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Hedge funds, a challenge

Reserve Bank of India (RBI) Governor Y. V. Reddy on Monday said new challenges to financial stability were posed by private equity funds as there was an increasing tendency on their part to consolidate the clearing and settlement of their trades at a single firm, the “prime broker.''

“In terms of financial stability, some new challenges are emerging. The international financial markets are now dominated by private equity funds like hedge funds, which are largely operating outside the `know-your-customer' and `know your investor' (KYC and KYI) norms. Hedge funds have long used arrangements that allow them to execute trades with several dealers but there is now an increasing tendency on their part to consolidate the clearing and settlement of their trades at a single firm, the `prime broker,'' Dr. Reddy said inaugurating a conference on macroeconomics.

Prime brokerage poses some unique challenges for the management of counterparty credit and operational risk. “Recent events have reinforced the possible adverse impact of their risks. Further, it is commonly observed at the global level that hedge funds are `opaque,' that is, information about their portfolios is typically limited and infrequently provided. From a policy perspective, transparency to investors is largely an issue of investor protection, but the need for counterparties to have adequate information is a risk-management issue,'' Dr. Reddy said.

Source : The Hindu

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