(Bloomberg) -- Hedge funds’ record bet on US Treasuries is facing fresh scrutiny as the world’s most powerful financial watchdog mulls a deep dive into the money-spinning trade.
After running into difficulties with a mammoth project launched last year to gather data on the sprawling shadow banking system, the Financial Stability Board is now discussing a pivot to focus on a handful of priority areas, including the so-called basis trades, three people with knowledge of the matter said.
The potential probe comes as wagers on one of the trades, which sees some of the world’s biggest hedge funds try to profit from the tiny price gaps between Treasuries and derivatives known as futures, hit $1.15 trillion recently.
Some FSB members believe that such a targeted approach would prove more fruitful than the broad project the watchdog initially embarked on. Difficulties encountered in the work so far include figuring out what data various regulators across the world already have, what they can share across jurisdictions and what further information they can gather, several people involved in the initiative said. The policymakers said in July that the initiative was taking longer than expected.
Private assets — where regulators are worried about inflated valuations, high leverage and patchy governance — are also a prime concern and a possible area for more focused work, the people said.
“You can’t boil the ocean. We need areas to really look for. One of those should be private finance,” said Tajinder Singh, acting secretary general of global securities at the International Organization of Securities Commissions, which sits on the FSB. IOSCO warned last year that private markets were too complacent about escalating risks.
IOSCO chairman Jean-Paul Servais said his general approach was that the watchdog should begin by understanding “what data we need” and should also take stock of what’s already available.
“We need to find solutions. It’s not impossible” said Servais. “We are richer than we expect, a lot of information already exists, it’s about aggregating them.”
He declined to comment on internal FSB discussions in which he’s engaged. The watchdog, convened in the aftermath of the financial crisis to minimize the risk of future shocks, also declined to comment on those deliberations.
The watchdog’s push for data on so-called non-bank financial institutions, which now hold half of financial assets, comes as regulators across the world weigh policies to tame risks in a fast-growing industry that’s more loosely regulated than traditional lenders.
National regulators have also made efforts to gather information on the sector, most notably the Bank of England, which will soon announce the results of a ‘System Wide Exploratory Scenario’ that aims to map the impact hypothetical shocks would have across the broad financial system.
The data gathering is a precursor to developing policies to minimize risks, though the FSB has publicly acknowledged waning political support for implementing new financial regulations.
Still, Servais said non banks should engage in the data gathering efforts.
“I’m telling the industry, ‘Don’t refuse the debate about data,’” he said. “If you want to avoid a one-size-fits-all approach, we need data.”
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