SEC Cracks Down On Basis Trades, Will Force Top Hedge Funds To Register As Dealers, Resulting In Collapsing Treasury Market Liquidity

After the latest Quarterly Refunding presentation by the TBAC dedicated a substantial portion of the prepared materials to the risk of a basis trade exploding, leading to catastrophic damage to the Treasury market, it should not come as a surprise that moments ago the SEC revealed that going forward hedge funds and prop trading firms that regularly trade US Treasuries - often with 20x leverage or more to greatly magnify moves as little as one basis point (here LTCM flashbacks should come flooding in)- are set to be labeled as dealers by the US regulator, a tag that will bring with it unwelcome scrutiny and attention not to mention greater compliance costs and scrutiny.

It's also why demand for the basis trade, which has been so instrumental in allowing all the massive debt supply to be easily digested and remain liquid, may soon collapse leading to unexpected and jarring consequences to the Treasury complex just as US debt is growing by tens of billions every single day.

As Bloomberg reported first, on Tuesday the SEC - best known for being unable to keep its X account safe after voluntarily turning off 2FA and getting hacked one day before a historic bitcoin ETF announcement in what may be the most humiliating moment in the agency's history - decided in a 3 to 2 vote to boost oversight of rates trading by the firms, which are increasingly responsible for liquidity in the world’s biggest government bond market but only because they use trillions in leverage. The new regulations would also apply to market participants in additional government bonds, equities and other securities.