Corrigan Says PWG Hedge Fund Guidance Must Trigger Benchmarked Best Practices

While praising the recent hedge fund guidance issued by the President’s Working Group on Financial Markets, former Fed senior official Gerald Corrigan said that a common benchmark of best practices for hedge funds must be developed to augment the systemic risk principles in the guidance. Having in place a benchmark of best practices would provide real assurance across classes of institutions that best means best, he reasoned, and also encourage an environment that stresses competitive excellence rather than a gradual drift toward the least common denominator. In testimony before the House Financial Services Committee, Mr. Corrigan observed that major banks and securities firms are credit suppliers and trading counterparties for hedge funds.

Mr. Corrigan is the chair of the Counterparty Risk Management Policy Group, which published a far reaching report about 18 months ago. The report is a forward-looking, integrated framework of initiatives dealing with risk management, enhanced disclosure, transparency, and sound corporate governance.

According to the CRMPG chair, the major drawback to the creation of a common benchmark of best practices is the difficulty of drafting such a statement in a manner that guards against slippage into unwanted detail that compromises the principle-based approach called for by Working Group. While acknowledging that risk as very real, the former NY Fed president said that the potential benefits arising from the presence of common benchmarks of best practices are considerable. He indicated that many of the building blocks for the best practices are already available in the CRMPG Report.