Friends,
I read the article below with much concern. A second Russian debt default
could make the meltdown of the Long-Term Capital Management "hedge fund"
look like a walk in the park, no?
Seth Sandronsky
Monday May 3 1999
HK issues US with hedge-fund warning
BARRY PORTER in Manila
Hong Kong Monetary Authority chief executive
Joseph Yam Chi-kwong has told the United
States not to put the interests of American
hedge funds and other highly leveraged
institutions ahead of small open markets such
as Hong Kong.
He warned the US and other economic
powerhouses against stalling proposed reforms
to the world's financial architecture in the wake
of the economic crisis.
Mr Yam told a gathering of leading
international bankers that the many working
groups set up to review possible global financial
sector changes were taking "too long".
"There is always the risk that, when the dust
has settled, the initiative and enthusiasm, dare I
say, on the part of those less affected by the
crisis, may be stifled," Mr Yam said in an
address to the Institute of International Finance
in Manila.
"There is also the risk that the plight of those
who have been seriously affected by the crisis
is not given the attention it deserves, simply
because they do not have an adequately
representative voice on the issues at hand at
these international forums."
Mr Yam said there had been no lack of ideas,
but these needed to be translated into action
sooner rather than later.
He said it was clear highly leveraged institutions
acted in a calculated, secretive and potentially
highly destablising way and safeguards were
needed.
Mr Yam made three suggestions.
He called for greater transparency of markets,
particularly over-the-counter (OTC) markets,
which, he said, were very opaque and were
where highly leveraged institutions conducted
most of their activities.
"Unlike ordinary exchanges, OTC markets are
subject to little, if any, transparency or
regulatory requirements, raising the risk of
price-ramping, collusion of misconduct," said
Mr Yam, calling for a better disclosure
framework.
He said he supported a German proposal for an
international credit register, which would collate
information on the exposures of international
financial intermediaries to large market players
that have a potential to create systemic risk.
He called for highly leveraged institutions and
hedge funds to be regulated.
The Basle Committee on Banking Supervision,
a working group of specialists from the Group
of 10 leading industrialised nations, has
recommended indirect regulation whereby
banks adopt more prudent policies on the
assessment and management of their exposure
to such institutions.
Mr Yam said: "Other tools of indirect
regulation could include the imposition of
capital charges on lending to such institutions,
raising margin and collateral requirements."
However, he was yet to be convinced that such
indirect measures could adequately protect
smaller markets like Hong Kong from
overwhelming speculative onslaughts.
Finally, the HKMA chief said there was a need
for international co-operation to tackle
regulatory arbitrage, in order to penalise highly
leveraged institutions trying to escape any new
market environment.
He suggested higher risk weights for
counter-party transactions for banks doing
business with financial entities operating out of
offshore jurisdictions that did not comply with
Basle core principles.
However, Mr Yam stressed he was not against
free markets and warned that a delicate
balancing act would be required not to impose
over-heavy reporting burdens or infringe too
much on proprietary information of individual
institutions.
South China Morning Post Publishers Ltd.
All Rights Reserved.
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