Former head of Hedge Fund Working Group warns change is coming
29 April 2021 US
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The former head of the US Treasury’s Hedge Fund Working Group (HFWG) has warned that, post-pandemic, the revived taskforce will have the political backing and sense of urgency to crack down on the systemic risk posed by hedge funds’ leverage strategies.
Janet Yellen, President Biden’s new pick to head up the US Treasury, revived the HFWG — put on hiatus under the Trump administration — at the beginning of April to look into the way that leverage strategies of some hedge funds can amplify the sort of market stresses the economy faced during the pandemic in 2020.
Jonah Crane, who led the original working group under the US Treasury’s Financial Stability Oversight Council, is now a partner at law firm Klaros Group in Washington, DC. Although calls have been made repeatedly to create enhanced oversight of and transparency in the US hedge fund space over the years, Crane predicts this time around will be different.
“I think the events of March 2020, while not solely a hedge fund phenomenon, impaired market functioning to the point the Fed had to step in, and that appears to have focused people's minds,” Crane tells SFT.
Crane says that the HFWG must be proactive and there are “a few ideas that should clearly be on the table”, including: more comprehensive, timely, and useful reporting by hedge funds so regulators have a better sense of where risks might lie; enhanced supervision over the intermediaries providing leverage; improvements to market infrastructure, such as increased use of central clearing in various treasury markets; and minimum haircuts on repo transactions.
Some of these ideas were considered by Crane and the HFWG back in 2016. Others were not. For example, a HFWG report that Crane delivered to the FSOC at an open meeting in late 2016 laid out the state of play at the time and focused mostly on reporting data.
But Crane says the other ideas have not, to his knowledge, been formally considered by the HFWG — but should be.
Central clearing for treasuries has been discussed in other contexts, but not by the HFWG, “so, beyond data, these are mostly my ideas for solutions the HFWG should consider — some of which were discussed in the group previously but, outside of data, not part of the formal recommendations of the working group”, Crane says.
But thanks to the Trump administration mothballing the group, “the Financial Stability Oversight Council has unfortunately lost four years during which it could have been identifying and refining ideas”, Crane adds.
However, this time there is more bipartisan support for Yellen’s desire to rein in the hedge funds. “Randy Quarles [a Republican and vice chair for supervision of the Federal Reserve Board of Governors] has identified the need to protect against systemic risk coming from hedge funds, so it's not a partisan issue,” Crane says. But there will be pushback from the industry, he says, and it's not a high-salience issue with the public, “so I am not sure which way ‘politics’ cuts here”, Crane adds.
Nonetheless, Crane believes Yellen will have a willing partner in the new SEC in chairman Gensler, “which will help”. The Fed is also focused on addressing this [issue] and other vulnerabilities that have contributed to several episodes of market volatility, Crane adds.
“We don't know who will lead the Commodity Futures Trading Commission (CFTC) yet, but I would be surprised if they are not also supportive. If you have those regulators, you have plenty of critical mass.”
Read the full Q&A with Jonah Crane in the upcoming issue of Securities Finance Times
Janet Yellen, President Biden’s new pick to head up the US Treasury, revived the HFWG — put on hiatus under the Trump administration — at the beginning of April to look into the way that leverage strategies of some hedge funds can amplify the sort of market stresses the economy faced during the pandemic in 2020.
Jonah Crane, who led the original working group under the US Treasury’s Financial Stability Oversight Council, is now a partner at law firm Klaros Group in Washington, DC. Although calls have been made repeatedly to create enhanced oversight of and transparency in the US hedge fund space over the years, Crane predicts this time around will be different.
“I think the events of March 2020, while not solely a hedge fund phenomenon, impaired market functioning to the point the Fed had to step in, and that appears to have focused people's minds,” Crane tells SFT.
Crane says that the HFWG must be proactive and there are “a few ideas that should clearly be on the table”, including: more comprehensive, timely, and useful reporting by hedge funds so regulators have a better sense of where risks might lie; enhanced supervision over the intermediaries providing leverage; improvements to market infrastructure, such as increased use of central clearing in various treasury markets; and minimum haircuts on repo transactions.
Some of these ideas were considered by Crane and the HFWG back in 2016. Others were not. For example, a HFWG report that Crane delivered to the FSOC at an open meeting in late 2016 laid out the state of play at the time and focused mostly on reporting data.
But Crane says the other ideas have not, to his knowledge, been formally considered by the HFWG — but should be.
Central clearing for treasuries has been discussed in other contexts, but not by the HFWG, “so, beyond data, these are mostly my ideas for solutions the HFWG should consider — some of which were discussed in the group previously but, outside of data, not part of the formal recommendations of the working group”, Crane says.
But thanks to the Trump administration mothballing the group, “the Financial Stability Oversight Council has unfortunately lost four years during which it could have been identifying and refining ideas”, Crane adds.
However, this time there is more bipartisan support for Yellen’s desire to rein in the hedge funds. “Randy Quarles [a Republican and vice chair for supervision of the Federal Reserve Board of Governors] has identified the need to protect against systemic risk coming from hedge funds, so it's not a partisan issue,” Crane says. But there will be pushback from the industry, he says, and it's not a high-salience issue with the public, “so I am not sure which way ‘politics’ cuts here”, Crane adds.
Nonetheless, Crane believes Yellen will have a willing partner in the new SEC in chairman Gensler, “which will help”. The Fed is also focused on addressing this [issue] and other vulnerabilities that have contributed to several episodes of market volatility, Crane adds.
“We don't know who will lead the Commodity Futures Trading Commission (CFTC) yet, but I would be surprised if they are not also supportive. If you have those regulators, you have plenty of critical mass.”
Read the full Q&A with Jonah Crane in the upcoming issue of Securities Finance Times
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