[Congressional Record Volume 140, Number 35 (Thursday, March 24, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 24, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                  BANKS, DERIVATIVES, AND HEDGE FUNDS

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas [Mr. Gonzalez] is recognized for 5 minutes.
  Mr. GONZALEZ. Mr. Speaker, I take the floor today to update my 
colleagues about the Banking Committee's efforts to ensure the safety 
and soundness of the financial system. Over the past 6 months the 
Banking Committee has been monitoring the rapid growth of newfangled 
financial instruments called derivatives and I have ordered my staff to 
draft legislation that would call for further regulation of 
derivatives.
  As part of our review of the risks posed by derivatives, the 
Committee has been studying one of the major purchasers of derivative 
products--hedge funds. Bank lending to these highly leveraged and 
largely unregulated investment funds raises a number of serious safety 
and soundness questions about hedge funds and their use of derivatives.
  Hedge funds are one of the largest purchasers of derivative products 
from banks, and that status alone makes them worthy of scrutiny. But 
hedge funds deserve extra scrutiny because their massive financial 
clout, fueled by large credit lines from banks, is used for speculative 
purposes. This speculative activity has grown so great that it has a 
tremendous effect on the stability of our financial markets.
  The Congress and regulators must make sure that they understand the 
impact of hedge funds on the stability of our financial markets and the 
banking system. Based on recent events, it appears that hedge funds are 
increasingly being viewed as a growing threat to the stability of our 
financial system. The only way to understand that threat is to learn 
more about hedge funds, debunk the myths, and develop supervisory 
strategies to control those risks. To execute that strategy the 
regulators must begin to require greater disclosure about bank exposure 
to hedge funds and the securities regulators need to require greater 
information about hedge fund operations.
  As a first step to ensuring that the regulators are learning all they 
can about the risks posed by hedge funds, the Committee will hold a 
hearing to explore the implications of bank exposure to hedge funds on 
Wednesday, April 13.


                       background on hedge funds

  Generally, there is very little publicly available data on hedge 
funds because hedge funds deliberately structure their activities so as 
to avoid regulation, including public disclosure. It is not uncommon 
for a hedge fund to have its trading offices located in some exotic tax 
haven that does not require public disclosure of the fund trading 
activities.
  There is no precise definition of a hedge fund, but basically a hedge 
fund is a speculative investment vehicle that uses sophisticated 
techniques to trade a wide range of currencies, securities and 
commodities. They offer high-risk, high-profit investments to 
investors, usually wealthy individuals who can afford to take the 
risks.
  In legal form hedge funds are commonly structured as private limited 
partnerships organized in the U.S. or a foreign corporations in an 
offshore tax haven. Organizing in this way permits hedge fund to avoid 
most domestic regulation. They are exempt from most securities laws and 
because they are partnerships or off-shore corporation they do not pay 
U.S. taxes. Without these important legal distinctions hedge fund 
activities would be severely curtailed.
  Each hedge fund partnership has a general partner that is responsible 
for managing the fund, making investment decisions and raising new 
capital. The general partner often have a large personal stake in the 
fund. The general partner receives a fee for managing the fund and on 
top of that, typically takes 20 percent of all fund profits.
  Hedge funds are usually highly leveraged. In other words, they use 
borrowed money to engage in many of their activities. Banks and 
securities firms are a key source of funds for hedge funds. Hedge funds 
are also one of the largest purchasers of derivatives and they rely on 
banks to supply both derivative products and credit, yet there is 
little available data on the exact magnitude of derivative product 
sales to hedge funds or even bank credit exposure to hedge funds.
  The Commodity Futures Trading Commission [CFTC] is the only financial 
regulatory agency with any regular reporting contact with hedge funds. 
In the futures market the CFTC requires reporting which identifies the 
positions of large traders such as hedge funds. The CFTC's large trader 
reporting authority derives from the Commodities Exchange Act which 
requires large traders to and position holders in particular futures 
contracts to maintain books and records of their transactions and 
positions in both futures and cash market for particular commodities.
  Information on hedge funds is sometimes reportable by brokers and 
dealers under the Securities Exchange Commission's [SEC's] large 
trading reporting requirement, but these regulations cover only 
publicly traded corporate equities and options.
  Hedge funds are subject to the Securities Exchange Act which requires 
investors to report large positions in equity securities. Also some 
investment managers of hedge funds that exercise investment discretion 
with respect to equity securities must file quarterly reports with the 
SEC regarding their equity positions.


