Subcommittee on Capital Markets,
Securities and Government Sponsored Enterprises
Richard H. Baker, Chairman
|For Immediate Release:||Contact: Pat Cave (202) 225-4221|
|Thursday, March 16, 2000||or|
Today, the Subcommittee on Capital Markets will mark-up legislation to require large hedge funds to report financial information to market participants.
This bill does not aim to regulate hedge funds. In fact, the goal of the bill is simply to enhance market discipline and allow market participants to make better, more informed judgments about the creditworthiness of hedge funds. Efficient markets rely on timely and useful information. Market disclosure will aid in constraining excessive leverage, particularly in the largest hedge funds, and help to limit risk exposure to the broader financial markets.
The legislation responds to the near collapse of the hedge fund Long-Term Capital Management. On April 29, 1999, the Presidents Working Group on Financial Markets released a report, "Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management."
Its primary finding was that it is excessive leverage that poses unacceptably high levels of systemic risk, an issue that is not limited to hedge funds. Among a list of legislative and regulatory recommendations, the Working Group urged Congress to create a mechanism to enhance public disclosure of hedge funds. This bill responds to that recommendation.
In addition, we have received testimony from regulators, counterparties, and other market participants. I want to thank the Counterparty Risk Management Policy Group and several large hedge funds for responding to the Report with concrete proposals for best practices of risk management. Both efforts demonstrate the willingness of the private sector to resolve the policy concerns raised by LTCM.
After considering the report and testimony at several hearings held by the House Committee on Banking and Financial Services, I have concluded that the most appropriate response to the treatment of hedge funds is a measured, market-oriented approach of enhanced disclosure. That is the approach of H.R. 2924, "The Hedge Fund Disclosure Act."
It is clear to me, that the lesson of Long-Term is that the market exercised minimal scrutiny of the Funds risk-management practices and risk profile. This is largely due to LTCMs practice of disclosing only minimal information to these parties.
I believe unregulated hedge funds should disclose more meaningful and comprehensive measures of market and credit risk. However, I do not intend to require hedge funds to disclose proprietary information on investment strategies or positions.
Under H.R. 2924, hedge funds will be required to file quarterly reports with the Federal Reserve, as well as the other Members of the Presidents Working Group on Financial Markets: the Treasury Department, the Securities and Exchange Commission, and the Commodities Futures Trading Commission. These reports are to be made available to the public.
Information disclosed to the Federal Reserve and available to the public should include total assets, total derivatives positions, asset to liability ratios and market risk measures.
We invite a vigorous discussion on the utility of these disclosures. I agree with the Working Group Report that the response to LTCM is to encourage private market participants to constrain leverage in the financial markets and mitigate systemic risk. Most importantly, I anticipate that making better, more up-to-date information on the activities of the largest hedge funds available to the private market will best facilitate that purpose.