Regulators Warn of Excessive Risk in Treasury Market, Fear Disorderly Unwind Poses Threat to Financial Stability

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US Treasury market debate around hedge fund collateral intensifies

“NEW YORK, Nov 21 (Reuters) – As U.S. regulators ready rules that would push more trading in Treasuries to a central clearing venue, the industry’s focus is turning on a key question: how much collateral should hedge funds and others put up to trade there.

At issue is whether imposing minimum requirements for collateral, called margin or haircuts, would raise trading costs and curb market liquidity versus the need to guard against a painful collapse in the world’s biggest bond market.

Industry practice suggests that a large share of hedge funds trading in repo markets put up zero collateral, meaning they are fuelling activity using enormous amounts of cheap debt.

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That has raised concerns among regulators that too much risk has built into the system and market stress could lead to a disorderly unwind of positions by such highly leveraged traders and threaten financial stability.”

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