                     Recent Losses Raises Concerns

  The recent collapse of European bond prices was the latest warning 
bell that illustrates the potential risks posed by hedge funds. Press 
reports indicate that hedge funds made massive but incorrect bets on 
the direction of European bond prices and the result was staggering 
losses. The newspapers are full of stories about hedge funds losses. 
For example, one headline reads ``Soros Empire Unfazed by Loss of $600 
million.'' George Soros' runs the largest hedge fund called the Quantum 
Fund which reportedly has over $10 billion in assets under management. 
The Fund reportedly lost in the neighborhood of $600 million in 1 day. 
Other funds have had similar experiences. I will invite Mr. Soros and 
other fund managers to testify on April 13 when I plan hearings on the 
risk these funds pose to banks.

  Recent headlines also suggest that the massive losses are 
understandably matched by a growing regulatory concern over hedge 
funds. One headline reads, ``Central Bankers Inquire Into Hedge Fund 
Risks,'' while another reads, ``SEC Is Concerned About Hedge Funds.'' 
Coupled with the recent market turbulence over the Federal Reserve's 
decision to raise interest rates, it is easy to understand why the 
regulators and even the Congress are jittery about hedge funds and 
their effect on the stability of our financial system.
  It is reasonable to ask how a hedge fund could lose $600 million in 
one day. In great part the explanation lies in the growth of hedge fund 
financial clout and the highly leveraged nature of hedge fund 
operations--big gains means big risks, and big risks mean big losses.
  Hedge funds have approximately $75 billion under management. The 
hedge funds apparently leverage that capital with bank loans ranging 
from $5 to $20 for every $1 under management. In other words, these 
funds could conceivably control anywhere between $375 billion and $1.5 
trillion in financial clout. The funds can then further leverage that 
amount by buying options and other derivatives.
  To place hedge fund financial clout in perspective, the average daily 
volume of currency transactions is estimated in the $1 trillion range, 
while the world's largest stock exchange, the New York Stock Exchange, 
has a daily trading volume of roughly $10 billion.
  Given their financial muscle, it is easy to see how hedge funds can 
move markets and worry regulators. It is also easy to see that given 
their aggressive activities, hedge funds have the potential to cause 
market disruptions and increase volatility--both threats to banks that 
are heavily involved in the securities and derivatives businesses.


                     concerns raised by hedge funds

  Hedge funds pose several major risks to our financial system and the 
regulators and the Congress must take aggressive steps to investigate 
those risks. One threat risk is systemic while the other relates to the 
level of individual bank exposure to hedge funds. Both of these risks 
are magnified by the lack of information on hedge fund activities and 
the lack of any reliable numbers on bank exposure to hedge funds. 
Without proper information, it is impossible to gauge the level of risk 
hedge funds pose to our financial system. In addition, the regulators 
can do little to limit bank exposure to hedge funds without such 
information. In other words, not knowing the data, no one can build a 
safety net.
  Examples of problems that could arise from hedge fund activities are 
easy to envision. A large hedge fund fails and defaults on billions in 
loans to several large derivatives dealing banks. On top of that, the 
hedge fund defaults on its side of billions in derivatives contracts 
which sets off a chain reaction panic in the highly concentrated 
derivatives market. Rumors would be raised about the dealer banks' 
ability to handle the defaults.

  Events like this would place severe stress on the derivatives markets 
and the credit markets and the financial system would likely grind to a 
halt over fears that the large banks could not meet their obligations. 
Confidence, the key underpinning of our financial system could easily 
be shaken to the core.
  This scenario alone should provide enough impetus for the regulators 
to gather more information in order to better understand bank exposure 
to hedge funds. While the hedge funds and banks will tell us that the 
above scenario is highly unlikely, in the real world such missteps are 
all too real. We need to prepare for all possibilities in order to 
protect the integrity of our financial system.
  I have asked the regulators if they are prepared to deal with 
potential hedge fund problems. I have also asked for detailed 
information on bank exposure to hedge funds and an explanation of the 
systemic risks that hedge funds pose to our financial system. And I am 
not the only person expressing concern about hedge funds.


