By Davide Barbuscia and Carolina Mandl
NEW YORK (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.
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.
In recent weeks, there has been increased focus on the pros and cons of a standard margin imposed on all such trades.
«Over time competitive forces have driven haircuts down to zero,» said Christopher Clarke, head of North America Sovereign Financing Trading at J.P. Morgan Securities, at a Treasury market conference held at the Federal Reserve Bank of New York last week. «Ultimately what does it mean from my perspective, a dealer? What does it mean for my costs and risks?»
A looming rule by the U.S. Securities and Exchange Commission would expand the use of central clearing in the cash Treasury and repo market.
Central clearing would require market participants to deposit margins, at a level possibly established by the Fixed Income Clearing Corporation (FICC), to protect against the risk of a counterparty'sRead more on investing.com