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DFSA unveils draft hedge fund code

The Dubai Financial Services Authority has issued for public comment its draft hedge fund code, which seeks to introduce best practice standards for the hedge fund industry in the Dubai International Financial Centre by setting out nine high-level principles.

The Dubai regulator is seeking feedback by October 4 on the proposals, which are published on the DFSA website at, in fulfillment of its promise to develop a code of conduct in consultation with the industry once the Collective Investment Funds regime had been in force for a year.

'We thought it appropriate to develop best practice standards under high level principles, rather than detailed rules,' says Ian Johnston, the DFSA's managing director for policy and legal services.

'We selected nine areas of risk that are more specific to hedge fund operations than to other types of collective investment fund. This approach is consistent with the DFSA's risk-based approach to regulation and gives the industry the flexibility to develop its own practices within the framework set by the principles.'

The principles are as follows:

Principle 1 - An operator of a hedge fund should have, or have access to, appropriate skills and resources to conduct the operations of the fund.

Principle 2 - An operator of a hedge fund should develop and implement a robust and flexible investment process to suit the objectives and risk profile of its investment strategies.

Principle 3 - An operator of a hedge fund should have systems and controls to mitigate trading related risks such as price overrides and failed trades.

Principle 4 - An operator of a hedge fund should have adequate back-office systems and controls to avoid backlogs in trade confirmations.

Principle 5 - An operator of a hedge fund should have appropriate measures to identify and manage portfolio risks.

Principle 6 - An operator of a hedge fund should have adequate valuation policies and procedures to ensure integrity, accuracy and timeliness of the valuation process.

Principle 7 - An operator of a hedge fund should not have arrangements under which any material benefits or concessions are provided to some investors where it would be unfair to any other investors in the fund.

Principle 8 - An operator of a hedge fund should have adequate systems and controls to deal with market sensitive information.

Principle 9 - An operator of a hedge fund should not invest in an underlying hedge fund without appropriate due diligence.

The code builds upon the legal requirements applicable to all collective investment funds in the DIFC. By developing these proposals in line with international best practice, the DFSA says it is furthering its regulatory objective of ensuring that Dubai is a well-regulated and internationally competitive financial market.

Subject to any changes resulting from the public consultation procedure, the DFSA hopes to introduce the code in the first quarter of next year.

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