MAY 6, 1999

Mr. Chairman and members of the Committee, thank you for the opportunity to testify concerning the study of the President's Working Group on Financial Markets ("President's Working Group") entitled "Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management," transmitted to the Speaker of the House of Representatives on April 28, 1999.

As a member of the President's Working Group, I am pleased to endorse its study on hedge funds. The President's Working Group and the staff of its members worked very cooperatively on the study and reached a consensus on its recommendations. The study identifies as a central issue excessive leverage in the financial system and the lack of available information about it. The study provides important recommendations about each of the four main issues raised by the near insolvency of Long-Term Capital Management, L.P. ("LTCM") -- the need for increased transparency, the need to eliminate excessive leverage, the need for better prudential controls and the need for enhanced international cooperation and harmonization of regulations.

The study recognizes the critical importance of heightened transparency in the markets by recommending greater disclosure and reporting by hedge funds. It calls for all hedge funds to report detailed financial information, including information about their exposure to market risk, on a quarterly basis. This information would be provided not only to regulators but also to the public. It would thus be available to hedge fund investors, counterparties and creditors to assess the creditworthiness of the hedge fund. It would also be available to regulators and market participants to help assess market integrity and financial stability. In addition, the study recommends that all public companies should be required to report publicly their exposure to highly leveraged financial institutions.

The study also emphasizes the need for enhanced risk management efforts by regulated entities and enhanced oversight of those efforts by regulators. It endorses the view that prudential supervisors and regulators should promote the development of more risk sensitive approaches to capital adequacy. In addition, the study recommends that regulators should have expanded risk assessment powers relating to unregulated affiliates of securities broker-dealers and futures commission merchants. It also reaffirms support for the President's Working Group's legislative proposal on financial contract netting upon insolvency.

Finally, the report recognizes the need for international cooperation among regulators to encourage the adoption and implementation of international standards governing hedge funds and credit exposure to them.

The President's Working Group also agreed that, if these measures prove to be inadequate, serious consideration should be given to the direct regulation of hedge funds and other highly leveraged institutions, including such measures as capital requirements. In addition, direct regulation of derivatives dealers should be considered and indeed is being currently studied by the President's Working Group in the context of its ongoing study on the over-the-counter ("OTC") derivatives market.

These recommendations represent a significant contribution to the effort to reduce the dangerous risks to the financial markets and the economy demonstrated by the LTCM episode. The Commodity Futures Trading Commission and the other agencies represented on the President's Working Group will be taking steps promptly to implement the recommendations to the extent that they can do so without new legislation. To the extent that Congressional implementation of the recommendations is necessary, I commend them to Congress and to this Committee.

I would be happy to answer your questions. Thank you very much.