I. Introduction and background

1. In March 2000, the Financial Stability Forum (FSF) endorsed recommendations to address concerns raised by highly leveraged institutions (HLIs) following the Asian Crisis and the Long Term Capital Management debacle. These included strengthened risk management practices by HLI counterparties and HLIs, enhanced regulatory oversight of HLI credit providers, enhanced public disclosure by HLIs and counterparties, improvements to market infrastructure, guidelines on good practices for foreign exchange trading, and enhanced market surveillance by national authorities. The Report did not recommend direct regulation of currently unregulated HLIs but indicated that this would be reconsidered if, upon review in March 2002, the implementation of the report's recommendations had not proven effective in addressing the concerns identified.

2. In March 2001, the FSF took stock of the progress towards implementation of the recommendations, drawing on a note from the Chairman of the HLI Working Group. And in September 2001, it set in train work on the present assessment, which has been prepared by the FSF Secretariat, drawing on input from FSF members, consultations with external experts and market participants, and previous reports.

3. The note provides a general overview of recent developments in the industry in order to provide a context for consideration of the progress made in addressing earlier concerns. It also highlights industry changes that have given rise to some fresh concern, though these do not pose threats to financial stability per se. The note concludes with issues for the FSF's consideration. Continue reading