Hedge Fund Leverage Probe Is Trans-Atlantic

Jan 9 2007 | 10:58am ET

Hoping to head off another Long Term Capital Management, regulators from the U.S. and Europe are together investigating loans to hedge funds, potentially presaging a move to increase margins.

The Securities and Exchange Commission, New York Federal Reserve Bank and the U.K.’s Financial Services Authority, along with German and Swiss regulators, met with 10 banks that are among the largest lenders to hedge funds last month.  In an interview with Bloomberg News, SEC Commissioner Annette Nazareth called the meeting “a fact-finding effort,” and said that no decision on whether new rules are needed has been made. But one thing is clear: Any move could put a dent in the $8 billion in prime brokerage fees investment banks reap each year.

Regulators fear that a battle for business in the lucrative prime brokerage market may be inflating leverage to dangerous levels. They hope to learn how much margin banks require in loans to hedge funds.

According to Bloomberg, Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley and UBS participated in last month’s gathering.


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