large international banks – should strengthen counterparty risk management practices as they are directly exposed to HLIs (first transmission channel). Second, core intermediaries should improve their robustness to the potential erosion of market liquidity (second transmission channel). Moreover, the FSF suggests that supervisors evaluate whether the link between HLIs and banks should be better monitored. The UK Financial Services Authority, for instance, conducts a six-monthly survey of prime broker dealers' exposure to hedge funds. Finally, the FSF encourages counterparties and investors to demand accurate and timely portfolio valuations and risk information from HLIs in order to strengthen market discipline. At present, HLIs disclose information to their investors and counterparties, but the level of disclosure varies considerably. The best practice guidelines issued by the Managed Fund Association aim at guaranteeing a minimum level of transparency. It is evident, however, that there are also limits to disclosure. A detailed disclosure of all portfolio positions in good time might be neither feasible nor desirable as it would force HLIs to give away proprietary information which is essential for their business. The recommendations by the FSF are an important contribution to the international debate on how to deal with HLIs. The correct measurement and proper management of the risk inherent in HLIs is crucial. Counterparties and creditors of HLIs are thus firmly requested to carry out regular stress tests designed to simulate risk exposures and liquidity during periods of stress.
However, central banks and regulatory authorities will closely follow developments in the HLI industry, in particular the initiatives taken by market participants to mitigate spillovers to the banking industry. References Counterparty Risk Management Policy Group (2005), "Toward Greater Financial Stability: A Private Sector Perspective," The Report of the Counterparty Risk Management Policy Group II. De Nederlandsche Bank (2007), "Overview of Financial Stability in the Netherlands." Financial Stability Forum (2007), "Update of the FSF Report on Highly Leveraged Institutions". Greenspan, Alan (1998), "Private-sector refinancing of the large hedge fund, Long-Term Capital Management," Testimony of chairman Alan Greenspan before the Committee on Banking and Financial Services, U.S. House of Representatives, October 1, 1998. Hildebrand, Philipp (2007), "Hedge funds and prime broker dealers: step towards a ’best practice proposal’," Banque de France, Financial Stability Review – Special issue on hedge funds, No. 10. Managed Fund Association (2005), "MFA's 2005 Sound Practices for Hedge Fund Managers." McCarthy, Callum (2006), "Hedge Funds: what should be the regulatory response," speech at SUERF (European Money & Finance Forum). The President's Working Group on Financial Markets (1999), "Hedge Funds, Leverage, and the Lessons of the Long-Term Capital Management." The President's Working Group on Financial Markets (2007), "Agreement among PWG and US Agency principals on principles and guidelines regarding private pools of capital." 6  BIS Review 74/2007