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Fed Vice Chair flags hedge fund risk in Treasury market

Published Nov 16, 2023 01:21PM ET Updated Nov 16, 2023 02:01PM ET
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NEW YORK - At a New York Fed conference today, Federal Reserve Vice Chair for Supervision Michael Barr expressed concerns about the heightened risk from leveraged trading by hedge funds in the Treasury market, particularly through basis trade strategies. These strategies exploit price differences between Treasury futures and cash markets, which can enhance market efficiency but also increase risks.

Barr emphasized the necessity for better understanding of such trades, especially those that are not centrally cleared and thus lack transparency. He pointed out the current data deficit in this area, despite the Federal Reserve's knowledge of the triparty repo market, and advocated for more robust risk management practices. This includes the collection of margin to mitigate counterparty risk.

Backing a government effort to gather more data on these market segments, Barr sees this as a crucial step forward. His comments align with the broader scrutiny under the Biden administration on hedge funds and their trading tactics. This scrutiny has been part of an ongoing initiative to identify regulatory gaps in hedge-fund trading highlighted by SEC Chair Gary Gensler.

Barr also recognized the input from a hedge-fund working group within the US Financial Stability Oversight Council, which has been instrumental in examining the systemic risks posed by these entities. The push for increased oversight reflects a growing concern about potential vulnerabilities in financial markets and the need for regulatory bodies to keep pace with complex trading strategies that could pose systemic risks.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Fed Vice Chair flags hedge fund risk in Treasury market
 

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