US Weighs Leaning on Banks to Curb Hedge Fund Leveraged Trading

By Lydia Beyoud and Katanga Johnson

Top US regulators are zeroing in on dangers posed by highly leveraged hedge fund trades, and considering options to rein in risks to the broader financial system. Regulators are especially concerned about the growth of one strategy known as the basis trade, which involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market. Borrowing in the repurchase market using US Treasuries as collateral has soared in recent years to almost $3 trillion….Karen Petrou, a managing partner at Washington-based consulting firm Federal Financial Analytics Inc., says that regulators are aware of the difficulties of imposing major rule changes or designating firms.
“The banking agencies know this,” she said. “Short of these new tools, then, regulators are hoping to reduce counterparty risk by using their existing powers.”