Regulators concerned over hedge funds; Seeking to limit banks' credit risks
Published in Lipper, November 2006 Edition


Luxembourg Regulated Hedge Fund of Funds

WASHINGTON U.S. and U.K. regulators will meet with Wall Street securities firms to discuss whether too many loans to hedge funds leaves them overexposed to potential meltdowns.

The Securities and Exchange Commission, the Federal Reserve and the U.K.'s Financial Services Authority will meet with firms in "just a few weeks" to discuss margin requirements and how banks can limit their credit risk to hedge funds, U.S. Securities and Exchange Commissioner Annette Nazareth said Wednesday.

"Several of these firms are major players in prime brokerage, lending securities and capital to funds to allow execution of strategies," Nazareth told a meeting of the American Institute of Certified Public Accountants in New York.

Regulators have become increasingly concerned that lending to hedge funds could put banks at risk after Amaranth Advisors LLC, a Greenwich, Conn.-based fund, lost $6.5 billion in September on bad natural gas trades. Oversight has decreased since a federal court in June threw out SEC rules forcing funds to submit to random inspections.

Regulators would follow up the initial meetings with monitoring to make sure securities firms have taken steps to limit their risk to a hedge fund collapse, Nazareth said.

Hedge funds are unregistered pools of capital with investments from wealthy individuals and institutions that allow managers to participate significantly in gains or losses.

Federal Reserve Bank of New York President Timothy Geithner said at the same conference that U.S. regulators need to increase cooperation with officials abroad to help manage global financial risks.

He said financial markets are "allocating risk better" than in the past, partly through the growth of derivatives.

Derivatives are financial instruments whose value is based on an underlying stock, bond, loan, currency or commodity.

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