We’re very grateful to those in the North East, Northern Ireland, Yorkshire & the Humber, London, Scotland, the West Midlands, and the South West who, in recent months, have spent an evening with me or my colleagues. They’ve given us much to chew on about how the economy and the financial system really look from where they sit in different parts of the country and society. They’ve challenged us on the financial crisis, quantitative easing, interest rates, living costs and more. And most importantly, they’ve held us to account, forcing us to explain every aspect of our work. And some. While that’s not easy, it’s essential. Because it’s their economy, their financial system and their lives that we influence. We are simply citizens in their service. 11  All speeches are available online at www.bankofengland.co.uk/speeches  11
In general, credit terms should be calibrated to the quality of the information provided by the hedge fund counterparty. To the extent this is done generally across those funds that are less transparent, have weak risk management disciplines and/or inadequate operational infrastructure, they will be able to take on less leverage, which would limit the potential risk they may pose in a disruptive event. As these points suggest, it is not enough to simply manage the firm’s direct potential future credit exposure to hedge funds within prudently low limits. This has to be complimented with a more exacting approach to the evaluation of a firm’s overall vulnerability to market risk that includes full consideration of the potential impact of a large shock, including one that involves hedge funds. Alongside these enhancements to risk management practices, we believe that market participants should also intensify their efforts to improve the underlying infrastructure of the markets in which hedge funds are important. Weaknesses in close-out procedures for OTC derivatives were among the areas singled out by the CRMPG for collective action in the wake of LTCM, and important progress has been made in this area since. In addition, there are potentially valuable efforts underway to standardize documentation and improve the confirmation and execution process in these markets.