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Hedge funds hit by SEC move to tighten Treasury market oversight

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The US Securities and Exchange Commission (SEC) has adopted a new rule aimed at tightening oversight of the US Treasuries market that means some hedge funds and high-frequency proprietary trading firms are facing increased compliance costs and scrutiny, according to a report by Bloomberg.

The SEC says the new rule, which also applies to market participants in other government bonds, equities and additional securities, is needed to bolster stability in the $26bn Treasury bond market.

Hedge funds and proprietary trading firms moved in to become central players in a market formally dominated by banks after regulations introduced following the global financial crisis made it more expensive for traditional lenders to trade Treasuries.

Under the terms of the new regulations, firms designated as dealers, including those who buy and sell securities for their own account as part of their regular business, will have to be more transparent about their positions and trading activity and as well as hold back capital to back their deals.

Some aspects of the new rule are softer than the SEC originally proposed, but have still drawn criticism from the hedge fund industry.

In a statement, Jack Inglis, CEO of AIMA, a representative body for the alternative investment industry, said: ” The US SEC has incorrectly concluded that customers of dealers, including certain AIMA members, may be dealers themselves – a clear departure from the statutory definition and understanding of what it has meant to be a securities ‘dealer’ for the past 90 years. Although the Commission did not adopt some problematic aspects that were included in the proposed rule, the final rule may nonetheless capture certain funds and strategies and therefore subject them to potential registration as a dealer and government securities dealer. AIMA will review the final rule text and assess next steps.”

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