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G7: Call for hedge fund scrutiny

Date: Sunday, February 11, 2007
Author: Reuters

Finance ministers say they will get ball rolling for greater oversight of hedge fund industry.

ESSEN, Germany (Reuters) -- The Group of Seven richest nations vowed on Saturday to push ahead with better scrutiny for hedge funds, calling for vigilance on the risks posed by the $1.5 trillion industry.

The G7 asked the international Financial Stability Forum to take a fresh look at hedge funds and report back in time for the next meeting of major industrialized nations in May.

"Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant," the final G7 communique said. "The assessment of potential systemic and operational risks associated with these activities has become more complex and challenging."

The rapid expansion of hedge funds is causing concern for policymakers because of the often-risky nature of their trading strategies and potential repercussions for global financial markets if a large fund runs into difficulties.

German Finance Minister Peer Steinbrueck, who had put hedge fund transparency on the agenda for this weekend's meeting of G7 finance officials in the industrial city of Essen, said officials would also meet with hedge fund management to work on industry initiatives, such as common standards.

"We will work towards hedge funds developing best practices," Steinbrueck said, noting that hedge funds also made a positive contribution to financial markets.

But Bundesbank President Axel Weber said: "Using (the word 'vigilance') should signal that we are everything other than relaxed about the systemic risks that could arise."

Common ground?

The G7's decision indicated that common ground had been found between Germany and key partners Britain and the United States - both of which have sizeable hedge fund sectors and have been more skeptical of the need for a regulatory clampdown.

U.S. Treasury Secretary Henry Paulson said market discipline among regulated counterparties was the best way to minimize hedge fund risk

European Central Bank President Jean-Claude Trichet said talks on improving transparency in the industry were "a work in progress" but self-assessment and a voluntary code of conduct were more likely than regulation as a first step.

Britain's light-touch to regulation has made it a thriving hedge fund center. Seventy percent of Europe's hedge funds are based in London and around 90 percent do their banking there.

Germany has recently toned down its rhetoric on hedge fund regulation, talking up the idea of a voluntary code of conduct rather than a heavy-handed clampdown. That call for greater transparency has been a unifying theme.

The Financial Stability Forum was established in 1999 in reaction to the Asia currency crisis that rocked foreign exchange markets. The group enables high-level financial authorities from the world's most important economies to watch financial risks, share information and steer regulation.

The Group of Seven rich countries - the U.S., Japan, Germany, Britain, France, Italy and Canada - are all members of the FSF, as well as Australia, Hong Kong, the Netherlands and Singapore. International financial institutions and regulators are also members.

Forum chairman Mario Draghi, who also heads the Bank of Italy, said a preliminary report would be presented at the next International Monetary Fund meeting in April.