US and Europe Conduct Joint Probe into Hedge Fund Lending

US and European regulators are conducting a joint probe into banks and securities firms to see if they are setting careful limits when lending to hedge funds.

Officials want to know how much margin banks require hedge funds to provide up front to obtain loans and cover potential losses. They're hoping to avoid the kind of turmoil that engulfed financial markets when Long-Term Capital Management LP's losses forced the Fed to organize a rescue in 1998.

The SEC, the Federal Reserve Bank of New York and the UK Financial Services Authority last month met with top lenders to the hedge-fund industry asking about the amount of collateral required by prime brokers for loans. Officials from Germany, and Switzerland are also taking part. strict enough limits on loans to hedge funds.

“We are doing work on credit-risk management with the SEC,” David Cliffe, a spokesman for the FSA, said. “It's looking at the prime brokers in relation to the hedge funds.'' The Swiss Banking Commission in Bern has worked with British, US and German authorities on the issue.