BASEL – Leading financial authorities urged action in May to strengthen protection against potential systemic risks arising from hedge funds and other so-called highly leveraged institutions. The Financial Stability Forum, which brings together senior officials of central banks, supervisory agencies, finance ministries and international financial institutions, said there have recently been signs of erosion of ‘counterparty’ standards that reflect the strength of competition for hedge fund business. These signs complement other signals of complacency about risk-taking in financial markets, the Forum said in a report requested by the finance ministers and central bank governors of the Group of Seven (G7) group of leading economies. The report is an update of the group’s 2000 paper on highly leveraged institutions.

LONDON – The body representing state insurance regulators in the United States declined comment on remarks by top UK regulator John Tiner casting doubt on the ability of the US to deliver proposed reforms on reinsurance regulation that are keenly desired in Europe. US and European leaders meeting in Washington in late April for the US-EU summit put the advancing of convergence in reinsurance regulation on the agenda of the agreement they reached on increasing cooperation on financial regulation (see page 18).

BASEL – The Bank for International Settlements (BIS), the so-called central banker’s central bank, has extended the term of office of its general manager, Malcolm Knight, to mid-2009 from March 2008. Knight was appointed general manager, or chief executive, of the BIS in April 2003 for a five-year term. At the request of the BIS directors he has agreed to an extension of his term until end-June 2009. He will reach the normal BIS retirement age of 65 in April 2009. As general manager of the BIS – the world’s oldest international financial institution

BRUSSELS – Hedge funds operating in the EU will not face tighter regulation – for the time being, anyway. Finance ministers of the 27-country bloc have passed the issue back to the European Commission, the EU’s executive arm. The decision was met with some relief from the hedge fund industry.

NEW DELHI – India’s state-run banks will need more than 500 billion rupees ($12.3 billion) in the financial year that began on April 1 to meet capital adequacy requirements under the Basel II rules, according to an Indian finance ministry official as reported by Reuters news agency.

NEW YORK – Eighteen of the largest US and European banks and investment firms claimed in a mid-May letter to Tim Geithner, president of the New York Federal Reserve Bank, that they are making “substantial progress” in improving the back office systems that process their rapidly expanding equity derivate operations. They committed themselves to meeting new efficiency targets. Responding, the New York Fed welcomed these new commitments, but reminded the firms that they still faced significant challenges in automating their equity derivative infrastructure.

PARIS – Islamic finance is set to go on expanding strongly, both geographically and in terms of products on offer. And newly created Shariah-compliant instruments are likely to rival products offered at conventional banks, according to two reports published in late April by credit rating firm Standard & Poor’s Ratings Services.*

LONDON – Britain’s principal financial sector watchdog – the Financial Services Authority, or FSA – should explain more clearly its strategy for exercising influence in the European Union, says a review commissioned by the UK government.

LONDON – Cyclical downgrades in banks’ internal ratings of the creditworthiness of their borrowers under the Basel II bank safety rules could affect financial stability through adverse effects on fund provision, the Bank of England acknowledged in April.

WELLINGTON – New Zealand’s central bank, fearing the risks arising from soaring lending and questioning whether existing bank capital rules are sufficiently sensitive, is thinking of modifying the current rules ahead of the introduction of the more risk-focused Basel II capital framework in January 2008.