IMF tackles hedge funds

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The Independent Online
TIGHTER CONTROL of hedge fund activity will figure heavily on the agenda at the forthcoming International Monetary Fund (IMF)/World Bank meetings in Washington, in the wake of last week's multi-billion dollar bail-out of the Long-Term Capital Management (LTCM) hedge fund.

Official sources indicated on Friday that recent developments in the financial markets had made the issue of tighter control of hedge fund activity a priority at the meetings, which kick off later this week.

One source commented: "Hedge fund activity was already on the agenda for discussion. But the timing of recent events obviously means that hedge funds will be on everyone's minds."

The events of Wednesday night - when it emerged that the US Federal Reserve was co-ordinating a $3.75bn (pounds 2.25bn) bail-out of LTCM amid fears of a systemic risk to the financial system - have given an additional impetus to calls for better regulation of hedge fund activity.

Under proposals expected to be discussed at the IMF/World Bank meetings, banks could be forced to provide regular updates of their exposures to the hedge funds. Some of the funds themselves could also be forced to divulge details of their investments, although some have argued that because many hedge funds have offshore status, the scope for direct regulation could be limited.

More generally, discussion of the global financial crisis is set to dominate the annual meetings - which will be attended by top-level bankers, regulators and finance officials from all over the world. Issues such as Third World debt and corruption, which are normally debated at length, are expected to be pushed down the agenda.

The official IMF/World Bank meetings begin on 6 October, but a number of top-level summits - including this weekend's meeting of the Group of Seven industrialised nations - will take place during the run-up to the official discussions.

Numerous politicians, among them Gordon Brown, the Chancellor of the Exchequer, are expected to press for a thorough overhaul of the IMF and the World Bank, which have been criticised by some for their handling of the current crisis. A report commissioned by Commonwealth Finance Ministers, for example - which will form the basis of discussions at next week's meeting of Commonwealth ministers in Ottawa - is thought to be critical of the IMF and the G7.

An official of the Commonwealth Secretariat said: "In places it is quite critical. There is also a concern that the G7 were not as responsive to the East Asian concerns as they were to Mexico."

The calls for an overhaul of the IMF and the World Bank - which could lead to the establishment of a new unit dedicated to global financial surveillance - are expected to be accompanied by proposals for better methods of funding. Resources at the IMF are now close to record lows, and the recent refusal of the US House of Representatives to approve $15bn of extra funds has exacerbated the funding crisis.

Tony Blair, the Prime Minister, said last week: "The IMF has lent $25bn over the last year and it is important now to strengthen its resources." Mr Brown is expected to pursue the issue at both the meeting of Commonwealth Finance Ministers and the G7 summit.