*** FT Article ***
HEDGE FUNDS: New regulation warning
By Richard Wolffe in Washington
3/25/99
The US House of Representatives yesterday warned it would consider direct regulation of the hedge fund industry, if measures to supervise the industry indirectly - through the banking system - failed.
Members of the House financial institutions subcommittee urged banks to improve their scrutiny of hedge fund risks in the wake of the near-collapse of Long-Term Capital Management last year.
Marge Roukema, chairwoman of the committee, welcomed bank regulators' efforts to step up their supervision of bank lending to hedge funds. She said: "Quite frankly, I think indirect regulation, through regulation of the banks and securities firms, should be given an opportunity to work. I am somewhat worried that direct regulation will lead to hedge funds going offshore.
"I want to make it clear, however, that if indirect regulation does not work, I am willing to look at the direct regulation of hedge funds."
The warnings yesterday follow indications from influential House members earlier this month that they were considering a range of measures - from new legislation to tighter regulation - to tackle the risks posed by hedge funds to the international banking system.
However, bank regulators repeated their insistence yesterday that any efforts to regulate hedge funds would force the funds to move offshore, beyond the reach of US officials.
Instead, William McDonough, president of the Federal Reserve Bank of New York, urged banks to improve their analysis of hedge fund operations.
Speaking before the committee yesterday, Mr McDonough said banks "must obtain comprehensive and timely financial information" from hedge funds about their risk profile and credit quality.
Mr McDonough said it was crucial for banks to measure the "potential future exposure" of hedge funds. Bank methods for calculating such exposure - notably in volatile markets - had not kept pace with the growth and complexity of hedge funds.
The activities of hedge funds are largely unsupervised. However, US regulators have issued strict new guidelines governing bank dealings with hedge funds this year, in an attempt to limit the risks posed by hedge funds to the wider banking system.
Mr McDonough said banks had "generally tightened the credit risk management standards" for hedge funds. But he added: "Memories tend to be short, and we want to make sure that. .. banks do not return to the old ways of doing business." |
