Fed Vice Chair flags hedge fund risk in Treasury market By Investing.com
NEW YORK – At a Fed conference in New York today, Federal Reserve Vice Chairman for Supervision Michael Barr expressed concerns about increased risk from leveraged trades conducted by hedge funds in the Treasury market, particularly through basic trading strategies. These strategies exploit price differences between Treasury futures and spot markets, which can improve market efficiency but also increase risks.
Barr highlighted the need for a better understanding of these transactions, particularly those that are not centrally cleared and therefore lack transparency. He highlighted the current data gap in this area, despite the Federal Reserve’s knowledge of the tri-repo market, and argued for more robust risk management practices. This includes collecting margin to mitigate counterparty risk.
Supporting government efforts to collect more data on these market segments, Barr sees this as a crucial step forward. His comments align with the Biden administration’s broader review of hedge funds and their trading tactics. This scrutiny is part of an ongoing initiative to identify regulatory gaps in hedge fund trading highlighted by SEC Chairman Gary Gensler.
Barr also acknowledged the contributions of a hedge fund task force within the U.S. Financial Stability Oversight Council, which has been instrumental in examining the systemic risks posed by these entities. The push for increased oversight reflects growing concern about potential vulnerabilities in financial markets and the need for regulators to keep pace with complex trading strategies that could pose systemic risks.
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