Unregulated Entities, Products, and Markets: Challenges for Monitoring and Regulation

The implications for financial stability of lightly regulated and highly leveraged financial institutions such as hedge funds and private equity funds, together with innovative financial products such as derivatives and asset-backed securities, remain a subject of controversy, especially in the current global financial crisis, where issues of systemic risk have not only national, but regional and global implications. This policy brief examines hedge funds, private equity funds, and innovative financial products, particularly collateralized debt obligations and asset-backed securities, including their overall structure, their role in the development of the current global financial crisis, and what changes are needed in the global financial architecture related to these institutions and products to strengthen financial stability going forward.