Regulators consider investigating hedge fund basis trading faces scrutiny

(Bloomberg) — Hedge funds’ record bets on U.S. Treasuries are facing new scrutiny as the world’s most powerful financial regulator considers dipping deeper into money-making trades.

After a massive project launched last year to collect data on the vast shadow banking system ran into difficulties, the Financial Stability Board is now discussing focusing on a few priority areas, including so-called basis trading, three people with knowledge of the matter said. .

The potential investigation comes as bets on one of the trades, in which some of the world’s largest hedge funds try to profit from tiny price differences between Treasuries and derivatives called futures, recently reached $1.15 trillion.

Some FSB members believe such a targeted approach would be more productive than the broad program initially launched by regulators. Difficulties in the work so far include figuring out what data regulators around the world already have, what data they can share across jurisdictions and what further information they can collect, several people involved in the initiative said. Policymakers said in July that the move was taking longer than expected.

Regulators’ concerns about overvalued private equity assets, excessive leverage and poor governance are also a major concern and an area where work may need to be focused, people familiar with the matter said.

“You can’t boil the ocean. The areas we need to really look at. One of them should be private finance,” said Tajinder Singh, a member of the Financial Stability Board and acting secretary-general for global securities at the International Organization of Securities Commissions. The International Organization of Securities Commissions warned last year that private markets were too complacent about escalating risks.

Jean-Paul Servais, president of the International Organization of Securities Commissions, said his overall approach was that regulators should first understand “what data we need” and should also evaluate what data is available.

“We need to find solutions. It’s not impossible,” Servais said. “We are richer than we expected, and a lot of the information already exists and it needs to be aggregated.”

He declined to comment on his involvement in internal discussions at the Financial Stability Board. The regulator, which meets after the financial crisis to minimize the risk of future shocks, also declined to comment on those deliberations.

The push for data from regulators on so-called non-bank financial institutions, which now hold half of financial assets, comes as regulators around the world weigh policies to rein in risks in a fast-growing industry that is less regulated than traditional lending. Institutions are more relaxed.

National regulators are also working to gather information on the sector, particularly the Bank of England, which will soon announce the results of “system-wide exploratory scenarios” aimed at mapping the impact of hypothetical shocks across the financial system.

Although the Financial Stability Board publicly acknowledges that political support for the implementation of new financial regulations is waning, data collection is a precursor to developing policies to minimize risks.

However, Servais said non-bank institutions should be involved in data collection.

“I tell the industry, ‘Don’t shut down the debate about data,'” he said. “If you want to avoid a one-size-fits-all approach, we need data.”

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