Unlike Prudent Bear, this stuff isn't predigested for spoon feeding. You have to make an effort to learn the jargon. All you have to do is click on the very first link to learn something -
>>FSF: Progress made in addressing concerns raised by Highly Leveraged Institutions
Financial Stability Forum
17 May 2001
The Financial Stability Forum (FSF) published today a report by Howard Davies, Chairman
of the UK FSA and Chairman of an earlier FSF Working Group, on progress in
implementing recommendations endorsed by the FSF last year to address concerns about
Highly Leveraged Institutions (HLIs). The recommendations addressed the systemic risks
raised by the near collapse of Long-Term Capital Management in the autumn of 1998, and
the concerns triggered by the operations of HLIs in the financial markets of emerging market
economies.
The progress report was discussed at a meeting of the FSF earlier this year. It draws on
work carried out by various supervisory and private sector groupings, including a joint task
force of the Basel Committee on Banking Supervision and IOSCO, a multidisciplinary
working group on public disclosure sponsored by four international financial services
regulatory organisations, a group of major market participants in the foreign exchange
markets, and the Global Documentation Steering Committee.
The report notes that good progress is being made to strengthen counterparty risk
management and regulatory oversight, notably with regard to senior management
reporting of HLI exposures, general standards of credit analysis, due diligence and
documentation.1 However, credit providers need to make further progress in the
measurement of credit exposures, including the conduct of comprehensive stress tests.
Supervisors remain concerned about the ability of regulated firms to resist market
pressures, in particular on initial margin.
Disclosure of information by HLIs to credit providers has improved in terms of both
quality and quantity. But progress remains inconsistent, with confidentiality concerns and
competitive pressures sometimes limiting information flows. The report notes that a
comprehensive voluntary study involving key financial institutions and hedge funds in setting
out a basis for improvements in public disclosure of financial risks has been completed.2
Progress towards introducing mandatory public disclosure requirements for HLIs/hedge
funds has been limited, however.
Leading foreign exchange market participants have agreed a set of Good Practice
Guidelines for Foreign Exchange Trading to help address concerns that large and
concentrated HLI positions could have the potential to influence materially market dynamics
in small and medium-sized open economies.3 The guidelines have been endorsed by the
bodies responsible for foreign exchange market standards in the main financial centres and
will be incorporated into existing codes of market conduct.
Progress is also being made in addressing weaknesses in legal documentation
practices revealed by the market disturbances of 1998.4 But it has proved difficult to achieve
improvements in the consistency, where appropriate, between different industry standards.
The earlier HLI report noted that legal documentation underlying all financial contracts is a
crucial building block in the stability of the financial system.
The progress report also draws on an analysis of recent developments in the hedge fund
industry, based on an update by the IMF of an earlier study for the working group. This
update is being released as an annex to the progress report.
When the FSF discussed the progress report at its earlier meeting this year, it confirmed its
prior decision to review thoroughly all the recommendations of the Working Group in March
2002.
The report is available on the FSF website at
fsforum.org
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