Bernanke warns against 'ad hoc' rules

The Federal Reserve chief today warned against creating "ad hoc" securities regulations—especially for derivatives or hedge funds.
MAY 15, 2007
Federal Reserve Chairman Ben S. Bernanke today warned financial regulators against devising "ad hoc" rules for financial instruments or institutions—especially derivatives or hedge funds. "We should strive to develop common, principles-based policy responses that can be applied consistently across the financial sector to meet clearly defined objectives," Mr. Bernanke said in prepared remarks, delivered via satellite to the Federal Reserve Bank of Atlanta's 2007 Financial Markets Conference in Sea Island, Ga. Regarding credit derivatives, Mr. Bernanke suggested that regulators need to be wary of drawing artificial distinctions, since not all are complex or linked to credit risk. He added that hedge funds and their trading strategies should be "unambiguously distinguished" from those of large global banks or of some traditional asset managers. "In addressing the challenges and the risks that financial innovation may create, we should also always keep in view the enormous economic benefits that flow from a healthy and innovative financial sector," he added. However, he suggested that financial stability depends on the ability of large institutions to properly manage and measure risk and protect market infrastructure and liquidity. "Financial innovation has great benefits for our economy," Mr. Bernanke said. "The goal of regulation should be to preserve those benefits while achieving important public policy objectives, including financial stability, investor protection, and market integrity."

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