Washington urges tighter controls on hedge funds

AMERICA AND Britain should pressure offshore financial centres to tighten their standards and their scrutiny of hedge funds, the US said in a report released yesterday.

Hedge funds would have to provide more information about their activities under proposals released by the US Treasury. The probe was triggered by the near-collapse of Long-Term Capital Management last year, and the government decision to prop it up.

The President's Working Group on Financial Markets brought together the Treasury, the Federal Reserve, the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) to assess the risks in the industry and possible solutions.

The final report includes "a number of policy recommendations that are designed to reduce the potential risks of excessive leverage as demonstrated by the near-collapse of Long-Term Capital Management," the White House said in a statement accompanying the report.

It aims to tighten industry self-regulation and to force the private sector to disclose what risks it is taking. It shies away from direct regulation on the argument that hedge funds would move further offshore, outside the ambit of US regulators. LTCM was based in the Cayman Islands. Regulators from the US and other Group of Seven countries should press offshore financial centres to tighten their standards and apply capital requirements, the report says.

It should also consider raising the risk weighting for transactions with offshore banks, and making it difficult for offshore jurisdictions to participate in international financial discussions unless they comply.

Several of the world's major offshore centres, including the Caymans and the Channel Islands, are under British rule although self-governed.

It recommends that the SEC and the CFTC be given more power to investigate firms that deal with hedge funds.