Look Out Investor Activist Funds in Japan...the Supervisory Authorities May Soon Have You in Their Database
"One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man."
Elbert (Green) Hubbard (1856-1915), American businessman, writer and painter
An earlier story today on Bloomberg News that the U.S. Securities Exchange Commission is planning to set up a database that tracks the insider trading activities of hedge funds is pretty interesting. Not only did the article stress that up to now the authority does not have an institutional memory to trace the activities of multiple fund activities, but that it must have been a factor in not recognizing potential abuses in the past. They call this a tracking system. I suspect that a similar tracking system will be considered by another financial center - if it is not already in place, and that is in Japan.
Why? Aside from the well-known activity of the CEO of one Japanese activist fund (Murakami of MAC Consulting fame) that eventually led to his arrest, it is not simply the activities of the well-known funds that must be a concern but many other "free-riders", or very often business colleagues in other funds who jump into the same trades...all around the same time. Such "gang-tackling" is likely to be picked up by the supervisory authorities and probably presupposes that there will be some sort of co-operation with exchanges and among the brokers. Yes, the same brokers that are in Japan or abroad and that may be themselves deeply involved in the trading activities of such hedge fund clients.
Like in the U.S. one can expect a greater emphasis and reliance on codes of ethics and compliance reporting presumably to move the legal liability to the brokers or others who knowingly/unknowlingly aid or assist such activity - not that this isn't already part and parcel of the Chinese Wall that is supposed to operate between the investment bank and equity departments of many banks and brokers in Kabutocho, New York and London.
Of note, illegal trading by hedge funds is a politically hot-button issue at the moment, in the U.S as well as in Japan. This is especially given the growing incidence in the press from the likes of well-known "shorts" but other interlopers who have targeted bigger and bigger corporate prey. The activities of Carl Ichan, Kerkorian, and Nelson Peltz are well known, but there are literally hundreds of others involved mostly engaged in legal activities.
The last time I saw any data, hedge funds accounted for between 35-45% of the market capitalization of activity on the NYSE. This compares to a figure of just over 30% for hedge fund activity of the market capitalization of the T.S.E. So, all signs point to even more activity by hedge funds in equity trading. This is something that Japanese authorities are well aware of. As the Bank of Japan recently remarked in a Dec 04 2006 report: "Hedge funds are big players in financial markets and their activities could have a destabilizing effect".
Like in the U.S. it seems logical to assume that the exchange survellience departments will have to "surrender" potentially suspicious reports on a regular basis to the FSA or other authorities to better track the buying and selling of their hedge fund clients/surrogates. Of course, there will be issues of whether it is the client putting through the trade or the prop desk of the brokers/bankers on their own behalf. There are tricky definitional issues on the horizon with associated costs.
If this happens, then isn't it logical to assume that better cross-border information sharing should and would be a next step? After all, a number of hedge funds in one jurisdiction operate as investor activists in others.
It is still too early to know if the S.E.C. is engaging in window-dressing or whether they will actually create a meaningful database, properly staffed that will keep abreast of potential insider situations related to big and not-so-big corporations.
Ironically, the cleaning up of corporate balance sheets in Japan and a focus on shareholder value is a part of the financial-social engineering that is being fostered by Japanese authorities in order to facilitate a sense of industrial and economic efficiency - something that Japan Inc. needed and has needed in order to regain and preserve its international competitiveness.
As ever, there is a fine line between encouraging the conditions for such change and at the same time not to choke off the activities of the market-place by imposing unduly transaction high costs on the marketplace participants.
Whatever the final direction, it certainly seems to this observer that Japan's supervisory authorities might do well to take the initiative and create their own tracking database very soon. There are many hedge funds lining up to take a crack at "promoting shareholder value" Japan Inc. as I write. Mahalo.
"One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man."
Elbert (Green) Hubbard (1856-1915), American businessman, writer and painter
An earlier story today on Bloomberg News that the U.S. Securities Exchange Commission is planning to set up a database that tracks the insider trading activities of hedge funds is pretty interesting. Not only did the article stress that up to now the authority does not have an institutional memory to trace the activities of multiple fund activities, but that it must have been a factor in not recognizing potential abuses in the past. They call this a tracking system. I suspect that a similar tracking system will be considered by another financial center - if it is not already in place, and that is in Japan.
Why? Aside from the well-known activity of the CEO of one Japanese activist fund (Murakami of MAC Consulting fame) that eventually led to his arrest, it is not simply the activities of the well-known funds that must be a concern but many other "free-riders", or very often business colleagues in other funds who jump into the same trades...all around the same time. Such "gang-tackling" is likely to be picked up by the supervisory authorities and probably presupposes that there will be some sort of co-operation with exchanges and among the brokers. Yes, the same brokers that are in Japan or abroad and that may be themselves deeply involved in the trading activities of such hedge fund clients.
Like in the U.S. one can expect a greater emphasis and reliance on codes of ethics and compliance reporting presumably to move the legal liability to the brokers or others who knowingly/unknowlingly aid or assist such activity - not that this isn't already part and parcel of the Chinese Wall that is supposed to operate between the investment bank and equity departments of many banks and brokers in Kabutocho, New York and London.
Of note, illegal trading by hedge funds is a politically hot-button issue at the moment, in the U.S as well as in Japan. This is especially given the growing incidence in the press from the likes of well-known "shorts" but other interlopers who have targeted bigger and bigger corporate prey. The activities of Carl Ichan, Kerkorian, and Nelson Peltz are well known, but there are literally hundreds of others involved mostly engaged in legal activities.
The last time I saw any data, hedge funds accounted for between 35-45% of the market capitalization of activity on the NYSE. This compares to a figure of just over 30% for hedge fund activity of the market capitalization of the T.S.E. So, all signs point to even more activity by hedge funds in equity trading. This is something that Japanese authorities are well aware of. As the Bank of Japan recently remarked in a Dec 04 2006 report: "Hedge funds are big players in financial markets and their activities could have a destabilizing effect".
Like in the U.S. it seems logical to assume that the exchange survellience departments will have to "surrender" potentially suspicious reports on a regular basis to the FSA or other authorities to better track the buying and selling of their hedge fund clients/surrogates. Of course, there will be issues of whether it is the client putting through the trade or the prop desk of the brokers/bankers on their own behalf. There are tricky definitional issues on the horizon with associated costs.
If this happens, then isn't it logical to assume that better cross-border information sharing should and would be a next step? After all, a number of hedge funds in one jurisdiction operate as investor activists in others.
It is still too early to know if the S.E.C. is engaging in window-dressing or whether they will actually create a meaningful database, properly staffed that will keep abreast of potential insider situations related to big and not-so-big corporations.
Ironically, the cleaning up of corporate balance sheets in Japan and a focus on shareholder value is a part of the financial-social engineering that is being fostered by Japanese authorities in order to facilitate a sense of industrial and economic efficiency - something that Japan Inc. needed and has needed in order to regain and preserve its international competitiveness.
As ever, there is a fine line between encouraging the conditions for such change and at the same time not to choke off the activities of the market-place by imposing unduly transaction high costs on the marketplace participants.
Whatever the final direction, it certainly seems to this observer that Japan's supervisory authorities might do well to take the initiative and create their own tracking database very soon. There are many hedge funds lining up to take a crack at "promoting shareholder value" Japan Inc. as I write. Mahalo.
posted by Franklin Scruggins | 9:37 AM
0 Comments:
Post a Comment
<< Home