Hedge funds or­dered to fix in­ter­nal con­trol sys­tem

The Korea Times - - FINANCE -

Fi­nan­cial au­thor­i­ties plan to order hedge funds to strengthen their in­ter­nal con­trol pro­cesses amid a liq­uid­ity cri­sis at Lime As­set Man­age­ment, the head of the fi­nan­cial reg­u­la­tor said Mon­day.

Lime As­set, which man­ages as­sets worth about $4 bil­lion, said last week that it was forced to freeze with­drawals from funds worth 846.6 bil­lion won ($721.5 mil­lion) be­cause it failed to liq­ui­date as­sets to meet re­demp­tion re­quests by clients.

Fi­nan­cial Ser­vices Com­mis­sion (FSC) Chair­man Eun Sung-soo told law­mak­ers that au­thor­i­ties will en­cour­age hedge funds to bol­ster their in­ter­nal con­trol sys­tems in the wake of the liq­uid­ity cri­sis at Lime.

Eun said the FSC will take steps to pre­vent the cri­sis at Lime from spread­ing to other hedge funds.

How­ever, Eun stopped short of say­ing whether the FSC will strengthen reg­u­la­tions on hedge funds.

Sep­a­rately, Fi­nan­cial Su­per­vi­sory Ser­vice (FSS) Gov­er­nor Yoon Suk-heun told law­mak­ers that Lime As­set is re­spon­si­ble for caus­ing the liq­uid­ity cri­sis in terms of its fund man­age­ment schemes.

Some banks and fi­nan­cial firms have been un­der fire for im­prop­erly sell­ing de­riv­a­tives linked to over­seas in­ter­est rates that carry the risk of los­ing nearly all the money in­vested in them.

Fi­nan­cial au­thor­i­ties have said about 20 per­cent of 3,954 cases de­tected may vi­o­late the law or in­ter­nal rules on sell­ing the de­riv­a­tives, but fur­ther in­ves­ti­ga­tion is needed into two lead­ing lenders — Woori Bank and KEB Hana Bank.

Dur­ing a Na­tional Assem­bly au­dit, Yoon crit­i­cized fi­nan­cial firms for sell­ing “gam­bling-like” de­riv­a­tive prod­ucts to in­di­vid­ual in­vestors.

Fi­nan­cial firms “must take re­spon­si­bil­ity” for sell­ing the high-risk prod­ucts, Yoon said.

The de­riv­a­tives are struc­tured to track the per­for­mance of con­stant ma­tu­rity swaps — swaps that al­low the pur­chaser to fix the du­ra­tion of re­ceived flows on a swap of Trea­sury bonds of the United States or Bri­tain or the yield of Ger­many’s 10-year state bonds.

The prod­ucts turned into losers as bond yields in the U.S., Bri­tain and Ger­many have un­ex­pect­edly sunk amid spec­u­la­tion that cen­tral banks in ma­jor economies may ag­gres­sively slash their in­ter­est rates.

If the con­stant ma­tu­rity swaps of U.S. and Bri­tish gov­ern­ment bonds keep their cur­rent lev­els, lo­cal in­vestors will re­port an ap­prox­i­mately 52.3 per­cent loss from their in­vest­ment, of­fi­cials said.

Yonhap

Fi­nan­cial Ser­vices Com­mis­sion Chair­man Eun Sung-soo, right, speaks dur­ing a Na­tional Assem­bly au­dit in Seoul, Mon­day. At left is Fi­nan­cial Su­per­vi­sory Ser­vice Gov­er­nor Yoon Suk-heun. Eun vowed to order hedge funds to strengthen their in­ter­nal con­trol process. Yoon likened de­riv­a­tive-linked funds (DLFs) to gam­bling, say­ing fi­nan­cial firms were re­spon­si­ble for in­vestor losses.

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