The UK's Financial Services Authority (FSA) has been probing the relationships between investment banks and hedge funds, the Financial Times has reported.
The business daily revealed that Stephen Drayson, head of the regulator's wholesale investment bank group is understood to have questioned at least six banks in the last few months with regard to their prime brokerage operations, in particular the provision of leverage, clearing, and other services to hedge funds.
Speaking to the FT about the focus of the FSA's investigation, an unnamed prime broker explained that:
"They wanted to know more about hedge funds and prime brokerage, and in particular the risks associated with it. They asked us what due diligence we did on clients and asked about risk monitoring. Then the obvious question was about leverage, and what we would do if the market heated up."
In its annual Financial Risk Outlook Report, published earlier this year, the FSA expressed concern about the potential risk posed to the UK financial system by hedge funds.
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