Counterparty Risk Management Policy Group: Back in Business
According to an article in the Wall Street Journal (February 25, 2020), the Counterparty Risk Management Policy Group, which was established to monitor risks to the global financial system following the 1998 collapse of Long Term Capital Management, has been quietly revived under the leadership of E. Gerald Corrigan, past president of the Federal Reserve Bank of New York and now a managing director of Goldman Sachs Group, Inc..
The policy group is comprised of 15 members representing major brokerage firms, banks, and one insurer.
The Counterparty Risk Management Policy Group’s report of July 1999, was available on the Internet. There are also related papers on default risk management at DefaultRisk.com.
According to the WSJ, the Group’s revival comes with the backing of the New York Federal Reserve Bank. Behind this move, undoubtedly, is growing concern about the rapid growth of unregulated hedge funds. According to the Tremont Company. , investment in hedge funds has grown from $39 billion in 1990 to $650-$700 billion in 2003.
The total size of the hedge funds industry is, of course, unknown, since for tax and regulatory reasons, many are located offshore and are organized as private partnerships.
The operations and strategy of these funds varies considerably and, although initially reserved for wealthy individuals, the popularity of these often “blind trusts” has resulted in marketing to the general public and to high risk investments being held in “conservative” portfolios of institutional investors such as insurance companies and pension funds. The SEC in recent years has shown growing concern about unregulated hedge funds.
The link between hedge funds and the fuzzy, pseudo-scientific world of derivatives
(See: “Uncontrollable Risk” and the resounding failure of Long Term Capital Management
(See: “When Genius Failed”, suggest that the uncontrolled growth of hedge funds may indeed represent a serious systemic risk for global capital markets.
For this reason, capital flow analysts may wish to monitor news on the Counterparty Risk Management Policy Group II, since members of this group have sufficient clout to have a similar effect on capital market operations of hedge funds as had the Group of Thirty during the 1990s with respect to international clearings and settlement.
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