SEC Chief Gensler’s Concerns Mount Over Leverage in Treasuries Market

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Securities regulators have leverage risks in the multi-trillion dollar US Treasuries market back under the microscope. Recent remarks by Securities and Exchange Commission (SEC) Chair Gary Gensler signaled renewed urgency around curtailing destabilizing trading practices in the world’s largest bond market.

In a speech to financial executives, Gensler emphasized the systemic dangers posed by excessive leverage use among institutional government bond traders. He pointed to stresses witnessed during this year’s regional banking turmoil as a reminder of such hazards manifesting and causing wider contagion.

Regulators worry traders combining high leverage with speculative strategies in Treasuries could trigger severe market dysfunction during times of volatility. This could then spill over to wreak havoc in the broader financial system given Treasuries’ status as a global haven asset class.

Gensler advocated for SEC proposals intended to impose tighter control over leverage and trading risks. These include requiring central clearing for Treasuries transactions and designating large proprietary trading institutions as broker-dealers subject to higher regulatory standards.

The SEC chief argues such reforms are vital to counterbalance the threat of destabilizing blowups in a foundational market underpinning global finance.

Among the riskier trading plays under scrutiny is the so-called basis trade where leverage magnifies bets exploiting slight pricing variations between Treasury futures and underlying bonds. While providing liquidity, regulators fret the strategy’s extensive borrowing leaves it vulnerable to violent unwinding in turbulent markets.

Warnings around the basis trade have intensified given concentration of risks among influential bond trading heavyweights. US regulators demand greater visibility into leverage levels across systemically-important markets to be able to detect emerging hazards.

Overseas authorities are also tightening oversight of leveraged strategies. The Bank of England recently floated measures to restrain risk-taking in British government bond markets that could destabilize the financial system.

However, Wall Street defenders argue the basis trade fulfills a valuable role in greasing trading and provides resilience during crises. They point to the strategy weathering last decade’s pandemic-induced mayhem in markets without mishap.

But SEC leadership remains unconvinced current patchwork regulation provides sufficient safeguards against excessive risk-taking. They emphasize the over-the-counter nature of Treasuries trading allows huge leverage buildup outside the purview of watchdogs.

Hence the regulatory push for greater transparency from large leveraged investors to facilitate continuous monitoring for dangers to system stability. Furthermore, shorter settlement timelines being phased in are meant to curb risk accumulation in the opaque Treasury secondary market.

While largely supportive of the abbreviated settlement schedule, Gensler noted challenges still abound on the foreign exchange side that demand close tracking.

Overall, the revived warnings from America’s top securities regulator underscore enduring concerns post-2008 crisis reforms did not fully address leverage-fueled excess in Treasury markets. Keeping a tight leash on potentially destabilizing trading practices remains a clear priority for policymakers focused on securing the financial system against shocks.


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