ECB's Trichet urges global hedge fund regulation
PARIS (Reuters) - Hedge funds, credit rating agencies and all other important market players should be subject to regulation based on a global approach, European Central Bank President Jean-Claude Trichet said on Monday.
The worst financial crisis in over 80 years has sparked a rethink of how markets should be supervised to cut excessive risk-taking by banks.
"The current crisis is a loud and clear call for extending regulation and oversight to all systemically important institutions -- notably hedge funds and credit rating agencies -- as well as all systemically important markets -- in particular the OTC derivatives market," Trichet said.
"What is currently under discussion is the precise way in which these elements should be integrated within an overall regulatory framework," he told a conference on supervision.
"We are in the process of identifying the regulatory gaps."
Global regulatory reform tops the agenda for a summit of the Group of 20 rich and big emerging economies in London in April. Several leaders from the 27-country European Union met in Berlin at the weekend to prepare a common EU position for the summit.
The Berlin meeting agreed that no key financial player should escape regulation but stopped short of giving precise details.
The EU is adopting a draft law to introduce mandatory registration and oversight of credit rating agencies and will make proposals on hedge funds and private equity in coming weeks.
The measure on credit rating agencies has raised concerns in the United States as it would impinge on the operation of U.S. agencies such as Standard & Poor's MHP.N and Moody's (MCO.N).
"Let me stress that both initiatives on rating agencies and hedge funds warrant strong international coordination," Trichet said.
Trichet reiterated that the ECB stood ready to play a role in macro prudential supervision of banking risks.
Ethiopis Tafara, director of international affairs at the U.S. Securities and Exchange Commission, said any new regulatory structure must address systemic risk and provide a prudential framework for institutions deemed too big to fail.
"We need a regulatory framework that addresses misaligned incentives," Tafara said at the conference.
Another flaw in the system was that "nobody was able to access anybody else's exposure," Tafara said, adding that central clearing of off-exchange products was a major step forward.
Deven Sharma, S&P president, said issues raised by ratings of some structured products were a "matter of regret" and the company was taking action as it reflected and learned.
"We recognise that investors look for greater stability in ratings," Sharma said.
New regulation should be "globally consistent" and avoid multiple regimes that could have unintended consequences such as undermining the quality of ratings, Sharma said.
Antonio Borges, chairman of the Hedge Funds Standards Board, said hedge funds had behaved responsibly, proven their value with lower losses than elsewhere in the market and had a better understanding of risk than almost anybody.
"We have to conclude the hedge fund model will remain quite powerful. It has very low leveraging," Borges said.
The industry has put in place very strong standards that deal with governance, conflicts of interest and the behaviour of activist hedge funds, Borges said.
Trichet also said pay structures in the financial industry must prevent excessive risk-taking.
"At the level of individual institutions, compensation schemes must be adjusted to avoid encouraging excessive risk-taking on the basis of relatively small amounts of capital," Trichet said.
Malcolm Knight, vice chairman of Deutsche Bank (DBKGn.DE), said rewards for senior bankers should be in return for long-term risk-adjusted profitability.
"There are many ways of doing that such as more performance-related compensation in the form of equities, longer vesting periods," Knight said.
Bonuses should also be clawed back if performance turns out weaker than initial accounting statements showed, Knight said.
(Editing by Dale Hudson)
- Tweet this
- Share this
- Digg this