. even if comprehensive data on hedge funds ’ assets under management were available, we would still have a hard time assessing the true economic risk they carry. for they typically make extensive use of derivatives and hold leveraged positions, not least in rather illiquid markets. a partial industry survey conducted by the fsa in the uk found out that hedge fund equity of usd 250 billion translated into gross counterparty positions in the range of usd 860 billion. 1 the opaqueness of risk profiles is an issue in at least three respects. first, with their high leverage and active trading, hedge funds now wield considerable clout in some financial market segments. second, hedge funds are important counterparties to systemically relevant financial intermediaries, for example, to their prime broker banks. and, third, institutional investors such as pension funds have turned to hedge fund investing, a trend that is expected to continue. what does all this mean for the international financial system? • there are some blind spots in the system. • these blind spots have recently grown in size and number. dan waters, fsa, ” regulation and the hedge fund industry : an ongoing dialogue ”, 8 february 2005, speech at hedge funds blueprint europe conference. • and more and more often, these blind spots are related to systemic players. owing to the lack of transparency, the overall risk allocation in the international financial system and the potential for disturbances have become harder to gauge. possible systemic risk has become harder to spot. the lack of transparency hampers market discipline and, as a logical consequence, its use as an important pillar of financial stability. however, direct regulation of the hedge fund industry is hardly feasible, if not impossible, and the efficiency of indirect regulation via the regulation of counterparties is limited. this means that authorities responsible for safeguarding financial stability have to rely on banks monitoring their hedge fund credit clients. however, aggregating their total hedge fund exposure and assessing their hedge fund clients ’ total risk profile have become more difficult for lending institutions since hedge funds are being served by multiple prime brokers. when looking at new trends in the financial system, we need to consider both sides of these coins. shining improvements to financial stability must be weighed against the darker side of stability - impairing features. the challenge is to harness the benefits of new financial trends while minimising their potential costs. unfortunately, there is no instant recipe for safeguarding the stability of evolving financial systems. case by case assessments are required. 4

costly. after all, one needs only to find and repair all date instances in programs. but when you consider the number of lines of code in computer programs in the aggregate, however, the scale of this task is monumental. consider these estimates : • the gartner group believes that there are about 180 billion lines of cobol code alone in the u. s. • british telecommunications estimates it will need 1, 000 staff at peak to check and correct some 300 million lines of computer code. the federal reserve is faced with checking some 90 million lines, and some very large financial institutions have many more than that. clearly, solving the year 2000 problem requires skilled staff and is time consuming. because of so many unknowns, however, it is difficult to accurately estimate the amount of resources that will ultimately be required. killen & associates estimates that $ 280 billion will be spent worldwide between 1997 and 2002. other responsible estimates run to over twice that. federal reserve readiness efforts let me now turn to the approach toward year 2000 compliance that we have taken at the federal reserve, as it may be a useful case study of the scope and scale of what a substantial public agency faces. doubtless there are larger entities that will confront larger tasks internally, but there are probably not very many with more substantial external relationships requiring attention. for example : the federal reserve operates several payments applications that process and settle payments and securities transactions between depository institutions in the united states. three of these applications, fedwire funds transfer, fedwire securities transfer, and automated clearing house ( ach ) are the most critical payment systems. about 10, 000 depository institutions use the fedwire funds transfer system to transfer each year approximately 86 million payments valued at over $ 280 trillion. about 8, 000 depository institutions use the fedwire securities transfer service to transfer each year approximately 13 million securities valued at over $ 160 trillion. the average total daily values of fedwire funds and securities transfers are about $ 1. 1 trillion and $ 650 billion respectively. the ach is an electronic payment service that is used by approximately 14, 000 financial institutions, 400, 000 companies, and an estimated 50 million consumers. approximately 4 billion ach transactions were processed in 1996 with a total value of approximately $ 12 trillion. about 3. 3 billion of these payments were commercial transactions and the remainder were originated by the federal government. the scope of the federal reserve ’ s year 2000 activities includes remediation and testing of all components of these processing environments,