{"id":81559,"date":"2023-11-07T04:53:41","date_gmt":"2023-11-07T09:53:41","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/washington-eases-path-to-scrutinize-hedge-funds\/"},"modified":"2023-11-07T04:53:45","modified_gmt":"2023-11-07T09:53:45","slug":"washington-eases-path-to-scrutinize-hedge-funds","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=81559","title":{"rendered":"Washington Eases Path to Scrutinize Hedge Funds"},"content":{"rendered":"
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Federal regulators say they have growing concerns that some hedge funds could be making bets that put the economy at risk. Now, they have a new tool to clamp down.<\/p>\n

On Friday, the Financial Stability Oversight Council (FSOC) finalized changes that will make it easier for them to designate hedge funds, private-equity firms and other nonbank financial companies as systemically important financial institutions or SIFIs. The designation, which has most often applied to banks, subjects companies to Federal Reserve oversight and potential capital and liquidity requirements.<\/p>\n

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It\u2019s a headache that nonbanks for years have successfully avoided. During the Trump administration, the council changed its process in a way that essentially made a SIFI designation a tool of last resort. Friday\u2019s FSOC vote reversed course.<\/p>\n

The change doesn\u2019t just concern hedge funds and could bring greater oversight to a whole host of nonbank firms, from mutual-fund managers to insurance companies. Still, it\u2019s clear that a primary concern for regulators right now is the hedge-fund industry and, specifically, highly leveraged bets that some funds are making in the Treasury bond market, said Chris Niebuhr, a senior research analyst for Washington-based Beacon Policy Advisors.<\/p>\n

Some funds over the past several years have profited from the so-called basis trade, an arbitrage that takes advantage of price differences in the Treasury and futures markets. Funds typically make those trades with high amounts of leverage.<\/p>\n

In 2020, as the Covid-19 pandemic deepened, some funds unloaded Treasury bonds at once, which compelled the Federal Reserve to step in to stabilize the market. The following year, FSOC restarted a hedge-fund working group to examine stability risks the funds pose, citing that event.<\/p>\n

Rather than immediately look to designate a fund as systemically important, \u201cthey might use this as an opportunity to take a shot across the bow,\u201d Niebuhr said. \u201cThey\u2019re saying, you may have to rein in this activity or we\u2019ll take steps to force you to.\u201d<\/p>\n

Friday\u2019s meeting made clear that funds\u2019 use of leverage was top-of-mind for some FSOC members, which include Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell, among others.<\/p>\n

\u201cThe guidance we\u2019re considering today is important in reinvigorating the Council\u2019s designation process in a manner consistent with Congress\u2019s vision,\u201d said Securities and Exchange Commission Chair Gary Gensler in his statement to the council. Gensler said he could \u201cvividly recall\u201d the near-collapse of the hedge fund Long-Term Capital Management in 1998, and how that threatened the financial system at the time.<\/p>\n

Hedge-fund advocates say the council\u2019s concerns are misplaced, and that primary regulators such as the SEC are more than sufficient to oversee their activity.<\/p>\n

\u201cSIFI designation for alternative asset managers is inappropriate\u2014as they do not carry the same risks as banks\u2014and will do nothing to curtail systemic risk in the market,\u201d said Managed Funds Association President Bryan Corbett in a statement after the FSOC meeting on Friday.<\/p>\n

Some hedge-fund managers have said trying to curtail the basis trade would reduce funds\u2019 participation in the Treasury market, hampering liquidity and potentially leading to higher rates.<\/p>\n

Even if FSOC moved to try to designate a hedge fund as systemically important, the process could take more than a year, Niebuhr noted, taking the final decision well past the 2024 presidential election. As a practical matter, that could make the changes moot if President Joe Biden doesn\u2019t win reelection.<\/p>\n

But while Democrats are in charge, it\u2019s clear the hedge-fund industry will be in regulators\u2019 sights.<\/p>\n

Write to Joe Light at joe.light@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Federal regulators say they have growing concerns that some hedge funds could be making bets that put the economy at risk. Now, they have a new tool to clamp down. On Friday, the Financial Stability Oversight Council (FSOC) finalized changes that will make it easier for them to designate hedge funds, private-equity firms and other […]<\/p>\n","protected":false},"author":1,"featured_media":81560,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-81559","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nWashington Eases Path to Scrutinize Hedge Funds | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Federal regulators say they have growing concerns that some hedge funds could be making bets that put the economy at risk. 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