Form PF Dawns on Hedge Funds

Terry Flanagan

Hedge funds are facing an unprecedented burden of reporting requirements under newly effective regulations promulgated under the U.S. Dodd-Frank Act.

“To meet their Form PF obligations, advisers will have to provide regulators with an unprecedented assortment of information on either a quarterly or annual basis,” said Jayme Fargas, head of evaluated pricing at financial data vendor Thomson Reuters.

“This has profound operational and cultural implications for the private fund adviser arena, since for the first time the market will be subject to consistent levels of transparency.”

The 49-page, five-section Form PF requires fund advisors to answer 79 questions and submit the data electronically to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission.

The U.S. regulators plan to use data collected from respondents to aid in their mandates to govern the U.S. financial system and seek to determine whether specific funds, fund types or investment strategies threaten to destabilize it.

The primary objective is to provide the Financial Stability Oversight Council, which was established by the Dodd-Frank Act, with information to monitor systemic risk in the U.S. financial system but it could be used for other purposes, which has sparked some confidentiality concerns.

“The SEC can use the information in Form PF in connection with examinations and rulemaking,” said Donald Babbitt, associate director at Kinetic Partners, a regulatory consultancy. “The SEC has indicated it will establish processes to prevent leakages of information, but it’s a little worrisome from a confidentiality standpoint.”

Also, the information on Form PF could form the basis for enforcement actions, even though the information only represents estimates.

“Advisers are permitted to use their own internal methodologies to provide estimates, as long as the methodology is consistent,” said Babbitt. “It’s a little odd that the SEC could use that in an enforcement action.”

Large hedge funds and liquidity funds with assets under management of more than $5 billion are also subject to quarterly filing requirements under Form PF beginning with the quarter ended June 30.

At the heart of the form filing process is ready access to high quality and verifiable source data.

Robust pricing and valuation data feeds many of the downstream calculations that regulators will use to conduct risk assessments.

“Only by using high quality evaluated prices for relevant instruments can a firm accurately determine its aggregate positions,” said Fargas at Thomson Reuters.

Derivatives usage in particular can result in significant position dilution or concentration, so it’s essential that advisers incorporate relevant parameters—such as interest rates, volatility and liquidity—in order to gauge the impact of each leveraged transaction and position.

Form PF is part of a wider series of global regulatory indicatives, including Dodd-Frank, designed to provide greater disclosure and transparency.

“On the surface, Form PF may appear to be another very challenging regulatory hurdle,” said Fargas. “Nevertheless, if approached effectively, it can present advisers with a more detailed view of their relationships with key clients and insights into risk management strengths and weaknesses.”

The regulatory framework under the Dodd-Frank Act establishes the need to look at data holistically and to aggregate data from multiple sources.

Form PF requires hedge funds to consolidate information that may be spread across multiple fund administrators.

Thomson Reuters Evaluated Pricing evaluates over 2.5 million OTC global fixed income and derivatives securities, As an independent third-party information provider, Thomson Reuters has no conflict of interest as it doesn’t originate, issue, trade, buy or sell these instruments, the company says.

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