Comment Letter Responding to FSB’s Background Note, ‘Shadow Banking: Scoping the Issues’

May 16, 2011

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Topics: Financial Stability Board Shadow Banking: Scoping the Issues, shadow banking system, banks, broker dealers, Background Note, hedge fund industry, concentration of assets, low leverage, borrowing arrangements, derivatives contracts, stable capital, regulation, credit intermediation chain, Distribution/Wholesale Funding, non-bank institutional investors, long-only mutual funds, insurance companies, Pension Funds, private equity funds, large corporate investors, systemic risk concerns, maturity transformation, liquidity transformation, individual adviser, hedge fund adviser, asset concentration, asset management structures, interconnectedness of hedge funds, systemic impact of hedge funds, The UK Financial Services Authority, FSA, legal separation of different funds, bank holding companies, nonbank financial institutions, secured borrowings, manage liquidity risk, investors, bank/broker counterparts, secured basis, short term liability, repo liabilities, ABCP conduits, mutual funds, collateral, margining process, haircuts, initial margin, mark-to market margining, repo sellers, repo collateral, highly leveraged financial institutions, hedge fund borrowings, Long Term Capital Management, LTCM, U.S. President's Working Group on Financial Markets, counterparty risk management, Counterparty Risk Management Policy Group, hedge fund leverage, regulatory arbitrage, regulatory arbitrage concerns, off-balance sheet vehicles, direct regulation of entities, U.S. Securities and Exchange Commission, macro-prudential approach,
From: MFA, Richard Baker


Secretariat of the Financial Stability Board
Bank for International Settlements

MFA submitted a comment letter in response to the FSBs Background Note on Shadow Banking. In our letter, we discussed the role of hedge funds in the financial system, noting that they generally are not part of the shadow banking system as defined by the FSB and that hedge funds do not pose systemic risk, at least currently. We discussed the structure of hedge funds and their financing arrangements to make the point that hedge funds generally do not engage in maturity transformation. We also explained that hedge funds are well regulated and subject to significant reporting and oversight requirements under the Dodd-Frank Act and the Alternative Investment Fund Manager Directive. Finally, we encourage the FSB to support the macro-prudential measures approach to regulation, which would allow the regulators to monitor the financial system as a whole and manage the systemic risks appropriately.