                       central bankers concerned

  The G-10 Central Bank governors convene regularly at the Bank for 
International Settlements [BIS] to discuss international monetary 
issues. Earlier this year the central banks began asking questions 
about hedge fund operations. Recent press reports indicate that several 
of the world's central banks have begun investigating hedge funds after 
the huge losses of the funds incurred in the European bond markets.
  The central banks are concerned over the risks that hedge funds pose 
to the stability of the world's financial system and the risks to 
individual banks. One newspaper reported that the Bank of England is 
holding talks with United Kingdom clearing and merchant banks and has 
sent them a questionnaire seeking a clearer picture of the risks 
involved and the extent of bank exposure to hedge funds.
  Another paper reported that the Federal Reserve has undertaken an 
informal but similar survey of the major U.S. banks in order to gather 
information on the effect of hedge funds on bank safety and soundness 
and the systemic risks posed by the funds.
  These efforts are necessary because there is very little publicly 
available data on bank exposure to hedge funds. I liken the current 
situation to the recent experience with highly leveraged transactions. 
In that case the regulators had no systemic data on bank exposure to 
highly leveraged transactions and they were unable to gauge the safety 
and soundness risks posed by bank lending on highly leveraged 
transactions. In order to get a better handle on those risks, those 
regulators eventually forced the banks to provide detailed information 
on their exposure to highly leverage transactions.
  The same should happen with respect to bank exposure to hedge funds. 
It is impossible to gauge the risks of exposure to hedge funds without 
an accurate picture of the exposure. Chairman Greenspan recently stated 
that before bank supervisors can develop effective supervisory 
strategies to deal with derivatives, it was imperative that banks 
supply additional information on derivatives. For that same reason I 
want the regulators to require banks to provide additional reporting on 
their exposure to hedge funds.


          dingell, markey and sec concerned about hedge funds

  On March 10, 1994, Energy and Commerce Committee Chairman Dingell and 
Telecommunications and Finance Subcommittee Chairman Markey wrote to 
the Treasury Secretary and SEC Chairman expressing concern over hedge 
funds and asking for greater disclosure of hedge fund operations.
  Independent of that action, Mr. Arthur Levitt, the Chairman of the 
SEC, recently stated that he was concerned about hedge funds' impact on 
the stock markets and the SEC's limited ability to monitor the funds. 
He also stated that the SEC was working on measures to improve hedge 
fund reporting.
  These initiatives will allow the government to better monitor the 
impact of trading by such funds in the nation's securities markets and 
take steps to limit risks to the financial system.


                            single regulator

  I want to reiterate that the public would be much better served by 
the existence of a single bank regulator to deal with complex issues 
such as derivatives and hedge funds. Each regulator has a slightly 
different orientation and philosophy toward derivatives and hedge funds 
and what steps should be taken to ensure safety and soundness. We need 
a unified, uniformly applied policy.


                               conclusion

  The 1992 Joint Report on the Government Securities Market, conducted 
by the Treasury Department, Federal Reserve and SEC provides important 
insight into how hedge funds can negatively affect a market. The report 
states:

       Events in the government securities markets have shown that 
     their capacity for leverage allows hedge funds to take large 
     trading positions disproportionate of their capital base. 
     However the sheer size of the positions taken by hedge funds 
     raises concerns about systemic risk that these fund may 
     introduce into the financial markets. Regulators currently 
     have little information that might help them assess the 
     market impact of a failure of a hedge fund or that would warn 
     of impending failure.

  The landscape has not changed in the last two years. Before we get to 
the crisis stage with hedge funds, all the regulators should develop 
the means to better understand the risks posed by hedge funds. This can 
only be done by increased disclosure. For their part, bank regulators 
should require greater disclosure of bank exposure to hedge funds. In 
addition, hedge funds should no longer be exempt from prudent safety 
and soundness regulations as called for under the securities laws.
  The Congress must ensure that the regulators have an adequate 
understanding of and clear policies to deal with the systemic and 
operational risks posed by hedge funds. It is also the responsibility 
of the Congress to ensure that supervision of bank derivative 
activities and hedge funds is adequate.
  I will have more to say on this in the near future. Meanwhile, I want 
to emphasize that the concern I have is shared by many and I intend to 
bring to light the risks hedge funds pose, and bring into being the 
polices needed to control those risks.
         U.S. House of Representatives, Committee on Banking, 
           Finance and Urban Affairs,
                                   Washington, DC, March 24, 1994.
     Hon. Alan Greenspan,
     Chairman, Board of Governors of the Federal Reserve System, 
         Washington, DC.
       Dear Chairman Greenspan: On April 13, 1994 at 10:00 a.m., 
     in Room 2128, Rayburn House Office Building, the Committee on 
     Banking, Finance and Urban Affairs will hold a hearing to 
     explore safety and soundness issues related to bank holding 
     company involvement with hedge funds. You or your designee is 
     invited to testify at the hearing.
       So that the Committee may better understand the various 
     safety and soundness issues involving the relationship 
     between bank holding companies and hedge funds, please 
     provide written answers to the following questions with your 
     testimony.


