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Citadel founder Ken Griffin has emphasized the importance of regulatory scrutiny on banks rather than hedge funds in addressing financial risks arising from highly leveraged trades in the Treasury market, according to the Financial Times (FT).
US regulators have been closely examining the potential hazards associated with the so-called basis trade. This trade involves leveraging to capitalize on the price differential between Treasury futures and the underlying cash market. Options for mitigating risks to the broader financial system have been under consideration, as previously reported by Bloomberg. Hedge funds frequently rely on large, highly regulated banks to finance a multitude of their trades, including those involving Treasuries.
The FT reported that the US Securities and Exchange Commission (SEC) has proposed a new regulatory framework that would subject hedge funds to similar treatment as the broker-dealer arms of banks within the Treasury market. However, Griffin urged the regulator to shift its focus to the risk management practices of the banks that facilitate lending.
In an interview with the FT, Griffin stated, “The SEC is searching for a problem. If regulators are genuinely concerned about the scale of the basis trade, they can request that banks perform stress tests to assess whether they have adequate collateral from their counterparties.”
Griffin’s perspective underscores the need for a balanced and effective regulatory approach to mitigate financial risks in the Treasury market while considering the pivotal role played by both hedge funds and banks in the context of basis trades.
