How regulatory developments may impact financial institutions in 2025

Regulations governing hedge funds and other financial institutions are in a constant state of flux. In 2024 alone, a raft of new measures were introduced across the world. China, for example, raised the minimum asset threshold of the 5.5 trillion yuan ($762 billion) industry while imposing restrictions on the use of derivatives and leverage.¹

The year 2025 is likely to see a flurry of new developments that institutions should prepare for and even seek to influence.

More favourable regulatory outlook in the US

A Trump presidency could well see a more favourable regulatory attitude towards financial institutions than was the case under Biden. Trump’s nomination of the successful hedge fund manager Scott Bessent to lead the US Treasury Department, a post with wide oversight of tax policy, public debt, international finance and sanctions, signalled the likely direction of policy: Bessent has called for deregulation of the economy.

Moreover, Gary Gensler, the Democrat chair of the five-member US Securities and Exchange Commission (SEC), announced he would step down two years early shortly after Trump’s election in November 2024. That will leave Republicans, who are likely to adopt a more friendly approach to hedge funds, in charge of the SEC from the start of Trump’s administration in January.

Trump had vowed to fire Gensler.² In November 2024, a federal judge struck down an SEC rule requiring certain firms, including hedge funds, to register as dealers in the US Treasuries market. The judge said that the SEC had exceeded its authority, agreeing with hedge funds that argued the rule was overly broad and could harm liquidity. The ruling highlighted criticism of the SEC under Gensler, who had long faced accusations of regulatory overreach and an overly aggressive approach to hedge funds and the crypto industry.³

US liberal approach to influence global regulation?

The likely move to ease the regulation of hedge funds and other financial institutions in the US will clearly have implications for the rest of the world. Jurisdictions will have to consider whether to place themselves at a competitive disadvantage by clamping down on activities. That is particularly pertinent for the European Union, which is struggling to match US economic growth rates. In 2008, the economies of the eurozone and the US were similar in size, at current prices of $14.2 trillion and $14.8 trillion respectively. Fifteen years on, the eurozone’s gross domestic product (GDP) is just over $15 trillion, while US GDP has surged to $26.9 trillion.⁴

Clearly, attracting new financing to revitalise the European economy is a priority for European leaders, which suggests they will be eager to allow financial institutions to flourish and not place an excessive regulatory burden on them. This is particularly true in the case of hedge funds, which are buying a large and growing share of government debt sales, and providing a source of much-needed capital. Reuters, citing figures from Tradeweb, reports that hedge funds accounted for a record 55% of trading volume for European government bonds in 2023, up from 36% in 2020, making them the dominant players in the sector for the first time.⁵

Bloomberg believes that, over the next five years, the European Union needs to address some of its most pressing economic priorities to achieve its competitiveness agenda. It should therefore “review and deepen existing policies to ensure the regulatory framework is well-functioning and effective”. At the same time, Bloomberg says, the EU will seek to progress on its digital and sustainable finance agenda, as well as maintain its objective of ensuring the stability of the financial sector in the face of existing and emerging risks.

To that end, the implementation of the revised Markets in Financial Instruments Regulation and Directive (MiFID/R) is crucial, says Bloomberg. It adds that MiFID/R is expected “to massively improve market transparency and efficiency over the next few years”.⁶

The EU is also likely to press ahead in the coming years with regulations covering the use of artificial intelligence in financial markets, sustainable finance, digital finance, risk, capital and financial stability.

Liberalisation of financial markets also appears likely to progress further in Asia. Reuters reports that in India, for example, Indian and global asset managers are firming up plans to launch higher-risk investment products, after the country’s markets regulator allowed fund houses to offer investors such options. In September, the Securities and Exchange Board of India (SEBI) allowed asset-management firms to offer riskier strategies, such as long-short equity and derivative-based plans. These options will require a minimum investment of 1 million rupees ($11,940) and will be offered to investors who can take on higher risk.⁷ China is likely to prove an exception to the trend towards liberalisation, however, with tightening scrutiny of trading, financing and dealmaking underway. Thousands of hedge funds have closed down as a result.⁸

Growing competition from lightly-regulated financial centres such as Dubai and Abu Dhabi could also increase pressure on regulators worldwide to carefully consider the impact of any new rules. The United Arab Emirates, to which Dubai and Abu Dhabi belong, has emerged as a magnet for hedge funds and other financial institutions in recent years. Some of the world’s biggest hedge funds, including Millennium and Balyasny, have opened offices there, while overall employment in financial services has exploded to 44,000, up by two-thirds on the 2019 figure.