The U.S. Treasury Department said this week it plans to host series of financial-market meetings in the next 12 months to address potential risks from the rapid growth of hedge funds and derivatives.
The Treasury Department said it hopes the off-the-record discussions will address questions about hedge funds, derivatives and other market developments.
Emil Henry, Treasury assistant secretary for financial institutions, told a bond market forum, As we evaluate these questions, we also need to evaluate our current regulatory framework to ensure that this framework provides us with the tools and information we need to get the job done.
Henry also said with all the uncertainty in the financial marketplace, the only likely constant is that hedge funds will likely continue to grow.
Though the Securities and Exchange Commission is deviling into potential regulation of hedge funds, the Treasury seeks to look at the explosive growth of the asset class to see if it presents systemic concerns that need to be dealt with proactively.
One area the Treasury should study is “the nexus of over-the-counter derivatives markets with the hedge fund community,” as hedge funds are among the biggest users of OTC derivatives, particularly credit derivatives, Henry said.
The notional value of credit derivatives is estimated to be about $12 trillion to $13 trillion, only a fraction of the $219 trillion in total estimated derivatives value, but they have recently been the fastest growing component, roughly doubling each year, he said.
Henry said that the Treasury is not responding to a crisis, but trying to prevent one from occurring.