Fed’s Barr concerned over risks of highly leveraged hedge fund trading in Treasury market

ICYMI – The Fed’s Barr expressed concerns over the risks of highly leveraged trading by hedge funds in the Treasury market. In particular the “basis trade”.

His remarks in summary:

• “leverage can also increase risks to both market participants and to Treasury market functioning and must be managed appropriately by both investors and their counterparties, including through collecting margin to manage counterparty risk”
• although the Fed collects information on the triparty repo market, Barr said there’s less data on trades that aren’t centrally cleared
• said the government needed more information about these trades

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In (very) brief the”basis trade involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market. No single regulator sees the full picture and can therefore ascertain the full scope of risks associated with basis trading.

Michael Barr is vice chair for supervision at the US Federal Reserve. He spoke on Thursday at a New York Fed conference on the Treasury market.