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6 J. Corp. L. Stud. 1 (2006)

handle is hein.journals/corplstd6 and id is 1 raw text is: Journal of Corporate Law Studies THE EC AND THE HEDGE FUND CHALLENGE: A TEST CASE FOR EC SECURITIES POLICY AFTER THE FINANCIAL SERVICES ACTION PLAN NIAMH MOLONEY* This article considers the burgeoning hedge fund challenge in the context of the post-FSAP regulatoy and supervisogy environment in the EC securities market. While it considers hedge fund risk, it also uses hedge funds as a case study to examine the resilience of the EC's new regulatoy and supervisoy regime. Four questions are considered: What are the appropriate elements of an EC response to the hedge fund risk chain? Is the EC institutionalframework sufficiently robust for the hedge fund challenge? What is the appropriate response to retail investor access risks? What is the appropriate response to the market stability risks raised by hedge funds' large, undisclosed positions across markets? The hedge fund test reveals considerable weaknesses in the post-FSAP regulatoy and supervisog structure. The EC's response is likely to be revealing as to the sophistication of its policy-making structures post- FSAP. A. THE EC AND THE HEDGE FUND CHALLENGE 1. Introduction Hedge funds have recently emerged as a major concern for securities and banking regulators worldwide. This is particularly the case in the EC. EC institutions are now moving to develop a response to the threats which hedge funds are alleged to represent. While hedge funds pose important specific questions for EC securities policy design, they also represent a timely and important test case for EC securities policy-making generally, in the wake of the massive substantive and institutional reforms introduced by the Financial Services Action Plan.1 Many of the risks which hedge funds represent challenge the generic choices made by EC securities policy concerning core investment * University of Nottingham. This paper was originally presented at the TransAtlantic Financial Services Regulatory Dialogue, St John's College, Cambridge University, 30 September 1 October 2005. I am grateful to the participants in the Dialogue and in particular to Kern Alexander, James Palmer and Jane Welch for their valuable comments. All errors and omissions remain my responsibility. I Commission, Financial Services: Implementing the Framework for Financial Markets: Action Plan (COM (1999) 232). April 2006

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