Fed's Fischer Seeks Greater Oversight on Derivatives, Hedge Funds

Mar 27 2015 | 12:33pm ET

Federal Reserve Vice Chairman Stanley Fischer stated in a speech on Friday that hedge funds should be subject to greater scrutiny by federal regulators. 

Speaking in Frankfurt, Fischer noted that although the United States had made progress in reducing vulnerabilities in the non-bank financial sector, hedge funds remained an exception. 

"Leverage at hedge funds, while difficult to measure…appears in aggregate to have trended upward in recent years," Fischer was quoted as saying in media reports. He added that despite improvement in the data available to them, federal regulators still did not have a "complete picture of the scope and size of hedge fund activities".

“For example”, Fischer noted, “outside of the banking system, we have only limited information on leverage and maturity transformation.”

During the speech, Fischer reminded the audience that the size of the U.S. non-bank financial sector has never been this large. He mentioned the Long Term Capital Management fiasco in 1998, and warned that the event was illustrative of systemic problems that can arise in the non-bank financial sector.

Fischer also drew attention to the rise of liquid instruments, like mutual funds and ETFs tracking indices based on illiquid instruments, such as credit default swaps. While the veneer of liquidity is offered to investors, Fischer pointed out that the underlying assets are hard to sell quickly, and thus make the funds vulnerable to liquidity risk.

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