jean - pierre roth : highly leveraged institutions and financial stability – a case for regulation? address by mr jean - pierre roth, chairman of the governing board of the swiss national bank and chairman of the board of directors of the bank for international settlements, at the second conference on law and economics of risk in finance, university of st. gallen, st. gallen, 29 june 2007. the author thanks ms jeanette henggeler - muller, financial stability unit of the swiss national bank for the first draft of this paper. * * * highly leveraged institutions ( hlis ), or hedge funds, are currently a hot topic. no day passes without a warning about hlis in the financial press, and hlis are on the agenda of politicians, supervisors and central bankers in many countries. the german presidency of the eu and the g8 have declared hlis to be a high priority agenda item. after the collapse of ltcm, the then chairman of the federal reserve bank said that " had the failure of ltcm triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own " 1. and in the newspaper bild am sonntag of 17 april 2005, the german bundesminister fur arbeit und soziales accused hlis of " remaining anonymous, having no face, pouncing on firms like locusts, grazing them and moving on. " why is there such distrust of hlis? there are several reasons : hlis are perceived as a highly risky industry which is not subject to supervision. hlis are perceived as non - transparent and opaque. hlis use complex financial instruments and employ non - traditional investment strategies, partially based on complex mathematical models. hlis are active shareholders, as the recent example of abn amro showed. hlis are part of the glamorous world of high - net - worth investors and high - salary investment managers. and, probably most important, in recent years, the importance of hlis has grown tremendously. why is the risk they pose to financial stability perceived as being so high? hlis account not only for a significant share of trading volume in some market segments, especially complex ones, they are also important counterparties and clients which provide a significant source of revenue for large international banks. this raises the question of whether hlis are indeed a threat

mario draghi : measures for the protection of savings and the regulation of financial markets testimony of mr mario draghi, governor of the bank of italy, at an inquiry into matters relating to the implementation of law 262 / 2005, before the sixth standing committee of the italian senate, rome, 26 september 2006. * 1. * * introduction the law on savings ( law no. 262 of 28 december 2005 ) is a sweeping reform with commendable objectives : to strengthen companies ’ internal controls and public controls for the protection of savings, enhance the transparency of markets and foster cooperation between authorities by establishing rules to govern their coordination. together with many appreciable, necessary changes, the new rules also have several problematic points, chiefly as regards the division of the regulatory framework between laws, administrative rules and self - regulation. the quality of financial regulation is gauged by its effectiveness in preventing improper conduct, protecting investors against uninformed risk - taking, and averting systemic crises. with today ’ s increasingly complex financial markets and financial products, it would be illusory to pursue these objectives by means of ever - more detailed and pervasive formal constraints and prohibitions. the fact is that constant financial innovation often results in the rapid obsolescence of formally rigorous and detailed rules crystallized in a law, thus imposing unwarranted costs on economic agents and undermining their competitiveness, with counterproductive effects for investor protection. it is important that the fundamental principles the law must establish should fully exploit the potential of mechanisms based on transparency and reputation, the application of self - regulatory codes, and flexible action by the supervisory authorities. the law on savings takes this course, but only up to a point. on the matter of conflicts of interest within financial intermediaries in particular, it introduces detailed and rigid prescriptions that are not always in line with the rules prevailing at european and international level, which make the most of the selfregulatory capacity of the markets and the flexibility and adaptability to concrete cases characteristic of secondary legislation issued by regulatory authorities. in the field of corporate governance as well, the reform appears to be torn between measures designed to strengthen internal arrangements and the role of self - discipline, and more dirigiste instruments based on meticulous prescriptions. in coordinating the new rules with existing codified laws and other sectoral legislation, the draft legislative decree under examination introduces many useful elements of rationalization and solves a number of problems. i shall offer some considerations in