Hong Kong Regulator Calls For More Coordinated Risk Management

by Mary Swire, for LawAndTax-News.com, Hong Kong

13 July 2007

More effective dialogue and co-operation internationally between regulators and market participants is needed in managing the risks in highly complex financial markets, according to Martin Wheatley, Chief Executive Officer of the Hong Kong Securities and Futures Commission (SFC).

In a keynote address to the Asia Pacific Capital Markets Congress in Hong Kong, Wheatley explained that risk management was more challenging in the current environment, given the complexity of financial instruments and trading strategies.

“Everybody who is engaged with the financial system is watching out for the risks,” he observed. “We all share a responsibility in exercising discipline to ensure that risks are not excessive.”

Wheatley warned that illiquidity could magnify the risk of these instruments and strategies, and embedded leverage compounded the difficulty in managing the risks.

“The various international efforts to set international best practices and standards, better regulation, dialogue with industry, as well as market initiatives on hedge funds and the management of counterparty risk are efforts in the right direction,” he told the conference.

The SFC chief's concerns echo similar sentiments expressed recently by the head of the Hong Kong Monetary Authority, Joseph Yam.

Writing in his weekly 'Viewpoint' column for the HKMA website, Yam suggested that the current regulatory framework may not be robust enough to remove systemic risks to the global financial system posed by hedge fund activities in particular.

"Hedge funds can bring significant benefits to financial markets, but they also bring with them the possibility of systemic risks," he observed.

Yam believes that systemic risk is most likely to arise from the failure of a significant hedge fund that has large exposures to other financial institutions.

"The failure itself, and any panic sell-off afterwards, could push up the risk premium, causing a sharp decline in asset prices that might eventually drain the market of liquidity. It might also trigger herding behaviour among some less sophisticated hedge funds," he cautioned.

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