G7 asks finance ministers to talk with hedge fund managers

By Bertrand Benoit and Ralph Atkins
Financial Times, London
via Yahoo News
Sunday, February 11, 2007

http://news.yahoo.com/s/ft/20070211/bs_ft/fto021120071135464206

ESSEN, Germany -- Fast growth in the global hedge fund industry requires a "vigilant" stance by governments and central banks, the G7 summit in Essen concluded.

Germany won support -- including from the US and UK -- at the summit for a package of proposals intended to encourage greater transparency in the trillion-dollar hedge fund industry, without calling into question its economic benefits. "Whenever something is growing as quickly as this, it bears looking at," said Hank Paulson, US treasury secretary.

Although the global financial system has been relative free of financial crises in recent years, European central bankers and finance ministers in particular have expressed concern about hidden "systemic" risks that may have been created by hedge funds, particularly given the opaqueness and complexity of many deals. The US has also stressed the importance of investor protection.

The UK and US were wary of any initiative that could have created regulatory hurdles for hedge funds and the German presidency had tailored its proposal accordingly, scaling back its original ambition to agree on a set of instruments to monitor hedge funds by the end of the year.

The focus among G7 countries in recent months has been on encouraging voluntary steps by the industry and on the risk management by regulated institutions, such as banks, that act for hedge funds. Still, Germany is hopeful that member states will agree on concrete measures to improve the sector's transparency under Japan's presidency of the G7 next year.

Speaking after the Essen summit, Jean-Claude Trichet, president of the European Central Bank, said that there had been "a lot of reflection in the industry" but there had not yet been agreement on standards and codes that would form a system of self-assessment. "I'm sure that the industry will crystallise on an appropriate concept," he said.

Under the proposals agreed at the weekend's G7 summit, Gerald Corrigan, former president of the New York Federal Reserve, who compiled a report in 2005 on ways to improve the stability of financial markets, will help encourage direct contacts between national finance ministries and hedge fund managers.

The summit communiqué confirmed that the Financial Stability Forum, an international organisation bringing together the financial industry, regulators, and central bankers, would be asked to update its 2000 report on "highly-leveraged institutions."

Along with other advanced financial techniques, including credit derivatives, hedge funds "have contributed significantly to the efficiency of the financial system," the Essen summit communiqué said. "Nevertheless the assessment of potential systemic and operational risks associated with these activities has become more complex and challenging. Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant."

Axel Weber, president of Germany's Bundesbank, said that "vigilant means that we are anything other than complacent". Rodrigo Rato, managing director of the International Monetary Fund, said that the evolution of recent financial markets had helped spread risk "but there are maybe new vulnerabilities possible."

"We should be aware that the currently very benign financial scenario could lead to complacent attitudes in some parts of the financial sector," Mr Rato said. "This is a possible threat."

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