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The Financial Stability Forum met in Frankfurt discussing the risks and vulnerabilities in the international financial system and reviewed ongoing work to strengthen financial system stability and resilience. Among others the FSF discussed developments in the hedge fund sector and the supervisory, regulatory and private sector actions taken in recent years to strengthen market discipline, risk management practices and market infrastructure.
The role of hedge funds in price discovery, market liquidity and the risk-bearing in markets has increased. More recently, hedge funds have significantly expanded their involvement in credit markets, where complex products can pose substantial risk management and valuation challenges.
Members discussed how financial institutions are responding to associated risks, including developments in collateral, margining and stress testing practices. They emphasised the importance of enhancing the effectiveness of market discipline and continuing attention to strengthening counterparty risk management practices.