UK watchdog to check banks' collateral management

By Jane Merriman

LONDON (Reuters) - Britain's financial watchdog is looking into the management systems investment banks employ to monitor and evaluate collateral used to back their business, a senior UK regulator said on Tuesday.

Thomas Huertas, director of wholesale firms division at the UK Financial Services Authority, said: "We are going to kick the tires on investment bank collateral management systems."

Huertas, speaking at Reuters Hedge Funds and Private Equity Summit, said the FSA hoped to complete its review by the third quarter of this year.

He said the review followed on from a survey the FSA had done on investment bank exposure to hedge funds as counterparties, which found the exposure was quite small and well collateralized.

"We found the total amount of exposure was relatively small compared to the banks' capital, and the exposure was by and large very well capitalized, so the net effect was quite small."

"It is a very reassuring statement to hear that the exposures are collateralized. We just like to be sure the collateral management systems are actually working," he said.

Huertas said the FSA's hedge fund exposure survey had only covered the banks' exposures booked in the UK, so it was talking to regulators in other countries to look at the exposure on a global basis.

Hedge funds account for a big slice of investment bank revenues, estimated at around $25-$27 billion, according to analysts' estimates. Credit Suisse has estimated that in 2004 this represented more than an eighth of their revenue pool.

The banks provide financing and other services to hedge funds through their prime brokerage divisions.

Huertas said typically the banks would look carefully at the collateral of hedge fund clients, but there were concerns where hedge funds might have more than one prime broker.

He said in a worst-case scenario a fund could use the same collateral for more than one of its prime broker relationships.