International Regulators Issue Report on Hedge Fund Risks

The International Organization of Securities Commissions has issued a report that contains recommendations for hedge funds and other highly leveraged institutions ("HLIs") to reduce the potential for systemic risk in the financial markets. The IOSCO Report characterizes HLIs as entities which (i) trade for their own account, (ii) take on significant leverage, (iii) are not subject to direct prudential regulation and (iv) are subject to limited disclosure requirements by virtue of being private companies. The Report mentions that last year's near-collapse of Long-Term Capital Management "highlighted the potential risks to regulated institutions, markets and the financial system" that are posed by such institutions, and increased "the need to address whether there are any regulatory gaps" in overseeing their activities. Advocating a heightened focus on risk management procedures by securities firms that act as counterparties to HLIs, the Report recommended that securities regulators apply greater scrutiny to firms that deal with HLIs and encourage them to adopt sound practices. In addition, the Report suggested greater disclosure of HLI activities to regulators, market authorities, regulated counterparties of HLIs and the public generally. (Securities Regulation & Law Report, 11/12/99, p. 1493; see also "Hedge Funds and Other Highly Leveraged Institutions," Report by the Technical Committee of IOSCO, 11/99, available at www.iosco.org)

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Michael R. Butowsky at (212) 940-6757 or e-mail mrbutowsky@rosenman.com, William Natbony at (212) 940-8930 or e-mail wnatbony@rosenman.com, Fred M. Santo at (212) 940-8720 or e-mail fmsanto@rosenman.com, or Lawrence Cowen at (212) 940-8546 or e-mail lcowen@rosenman.com