                         1. general information

       How does the Federal Reserve define hedge funds? Please 
     provide a list of hedge funds, including their balance sheet 
     and income statement data and total assets under management. 
     Is there any available measure of the degree of leverage that 
     hedge funds employ? In what markets do hedge funds operate?


            2. bank holding company/hedge fund relationship

       What is total bank holding company (BHC) exposure to hedge 
     funds? Please include totals for extensions of credit, 
     guarantees, derivatives exposure, etc. What is the total BHC 
     credit risk exposure to hedge funds?
       Please list all the BHC services provided to hedge funds 
     and the revenue derived from those services. Are any BHC 
     investors in hedge funds? Do any bank holding companies act 
     as investment advisors to hedge funds?


                3. hedge funds as derivatives customers

       In dollar and quantity terms, what percentage of BHC OTC 
     derivatives contracts are purchased by hedge funds? What 
     percentage of BHC exchange traded derivatives contracts are 
     p666Xby hedge funds?
       Are there any restrictions or prohibitions on the sharing 
     of hedge fund derivative purchases with BHC trading account 
     operations? Would a Chinese Wall between these activities 
     limit bank trading account speculation?


              4. federal reserve monitoring of hedge funds

       Does the Federal Reserve require BHC's to report any 
     information on their exposure to hedge funds? Has the Federal 
     Reserve performed any studies on bank exposure to hedge 
     funds? Is the Federal Reserve currently monitoring bank 
     exposure to hedge funds? Do hedge funds cooperate with 
     Federal Reserve requests for information?


                    5. hedge funds and systemic risk

       What risks do hedge funds pose to the safety and soundness 
     of the banking system? For example, how would the failure of 
     a large hedge fund and the ensuing default on derivatives 
     contracts affect BHC's and the derivatives market?
       Recent press accounts indicate that the Federal Reserve and 
     other central banks discussed the systemic risks to the world 
     financial system posed by hedge funds. What were the results 
     of that meeting? Does the Federal Reserve contemplate taking 
     any action that would curb the aggressive trading strategies 
     of hedge funds? Does the Federal Reserve have any contingency 
     plans should a large hedge fund fail?


             6. hedge funds and treasury securities market

       The ``Joint Report on the Government Securities Market'' 
     (January 1992) raises concerns about the influence hedge 
     funds have on the government securities market. The report 
     also noted that hedge funds provide only limited information 
     on their activities in this market. Please update the 
     Committee on developments since the report was published. Are 
     hedge fund activities still a concern to the efficient 
     operation of the government securities market? Do hedge funds 
     provide adequate information on their activities in this 
     market? Does the Federal Reserve have similar concerns about 
     hedge fund activities in other markets?


                         7. increased reporting

       You recently stated that before supervisors can develop 
     effective supervisory strategies to deal with derivatives, it 
     was imperative that banks supply additional information. For 
     that same reason it seems to make sense that banks provide 
     regulators and/or the public with information on their 
     exposure to hedge funds. I also note that House Energy and 
     Commerce Committee Chairman Dingell has urged the SEC to 
     require hedge funds to make greater disclosures.
       Does the Federal Reserve have any plans to require BHC's to 
     report on hedge fund exposure?


       8. adequate netting arrangements with tax-haven countries

       For various reasons, some hedge funds are chartered in tax-
     haven countries and these hedge funds purchase derivatives 
     from banks. Is the Federal Reserve concerned over the 
     adequacy of netting arrangements with tax-haven countries?
       Finally, please provide additional comments or 
     recommendations your agency has on the BHC/hedge fund 
     relationship and the need for improved reporting of that 
     relationship.
       You will be given 5 minutes to summarize your written 
     remarks. Banking Committee rules require that 200 copies of 
     your written testimony be delivered to Room 2129, Rayburn 
     House Office Building, no later than noon on April 12, 1994.
       Thank you for your time and cooperation. The Committee 
     looks forward to your testimony.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
         House of Representatives, Committee on Banking, Finance 
           and Urban Affairs,
                                   Washington, DC, March 24, 1994.
     Hon. Barbara Holum,
     Acting Chairperson, Commodity Futures Trading Commission, 
         Washington, DC.
       Dear Chairperson Holum: On April 13, 1994 at 10:00 a.m., in 
     Room 2128, Rayburn House Office Building, the Committee on 
     Banking, Finance and Urban Affairs will hold a hearing to 
     explore safety and soundness issues related to hedge funds 
     and their use of derivative products. You or your designee is 
     invited to testify at the hearing.
       So that the Committee may better understand the various 
     risks hedge funds pose to our financial system, please 
     provide written answers to the following questions with your 
     testimony.


