U.S. Fed favours indirect influence on hedge funds
SYDNEY, Oct 25 (Reuters) - The U.S. Federal Reserve gave its strongest indication yet on Sunday that it would move to regulate hedge funds and said it favoured indirect regulation.
Federal Reserve Bank of New York President William McDonough said after an international banking regulation conference in Sydney that regulating hedge funds directly was unlikely to work.
''But regulating them indirectly through a closer control of their counter-parties -- the securities firms, banks, insurance companies -- that has a much higher likelihood of working and I think we will be doing that,'' McDonough said in a television interview broadcast on Sunday.
McDonough said on Thursday during the conference, sponsored by the Bank of International Settlements (BIS), that it was almost certain some controls on hedge fund activities were needed. But he stopped short of saying the Fed would go ahead.
McDonough told the Nine Network's Business Sunday show that the Fed would have to ensure that any controls made sense from a market-freedom point of view.
''If we can reach that conclusion that it would make sense, I believe that getting international cooperation would not be difficult,'' he said.
McDonough told the BIS conference that work on the issue had begun. The Basle Committee of the BIS would create a working group on highly leveraged institutions that would report back in December, he added.
Hedge funds, highly leveraged investment vehicles for the wealthy, have come under the spotlight in recent weeks after the 11th-hour bailout of the Long Term Capital Management (LTCM) fund, which was heavily exposed to troubled emerging markets.
Large-scale losses by LTCM and others contributed to the latest round of turmoil in financial markets and sparked calls for greater regulation, either of the funds directly or via the banks that lent them money.
The US$3.5 billion private-sector rescue of LTCM was coordinated by the New York Fed out of concerns that the fund's collapse would have posed serious risks to the U.S. economy.
U.S. Congress has been conducting hearings on whether new rules are needed to govern the funds.
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