[R-G] FT: Japan's Watchdog Set to Curb Hedge Funds

[Yoshie Furuhashi]

In the post-socialist and post-social democratic world today, terms
such as "Left," "Right," and "Center" make little sense.  That is most
obviously the case on the political and military front in the Middle
East, but so it is on the financial front worldwide.  The power elite
in Japan, reliably conservative as always, are set to regulate hedge
funds, apparently more tightly than in countries whose governments are
run by the electoral "Left." -- Yoshie

<http://www.ft.com/cms/s/b3bd70f2-46d9-11dc-a3be-0000779fd2ac.html>
Japanese watchdog set to curb hedge funds

By Michiyo Nakamoto in Tokyo

Published: August 10 2007 03:00 | Last updated: August 10 2007 03:00

Japan's financial regulator, the Securities and Ex-change Surveillance
Commission, is concerned that the growing influence of hedge funds is
encouraging insider trading and undermining the integrity of the
country's stock markets.

"We believe there is [a] risk . . .that hedge fund managers are
involved in market misconduct . . . such as in-sider trading based on
information obtained from prime brokers, or market manipulation," says
Kiyotaka Sasaki, director of strategy and policy co-ordination at the
SESC. "Investment banks can't survive unless they do business with
hedge funds. The relationship between investment banks and hedge funds
is too close."

The SESC is poised to crack down on hedge funds and others when the
Financial Instruments and Ex-change Law is implemented next month.
This will require hedge funds with more than a certain number of
Japanese investors to file or register with the FSA. Currently, hedge
funds are not regulated in Japan.

Funds that have filed notification or registered with the FSA will be
subject to inspections. Funds with 10 Japanese investors or fewer
whose total investment amounts to less than a third of the fund will
not be subject to the new regulations.

The SESC is also poised to crack down on investment advisers in Japan
who act as fund managers without the necessary authorisation.

Many hedge funds have analysts or advisers in Japan who make
recommendations but not investment decisions, and therefore do not
need a licence.

The new rules have raised concern in the investment community that
hedge funds will be driven out of Japan by heavy-handed regulation.

Mr Sasaki concedes that "If Japan alone strengthens regulation, funds
will leave Japan." But, he says, "it is also possible that the market
will become . . . healthier".

The SESC believes it needs a better grasp of hedge funds operating in
Japan to guard against abuse.

"If there is a problem involving a fund in Tokyo, like insider
trading, andit turns out the fund manager is in Hong Kong or
Sing-apore, how do you enforce anything?" asks Mr Sasaki. He cites the
case of insider trading by Philippe Jabre of GLG, one of Europe's
largest hedge funds, who was fined by the UK FSA after Japan's SESC
alerted the UK authorities to suspect trading in shares of Mitsui
Sumitomo Financial Group shares prior to its Y300bn preference share
offering in 2003.
--
Yoshie