What’s the Basis Trade? Why Does It Worry Regulators?: QuickTake

A trading strategy used by hedge funds to exploit discrepancies in the US Treasuries market is causing headaches for market regulators. Proponents of the maneuver, known as the basis trade, say it’s an essential market lubricant as a source of demand for Treasuries. But because the trade often involves heavy borrowing, it can blow up when unexpected events lead to market volatility that forces funds to offload their holdings all at once. US regulators are looking at how they might use their existing bank oversight authority to rein in the risk or make the basis trade less lucrative.

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