                         1. general information

       How does the CFTC define hedge funds? Please provide a list 
     of hedge funds, including balance sheet and income statement 
     data and assets under management. Is there any available 
     measure of the degree of leverage that hedge funds employ? In 
     what markets do hedge funds operate?


                        2. hedge fund regulation

       Please provide a brief overview of the CFTC-related laws 
     and regulations governing hedge fund operations, including 
     any registration, record keeping and reporting requirements.


                   3. cftc monitoring of hedge funds

       How many hedge fund managers are registered as commodity 
     pool operators (CPO) with CFTC? How many hedge fund advisors 
     are registered as commodity trading advisors (CTA) with the 
     CFTC? Does the CFTC have adequate authority and resources to 
     monitor hedge funds? Has the CFTC performed any studies on 
     hedge funds? Is the CFTC currently monitoring any aspect of 
     hedge fund operations or contemplating improvements in 
     regulations applicable to hedge funds?


                 4. systemic problems with hedge funds

       Is the CFTC concerned about the impact hedge fund have on 
     the financial markets? Does the CFTC have any concerns about 
     hedge fund use of derivative products? What steps has the 
     CFTC taken to address those concerns? Does the CFTC 
     contemplate taking any action that would curb the aggressive 
     trading strategies of hedge funds?
       Finally, feel free to provide any additional comments or 
     recommendations related to hedge funds.
       You will be given 5 minutes to summarize your written 
     remarks. Banking Committee rules require that 200 copies of 
     your written testimony be delivered to Room 2129, Rayburn 
     House Office Building, no later than noon April 12, 1994.
       Thank you for your time and cooperation. The Committee 
     looks forward to your testimony.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
         U.S. House of Representatives, Committee on Banking, 
           Finance and Urban Affairs,
                                   Washington, DC, March 24, 1994.
     Hon. Arthur Levitt, Jr.,
     Chairman, Securities and Exchange Commission, Washington, DC.
       Dear Chairman Levitt: On April 13, 1994 at 10:00 a.m., in 
     Room 2128, Rayburn House Office Building, the Committee on 
     Banking, Finance and Urban Affairs will hold a hearing to 
     explore safety and soundness issues related to hedge funds 
     and their use of derivatives. You or your designee is invited 
     to testify at the hearing.
       So that the Committee may better understand the various 
     risks hedge funds pose to our financial system, please 
     provide written answers to the following questions with your 
     testimony.


                         1. General Information

       How does the SEC define hedge funds? Please provide a list 
     of hedge funds, including their balance sheet and income 
     statement data and assets under management. Is there any 
     available measure of the degree of leverage that hedge funds 
     employ? In what markets do hedge funds operate?


                        2. Hedge Fund Regulation

       Please provide a brief overview of the laws and regulations 
     governing hedge fund operations, including any investor 
     protection, registration, record keeping and reporting 
     requirements.


                3. Hedge Funds as Derivatives Customers

       In dollar and quantity terms, what percentage of registered 
     broker-dealer OTC derivatives contracts are purchased by 
     hedge funds? What percentage of exchange traded derivatives 
     contracts are purchased by hedge funds?


                    4. sec monitoring of hedge funds

       Recent press accounts indicate that the SEC is concerned 
     about the ways that hedge fund impact the financial markets 
     and the Commission's limited ability to monitor hedge funds. 
     What steps has the SEC taken to address those concerns? Has 
     the SEC performed any studies on hedge funds? Is the SEC 
     currently monitoring any aspect of hedge fund operations? 
     Does the SEC contemplate taking any action that would curb 
     the aggressive trading strategies of hedge funds?


