Hedge Fund Reader : A Closer Look at Lending Risks

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January 13, 2007

A Closer Look at Lending Risks

-- Pushpa Sathish, Staff Writer

Disclosure and transparency seem to be the buzzwords doing the rounds in the hedge fund industry. Though regulatory agencies have not met with much success in their attempts to get funds to be more open about their investment strategies, they’re trying to minimize the risks to others associated with the industry – like banks and prime brokers who lend leverage amounts to the funds. A committee comprising economists and representatives from the U.S. Securities and Exchange Commission (SEC), the Federal Bank of New York, and the U.K. Financial Services Authority will probe lending practices, counter-party risk measures, and collateralization at large broker dealers, according to the SEC’s commissioner Paul Atkins.

Atkins stressed on the fact that it was not a question of laying down rules for banks to follow; rather, the regulators sought to improve good lending practices and encourage banks and prime brokers to share information with counter-parties and creditors. Being prepared for the risks will make all the difference in how the market copes when a massive collapse occurs – Atkins said that prime brokers were better prepared to deal with Amaranth’s losses of $6 billion than they were when Long Term Capital Management went down in 1998. Reuters reports:

More useful down the road, he said, is to improve disclosure by market participants. "It seems if we can push forward and make sure that the right hand knows what the left hand's doing, that people are involved to a good extent, that the government brings people together so they know what's going on, then that's a very positive thing for the market," Atkins said.

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January 13, 2007 in Regulation | Permalink