U.S. Regulators Seek To Rein In Highly-Risky Basis Trade

Top US regulators are zeroing in on the dangers posed by highly leveraged hedge fund trades and considering options to rein in risks to the broader financial system.

Securities and Exchange Commission Chair Gary Gensler said that the "generous" funding prime brokerages provide to some hedge funds is the biggest source of risk out there.

Officials 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. David E. Rovella wrote for Bloomberg News.

Although hedge funds are subject to less direct government oversight, they rely on highly regulated large banks to finance many of their trades.

As a result, regulators are considering options ranging from pushing banks to gather more data on exposures to pressing them to increase haircuts on some secured borrowing.

Securities and Exchange Commission Chair Gary Gensler said that the "generous" funding prime brokerages provide to some hedge funds is the biggest source of risk out there.

His subsequent warning may strike some as familiar, given recent (and not-so-recent) Wall Street history: "If a problem happens," he said, "it’s going to be the public that bears the risk."

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