(Bloomberg) - Citadel founder Ken Griffin said regulators should focus on banks, not hedge funds, as they seek to limit financial risks stemming from highly leveraged trades in the Treasury market, the FT reported, citing an interview.
US regulators have been examining dangers posed by 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, and are considering options to rein in risks to the broader financial system, Bloomberg previously reported. Hedge funds rely on highly regulated large banks to finance many of their trades, including those in Treasuries.
QuickTake: What’s the Basis Trade? Why Does It Worry Regulators?
The FT said the US Securities and Exchange Commission has proposed a new regime that would see hedge funds treated like the broker-dealer arms of banks when it comes to the Treasury market. Griffin urged the regulator to instead focus on the risk management of banks that do the lending.
“The SEC is searching for a problem,” Griffin told the FT. “If regulators are really worried about the size of the basis trade, they can ask banks to conduct stress tests to see if they have enough collateral from their counterparties.”
By Christine Burke
