This is an Update of the FSF's 2000 Report on Highly Leveraged Institutions. It was produced in response to a request by G7 Finance Ministers and Central Bank Governors.

The report recognises the contribution hedge funds have made to financial innovation and market liquidity. At the same time, it notes heightened risk measurement, valuation and operational challenges for market participants and makes the following recommendations:

  • Supervisors should act so that core intermediaries continue to strengthen their counterparty risk management practices.
  • Supervisors should work with core intermediaries to further improve their robustness to the potential erosion of market liquidity.
  • Supervisors should explore and evaluate the extent to which developing more systematic and consistent data on core intermediaries' consolidated counterparty exposures to hedge funds would be an effective complement to existing supervisory efforts.
  • Counterparties and investors should act to strengthen the effectiveness of market discipline, including by obtaining accurate and timely portfolio valuations and risk information.

The global hedge fund industry should review and enhance existing sound practice benchmarks for hedge fund managers in the light of expectations for improved practices set out by the official and private sectors. Continue reading