Hedge fund managers told to focus on business continuity practices

The Managed Funds Association’s 2003 ‘Sound Practices For Hedge Fund Managers’ recommends that BC is treated as a high priority.

The Managed Funds Association (MFA), the global voice for the hedge fund industry, has submitted its 2003 ‘Sound Practices For Hedge Fund Managers’, to the US Securities and Exchange Commission (SEC).

Sound Practices for Hedge Fund Managers is the product of several months of preparation by MFA and its members. It builds upon a similar document that was published for the hedge fund industry in February 2000 and aims to establish a set of sound practices for hedge funds’ risk management and internal controls. The 2003 guidance expands and updates the 2000 document and, for the first time, includes business continuity and disaster recovery advice.

The recommendations contained in the 2003 Sound Practices are divided among the following six topics:
* Management and internal controls;
* Responsibilities to investors;
* Valuation policies and practices;
* Risk monitoring;
* Regulatory and documentation controls.
* Business continuity and disaster recovery.

The business continuity and disaster recovery advice is as follows (verbatim):

Hedge Fund Manager should establish a business continuity plan that includes practices to ensure, to the greatest extent practicable, that appropriate personnel will have the ability to monitor a Hedge Fund’s existing portfolio positions and execute transactions where necessary in the event of a market emergency or other severe market disruption.

A Hedge Fund Manager should establish a written business continuity and disaster recovery plan that outlines practices to be followed in an emergency or significant market disruption. Hedge Fund Managers should consider addressing the following items as applicable to its operations:
• Developing a communication plan to contact essential parties (e.g., senior management, portfolio managers, risk managers, brokers and trading counterparties, vendors and disaster recovery specialists);
• Backing-up or copying essential documents and data and storing the information offsite in hard-copy or electronic format;
• Establishing back-up facilities or the ability to continue to do business in a location which is in a separate geographic area from the Hedge Fund Manager’s primary facilities; and
• Considering the impact of business interruptions encountered by third parties and identifying ways to minimize that impact.
The plan should be updated as necessary to respond to material changes in a fund’s operations. It is also recommended that the Hedge Fund Manager test its plan for effectiveness.

A Hedge Fund Manager should establish contingency plans for responding to failure of a third party administrator, credit provider or other party that would affect the market, credit, or liquidity risk of a Fund.

Contingency planning should address responses to a failure of a third party on a Fund’s ability to meet its obligation, including transfers of activity to back-up clearing systems, credit providers and other service providers and back-up provider.

A PDF version of 2003 Sound Practices for Hedge Fund Managers can be downloaded by clicking here.

•Date: 7th August 2003 • Region: N.America/Worldwide •Type: Article •Topic: BC general
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