US regulators including the SEC and the Financial Stability Oversight Council (FSOC) are considering a range of measures aimed at curbing highly leveraged trading by hedge fund firms, due to concerns over the risks posed by the practice to the wider financial system, according to a report by Bloomberg.
The report cites unnamed sources with knowledge of the matter as revealing that the options under consideration include pressing banks to collect more data on exposures and pushing them to up the haircuts on some secured borrowing.
A rise in populariity of the so-called basis trade, which involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market, is reportedly the the centre of regulators’ concerns.
Officials have discussed a 2% haircut on Treasury repo borrowing to increase the cost of leveraged trading, while aAdvocates for hedge funds argue that the basis trade serves an important market function, helping insurance companies and pension funds manage their interest-rate exposure.
