Regulatory initiatives in the arena of position reporting strike me as misguided. Position reporting is at best an unrealistic proposition. At worst, it could undermine the integrity of financial markets. It is unrealistic because the timeliness and aggregation problems are virtually insurmountable in an industry which today represents nearly 25% of the total mutual funds industry in the United States. More importantly, it is potentially counterproductive because, amongst other things, position leaks could encourage behavior by market participants which is fundamentally incompatible with a market-based price finding mechanism. The most complex potential regulatory arena concerns leverage in the hedge fund industry. Extreme levels of leverage are an obvious source of concern for central banks in light of the credit risk nexus between hedge funds and the global banking system. This credit risk nexus could become particularly precarious if a large scale credit crisis were to coincide with a global capital market liquidity crisis. Regulatory initiatives directed at assessing the degree of leverage in the hedge fund industry should therefore not be dismissed ex ante. 7  4  I.e. the value of the positions as a multiple of the equity value. BIS Review 8/2005  Nonetheless, meaningful efforts to measure leverage in the hedge fund industry are bound to be undermined by complex aggregation problems not dissimilar to those prevalent in the arena of position reporting. Misguided regulatory initiatives will fail to accomplish what they set out to do and thus undermine the credibility of regulation. Ineffective regulation can ultimately undermine the competitiveness of financial centers.

Consequently, the interest rate differential between investments in foreign currencies and those in Swiss francs had declined to almost zero towards the end of last year. This made the Swiss franc even more attractive for investors. The Swiss franc is equally attractive to both domestic and foreign investors. The upward pressure on the Swiss franc is not only due to the fact that foreigners want to invest in the Swiss franc, but also because Swiss residents invest less abroad or repatriate their international investments. Allow me to explain this in more detail. For a long time, Switzerland has had a current account surplus, in other words, it exports more goods and services than it imports. In addition, the high level of international investments earns significant investment income. Due to the current account surpluses, Switzerland has built up considerable foreign assets over time. These asset holdings abroad were largely invested in foreign currencies, partly because of the more attractive returns. 1 The net revenue earned with the current account surpluses has to be “re-exported” in the form of foreign securities purchases or investments abroad. In the years before the financial crisis, inflows attributable to the current account surplus were more or less balanced by outflows in the form of private capital exports. Following the financial crisis, the situation changed completely. Risk appetite in Switzerland reduced sharply. Investment of the proceeds from the current account surplus abroad by the domestic private sector has become increasingly restrained.