Swiss central bank chair rejects regulation of hedge funds

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Jean-Pierre Roth, chairman of the Swiss National Bank, has said hedge funds do not threaten financial stability and that direct regulation would be difficult to justify.

“I do not see Highly Leveraged Institutions (HLI) as a direct threat to financial stability,” said Roth in a lecture on Highly Leveraged Institutions and Financial Stability: A Case for Regulation? at the University of St. Gallen in Switzerland on Friday. “The Achilles heel of the system is the link between HLIs and banks of systemic importance. Thus, the systemic risks originating from HLIs are better addressed through indirect measures aimed at the HLIs' counterparties and creditors, which are mostly large international banks.”

Roth pointed out that the collapse of the Amaranth hedge fund in 2006 “had only a small impact on the financial markets.” He also noted the industry’s relatively small size in comparison to the size of the global economy, and its diversity.

Roth advocated market discipline and best practice guidelines over direct regulation. “I assume market discipline to be more effective in the case of HLIs than in the case of banks for three reasons: (a) investors in HLIs are generally well-informed and relatively ‘sophisticated’; (b) the number of investors is small and (c) HLIs do not constitute an industry regarded as worth being rescued in terms of the public interest,” he said.

Hedge fund regulation is high on the economic agenda because of the industry’s strong growth. In May, the Financial Stability Forum released guidelines encouraging hedge funds to implement sound risk management systems, following a request from the G7 finance ministers and governors. The governors made the request at the February meeting of the Financial Stability Forum in Essen, Germany.