution are already required to be published and some inter Agency communicating would address this specific requirement.
• Establish specify ranges* (see Footnote1) that any single fund (or groups of funds in the case of individuals or entities holding several funds) could operate (or trade) in safely without impacting the economy. Which simply means that trading positions in specific “critical to the economy” industries could not be traded in an unsafe manner by a single fund or block of connected funds, which is a more equitable approach than the cast the wide net type focus, in my opinion and
• Actively monitor market activity on a monthly basis (for those who favor more Regulatory involvement but on the "sidelines" or in a more "hands off" style), to search for potential questionable trading practices and then
• requiring ONLY those involved in such activity to submit the types of information called for as indicated above, namely the submission of information outlining intimate trading positions from, which realistic data can be obtained to prevent serious damage from taking place in the financial markets that could in turn pose serious risks to the Nation's economy. This is a much less intrusive approach, but would require more active regulatory activity on the periphery of the markets evaluating all available information to assist in determining trends and then casting a much smaller "net" ONLY when certain predetermined trends are either evident or have the potential to become a serious concern for the larger economy.   

The Conclusion:
All of the approaches above would in my opinion be much less intrusive than what has been proposed but admittedly would require more work on the part of regulators at the outset and such bureaucratic types tend NOT to desire carrying out such undertakings but would rather choose alternatives that involve casting broad "nets" because much less input is required on their part. These alternatives to achieving the desired outcome while simultaneously eliminating the need for the introduction of costly quality control tools to be implemented, ensuring that security breaches are either eliminated or kept to a minimum because of the highly competitive nature of their industry, have at their root a prudent approach to balancing Regulatory needs against the industry’s concerns with security for their proprietary information. With the emphasis on more even-handed approach to balancing the needs of both sides, a more reasonable method can be established for obtaining the desired objective of trends spotting with the potential for causing serious impact to the Nation's economy. While in at least one instance, greater responsibility would be placed on regulators to evaluate EXISTING available data that these entities are required to publish and/or make available, it has the potential to generate the most balanced view of what's taking place (trending) while only examining those outliers with the potential to impact markets in a significant way due to some predetermined criteria with more emphasis on providing regulators with the type of detailed data to enable them to get a broader view in such select cases ONLY, to ensure that no disruptions can or have the potential to take place by the actions of such traders/entities.
The other scenario that's avoided by this approach is the potential for another broad category of individuals now armed with sensitive insider information, now being in the position to potentially divulge it either wittingly or unwittingly to others and the need for added oversight over these individuals creating many levels of bureaucratic layers in addition to costly quality controls* (see Footnote) to ensure that such information is handled in an as judicious a manner as possible, to avoid leaks.
This cross sectional view examined some of the available potential avenues for addressing the need for oversight balanced with that for determining trends while taking a look at the potential pitfalls that are possible if such a balanced view is not pursued to ensure as little intrusiveness in market conditions on the part of regulators as possible to avoid disruptive scenarios that are not in the best interest of anyone.




* Footnote:
For an example of how far-reaching, broadly and well intentioned quality assurance (QA) controls are intended to function, see the Footnote in the post WHAT'S GOOD FOR THE GEESE IS ALSO GOOD FOR THE WIRELESS "CARNDERS" - EDITED AND UPDATED about how comprehensive such controls are, as they apply to the nuclear industry. However, as depicted in the 3rd bulleted listing in The Finale/Outcome section  from the post WHO REALLY WAS GRANTED FREEDOM TO SPEAK - UPDATED AND AMENDED such well-intended  regulations do NOT always work as they are supposed to when expedient "free loader cause" types implement their craft, because as documented previously on the Pages of this Blog, such types have little or no regard for any authority/agency, etc.


*  Footnote1:
Since I am the type of individual who generally will try to practice what's advocated, a review of the NEW COSVRY INVESTMENT ORGANIZATION PLANNED Page and an examination of the responsibilities for some positions will show that the concept of ranges have been implemented in this organization and assigned to selected positions as a means of assigning greater responsibility and accountability, especially to those in, which significant impact on the activities of the Proprietorship can take place by these decision-makers.