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The top US securities regulator has played down the impact on hedge funds of a new rule tightening oversight of the Treasury bond market, telling the Financial Times that they are not the main target.
Gary Gensler, chair of the Securities and Exchange Commission, said in an interview on Friday that the so-called dealer rule his agency passed this month is more focused on big high-speed trading firms than on hedge funds.
The rule mandates that more large traders must register as dealers — firms that are regularly engaged in providing liquidity to the market place — a status that requires them to hold capital and report trades to the regulator.
Hedge fund groups have sounded worries that registration will be required for their members, but Gensler said the rule was aimed mainly at the high-speed trading firms that often buy and sell securities in fractions of a second.
“[The dealer rule] is primarily about principal trading firms that dealer trade. That’s what that rule is principally about,” Gensler said.
The impetus for the SEC rule is the increasingly important role played by some of the largest traders in the $26tn US government debt market as they enter an arena once dominated by banks. Treasury markets have been undergoing a sweeping overhaul intended to bolster stability after a series of crises.
Treasury traders that register as dealers are subject to greater SEC scrutiny over their positions and activity. Some principal trading groups have voluntarily registered, including DRW, Citadel Securities and Jump Trading.
Gensler said: “In the equity markets, we have all the [principal trading firms] registered. In the Treasury market, we have some but not all, and that rule really addresses that directly.”
He said criteria for inclusion would depend on a firm’s trading strategy: “It’s about parties posting liquidity on both sides of the market in the same security. That’s what dealers do.”
“I couldn’t tell you whether some small number of hedge funds are doing that. To my knowledge, that’s not what they’re doing as a regular business,” said Gensler.
The hedge fund industry criticised the SEC immediately after the publication of the final rule on February 6, concerned they would be caught up in the new regulation.
“Alternative asset managers are not dealers,” said Bryan Corbett, president of the Managed Funds Association, raising concerns that “the rule may not go far enough in excluding them and private funds from being regulated as dealers”.
In analysis accompanying the final rule, the SEC said that there might be up to 16 private funds — a category that includes hedge funds — that fit the bill. Gensler emphasised that it was “up to” that figure.
Confusion over the dealer rule comes in part because its original draft, when it was proposed nearly two years ago, would have captured many hedge funds in addition to principal trading firms. The hedge fund industry responded with outrage.
The final rule seemed to take those objections into consideration. But, even with SEC concessions, hedge funds were not convinced that they had been excluded.
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