The recent record level of US Treasuries basis trade bets by hedge funds has attracted increased regulatory attention, with global financial watchdog the Financial Stability Board (FSB) considering an investigation into the strategy, according to a report by Bloomberg.
The FSB has been grappling with challenges in its broader initiative launched last year to map the extensive shadow banking system. Now, according to unnamed Bloomberg sources, the agency is contemplating a shift toward a more focused approach, including a closer look at basis trades — a strategy where hedge funds attempt to profit from small price differences between Treasuries and their derivatives, or futures. Recently, hedge funds’ investments in these trades reached $1.15tn.
Some FSB members believe this targeted probe could yield better insights than the board’s original expansive project, which has encountered obstacles such as assessing what data regulators in different countries already hold, what can be shared across borders, and what additional information could be gathered. This broad initiative, initially expected to conclude sooner, has faced delays, according to people involved.
Private asset markets are also a growing concern, with regulators noting risks of inflated valuations, high leverage, and inconsistent governance. The FSB may consider these markets for further investigation, sources added.
The FSB, established after the financial crisis to help prevent future disruptions, has declined to provide details on the internal deliberations.