                    5. large trader reporting system

       In a 1992 Report to Congress the SEC stated that the 
     ``large trader reporting system'' for equity securities and 
     the ``large position reporting system'' for government 
     securities would, when implemented, provide the Commission 
     with adequate information about the systematic effect of 
     hedge funds on those two markets. Please update the Committee 
     on the implementation of these systems, and describe their 
     usefulness in addressing systemic issues. Are any other 
     reporting requirements necessary to ensure the SEC has a 
     clear grasp of hedge funds' impact on the markets?
       Finally, feel free to provide additional comments or 
     recommendations related to hedge funds.
       You will be given 5 minutes to summarize your written 
     remarks. Banking Committee rules require that 200 copies of 
     your written testimony be delivered to Room 2129, Rayburn 
     House Office Building, no later than noon on April 12, 1994.
       Thank you for your time and cooperation. The Committee 
     looks forward to your testimony.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
         U.S. House of Representatives, Committee on Banking, 
           Finance and Urban Affairs,
                                   Washington, DC, March 24, 1994.
     Hon. Eugene A. Ludwig,
     Comptroller, Office of the Comptroller of the Currency, 
         Washington, DC.
       Dear Comptroller Ludwig: On April 13, 1994 at 10:00 a.m., 
     in Room 2128, Rayburn House Office Building, the Committee on 
     Banking, Finance and Urban Affairs will hold a hearing to 
     explore various safety and soundness issues related to bank 
     involvement with hedge funds. You are invited to testify at 
     the hearing.
       So that the Committee may better understand the various 
     safety and soundness issues involving the relationship 
     between banks and hedge funds, please provide written answers 
     to the following questions with your testimony.


                         1. General information

       How does the OCC define hedge funds? Please provide a list 
     of hedge funds with significant exposure to banks including 
     their balance sheet and income statement data and assets 
     under management. Is there any available measure of the 
     degree of leverage that hedge funds employ? In what markets 
     do hedge funds operate?


                    2. Bank/Hedge Fund Relationship

       What is total bank exposure to hedge funds? Please include 
     totals for extensions of credit, guarantees, derivatives 
     exposure, etc. What is the total bank credit risk exposure to 
     hedge funds?
       Please list all the banking services provided to hedge 
     funds and the revenue derived from those services. Are any 
     banks investors in hedge funds? Do any banks act as 
     investment advisors to hedge funds?


                    3. occ monitoring of hedge funds

       Please describe the means used by the OCC to evaluate the 
     degree of bank credit risk exposure to hedge funds. Does the 
     OCC require banks to report any information on their exposure 
     to hedge funds? Has the OCC performed any studies on bank 
     exposure to hedge funds? Is the OCC currently monitoring bank 
     exposure to hedge funds? Does the OCC have any plans to 
     require banks to report on hedge fund exposure?
       Since hedge funds are not rated by the independent credit 
     agencies, based on what information do banks lend to hedge 
     funds? Do hedge funds provide adequate data for banks to make 
     credit decisions? Does the fact that a hedge fund is also 
     usually a purchaser of derivatives sway the banks credit 
     decisions in any way?


              4. hedge funds as bank derivatives customers

       In dollar and quantity terms, what percentage of bank OTC 
     derivatives contracts are purchased by hedge funds? What 
     percentage of exchange traded derivatives contracts are 
     purchased by hedge funds?
       Are there any restrictions or prohibitions on the sharing 
     of information on hedge fund purchases of derivative products 
     between bank derivative operations and bank trading account 
     operations?


                    5. hedge funds and systemic risk

       What risks do hedge funds pose to the safety and soundness 
     of the banking system? For example, how would the failure of 
     a large hedge fund and the ensuring default on derivatives 
     contracts affect banks and the derivatives market?
       Does the OCC contemplate taking any action that would curb 
     the aggressive trading strategies of hedge funds? Does the 
     OCC have any contingency plans should a large hedge fund 
     fail?


        6. adequate netting arrangements with tax have countries

       For various reasons, some hedge funds are chartered in tax-
     haven countries and these hedge funds purchase derivatives 
     from banks. Is the OCC concerned over the adequacy of netting 
     arrangements with tax-haven countries?
       Finally, please provide additional comments or 
     recommendations your agency has on the BHC/hedge fund 
     relationship and the need for improved reporting of that 
     relationship.
       You will be given 5 minutes to summarize your written 
     remarks. Banking Committee rules require that 200 copies of 
     your written testimony be delivered to Room 2129, Rayburn 
     House Office Building, no later than noon, April 12, 1994.
       Thank you for your time and cooperation. The Committee 
     looks forward to your testimony.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
     Chairman.

                          ____________________