This is a progress report on the recommendations of the Working Group created at the FSF's inaugural meeting in April 1999, under the chairmanship of Mr Howard Davies, Chairman, Financial Services Authority, UK, to review the implications of Highly Leveraged Institutions (HLIs) for global stability.

The report notes that good progress is being made to strengthen counterparty risk management and regulatory oversight, notably with regard to senior management reporting of HLI exposures, general standards of credit analysis, due diligence and documentation. However, credit providers need to make further progress in the measurement of credit exposures, including the conduct of comprehensive stress tests. Supervisors remain concerned about the ability of regulated firms to resist market pressures, in particular on initial margin.

Disclosure of information by HLIs to credit providers has improved in terms of both quality and quantity. But progress remains inconsistent, with confidentiality concerns and competitive pressures sometimes limiting information flows. The report notes that a comprehensive voluntary study involving key financial institutions and hedge funds in setting out a basis for improvements in public disclosure of financial risks has been completed. Progress towards introducing mandatory public disclosure requirements for HLIs/hedge funds has been limited, however.

Leading foreign exchange market participants have agreed a set of Good Practice Guidelines for Foreign Exchange Trading to help address concerns that large and concentrated HLI positions could have the potential to influence materially market dynamics in small and medium-sized open economies. The guidelines have been endorsed by the bodies responsible for foreign exchange market standards in the main financial centres and will be incorporated into existing codes of market conduct.