Post by jannikki on Sept 16, 2006 15:41:49 GMT -4
Fed's Geithner Says Hedge Fund Margin Rules Need Attention
By Anthony Massucci and Philip Lagerkranser
Sept. 15 (Bloomberg) -- Financial regulators need to pay more attention to whether margin requirements placed on investors such as hedge funds are adequate, said New York Federal Reserve Bank President Timothy Geithner.
Efforts to strengthen capital markets should ``be reinforced with more attention by supervisors to margin practice and limits around the counterparty risk-management process,'' Geithner said in a speech to the Hong Kong Monetary Authority and Hong Kong Association of Banks in the city today.
Geithner's speech, marking the approaching 10-year anniversary of the 1997 Asian financial crisis, focused on how regulators can reduce markets' vulnerability to low-probability, extreme events and make self-regulation more effective.
Market factors lessening the probability of ``future systemic events,'' he said, may increase the damage of and complicate the management of severe financial shocks. ``The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones,'' he said.
He declined to comment on the direction of interest rates or the economic outlook.
A margin requirement is the amount of money or collateral a bank or securities dealer requires clients to deposit in their margin accounts. The bank can collect the money or sell the collateral if investor can't meet obligations made in conjunction with the initial trade.
Margin requirements ``can provide an important cushion'' when financial systems come under stress and investors withdraw money, as happened in the 1997-98 crisis that plunged many Asian economies into recession, Geithner said.
Risk Management Limitations
``The question for policymakers is whether the mix of capital and margins produced by the market is appropriate from the perspective of the financial system as a whole,'' Geithner said.
Regulators and institutions need to be aware of the limitations of conventional risk management tools in assessing potential losses in today's financial system, Geithner said.
There's a risk that ``individual institutions will operate with less of a cushion than might be desirable for the market as a whole,'' he said.
As New York Fed president, Geithner, 45, serves as vice chairman of the Fed's Open Market Committee, which sets U.S. interest rates. The Fed in August held its benchmark rate steady at 5.25 percent after 17 consecutive quarter-point increases dating back to June 2004. Policy makers next meet on Sept. 20.
Geithner was undersecretary of the Treasury for international affairs from 1999 to 2001. He then joined the International Monetary Fund as director of the policy development and review department before being named president of the New York Fed in November 2003.
Transfer of Risk
Requirements and restraints placed on regulated institutions, Geithner said, led to the transfer of risk to a wider range of institutions, including private capital or hedge funds.
As existing funds grow larger and their importance increases, he added, ``distress among those institutions can have greater effects on overall market dynamics, potentially increasing risks to the regulated core.''
This will force financial markets to design a framework to protect against ``systemic risk that is so important to economic growth and stability.''
Geithner didn't cite any specific rules or protection measures, saying the focus should be on strengthening ``core'' institutions to adverse economic and financial conditions.
To contact the reporter on this story: Anthony Massucci in New York at amassucc@bloomberg.net .
Last Updated: September 15, 2006 02:50 EDT
quote.bloomberg.com/apps/news?pid=20601087&sid=an02p3jWWNJk
By Anthony Massucci and Philip Lagerkranser
Sept. 15 (Bloomberg) -- Financial regulators need to pay more attention to whether margin requirements placed on investors such as hedge funds are adequate, said New York Federal Reserve Bank President Timothy Geithner.
Efforts to strengthen capital markets should ``be reinforced with more attention by supervisors to margin practice and limits around the counterparty risk-management process,'' Geithner said in a speech to the Hong Kong Monetary Authority and Hong Kong Association of Banks in the city today.
Geithner's speech, marking the approaching 10-year anniversary of the 1997 Asian financial crisis, focused on how regulators can reduce markets' vulnerability to low-probability, extreme events and make self-regulation more effective.
Market factors lessening the probability of ``future systemic events,'' he said, may increase the damage of and complicate the management of severe financial shocks. ``The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones,'' he said.
He declined to comment on the direction of interest rates or the economic outlook.
A margin requirement is the amount of money or collateral a bank or securities dealer requires clients to deposit in their margin accounts. The bank can collect the money or sell the collateral if investor can't meet obligations made in conjunction with the initial trade.
Margin requirements ``can provide an important cushion'' when financial systems come under stress and investors withdraw money, as happened in the 1997-98 crisis that plunged many Asian economies into recession, Geithner said.
Risk Management Limitations
``The question for policymakers is whether the mix of capital and margins produced by the market is appropriate from the perspective of the financial system as a whole,'' Geithner said.
Regulators and institutions need to be aware of the limitations of conventional risk management tools in assessing potential losses in today's financial system, Geithner said.
There's a risk that ``individual institutions will operate with less of a cushion than might be desirable for the market as a whole,'' he said.
As New York Fed president, Geithner, 45, serves as vice chairman of the Fed's Open Market Committee, which sets U.S. interest rates. The Fed in August held its benchmark rate steady at 5.25 percent after 17 consecutive quarter-point increases dating back to June 2004. Policy makers next meet on Sept. 20.
Geithner was undersecretary of the Treasury for international affairs from 1999 to 2001. He then joined the International Monetary Fund as director of the policy development and review department before being named president of the New York Fed in November 2003.
Transfer of Risk
Requirements and restraints placed on regulated institutions, Geithner said, led to the transfer of risk to a wider range of institutions, including private capital or hedge funds.
As existing funds grow larger and their importance increases, he added, ``distress among those institutions can have greater effects on overall market dynamics, potentially increasing risks to the regulated core.''
This will force financial markets to design a framework to protect against ``systemic risk that is so important to economic growth and stability.''
Geithner didn't cite any specific rules or protection measures, saying the focus should be on strengthening ``core'' institutions to adverse economic and financial conditions.
To contact the reporter on this story: Anthony Massucci in New York at amassucc@bloomberg.net .
Last Updated: September 15, 2006 02:50 EDT
quote.bloomberg.com/apps/news?pid=20601087&sid=an02p3jWWNJk