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Pressure for hedge fund scrutiny builds as Yellen leads her first U.S. financial stability meeting

Credit: REUTERS/TOM BRENNER

By David Lawder

WASHINGTON, March 31 (Reuters) - U.S. Treasury Secretary Janet Yellen is facing pressure from Democrats to revive tougher scrutiny of hedge funds and other large pools of capital as she heads her first meeting of the premier grouping of U.S. financial regulators on Wednesday.

The meltdown of leveraged hedge fund Archegos Capital Management this week, which inflicted losses on Credit Suisse CSGN.S, Nomura 8604.T and other intermediaries, gives the Financial Stability Oversight Council fresh evidence to review.

The council, led by Treasury and including heads of the Fed, the Securities and Exchange Commission and other major financial regulators, is scheduled to meet at 3 p.m. EDT (1900 GMT) to privately discuss hedge fund activity and the performance of open-end mutual funds during the coronavirus pandemic.

It also will hold a rare public session to discuss financial system risks from climate change for the first time.

Archegos' failure to meet margin calls is the third significant market episode in the space of a year involving faltering hedge funds or open-end mutual funds.

Thus far, the damage from the Archegos incident has been limited to a handful of stocks, including ViaComCBS Inc VIAC.O and Discovery Inc DISCA.O, but concerns are rising that trillions of dollars in government coronavirus aid will fuel more market risk-taking.

"Archegos is a potential canary in the coal mine because this came out of nowhere," said Gregg Gelzinis, associate director of economic policy at the left-leaning Center for American Progress in Washington.

"Is there another fund that's larger, that's more leveraged with the same characteristics that could prove to be a more systemic event? That's the major concern right now."

FSOC BACKTRACKED UNDER MNUCHIN

Former Treasury Secretary Jack Lew used the FSOC from 2014 to 2016 to focus on risks posed by hedge funds and asset managers, forming a working group to study their use of leverage. Yellen, an FSOC member as Fed chair, backed these initiatives.

The fund leverage working group was abandoned by President Donald Trump's Treasury secretary, Steven Mnuchin. The FSOC also weakened rules on the designation of nonbank financial institutions as systemically important.

Gelzinis said that a good FSOC start for Yellen would be to revive the Treasury working group on hedge fund leverage.

The Treasury declined to comment further on the agenda for Wednesday's meeting, which was issued last week, before news of the Archegos downfall broke.

Yellen said at her confirmation hearing in January that she still thought that studying leverage was worth pursuing, citing the market problem experienced last March.

"This is an activities-based approach that FSOC is pursuing and I thought that was the right approach and I would want to look again at some of those approaches," Yellen said.

Last week, Senator Elizabeth Warren, a Democrat and long-time critic of Wall Street, pressed Yellen on whether she would designate BlackRock Inc BLK.N and other big asset managers as systemically important financial institutions.

Yellen said it was "important to look very carefully" at the risks posed by these firms, but again backed scrutiny of market activities over company-based designations.

Mark Sobel, a former Treasury and International Monetary Fund official, said that Yellen, as FSOC chair, needs to make clear to regulators what "activities-based" supervision they should apply to hedge funds and asset managers.

Yellen "needs to use the bully pulpit of the FSOC to drill down on these issues and compel the relevant regulatory authorities to act," Sobel added.

ANALYSIS-Archegos meltdown set to intensify shadow banking regulatory scrutiny

FOCUS-In Archegos fire sale, Credit Suisse, Nomura burned by slow exit

BREAKINGVIEWS-Archegos pours sand into Nomura’s main fuel tank

Archegos losses tallied up, industry regulatory scrutiny grows

ANALYSIS-Debacle at Archegos throws excessive risk-taking into spotlight

EXPLAINER-Why Archegos Capital was in U.S. regulators' blind spot

(Reporting by David Lawder in Washington Editing by Heather Timmons and Matthew Lewis)

((David.Lawder@tr.com; +1 202 354 5854; Reuters Messaging: david.lawder.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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