Brown insists on hedge fund rules

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The Independent Online
GORDON BROWN, the Chancellor of the Exchequer, yesterday called for a new international standard of best practice to govern banks dealings with hedge funds. He said a new standard would address the "fundamental" problems with the level of transparency and disclosure provided by such funds.

International banking regulators are already drawing up a code of practise to encourage greater transparency and disclosure. But in a statement to parliament on last week's G7 communique on the international financial system, Mr Brown went further than his G7 counterparts.

He urged the Basle Committee on Banking Supervision to examine the capital adequacy rules which govern banks' dealings with hedge funds. "An agreed international standard of best practise would act as a benchmark both for financial institutions and their regulators," he said.

"Britain also believes that as part of the review of capital adequacy rules, the Basle committee needs to examine the appropriate treatment of banks' exposure to hedge funds so there is proper recognition of the risks that are involved."

Treasury sources said Mr Brown has already written to the Basle committee asking it to draw up tough rules on transparency and disclosure of hedge funds.

But since many funds are registered in off-shore centres outside regulators' reach, it may be more fruitful to establish new rules on how banks deal with the funds.

The comments follow the near collapse of US hedge fund Long Term Capital Management which caused a meltdown in financial markets.

Mr Brown said that since LTCM was based in the Cayman Islands, a British overseas territory, the G7's plans to encourage offshore centres to comply with internationally agreed standards were particularly pertinent to Britain.

The chancellor's comments follow a call last Friday by Howard Davies, the head of the Financial Services Authority, for banks to be required to set aside larger amounts of capital to cover lending to hedge funds.

The government is due to publish a report later this month which will recommend tighter regulation of business in Jersey, Guernsey and the Isle of Man. But the report is expected to recommend that companies registered in these centres can keep their holding structures secret.