In a reversal of the current flow of thinking, the Financial Stability Forum (FSF) this weekend issued a report, "Update of the FSF Report on Highly Leveraged Institutions", recommending action by financial authorities, as well as market players, to strengthen the protection against potential systemic risks relating to hedge funds.
The report was published at last February’s request by the G7 Finance Ministers and Central Bank Governors and follows from the original 2000 report which set out a range of recommendations to address the systemic risks posed by highly leveraged institutions. The latest report, a re-assessment of the financial stability issues and systemic risks posed by hedge funds, focuses on these and does not cover associated investor protection issues.
This latest report says that, whilst there has been an improvement in risk management practices at the larger players, there are concerns regarding general standards, particularly in intermediaries, and makes recommendations to supervisors to require players to improve their counterparty risk management practices, robustness against liquidity risk and to improve reporting. It also calls on market players to strengthen market discipline, including portfolio valuations and risk information and to develop sound practice benchmarks for hedge funds.
The FSF is a body of regulators, supervisors and central bank experts. It was set up by the G7 in 1999 to advise on international financial stability, is currently chaired by the governor of the Italian central bank and is based at the Bank for International Settlements in Basel.
In the past months we have had the US regulators and the European Commission strongly state the view that there is no need for more regulation on hedge funds. This has been supported by the EU finance ministers but opposed by political groupings in EU member states – see Chase Cooper News of 14th and 3rd of May, and 12th April. This latest report will be a blow to the EC and major regulators and provide ammunition for the hedge fund hawks to continue their battle.
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