Priming the Market with Voluntary Standards
The global fallout from the subprime mortgage market includes massive losses at financial firms, sometimes accompanied by massive bonuses for select executives. Errors by consumers, lenders, intermediaries and other stakeholders are causing instability that raises the prospect for increased regulatory intervention. While fault finding is easy, developing effective responses is difficult.
One model for reform is the Hedge Fund Working Group, a voluntary standards body established last year by leading hedge fund managers to create "a set of high quality best practice standards." The Working Group, which cooperated with "the US President’s Working Group on Hedge Fund Managers," describes its work as "an exercise in market discipline, based on disclosure." In addition to releasing a Final Report, the Hedge Fund Standards Board Ltd (HFSB), was established as a watchdog "to monitor conformity to the hedge fund best practice standards" and "to ensure they are updated and refined as appropriate."
Although nominally specific to hedge funds, the Final Report notes that "our work has highlighted a number of issues which are of importance far beyond the hedge fund industry." Issues discussed by the Working Group that are directly relevant to US markets include the "question of valuation of hard-to-value assets..." and "the management of liquidity risk."
While future American regulatory actions are undetermined, it is clear that any effective response to the current financial situation should be built on the principles of transparency, international cooperation, and market-based leadership.
See Hedge Fund Working Group Final Report
See Hedge Fund Standards Board website
See HedgeWeek article
